Why a Surging Economy Isn’t Necessarily Good for TJX Stock

TJX stock - Why a Surging Economy Isn’t Necessarily Good for TJX Stock

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It was the best of times for retail stores — at least, according to Target (NYSE:TGT) CEO Brian Cornell. Last Wednesday, Cornell said, “There’s no doubt that, like others, we’re currently benefiting from a very strong consumer environment — perhaps the strongest I’ve seen in my career.” Just last year, all we heard about was the retail apocalypse. Now, Amazon.com (NASDAQ:AMZN) worries have taken a back seat to the roaring economy.

But what does it mean for discount retailers such as TJX Companies (NYSE:TJX)? TJX stock has rallied sharply this year, but bears have their concerns. Will the good times keep on going for TJX stock, or is it time to lock in some gains?

TJX Stock and the Economic Cycle

In times past, discount retailers tended to lag the market when the economy was doing well. It isn’t hard to see why. Consumers, when flush with dispensable cash, will tend to shop at nicer stores. And, on the other end, when the economy turns sour, a lot of people pull back on spending, in turn favoring price-oriented stores. In 2008, for example, chains such as Dollar Tree (NASDAQ:DLTR), Dollar General (NYSE:DG) and Big Lots (NYSE:BIG) fared very well compared to most retail competition.

Dollar Tree stock, for example, almost doubled during 2008, while the broader market was melting down. And for what it’s worth, TJX stock held up fairly well. By mid-2009, TJX was trading above where it had been in early 2008 as investors quickly bought it back up as soon as the worst of the crisis had passed. Rather remarkably, TJX reported no negative same-store sales comps during the duration of the financial crisis, showing its resilience in a lousy economy.

However, TJX and other discounters should be expected to struggle in conditions such as 2018. With the favorable impact of the tax cuts on consumer sentiment, combined with historic unemployment, consumers are feeling less financial pressure. As a result, you’d expect to see TJX lose appeal with consumers.

A New Paradigm

Some of the low-end chains are indeed floundering in 2018, as we’d expect. Dollar Tree and Big Lots, for example, are both down double digits year-to-date. Others, though, are doing great. TJX’s closest peers are on a tear. Burlington Stores (NYSE:BURL) has doubled over the past 12 months, while Ross Stores (NASDAQ:ROST) has gained more than 50%.

It seems that something has changed with the economic cycle. In the past, we would have expected mall department stores to do well with a raging economy. Instead, JCPenney (NYSE:JCP) and Sears Holding (NASDAQ:SHLD) seem to hit new lows almost every week. Additionally, even stronger players such as upscale Nordstrom (NYSE:JWN) are opening more off-price stores that compete with TJX, rather than focusing in their usual high-end lane.

This has led analysts to wonder if the traditional model has broken down. Perhaps middle-class consumers simply aren’t going to return to higher-priced brick-and-mortar retail, even when the economy is good. It’s worth considering that it seems that rising income inequality is thinning out the middle class, creating a more clear line between economic winners and losers. If so, that should be a strong tailwind for TJX and similar retail companies, as they appeal to a growing demographic group — those struggling to keep up in the new economy.

TJX Is Beating Expectations, But for How Long?

In any case, TJX keeps putting up great same-store sales figures, much to the surprise of the bears. This last quarter showed a monster 6% gain, in fact, against expectations of just 2% growth. Not surprisingly, TJX stock ran up to another new high, with Burlington and Ross also advancing. For whatever reason, these companies have managed to buck the usual economic cycle in their sector.

That said, TJX is unlikely to be able to beat the trend forever. For one thing, the off-price game is getting more saturated. You have Burlington, TJX, and Ross Stores all expanding at a decent clip. Newer competition is coming from the likes of Ollie’s Bargain Outlet (NASDAQ:OLLI) and even stores such as Nordstrom with its discount concept.

Additionally, there is a finite supply of closeout inventory to be had. At the rate all these companies are expanding, they’ll likely run out of good merchandise with time. Remember, it’s closeout or off-price inventory because some other manufacturer or retailer made a mistake or miscalculation when making the product in the first place. Manufacturers are unlikely to want to keep increasing the proportion of their sales that go to off-price retailers as it is terrible for their margins.

TJX Stock Verdict

There’s a good case to be made for holding TJX stock here. The company is, against the odds, continuing to grow same-store sales even during a strong economy. Management deserves some real credit for exceeding expectations. And given how late we are in the economic cycle, a recession should be coming sooner than later. TJX’ sales should hold up better than retail competition during the next downturn.

As a result of these factors, TJX stock seems like a decent momentum play. But the stock is expensive at 26x trailing earnings and an unusually high for retail 1.9x price/sales ratio. Long-term headwinds will likely slow down TJX stock sooner or later. The increasing saturation of the off-price concept, the potential lack of sufficient inventory, and the absence of a strong e-commerce presence will all put a damper on TJX’s high valuation multiple sooner or later.

At the time of this writing, Ian Bezek held no positions in the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2018/08/surging-economy-not-good-for-tjx-stock/.

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