TJX Companies Inc (TJX) - Is the Stock Bargain Merchandise?
TJX Companies (TJX) is a retailer of heavily discounted name brand and designer apparel and home decorations. In the United States, the company has 4 stores: T.J. Maxx (896 stores), Marshall's (817 stores), and A.J. Wright (152) are primarily focused on apparel and accessories. HomeGoods (325 stores) is a home decor and furnishings store, similar to Bed Bath and Beyond (BBBY). The firm also has a sizable presence in Europe with 272 T.K. Maxx stores and 14 HomeSense stores. In Canada, TJX runs 79 HomeSense, 208 Winners (apparel), and 3 StyleSense (a new footwear concept) units, and plans to expand Marshall's to Canada in the near future.
TJX's stores have a compelling concept. Most offer high quality and brand name merchandise at prices 20-60% below department stores. Customers are motivated to return to the stores often due to the "treasure hunt" aspect. Inventory is turned very quickly, so the assortment of product is ever-changing. TJX's buyers purchase late in the cycle, allowing the company to take advantage of unique opportunities and also allowing it to adjust quickly to fashion trends. Also, TJX's stores are built literally without walls. Not only does this keep capital expenditures on fixtures low, but is also allows tremendous flexibility in merchandising, which can quickly change based on the product assortment "du jour".
Let's take a look at TJX through the investment trilogy prism of growth potential, competitive position, and financial strength, and then talk a little about valuation. Like all retailers, TJX will rely on new store openings and increasing same-store sales for revenue growth. With over 2,200 stores in the U.S., there is not a whole lot of expansion potential domestically. Europe and Canada provide some potential, and TJX is planning 110 new stores in 2010. The company has benefited from shoppers looking for bargains in the difficult economic climate, leading to increasing same store sales in the 3-5% range for many consecutive months. Longer term, though, the firm's size and likely economic rebound will probably put a cap on what we can expect for revenue growth. I don't believe anything more than 4-5% annual sales growth will be sustainable.
This can be augmented in several ways. For one, TJX has done a good job improving operating margins. In 2006, operating margin stood at 6.5%, today it sits at over 10%. The main reason for this has been better gross margins, a reflection of improved merchandise acquisition. Additionally, TJX is quite strong financially, with nearly $2 billion in cash, just $790 million in debt, and stable free cash flows currently approaching $2 billion a year. With this cash, it pays a 1.5% dividend yield and routinely buys back 2-5% of its shares each year. These things also contribute to bottom line earnings per share (EPS) growth. In fact, EPS has grown at a compound annual rate of 18% over the past 5 years.
Competition in retail is of course intense. TJX is almost 3 times larger then its most direct competitor, recent Magic Formula stock Ross Stores (ROST). This scale does afford the company excellent relations with many suppliers, giving TJX priority on discount merchandise in many cases (a deal with Ralph Lauren (RL) is one example). That said, I don't think TJX has very significant advantages over the outlet stores of any name brand retailer. While margins have improved in 2009 and 2010, similar results have been seen at Ross. Most likely the improvement is due more to a recent abundant supply of quality goods, as overstocked original manufacturers look to dump inventory.
This last factor is the primary one to be somewhat suspicious of TJX's apparent bargain valuation. 9-10% operating margins are probably not sustainable, and will likely drop back into the historical 7-8% range when the economy improves and/or original manufacturers tighten inventory. The current Magic Formula (MFI) earnings yield (EY) is 13.9%, which is cheap, but not excessively so for MFI. What's more, the market has never been willing to tag the company with a high valuation - 5-year average EY is just 10.2%. Limited revenue growth potential, a probably unsustainable operating margin, and a low ceiling on potential valuation make TJX a mediocre choice for the MFI investor.
Over the short term, though, the economy may remain weak, and TJX may continue to benefit. If we assume about $21.6 billion in sales for fiscal (Jan) 2011, at 10% operating margin, then tag an 11% earnings yield, we come up with a potential target price around $52, a 27% upside from the current price of $41. While this seems achievable, we need to also keep in mind that the 52-week high is just $48.
I'm neutral on this one. MFI investors can probably do better elsewhere over a full year holding, but it's not the worst pick in the screen either.
Steve owns no position in any stocks discussed in this article.
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