The retail sector has generally put forth lackluster performance over the last five years, and good growth by companies in the space has been hard to come by. Poor ones are a dime a dozen.
But TJX Companies Inc (NYSE:TJX) is a leading off-price apparel retailer that tends to weather economic downturns better than most other retailers. TJX stock has been a notable exception to the retail malaise, managing to maintain good growth and posting gains of more than 225% over the past half-decade, outperforming the retail sector by a good margin.
Over the past year, however, the tables have turned.
Retail stocks have reboundedas the stronger economy has encouraged consumers to continue loosening their purses and shop with glee. Many other low-price retailers from across the sector — such as Costco Wholesale Corporation (NASDAQ:COST) and Kroger Co (NYSE:KR) — did very well in 2014 and their shares surged.
TJX Companies’ same-store growth of 3% suddenly looked very pedestrian compared with Costco’s same-store growth of 6% or Kroger’s same-store growth of 5.2%. TJX shares were outright mediocre by comparison, and have continued to lag the sector in 2015.
Still, for a couple of reasons I’m optimistic that TJX still can perform well over the long-term, key among them the company’s immunity to fashion whims, its lean operations that enable it to have industry-leading profit margins, and its low exposure to international markets, which minimizes the risk of FX headwinds that have been hurting many international retailers.
Unique Operating Model
As a discount apparel retailer, TJX operates very differently from regular apparel sellers such as Nordstrom, Inc. (NYSE:JWN), Kohl’s Corporation (NYSE:KSS), Macy’s Inc. (NYSE:M), and Saks Fifth Avenue.
TJX buys its merchandise from desperate clothing manufacturers with order cancellations, manufacturer overruns and closeouts, and is thus able to obtain heavily discounted prices. TJX is able to pass on these discounts — somewhere in the range of 20%-60% — to its customers.
The company’s unique modus operandi helps it stock a wider variety of brands. Typical TJX customers are working moms who love its cheap merchandise and are usually not too concerned about where the goods are sourced from. And the fact TJX offers a wide variety of brands contributes to an exciting treasure hunt experience that many of its shoppers cherish.
Another aspect that sets TJX apart from other clothing sellers is the way the company manages its inventory. TJX turns over its inventory faster than anyone else in the industry. This greatly minimizes the risk of the company having to engage in fire sales to get rid of stale merchandise.
TJX stores are typically a no-frills affair. The company does not advertise its merchandise, which is hardly surprising given that manufacturers of high-end brands would naturally not want to be associated with cut-price goods. The company’s lean operations are one of the reasons it enjoys higher profit margins than its peers.
Positive European Expansion
A strong dollar might be great for the local economy, but tends to hurt businesses with large international exposures.
TJX was one of the litany of retailers who issued rather downbeat guidance during their latest earnings call citing currency headwinds, but TJX’s exposure to international markets still is quite low.
Morningstar estimates that the impact of currency headwinds on the company’s EPS in the current year will be limited to 5%. And Stifel analysts recently issued a positive note about the company’s European expansion, saying that despite its limited scale in Europe, TJX is well positioned to enjoy a high operating margin in excess of 10% in this market over the long-term.
Bottom Line
TJX might not be completely immune to the retail headwinds that its peers face in the space. The company is, however, well-positioned to weather these storms better than its brethren.
This makes TJX stock a solid long-term pick.
As of this writing, Brian Wu did not hold a position in any of the aforementioned securities.
