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The "Weak" December Retail Sales Report Is Good News for TJX and Ross Stores

Adam Levine-Weinberg, The Motley Fool

Investors were disappointed last week to learn that seasonally adjusted retail sales fell 1.2% in December, based on U.S. Census Bureau data. Most analysts had expected a small increase.

Yet as my Fool.com colleague Nicholas Rossolillo explained recently , the retail sales decline isn't as big a red flag as it might seem. While sales slowed by 1.2% compared to the pace seen in November, retail sales still rose 2.3% relative to December 2017. Moreover, some types of retailers saw much faster growth. For example, the clothing and accessories category posted another solid year-over-year sales gain. That bodes well for TJX Companies (NYSE: TJX) and Ross Stores (NASDAQ: ROST) ahead of their fourth-quarter earnings reports.

Consumers didn't stop spending on clothing

To some observers, the weaker-than-expected retail sales report was troubling because several department stores had already warned that sales missed expectations during December. That made it seem as if consumer spending had fizzled after Black Friday weekend.

That said, while there were sharp sales declines for some merchandise categories (e.g., sporting goods) in December, spending on apparel, shoes, and accessories remained robust. Sales at clothing and clothing accessories stores jumped 4.7% year over year in December, according to the Census Bureau. That was right in line with the category's full-year growth rate of 4.8%.

The off-price retail giants probably prospered

It's likely that TJX and Ross Stores posted strong sales growth last quarter, in light of the clothing and accessories category's strong growth. After all, the two companies together account for a significant chunk of the $275 billion category.

The exterior of a Ross Dress for Less store

TJX and Ross Stores dominate the U.S. off-price retail industry. Image source: Ross Stores.

TJX, the parent of chains including T.J. Maxx and Marshalls, probably generated about $39 billion of revenue in its recently ended 2019 fiscal year. About half of its revenue comes from selling apparel, shoes, and accessories in the U.S. (The other half is split between sales in international markets and domestic sales of home furnishings.) Ross Stores is smaller, with annual revenue of about $15 billion. However, it operates only in the U.S. and gets nearly three-quarters of its revenue from apparel, shoes, and accessories.

Furthermore, TJX and Ross Stores entered the holiday period with strong momentum . For the first nine months of fiscal 2019, TJX posted 6% comp sales growth -- including a 7% increase in the third quarter. Ross Stores, which was facing tougher comparisons, posted 3% comp sales growth both for the third quarter and for the first nine months of the fiscal year as a whole. In addition, both TJX and Ross Stores are opening new stores at a rapid pace, which is lifting their total sales growth several percentage points above their comp sales gains.

Thus, both off-price leaders grew significantly faster than the overall clothing and accessories category in the first several quarters of 2018. There's no reason to think that changed last quarter. Since the clothing and accessories category maintained its strong growth trajectory in November and December, TJX and Ross Stores should have good news for investors when they release their Q4 earnings reports in the next couple of weeks.

More room for growth ahead

Although TJX and Ross Stores primarily sell merchandise in stores -- and Ross Stores doesn't even have an e-commerce site -- both companies have been big winners from the so-called retail apocalypse of the past few years.

First, by offering an ever-changing merchandise selection, TJX and Ross Stores have been able to maintain strong store traffic trends, unlike most retailers. Second, subpar sales trends at full-price stores have led to ample supply of name-brand items that TJX and Ross Stores can snap up at a discount to enhance their in-store assortments. Third, the huge wave of store closures and outright liquidations has put a lot of market share up for grabs.

The retail apocalypse shows no signs of letting up. Midwestern general-merchandise chain Shopko is in the midst of closing most of its stores , Payless ShoeSource has started liquidating its U.S. business, and children's retailers Gymboree and Crazy 8 are closing all of their stores.

That means TJX and Ross Stores will have big opportunities again in 2019, both on the supply side and on the demand side. Both are likely to take advantage of the chance to make further market share gains.

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Adam Levine-Weinberg owns shares of The TJX Companies and is short April 2019 $57.5 calls on The TJX Companies. The Motley Fool recommends The TJX Companies. The Motley Fool has a disclosure policy .