Morningstar Magazine - June/July 2018 - 100

Investors

A third area is off-price retailers. That would
include stores like TJX TJX and Ross Stores ROST.
They offer a value that you can't get
elsewhere, and they also offer a treasure hunt
experience. People like going to the brickand-mortar stores.
TJX and Ross collect large amounts of consumer
demand data, and they use it well to direct
buying behavior and localization in merchandising.
This capability contributes to narrow economic

to sell at those price points online, so there aren't
a lot of new businesses entering this space.
I'd also highlight that because TJX has such a
massive scale, it has a lot of buying power.
The top brands want to sell their products through
TJX first, because TJX can buy a lot and get
the products to the most customers. That's another
advantage. We see low risk in TJX's strategy
or execution given its discounted offerings, scale
and inventory management, and experienced

You hear that Amazon is going to kill retail,
and it's true that they're certainly going
to take a lot of share. But there's still space
for strong players.
Bridget Weishaar

that means that they have a lower risk of
discounting and a lot less clearance than most
stores. It's a well-run company with a
very distinct, responsive supply chain, Big Data
capabilities, and distribution channel flexibility.
Few other specialty retailers have been able to
follow suit. Gap GAP is an example of how difficult
it can be to develop a responsive supply
chain. But our biggest concern for specialty
retailers lies within distribution channels. Many
remain overstored. We believe that store
closures will remain a headwind. While these
retailers could partner with Amazon, this
would likely result in a lower margin. We are
cautious on the subsector overall.
What do you foresee in apparel five years from now?

Weishaar: I think it's going to be technologydriven, even for brick-and-mortar stores.
If you walk into one of your local stores or malls,
it looks very similar to what was there 50 years
ago. This is a space that's just ripe for innovation.
I think that using Big Data, using different
technologies for sizing, for displaying the product-
all of that is going to become a very big
part of the success story of these companies. K
Laura Lallos is the managing editor of Morningstar magazine.

moat ratings for both companies. Further,
their supply chains are very responsive. Their
inventory levels are lean. By our estimate, they
averaged about 60 days inventory in 2016,
compared with an estimate of more than 100 days
for department stores.
Why is TJX one of your top picks?

Weishaar: Ross has been trading above
our $70 fair value estimate, while TJX has been
trading at about a 9% discount to our
$89 fair value. What we love about this company
is that it's very well positioned with its
low prices. The value space right now is very
strong. The consumer wants to buy
things at a value, and TJX offers some of the
best out there.

Because of its price points, and the treasure
hunt experience it provides, TJX has some barriers
of entry to the online threat. It's less profitable

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Morningstar June/July 2018

management team. It's an attractive growth story
both on the domestic and the international
fronts. Also, the company has a record of success
in both strong and weak economic environments.
You found that specialty retailers such as Inditex can
also maintain competitive advantages against Amazon,
if they are well-managed.

Weishaar: Inditex is one of the leaders in
fast fashion. Zara is its biggest brand; it's about
two thirds of their revenue.

This is a company with a best-in-class supply
chain. Most of the manufacturing is carried out
near the company's headquarters in Spain,
and shipments are made to all stores across the
globe twice a week, every week. These
stores are getting small bulk purchases of new
items. This allows the company to better
match the product to the consumer, and the
volume to the consumer demand. In the long run,
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