If any company has smashed its way to the top in retailing by totally changing the way consumers purchase items, it’s Amazon.com Inc. (NASDAQ: AMZN). Founded in 1994, the company has grown into an internet powerhouse that has left the bulk of its competitors lying in the dust. In addition to an incredible retail presence, Amazon is also the leader in providing cloud computing. Incredibly, three old-school companies are staying neck and neck with the tech behemoth in taking retail customers away from the mall stores.
In a new research report, Merrill Lynch’s outstanding retail analyst Lorraine Hutchinson notes that while Amazon is a huge threat to mall-based retailers, the off-price retailers have actually taken more share in recent years. The report points out that the combined off-price subsector stores have three times the size of the apparel and footwear sales of Amazon, a massive $45 billion in sales. In addition, the off-price stores snatched nearly $1 billion more in revenue growth in 2016.
Three companies are leading the charge against Amazon, and all three are rated Buy at Merrill Lynch.
This top retail stock has been on fire and is also on the Merrill Lynch US 1 list. Burlington Stores Inc. (NASDAQ: BURL) is a national off-price retailer of high-quality branded apparel with more than 500 locations in 44 states and Puerto Rico. Burlington also operates an e-commerce business. The company sources from over 5,000 vendors, with a focus on nationally recognized brands. Similar to other off-price retailers, the company employs an everyday low price model and offers discounts of 60% to 70% off department and specialty stores’ regular prices.
The company posted strong fourth-quarter results that came in way above the Merrill Lynch estimates. Earnings were partly offset by lower gross margins and higher SG&A, though. The earnings estimates and price target were raised.
The Merrill Lynch price target now is $110, which compares with a Wall Street consensus estimate of $99.93. The shares traded early Friday at $92.90.
This discount retailer continues to be a favorite with cost-conscious consumers looking for the top brands and value. Ross Stores Inc. (NASDAQ: ROST) is the second largest off-price retailer in the United States. It operates about 1,350 stores under the Ross Dress for Less banner and over 200 stores under the dd’s DISCOUNTS brand. Both brands target women and men between the ages of 18 and 54.
About 75% to 80% of the company’s customers are females shopping for themselves or family members. Ross targets customers from middle-income households, while dd’s targets customers from more moderate income households.
Like Burlington, Ross Stores earnings beat the Merrill Lynch earnings estimates, driven by strong comparisons and better gross margins. The analyst is also positive on first-quarter numbers and sees potential upside to the current estimates.
Shareholders are paid a small 0.95% dividend. The Merrill Lynch price objective is $80, and the consensus target is $73. The stock traded at $66.65 Friday morning.
This is another off-price retailer the Merrill Lynch team loves. The TJX Companies Inc. (NYSE: TJX) is the largest global off-price retailer, with over 3,000 stores worldwide. The company offers brand-name merchandise at a 20% to 60% discount to department and specialty store prices. Its stores are generally known for their treasure hunt experience.
The core TJX customer is a middle to upper-middle income female, between 25 and 54 years old, who is fashion and value conscious. Like the other two companies, TJX posted strong numbers, and it plans to open an addition 250 units in the fiscal 2018 year, which makes it the only apparel retailer to expand square footage. The analyst feels that the company can continue to drive metrics through gains in market share.
Shareholders receive a 1.44% dividend. Merrill Lynch has an $85 price target. The consensus target is $85.32, and shares were last seen at $77.77.
Clearly retail is a tough business to be in. However, apparel and footwear is not always easy to sell online. Shares of these three companies have had solid runs, so investors may want to buy partial positions here and see if they don’t pull back some.