2 Top Fashion Retail Giants Keep Soaring Above the Crowd

Department store stocks have suffered another wave of selling pressure this month, after several big names in the sector reported weak second-quarter sales. For example, top department store operator Macy's had to slash its sales outlook, and now expects comp sales to be flat for the full year, with total sales down 1% year over year.

However, while the carnage was widespread, it was not universal. I've previously talked about Nordstrom and TJX as being two excellent long-term retail growth stories. Both companies showed exactly why they deserve their premium valuations with strong second-quarter performances. Let's take a look.

Nordstrom's growth initiatives start gaining steamNordstrom posted second-quarter earnings per share of $0.93, beating the average analyst estimate by $0.03 as sales growth remained strong. As a result, Nordstrom increased its full-year sales guidance -- it now expects sales growth of 8.5%-9.5%, up from an initial forecast of 7%-9% growth. Nordstrom also raised the low end of its full-year adjusted EPS guidance from $3.65 to $3.70.

The Nordstrom Rack off-price chain is just one of Nordstrom's big growth opportunities.

In the past few years, Nordstrom's earnings growth hasn't kept pace with its impressive sales growth. However, that's because it is investing heavily in growth opportunities -- such as off-price, e-commerce, Canadian expansion, and the Trunk Club personal stylist service -- to build a collection of billion-dollar businesses.

In the short term, those investments are driving up Nordstrom's costs. It estimates that growth investments (including the expansion into Canada, the 2014 purchase of Trunk Club, the addition of a new East Coast e-commerce fulfillment center, and an improved loyalty program) will depress operating income by $68 million this year. That translates to a negative EPS impact of about $0.22.

However, Nordstrom is only making these big investments because it expects them to generate strong long-term returns. Over the next few years, Nordstrom's new Rack off-price stores and Canadian full-line stores will mature, while the Trunk Club and e-commerce businesses will grow and leverage their fixed costs. This should help the company's profit margin recover.

Finally, Nordstrom is on track to get a $1.8 billion influx of cash from selling its credit card portfolio. JPMorgan Chase analyst Matthew Boss estimates that if Nordstrom applies all of the proceeds to share buybacks, it could provide a $0.21 EPS tailwind. Furthermore, the deal is structured to create earnings upside for Nordstrom if the credit card portfolio keeps growing.

Steady growth at TJX continuesOff-price giant TJX is also producing strong sales growth in spite of the broader retail malaise. Comparable-store sales rose 6% last quarter in constant currency, while total sales also rose 6%, despite the negative impact of the strong dollar on sales in Canada and Europe.

The strong sales performance allowed TJX to grow EPS to $0.80 last quarter, well ahead of the company's guidance of $0.72-$0.74. TJX also raised its full-year earnings and comparable-store sales forecasts for a second straight quarter thanks to its strong results.

Sales growth has been particularly impressive at TJX's HomeGoods chain.

While TJX has done a great job of growing comp sales across all of its formats and geographies, store growth is also a key part of its long-term growth trajectory. At the end of the second quarter, TJX operated 3,461 stores worldwide. However, management sees the potential to eventually grow to at least 5,475 stores, just in its current markets.

The two segments where TJX sees the greatest long-term growth opportunities are TJX Europe and the U.S. HomeGoods chain. (It expects to more than double its store count in both segments in the long run.) Both segments produced better comp sales growth than the main Marmaxx segment -- which consists of the T.J. Maxx and Marshalls chains in the U.S. and represents 65% of company sales. This strong comp performance bodes well for the long-term growth of TJX Europe and HomeGoods.

TJX is also steadily expanding into new markets, building on its existing strengths. This fall, it is opening its first stores in Austria and the Netherlands. It also recently acquired Australian off-price chain Trade Secret, adding another growth market. TJX is even trying its hand at off-price outdoor gear sales by expanding the Sierra Trading Post chain it acquired in 2012.

Finally, TJX has been slowly moving into the e-commerce space. While e-commerce efforts are harder to execute for off-price retailers, the tjmaxx.com website has seen some early success and the company is gradually adding categories and vendors to boost sales. TJX eventually plans to open e-commerce sites for its other brands, which should energize its e-commerce sales growth.

Two islands in a sea of retail woesThe bottom line is that Nordstrom and TJX are well positioned in the top two growth channels for fashion retail: off-price and e-commerce. As a result, while traditional department stores are struggling just to maintain a low-single-digit sales growth pace, Nordstrom and TJX are both posting high-single-digit growth.

Furthermore, both retailers have been investing proactively to create future growth opportunities. While these efforts can slow EPS growth in the near term, they should allow both Nordstrom and TJX to post strong long-term growth in sales and earnings.

The article 2 Top Fashion Retail Giants Keep Soaring Above the Crowd originally appeared on Fool.com.

Adam Levine-Weinberg owns shares of Nordstrom and is long January 2016 $55 calls on The TJX Companies, The Motley Fool recommends Nordstrom. 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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