The past two years defied norms, marked by a 40-year inflation peak in June 2022 and 11 Fed rate hikes by July 2023. Despite this, consumers resiliently challenged norms, persisting in spending sprees driven by varied factors, be it wage hikes or precarious financial decisions amid lingering economic uncertainty.

In light of this, we analyze the fundamentals of The TJX Companies, Inc. (TJX) and Dollar Tree, Inc. (DLTR), given prevailing market conditions. Prior to discussing the stocks, let's delve into the dynamics of the retail sector and economy in detail.

Over the past three years, inflation surged by almost 18%, as indicated by the consumer price index, gauging the costs of everyday goods Americans buy. Despite remaining higher than the Fed's 2% target, it has stabilized at a 3.1% annual rate as of January, a notable decline from its peak of 9.1% in June 2022.

Since December's onset, optimism regarding the economy has skyrocketed by 29%, marking the most substantial two-month surge since 1991. The buoyancy finds resonance in other recent indicators, such as a Morgan Stanley survey revealing a five-month pinnacle in consumer sentiment for January.

That said, in February, the University of Michigan's consumer sentiment index edged up to 79.6 from January's 79. Likewise, a New York Federal Reserve study reveals that 76.5% of American adults anticipate their finances to remain steady or improve in the next year, marking the highest level since September 2021.

Considering that, in January, retail and food services sales, adjusted for seasonal variation and holiday and trading-day differences but not for price changes, reached $700.30 billion, up 0.6% from January 2023. Total sales for the November 2023 through January 2024 period surged by 3.1% compared to the same period a year ago.

Given that the United States boasts one of the world's largest retail markets, with numerous global retail giants headquartered there, projections indicate significant growth in the global food & grocery retail market. A report from Grand View Research suggests a CAGR of 3.2%, reaching $14.78 trillion by 2030.

Additionally, according to Cognitive Market Research, the global luxury fashion market, valued at $104.50 billion in 2023, is expected to expand at a CAGR of 6.5% from 2023 to 2030.

In terms of price performance, DLTR has climbed 11% over the past month, while TJX gained 4.5% during the same period. Additionally, DLTR surged 26.2% over the past three months, while TJX gained 10.5% during the same time frame.

However, DLTR declined 6.6% over the past nine months, closing the last trading session at $145.88, whereas TJX jumped 28.3% during the same period, closing the last trading session at $99.38.

But which retail stock could be a better pick? Let's find out.

Recent Developments

On October 11, 2023, DLTR announced its plan to bring back Family Dollar operations to West Memphis, Arkansas, unveiling a vision for a fully rejuvenated distribution center. With a commitment exceeding $100 million, the project symbolizes DLTR's dedication to pioneering industry-leading standards in product safety and operational excellence.

By strategically reinvesting in infrastructure, DLTR could fortify its position as a market leader while enhancing consumer trust and loyalty through unparalleled quality assurance measures.

In its fiscal third-quarter earnings report, TJX unveiled that for the fiscal year that ended on February 3, 2024, the company anticipates a robust 4% to 5% increase in overall comparable store sales, indicative of sustained consumer demand and the company's resilient market position.

Moreover, for the 53-week fiscal period concluding on the same date, TJX projects a pretax profit margin of approximately 10.8%, highlighting the company's efficient operational management and cost-control measures.

Additionally, TJX is revising its outlook for diluted earnings per share, raising the anticipated range to $3.71 to $3.74. The adjustment reflects the company's solid performance and strategic initiatives aimed at maximizing shareholder value.

Recent Financial Results

For the fiscal 2023 third quarter that ended October 28, 2023, DLTR’s total revenue increased 5.4% year-over-year to $7.31 billion. However, its adjusted operating income decreased 20.9% from the year-ago value to $301.70 million.

Also, the company’s adjusted net income and adjusted EPS declined 20.6% and 19.2% from the prior year’s quarter to $212 million and $0.97, respectively.

