Don't Prejudge TJX Based on Macy's and Kohl's Poor Results

 NEW YORK (TheStreet) -- With worse-than-expected results coming in from the likes of Macy's (M) and Kohl's (KSS), investors have begun to distance themselves from the retail sector, sending the SPDR S&P Retail ETF (XRT) down 2% over the past month.

That investors have grown wary about retail stocks is understandable, given last week's report showing that U.S. retail sales flat-lined in April, against estimates of 0.2% growth. It means consumers aren't spending as much as the market had hoped.

There's a chance that this trend may continue, but even if it does, not every retailer will underperform. A name to bet on is TJX (TJX), which is due to report first-quarter fiscal 2016 earnings results Tuesday before the opening bell.

TJX, primarily known for its TJ Maxx and Marshall's discount chains, was trading early Monday at $66.58, up about 1%, but it's down roughly 3% on the year to date, lagging broader averages. TJX has also underperformed the 2% year-to-date gains in the SPDR S&P Retail ETF. And there's no way that makes sense.

The market seems to have already priced a poor report into TJX's stock before management has said a word about the just-ended quarter and issued their outlook for the rest of the year. After the poor April retail sales numbers, the consensus appears to be, "let's wait and see where retails sales end up for May."

But a broad turnaround in the retail sector is not required for TJX stock to pay off. Not only has the company shown it can get more customers into its stores, TJX has figured out ways to get shoppers to spend more during each visit. Among other improvements, the retailer has shown modest increases in same-store sales and profit margins.

Consider this: Not only has the company grown revenue for three consecutive quarters, but during that span, revenue has grown by an average of almost 14% year-over-year. By contrast, Kohl's has grown revenue by an average of just 1% during that period, while Macy's has averaged a negative 0.10% growth.

That TJX has averaged 12% year-over-year income growth in the past four quarters is evidence that management has put together an effective formula, helping the business squeeze as much profit as possible from the revenue it generates. And Tuesday, the company will look to extend that streak.

For the quarter that ended in April, TJX is expected to deliver 67 cents per share on revenue of $6.8 billion, marking increases of 4.6% and 4.7%, respectively. For the full year, ending in January, earnings are projected to climb 4.4% to $3.30 per share, while projected revenue of $30.44 billion would be a 4.7% climb.

All told, with TJX stock trading at just 20 times earnings, compared to a 21 P/E for the average S&P 500 stock, investors can do well here. Assuming TJX does meet its full-year estimates of $3.30 per share, the stock is trading at an meaningful discount. And the longer term outlook is promising as well: Earnings are projected to grow at 12% in fiscal-year 2017, reaching $3.71 per share. At that time, if they're properly priced, these shares should be 15% to 20% higher at around $75 or $80.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

More from Opinion

Elon Musk's Latest Twitter Tirade Is the Dumbest Thing on Wall Street

Elon Musk's Latest Twitter Tirade Is the Dumbest Thing on Wall Street

Elon Musk's Twitter Tirade Is the Dumbest Thing on Wall Street

Elon Musk's Twitter Tirade Is the Dumbest Thing on Wall Street

Why Google's Search Momentum Won't Be Badly Hurt by New EU Rules

Why Google's Search Momentum Won't Be Badly Hurt by New EU Rules

Flashback Friday: Amazon, Chip Stocks, Memorial Day

Flashback Friday: Amazon, Chip Stocks, Memorial Day

Time to Talk Tesla: What Happened This Week, Elon?

Time to Talk Tesla: What Happened This Week, Elon?