The retailing industry is extremely competitive, which has meant that only the strongest companies can maintain good growth rates and consistent profitability through economic ups and downs. But these days, shareholders face another risk due to soaring e-commerce demand.
The subset of companies that can routinely outgrow competitors -- both physical and digital -- is an exclusive club. Below, we'll look at three major retailers that fit that model. Home Depot (NYSE: HD), Costco (NASDAQ: COST), and TJX Companies (NYSE: TJX) have each demonstrated a knack for boosting market share while generating consistently healthy returns for investors.
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The collapse of the housing market significantly affected Home Depot's business, with operating margin, earnings, and return on invested capital all plunging by 40% or more between 2007 and 2010. However, it wasn't long before the company was setting new records on each of those metrics. Annual sales recently crossed the $100 billion mark -- up from $66 billion in 2010. Earnings soared to $8.6 billion in fiscal 2017 compared to $7 billion just two years earlier. Return on invested capital is now 35%, making Home Depot not only one of the most efficient retailers on the market, but one of the most efficient businesses in general.
Home Depot's rebound story is about much more than just a recovering industry, too. It has consistently outpaced rival Lowe's in core metrics including profitability and sales growth. Combine that impressive track record, strong finances, and management's smart capital allocation moves, and you have a formula for long-term gains that aren't seriously threatened by cyclical swings in the home-improvement industry.
Bulk up on market share
Costco isn't so much in the business of selling stuff, which exposes retailers to price-based competition and shifting economic trends, as it is in the membership business. The warehouse giant earns most of its money from membership fees. It is ridiculously easy to terminate that subscription, but hardly anyone actually goes through with a cancelation. In fact, Costco's renewal rate just ticked up further past 90%, despite the fact that the company rolled out its first fee boost in over five years.
Costco's customer traffic has consistently outpaced peers like Walmart and Target, and that success is showing up in its market-leading sales. It has grown revenue at a 7% rate over the last nine months, or almost double those rivals' results. Yes, investors have to pay a premium for this stock when compared to most other retailers. But they get a more resilient and consistent business in exchange for that higher valuation.
Off-price but on target
TJX Companies is different than your average retailer. The owner of the Marshall's, TJ Maxx, and HomeGoods franchises focuses on off-price products, for one, which tend to attract shoppers through a wide range of economic conditions. That approach, combined with other key assets like a huge sales base and a trusted brand, has been a gold mine for long-term investors. TJX Companies just marked its 22nd consecutive year of positive sales growth in fiscal 2018.
Fiscal 2019 is on track to be even better, with revenue gains accelerating to between 3% and 4%. Meanwhile, investors can relax as they collect a steadily rising dividend. TJX Companies has 22 consecutive annual pay raises under its belt, putting it within spitting distance of achieving Dividend Aristocrat status. For a retailer to make it into that club, it has to have the right mix of growth and competitive strengths -- just what shareholders need to feel confident about taking a hands-off approach to owning its stock.
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Demitrios Kalogeropoulos owns shares of Costco Wholesale and Home Depot. The Motley Fool has the following options: short September 2018 $180 calls on Home Depot and long January 2020 $110 calls on Home Depot. The Motley Fool recommends Costco Wholesale and Home Depot. The Motley Fool has a disclosure policy.