TJX, Gap, and ANN: Outperforming in a Tough Environment

Apparel retailers are facing a challenging economic environment as weak customer demand is hurting many companies in the sector. However, TJX , Gap , and Ann are doing materially better than the competition, and that says a lot about the fundamental strength and management quality of these companies.

TJX has a successful and differentiated business model: Through brands like T.J. Maxx, Marshalls, HomeGoods, and Winners, among others, the company operates more than 3,200 discount stores in the U.S., Canada, and Europe.

The company provides department stores the opportunity to clear excess inventory at very favorable terms. This gives TJX significant bargaining power with suppliers, which the company translates into pricing discounts of between 20% and 60% off traditional retail prices.

These bargains resonate remarkably well among consumers through good and bad economic times: TJX has experienced only one year of negative comparable-store sales in its 36-year history, and comparable-store sales have increased in 40 out of the last 41 quarters.

The company delivered a healthy increase of 9% in sales over the last quarter, fueled by a 5% jump in comparable-store sales during the period. Adjusted diluted earnings per share grew by a remarkable 21% year over year to $0.75 per share; this was better than the average estimate by Wall Street analysts of $0.738 per share for the quarter.

TJX also raised the low end of its earnings guidance due to this strong performance. CEO Carol Meyrowitz sounded quite optimistic regarding prospects for the key holiday quarter: "The fourth quarter is off to a good start and we see exciting opportunities for this holiday selling season."

Gap is going through a successful transformation; the company has materially improved its merchandising strategy and streamlined its operations by closing unprofitable stores and focusing on efficiency. In response, customers are staying loyal to Gap in times when most apparel retailers are finding it hard to sustain sales growth.

Through its widely recognized brands -- Gap, Banana Republic, Old Navy, Piperlime, Athleta, and Intermix -- the company has more than 3,160 company-operated stores and more than 350 franchised stores and e-commerce sites in more than 90 countries. Its combination of wide reach, affordable prices and brand recognition are proving to be valuable qualities under challenging conditions.

The company beat earnings estimates by a penny during the last quarter; earnings per share increased by 14% to $0.72 versus the average analyst estimate of $0.71. Sales were up by 3% on the back of a 1% increase in comparable-store sales. This was below analysts' forecast, but still much better than the performance delivered by other teen apparel retailers, many of which delivered declining sales and earnings in the last quarter.

Furthermore, Gap has announced a healthy increase of 8% in sales during November, fueled by a 2% jump in comparable sales. CEO Glenn Murphy sounds quite happy with the company's performance: "We are pleased with how we competed and delivered in November, providing a seamless experience for our customers whether they shopped in stores, online or on their mobile devices."

ANN is the parent company of Ann Taylor and LOFT, two leading brands focused on women's clothing. The company operates 1,027 Ann Taylor, Ann Taylor Factory, LOFT, and LOFT Outlet stores in 47 states, the District of Columbia, Puerto Rico, and Canada.  

A more affluent customer base, brand differentiation and superior pricing power seem to be protecting the company from the harsh economic environment. Total net sales for the third quarter increased by 7% to $657.5 million and comparable sales grew by 3.5% during the quarter.

Diluted earnings per share increased by 17.1% to $0.89 per share versus an adjusted figure of $0.76 in the same quarter of the previous year. This was above Wall Street analysts' estimations of $0.76.

CEO Kay Krill sounds optimistic about the future: "Despite a challenging and highly promotional retail environment, we achieved a double-digit increase in earnings per share... Looking ahead, both brands have entered the fourth quarter in an excellent position, and our strategic growth initiatives continue to add value on both the top and bottom line."

Even mediocre companies can do well when the wind is at their back, but it takes a superior business to thrive in a challenging economic environment. TJX, Gap, and ANN are performing strongly through a hostile environment while materially outgrowing the competition. Investors looking for quality companies in the retail apparel business may want to take a look at these three well-run firms.

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