Better Retail Stock: TJX Companies vs. Walmart

Consumers have been feeling the economic strain as persistently high prices and an uncertain labor market weigh on their spending. This has had an effect on many retailers' sales.

Two retailers have done well, though -- TJX Companies (NYSE: TJX) and Walmart (NASDAQ: WMT). But which retail stock makes the better long-term investment?

TJX Companies

TJX Companies operates under brands like TJ Maxx, Marshalls, and HomeGoods, offering goods like apparel, jewelry, furniture, and cookware. It's become known for offering merchandise 20% to 60% below full-price retailers.

How can it sell it so cheaply? TJX buys excess inventory from manufacturers at attractive prices and passes along these savings in the form of lower prices to customers. It's particularly effective during challenging economic times since it has a greater selection of merchandise and more negotiating power.

Since it buys merchandise based on availability and price, its offering could change. Hence, it provides a "treasure hunt" experience to customers.

People remain drawn to TJX's merchandise and value proposition. Its fiscal third-quarter same-store sales (comps) grew 5%, and they were positive across each division. This covered the period that ended on Nov. 1.

Walmart

Walmart has been tremendously successful since opening its first discount store in the early 1960s. The company operates under a simple premise: Keep a close eye on costs so it can charge customers everyday low prices. In fact, customers would be hard pressed to find lower prices.

Over the years, management has also been investing in technology to remain competitive. This includes making shopping faster and more convenient.

Walmart has three segments. These are Walmart U.S. and Walmart International, and Sam's Club (membership warehouse club). The Walmart U.S. business produces the majority of the company's revenue, however.

It's not a mature business that's no longer growing sales, either. The U.S. segment's fiscal third-quarter comps rose 4.5%. Higher traffic contributed 1.8 percentage points, and increased spending accounted for the balance.

Better buy

Walmart may no longer offer fast growth, but its steady sales and earnings growth clearly have appealed to investors. The shares returned 183% over the last five years through Feb. 2, beating the S&P 500 index's 96.2% return.

As a result of this success, the shares aren't a bargain. In fact, trading at a price-to-earnings (P/E) ratio of 44, they're expensive compared to the 10-year median multiple of 29. The stock also trades at a much higher multiple than the S&P 500's 30 P/E ratio.

TJX has also rewarded shareholders with a market-beating return. The stock's 145.7% 10-year return was nearly 50 percentage points higher than the S&P 500. While the stock's P/E multiple of 34 is higher than its 10-year median of 24, it's not that much higher than the market's valuation.

I'd buy both Walmart and TJX, but if I could only choose one, I'd pick the latter based on its much better valuation.

Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends TJX Companies and Walmart. The Motley Fool has a disclosure policy.