For the fiscal 2024 third quarter that ended October 28, 2023, TJX’s net sales increased 9% year-over-year to $13.27 billion. Its income before income taxes rose 16.9% from the year-ago value to $1.59 billion. Furthermore, the company’s net income and EPS grew 12% and 13.2% from the prior year’s period to $1.19 billion and $1.03, respectively.

Past and Expected Financial Performance

Over the past three years, DLTR’s revenue increased at a CAGR of 5.8%. Its net income grew at a 6.5% CAGR. However, the company’s EBITDA declined at a CAGR of 2.6% over the same time frame.

Analysts expect the company’s revenue for the quarter that ended January 2024 to reach $8.65 billion, indicating a 12% year-over-year increase. Moreover, the company’s EPS for the same period is expected to grow 29.7% from the previous year’s period to $2.65.

Over the past three years, TJX’s revenue and EBITDA increased at a CAGR of 16.1% and 48.2%, respectively. Moreover, its net income grew at a 76.3% CAGR during the same time period.

The consensus revenue estimate of $16.17 billion for the quarter that ended January 2024 reflects an 11.4% year-over-year increase. Moreover, the company’s EPS for the same period is expected to rise 25.6% from the prior year’s quarter to $1.12.

Profitability

TJX’s trailing-12-month revenue is 1.8 times that of what DLTR generates. Moreover, TJX is more profitable, with a trailing-12-month gross profit margin of 35.26% compared to DLTR’s 30.13%. Additionally, TJX’s trailing-12-month EBITDA margin and trailing-12-month net income margin of 11.96% and 7.85% compare with DLTR’s 8.45% and 3.92%, respectively.

Valuation

In terms of forward non-GAAP PEG, TJX is trading at 2.10x, 29.6% higher than DLTR’s 1.62x. Moreover, TJX’s forward EV/EBITDA of 18.16x compare with DLTR’s 15.79x.

POWR Ratings

DLTR has an overall rating of C, which equates to Neutral in our proprietary POWR Ratings system. Conversely, TJX has an overall rating of B, translating to Buy. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. DLTR has a C grade for Stability, which aligns with its 24-month beta of 1.12. In contrast, TJX holds a B grade for Stability, which is supported by its 24-month beta of 0.80.

Moreover, DLTR has a C grade for Quality, correlating with its mixed profitability metrics. The stock’s trailing-12-month levered FCF margin of 1.44% is 69% lower than the industry average of 4.65%. However, its trailing-12-month CAPEX/Sales of 5.54% is 62.8% higher than the 3.40% industry average.

On the other hand, TJX boasts a B grade for Quality, consistent with its higher-than-industry profitability. The stock’s trailing-12-month levered FCF margin and trailing-12-month CAPEX/Sales of 6.93% and 3.13x are 24.7% and 3.8% higher than the industry averages of 5.56% and 3.01x, respectively.

Of the 38 stocks in the A-rated Grocery/Big Box Retailers industry, DLTR is ranked #32. Meanwhile, TJX is ranked #7 out of 62 stocks within the B-rated Fashion & Luxury industry.

Beyond what we've stated above, we have also rated both stocks for Growth, Value, Momentum, and Sentiment. Click here to view DLTR’s ratings. Get all TJX ratings here.

The Winner

With consumer sentiment on the rise, the retail industry stands to benefit. TJX, with its promising growth prospects, impressive financial performance in the last reported quarter, enhanced stability, and strong profitability, could present an attractive investment opportunity than DLTR at present.

Our research shows that the odds of success increase when one invests in stocks with an overall rating of Strong Buy. You can view all the top-rated stocks in the Grocery/Big Box Retailers industry here. Additionally, for top-rated stocks in the Fashion & Luxury industry, you can click here.

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TJX shares were trading at $98.95 per share on Monday morning, down $0.43 (-0.43%). Year-to-date, TJX has gained 5.84%, versus a 6.90% rise in the benchmark S&P 500 index during the same period.

Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.

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