It has been a bumpy ride this year for off-price retailer TJX Companies Inc. (NYSE:TJX). TJX stock has been on a roller coaster ride over the past 11 months and investors who’ve stuck it out have only seen returns of 2.5% in that time. Discount stores like TJX initially appeared to be surviving the retail apocalypse because they were offering customers a ‘treasure hunt’ like experience that set them apart from other big-box stores. However, poor third-quarter results suggest that even off-price chains might finally be feeling the Amazon.com, Inc. (NASDAQ:AMZN) effect.
Third Quarter Slowdown for TJX
In the third quarter, comparable sales at T.J. Maxx and Marshall’s stores declined by 1% — a decline that investors took very seriously considering that the comps only increased 0.3% during the first three quarters of the year. Management attributed the slowdown to unseasonably warm weather and hurricanes, but investors started to question whether or not this was the beginning of a slump for TJX.
Some of TJX’s peers like Nordstrom, Inc. (NYSE:JWN), whose off-price brand, Nordstrom Rack, had been thriving, reported similarly disappointing results. That suggests that discount stores are starting to feel the effects of the shifting retail landscape.
Turning Things Around
However, although I’ll admit that the third-quarter slowdown is troubling, I think the company is in a good position to turn things around in the coming quarter.
For one thing, CEO Ernie Herrman admitted that TJX failed to execute in some apparel categories, saying that at least part of the poor comps can be attributed to a “fashion miss.” That’s reassuring, because it means that TJX has the opportunity to improve its offerings and pick itself up in the all important holiday quarter.
Luckily, TJX’s inventory is very well managed, and that means the company can capitalize on the inventory misses of its higher-priced retail peers. Right now, many retailers are struggling with inventory overload and will be looking to sell it off at a discount — that means TJX will have an opportunity to buy up new stock that will connect better with customers.
It’s Not All Bad … But Some of It Is
Then there’s the fact that TJX isn’t just a clothing retailer, the company also operates HomeGoods which saw a 3% increase in same-store sales, which is a pretty good showing for a brick-and-mortar retailer.
TJX has also been upping its online game — the company has successfully started up an e-commerce arm despite the fact that its products are constantly changing. Not only can TJ Maxx customers shop for bargains online, but the company also owns Sierra Trading Post which operates exclusively online as an off-price retailer.
The firm has also seen growth internationally. Right now the majority of the firm’s revenue comes from its U.S. operations, but management has said the company is hoping to expand its store count by 50% or more. There’s a huge opportunity for that expansion abroad since the company has barely scratched the surface in many countries.
That doesn’t mean that TJX doesn’t have some hurdles to overcome, though. It’s possible that the declining comps are part of a larger problem and not just a blip on the radar as management seems to believe. There’s no question that brick-and-mortar retail is under siege, and companies like TJX are defiantly not immune to what’s happening in the retail space.
As James Brumley pointed out, some analysts think this is the beginning of the end for ‘off-price’ stores. Although there are a lot of retailers out there with excess inventory, the sheer number of off-price players is simply getting to large and that supply of discount goods will eventually dry up. Not only that, but there’s no ignoring that people are starting to prefer online shopping and spending on experiences rather than stuff.
The Bottom Line
As a player in the retail space, TJX is certainly navigating some choppy waters. However, the company looks well equipped to outlast some of its peers and come out on top in the off-price category. Not only have we seen TJX Companies embrace e-commerce, but the firm has been able to maintain store traffic and give customers a reason to visit physical store locations.
If we are looking at a larger trend in which off-price retailers suffer the same fate as their retail peers, TJX is prepared to weather the storm. The company has relatively low debt and management has been able to effectively manage inventory and keep costs down.
As retail goes, TJX stocks is one of the better picks.
As of this writing, Laura Hoy was long AMZN.
