In normal circumstances, off-price discount retailers like TJX Companies (NYSE:TJX) offer a straightforward investment thesis. Selling name-brand fashion and household goods far below their regular retail price, TJX stock broadly appeals to investors. Furthermore, the company’s attractive rates create a moat against disruptive e-commerce stores.
That said, TJ Maxx stock took a beating starting from the middle of this week. With the shocking 800-point drop in the Dow Jones on Wednesday, virtually all companies saw red ink. Furthermore, TJX Companies faces an acute threat from the ongoing and escalating U.S.-China trade war.
As everybody knows, TJX stock lives on profitability margins. Their business revolves around taking off-season or otherwise discounted goods and passing the savings onto customers. However, a protracted trade war risks common goods and apparel from suffering a price hike. Eventually, this translates to higher costs for TJ Maxx, which directly impacts their more price-sensitive customers.
However, this circumstance most likely won’t impact the upcoming TJX earnings report for the second quarter of fiscal 2020. Analysts are expecting a solid showing, in line with prior results. Still, recent macro-economic headwinds will impact how you approach TJ Maxx stock. Let’s take a deeper look:
TJX Earnings Should Beat, but Guidance Will Be Key
For Q2, consensus estimates peg TJX earnings per share at 62 cents. This is in the middle of a narrow forecast spectrum, which ranges from 60 cents to 64 cents. In the year-ago quarter, the discount retailer produced an EPS of 59 cents, besting consensus of 53 cents. Therefore, a beat is well within reason, given the company’s impressive growth trajectory.
Speaking of growth, analysts forecast revenue to hit a consensus target of $9.9 billion. Again, the forecast range was very narrow, from $9.8 billion to $10 billion. In Q2 fiscal 2019, top-line sales came in at $9.3 billion. As with expectations for TJX earnings, it’s not unreasonable to anticipate a revenue beat.
Ordinarily, I’d expect TJX stock to jump both ahead of the print and after it. Fundamentally, TJ Maxx has done what few retailers have: offer a viable alternative to Amazon (NASDAQ:AMZN) and other online threats.
More impressively, the underlining business for TJ Maxx stock doesn’t lend itself to organic protection. This isn’t Home Depot (NYSE:HD), where consumers must absolutely have the perfect product. Instead, we’re talking about apparel and home goods, not exactly mission-critical stuff.
Further, 44% of online consumers begin their e-commerce window-shopping on Amazon. Thus, Amazon has countless opportunities for spur-of-the-moment purchases. Yet TJX stock has performed very well up until recently due to attractive prices, rotating inventory, and powerful initiatives like targeted mobile ads.
But because we have this nasty trade war, most retailers understandably face credibility questions. And that’s why TJX stock won’t have an easy go just because management hits all the right notes for the print. Instead, it’s guidance that will count.
How they will spin this is tough to predict. Like I said, TJ Maxx stock depends on margins which the trade war threatens.
How to Approach TJX Stock
When strategizing your next move, it helps to adopt a practical approach. On one hand, the TJX earnings report will likely highlight the reasons why you’re thinking about these shares. Additionally, TJ Maxx stock appeals to those who seek protection from a broader market downturn.
Because no matter what happens in the economy, people need to buy clothes. This dynamic alone will make TJX stock incredibly relevant.
Further, deflated consumer sentiment may actually help TJ Maxx at Amazon’s expense. If belt-tightening occurs, consumers are less likely to pay for things like shipping or premium subscriptions. Instead, they’ll hop into their cars and shop at brick-and-mortar retailers.
But on the other hand, this market decline probably represents a sign of things to come. We’ve been riding the longest bull market in history. Inevitably, we’ll have some kind of corrective action. And in this context, I believe TJX faces volatility risks.
Therefore, I’d probably sit out doing anything rash prior to and immediately following the TJX earnings report. Let the markets fully digest these macro-headwinds, and then carefully buy into the discount.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.