Why This Retailer Will Shoot Higher

Why This Retailer Will Shoot Higher

TJX has been coy about e-commerce, despite the chorus of retailers, from Urban Outfitters to Cabela's, crowing over double-digit e-tail sales growth. However, in the next earnings release, investors will hear about the company's new T.J. Maxx e-tail initiative, which debuted with little fanfare in September.

What took so long?
It should have been a no-brainer for the world's largest specialty off-price retailer (3,050 brick-and-mortar stores in the U.S., Canada, and Europe) to sell online. The company held back after its 2004-2005 failure generated $15 million in losses. That was nothing compared to 2007's security breach that resulted in the theft of 45 million credit and debit card numbers, which cost $256 million. Lazard analyst Jennifer Davis told CBS MarketWatch that the company's earlier e-commerce attempt was "really an afterthought."

Fashion bloggers are gushing over the new T.J. Maxx online selection, especially "The Runway," which is devoted to luxury designers.Pent-up demand to buy online clearly exists, as shown by big-box retailer Target and its online sales of designer collaborations. Its 3.1 collection by Phillip Lim for Target's online assortment was virtually decimated by 8 a.m. on Sept. 15, the day it became available.

Investors shouldn't get worked up over T.J. Maxx's online heel dragging, as it has been one of the top performers in retail for years. Most recently, it reported that second-quarter earnings were up 18%, and guided higher for the back half of 2013.

Ducks in a row
To build its e-commerce infrastructure, T.J. Maxx bought online off-price retailer Sierra Trading Post for $200 million in cash last December. Meyrowitz said, "We continue to plan on launching e-commerce sites for TJX brands and this acquisition adds immediate scale, capabilities, and infrastructure in e-commerce, which we can leverage in that regard."

TJX CEO Carol Meyrowitz said on the fourth quarter call that the company would launch in a "controlled, small test mode...We will take our time to do it right...More importantly, we will not disappoint our customers." She also said the company wants younger shoppers, and online sales should help.

It ended the fiscal year with $2 billion in cash and short-term investments after dividends, share buybacks worth $1.3 billion, and the Sierra Trading Post acquisition.

Jennifer Davis also told CBS MarketWatchthat she believes the company's online sales will grow to 10% of total sales within a few years. Davis asked on the February call what the TJ Maxx site would look like. Meyrowitz replied, "It's going to look like TJ Maxx... it's going to have great value and it's going to be very, very exciting."

RBC Capital Markets analyst Howard Tubin agrees, telling the Associated Press, "I think it's a great move for [TJ Maxx]." He discounted the perception that designer brands don't want discounts on their pricey merchandise advertised online. Target's high-profile designer collaborations should shed doubt on that idea, with Target collaborations seen as a coup by designers, and not just for the money.

Target is a good web role model. CEO Gregg Steinhafel said on their second quarter earnings call digital is a more efficient channel than just bricks and mortar to drive, " very high levels of guest engagement and..more bang for our buck for essentially the same investments that we have made in the past."

Target opened a Bay Area Technology Innovation Center to tap Silicon Valley talent. Online initiatives like Cartwheel, mobile apps, YouTube channel, and Pinterest have bumped Target up to number 18 in the Internet Retailer Top 500 Guide of Most Successful E-tailers. However, Target does not publicly release online sales as a percentage of total sales.

No e-sales for you
Meanwhile, TJX's smaller rival, Ross Stores , with a market cap of $15 billion to TJX's $40 billion, has no intentions of moving into e-commerce. It cites the added costs of shipping, marketing, and returns that cut into the bargain prices its middle-income customers expect.

TJX raised its dividend, now at 1.1%, by 26% in April for the 17th consecutive annual increase. Ross Stores' yield is 1%. TJX and Ross Stores are valued at forward earnings multiples of 17.6 and 16.2, respectively, but price-to-sales ratios come in at 1.5 each..

The Foolish takeaway
It doesn't make sense for Ross Stores to be so similarly valued to TJX, as it doesn't offer a huge e-commerce catalyst. Just as Target creates huge online buzz for its designer collaborations, which drive traffic, so should TJX create excitement for its e-commerce site and create long-term growth and attract new customers.

The retail space 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 Why This Retailer Will Shoot Higher originally appeared on Fool.com.

AnnaLisa Kraft has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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Originally published