2 Great Investment Opportunities in Retail Today
May 30th 2013 3:11PM
Updated May 30th 2013 4:20PM
While the e-commerce revolution is disrupting many traditional brick-and-mortar retailers, there are still some "physical" retailers that continue to show solid growth. Two particularly promising investment opportunities in this vein are Nordstrom and TJX . Both companies are well positioned within their sectors, and see the rise of e-commerce as an opportunity rather than a threat.
Nordstrom: Service wins
Nordstrom sits in a privileged place relative to many brick-and-mortar retailers, insofar as most of its business consists of selling apparel and shoes. Since customers usually want to try on clothing before making a purchase decision, online competitors cannot serve the market as well as brick-and-mortar stores.
Moreover, Nordstrom is known for its exceptional customer service. Employees try to make personal connections with customers and the company prides itself on a "customer is always right" mentality. This is critical, because as an upscale department store it caters to a wealthy clientele who expect superior service.
Nordstrom is a great investment opportunity because the company has plenty of room to grow and is pursuing expansion opportunities. The company is planning to enter the Canadian market with five new stores set to open between 2014 and 2016. It will also open several full-line stores in the U.S. in the next five years, most notably a Manhattan flagship location set to open in 2018.
However, the biggest opportunity for Nordstrom is the growth of its "Rack" off-price business. As of earlier this month, the company operated 127 Rack stores, but management plans to open another 14 this year and reach a total of more than 230 Nordstrom Rack stores by the end of 2016. Rack stores do not require nearly as much up-front investment as full-line stores, and therefore offer a very high return on invested capital, which is why Nordstrom is focusing on this growth opportunity.
Lastly, the company is not ignoring the growth of e-commerce. Its direct business (which primarily consists of online sales) grew by 37% last year, following a 30% increase in 2011. Nordstrom thus has great growth opportunities in both brick-and-mortar and e-commerce. With shares trading for just 16.5 times earnings, it's a great investment opportunity.
TJX: Price also wins
One of the other great retail investment opportunities out there is TJX, the parent company of stores like T.J. Maxx, Marshalls, and HomeGoods. Like Nordstrom, TJX primarily sells apparel, which limits the effectiveness of online competition. However, whereas Nordstrom differentiates itself based on service, TJX focuses on price leadership, by offering department-store closeouts at affordable prices.
TJX is able to provide extraordinary value to customers because it turns over inventory at a high rate, has a relatively inexpensive real estate footprint, and thereby minimizes selling costs. Whereas SG&A costs reach 25% to 35% of sales at most department stores, SG&A totaled just 16.4% of sales last year for TJX. This allowed the company to achieve a pre-tax margin of 11.9% on gross margin of just 28.4% (well below the 40% level frequently seen at department stores).
TJX's low overhead business model creates strong returns for investors. The company's return on assets of 21.5% and return on equity of 54.7% are both well ahead of peers. Moreover, even e-commerce leaders like Amazon.com cannot beat TJX's prices due to the latter's low overhead.
TJX already has over 3,000 stores worldwide, but CEO Carol Meyrowitz is confident that additional opportunities abound. She sees the potential to grow the store base by at least 50%, while also creating an e-commerce offering. Meanwhile, the company has been able to return plenty of cash to shareholders through dividends and share buybacks. In light of its strong growth profile, TJX seems like a great investment opportunity at its recent price of 19 times trailing earnings.
Foolish bottom line
While e-commerce will continue to gain share from brick-and-mortar retail over time, there are still some solid investment opportunities available among traditional retailers. Nordstrom and TJX each offer great value to consumers in their own way: through service leadership at Nordstrom and through price leadership at TJX. They each have plenty of growth opportunities available and trade at very reasonable valuations. Both of these investment opportunities are likely to pay off for long-term investors.
Meanwhile, the retail space as a whole is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.
The article 2 Great Investment Opportunities in Retail Today originally appeared on Fool.com.Fool contributor Adam Levine-Weinberg is short shares of Amazon.com. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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