Wedbush Sees Strong Trends Backing Discount Retail

Wedbush initiated coverage on three retailers, highlighting strong macro trends and business models that made it difficult for e-commerce rivals to replicate.

The Ratings

Wedbush analyst Jen Redding initiated coverage of Burlington Stores Inc BURL at Outperform with a $175 price target.

Redding came out with Neutral ratings on both Ross Stores, Inc. ROST and TJX Companies Inc TJX with $90 and $100 price targets, respectively.

The Theses

There is “no end in sight in the run-up for off-price goods,” according to Redding, making the companies attractive growth stories.

There are three other key factors, in Redding’s view, supporting the discount retail sector:

• E-commerce can’t replace the experience of bargain hunting customers enjoy.
• E-commerce competitors must also replicate the diverse assortment of these three companies, requiring high sourcing and warehousing costs that make profitability difficult.
• A strong dollar and other positive macro trends in the U.S. should drive spending in the consumer discretionary category.

With these factors common across the sector, why withhold Buy ratings from Ross and TJX?

The analyst believes Ross is a solid investment for those looking long-term, but is fairly valued at its current level.

TJX’s financials are “solid,” with enough cash being generated to buy back $2.5 billion to $3 billion of outstanding shares annually. There is limited visibility into international prospects at the moment, however, and reading “favor[s] investments with an exclusive U.S. focus.”

Price Action

Burlington was down by 1 percent at $150.75 at time of publication. Ross and TJX shares were faring slightly better, both down 0.4 percent.

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