Pricey TJX Booms on Bargain-Brand Names

by Alyssa Oursler | August 14, 2012 11:42 am

News that retail sales increased[1] in the month of July probably led to sighs of relief and even celebrations from many retailers, but it didn’t change much for value-oriented TJX Companies (NYSE:TJX[2]).

That’s because TJX — which operates Marshalls and T.J. Maxx stores, among others — has been going strong despite broader retail struggles of the past few months.

The company’s momentum continued during the past three months. Second-quarter net sales increased 9% year-over-year to $5.9 billion, and earnings grew 20% to $421 million, with adjusted earnings of 56 cents topping analyst expectations by a penny. Those numbers mark TJX’s 13th consecutive quarter of revenue growth and fifth consecutive quarter of earnings growth.

Considering the sometimes shaky world of retail, this might sound surprising. But considering TJX’s business model, it actually makes perfect sense.

TJX takes advantage of overproduction from manufacturers, buying up extra already-popular, in-season goods for low prices while remaining flexible on the sizes and styles it accepts. This has a few fundamental benefits: less volatility, fewer margin and revenue swings, and less time that goods sit in inventory.

Throw in the recent tough economic climate, though, and the biggest benefit is clear: TJX can offer great values — and values are exactly what penny-pinching American consumers are looking for.

The popularity and continued growth of discount retailers like Wal-Mart (NYSE:WMT[3]) and dollar stores[4] like Dollar Tree (NASDAQ:DLTR[5]) and Dollar General (NYSE:DG[6]) is a testament to that. However, stores like that, while they have cheap prices, also feel cheap. T.J. Maxx and Marshalls, on the other hand, don’t. Customers like that.

In the second quarter, same-store sales were up 7% — and the company hasn’t posted a decline in that metric in the past decade. Compare that to other retail names: Macy’s (NYSE:M[7]) saw its same-store sales fall five times, Kohl’s (NYSE:KSS[8]) saw them drop three times, Gap’s (NYSE:GPS[9]) fell eight times and Sears Holdings (NASDAQ:SHLD[10]) posted drops in all 10 years in that same time period, according to Bloomberg[11].

The most recent growth was driven by a substantial increase in customer traffic, which the company said reflects its “on-point fashions and brands at great values.”

And an increase in foot traffic is indeed impressive — just look at retailer Aeropostale (NYSE:ARO[12]), for one, which recently cut its outlook because of weaker traffic[13]. Shares plunged as a result, sending the company to double-digit losses for the year to date.

TJX, on the other hand, is booming. It has gained 36% since January and more than 60% in the past year.

The company’s shares didn’t jump on Tuesday’s news, though; instead, they wiggled between slight gains and losses. But that could just be because such success was to be expected.

Of course, with evidence that overall retail sales might be getting back on track, investors might be concerned about whether TJX can keep up its growth, or if customers will migrate back to their pre-recession shopping habits. Macy’s just posted a strong second quarter[14], for example, and improved sales at similar department stores could work against TJX’s stores.

But that result seems unlikely. Great value, especially when paired with brand names, doesn’t really go out of style — the company’s sales growth streak is a testament to that. And its business model, as the company put it[15], “enables (TJX) to succeed in most macro environments and, at the same time, has terrific growth potential.”

One pitfall though: TJX is a bit on the pricey side. Shares currently are trading at more than 20 times trailing earnings; meanwhile, luxury department store Nordstrom (NYSE:JWN[16]) is trading around 18, Macy’s at 12 and Dillard’s (NYSE:DDS[17]) at a paltry 7 and change — even after a fantastic 65% run this year. Still, TJX’s valuation is right on par with another growthy value-oriented competitor — Ross Stores (NASDAQ:ROST[18]), which trades at 22 times earnings and has nearly doubled in the past 52 weeks — so the premium seems merited as long as it can keep up the growth.

And growth certainly seems to be the expectation. While most companies are lowering their outlooks[19], TJX actually raised its full-year earnings guidance by a penny per share, and forecast earnings of 56 cents to 59 cents a share for Q3, along with a 2% to 4% increase in same-store sales.

The bottom line: This discount retailer has a lot going for it. TJX has a recipe that gets customers in the stores and sends them back out with packed bags. As long as value stays en vogue — and it should — TJX should continue bringing in solid results.

As of writing this, Alyssa Oursler did not hold a position in any of the aforementioned securities.

  1. retail sales increased:
  2. TJX:
  3. WMT:
  4. dollar stores:
  5. DLTR:
  6. DG:
  7. M:
  8. KSS:
  9. GPS:
  10. SHLD:
  11. according to Bloomberg:
  12. ARO:
  13. recently cut its outlook because of weaker traffic:
  14. posted a strong second quarter:
  15. as the company put it:
  16. JWN:
  17. DDS:
  18. ROST:
  19. lowering their outlooks:

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