TJX Companies (TJX), a leading off-price retailer of apparel and home fashions, carries CFRA’s highest recommendation of 5-STARS, or Strong Buy, explains analyst Camilla Yanushevsky in CFRA Research's flagship newsletter, The Outlook.
Our positive investment view reflects our belief that investors underestimate TJX’s ability to win in retail’s new paradigm.
First, TJX’s opportunistic purchasing model gives the company unprecedented leverage with suppliers, which are over-inventoried due to Covid-19 store closures in March and April, and are looking to quickly off-load, even for pennies on the dollar.
Looking closer at the logistics, TJX purchases later in the merchandise buying cycle than department, specialty, and other discount stores, which allows it to take advantage of imbalances between manufacturers’ supply of products and retailers’ demand.
Additionally, a large portion of TJX’s merchandise comes from opportunistic purchases created by manufacturer overruns and canceled orders, called “close-out” purchases.
Close-out purchases can be shipped to stores in-season or stored in warehouses as packaway merchandise. This strategy gives TJX the ability to procure the most popular brands at competitive prices.
Beyond 2020, we see TJX’s bargaining power further solidified as manufacturers’ choice of wholesalers dwindles with the retail industry, with our expectation for more than 10,000 store closures in 2021 alone.
We also like TJX’s defensive features with a long history of consistent sales and earnings per share growth in both healthy (posted positive comp and EPS growth consecutively year-over-year since FY 96) and challenging retail and macroeconomic climates.
Our forecast is that TJX’s sales will decline 17% in FY 21, with a strong recovery in FY 22, climbing 28%, with tailwinds from the resumption of a more aggressive pace of store openings (100+) and remodeling, we surmise. We estimate TJX’s long-term global store count potential is 6,100 stores vs. 4,529 at the end of FY 20.
Importantly, we expect that with the company’s strong free cash flow generation ($2.8B we see in FY 22), TJX will soon reinstate its dividend, which has for decades been an integral part of its total shareholder return algorithm. Our 12-month target of $65 is based on 22.0x our FY 22 EPS estimate of $2.96.
