TJX Companies, Ross Stores Can Each Continue To Grow Despite Competition

The firm initiated coverage of both TJX Companies and Ross Stores at Outperform, with price targets at $88 and $74, respectively.

At the time of writing, shares of TJX Companies were up 1.63 percent at $74.02 and those of Ross Stores were rallying 3.22 percent at $61.18.

TJX Companies: A Quality Compounder With Attractive Valuation

Analyst Jamie Merriman sees TJX Companies as the No. 1 off-price retail brand in the U.S., with additional room for growth in the home category and internationally. Thus, the analyst believes the company has a winning model.

The analyst forecasts 1- percent earnings per share growth on a CAGR basis, premised on 7-percent sustainable sales growth, based on a combination of 3-4 percent comp and a 3-4 percent contribution from the new space.

Bernstein believes the company's margins will begin to stabilize and modestly improve after three years of EBIT margin compression, as wage inflation begins to moderate. Therefore, the firm thinks EBIT growth will return to longer-term averages.

The firm also noted that the shares have pulled back over the last 12 months, rendering the valuation attractive.

Accordingly, the firm said it expects the company to be a quality compounder over the next five years, with the shares currently trading at an attractive valuation.

Ross Stores: Strong Business Model, Sustainable Growth Path

Bernstein believes Ross Stores has a strong business model with a sustainable growth path over the long term, given that it is the No. 2 off-price retailer in the U.S. and has plenty of room for further store growth.

Specifically, the firm noted that the company's opportunities lie in the Midwest and eventually in the Northeast. This along with the continued share gains could lead to sustainable sales growth of about 6.5 percent per year, premised on 3 percent comps and 3.5 percent contribution from the new space.

However, the firm thinks the big gains in gross margin, largely driven by merchandise margin expansion, might be over. Therefore, the firm expects the management to focus on modest gross and corresponding EBIT margin improvement. The firm estimates 110 basis-point improvement in margins in five years.

The firm also noted that just like TJX Companies, shares of Ross Stores have also pulled back over the last 12 months.

"Given our belief in the sustainability of earnings growth and the attractive entry point, we expect Ross to be a quality compounder over the next five years," the firm concluded.