Thrift Better Than Sex for TJX

10/11/2011 9:35 am EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

America’s leading brand-name discounter is cleaning up on the hunger for good deals, writes senior editor Igor Greenwald.

We’re a nation of temps, part-timers, and protesters no longer looking for work these days, at least at the margins where initial impressions form. Our confidence is shot, the credit cards maxed out.

Once trendsetters on the global scene, we’re now the embarrassing uncle in stomach-hugging pants, dispensing unsolicited advice everyone ignores.

We are, in other words, collectively TJ to the Max, an adjectival phrase denoting (perhaps unfairly) the wearing of unseasonable, unfashionable, or defective clothes.

And who’s better placed to profit from this unsightly state of affairs than the bargain peddlers at TJX (TJX)? That’s right: no one.

The TJXers may not know what “old-school” means, but they’re very old-school, in the accepted righteous sense, about making lots of money selling shmatte. And they’ve been very, very old-school about sharing the fruits of those labors with shareholders, via dividend hikes and share buybacks.

Because cash flow never goes out of style, this unhip but sturdy moneymaker would look good in most portfolios right now.

Perhaps TJX is doing so well these days because, like us, the company is a survivor. Tracing its roots to a ladies’ hosiery store opened in Boston by immigrant Russian Jews in 1929, it evolved into the horrible, unshoppable Zayre discount chain before hiring away a rival’s key executive, who hit a home run with the T.J. Maxx concept.

By the end of 2006, hackers tacking advantage of the laughably lax data security at one of the T.J. Maxx stores had stolen more than 45 million debit- and credit-card numbers. The company didn’t notify customers for a month after learning of the breach, and ultimately paid out well under $100 million in monetary compensation, mostly to MasterCard and Visa.

Affected consumers got credit monitoring, $15 in cash or a $30 coupon, and a one-day 15% off sale. The stock lost 13% over three months, but was at a new high by August 2007.

Shares lost nearly half their value in the fall of 2008, but even in that time of consumer panic, underlying same-store sales were down just 1% from 2007. On an annual basis, TJX hasn’t posted negative comps since 1996.

Meanwhile, the 1.3% dividend yield isn’t bad by retail standards. And the payout has risen for the last decade at a 22.5% annual growth rate, according to Zacks.

And yet the company will still spend $1.2 billion on share buybacks this year, nearly six times what it will pay out in dividends. Aggressive buybacks have more than doubled earnings-per-share since 2008, and are expected to boost them 14% this year and 12% in 2012.

But what I really like is that this embarrassment of riches doesn’t seem to have dulled corporate hunger. Maxxers are hustlers, for customers as well as deals.

Last year, on the weekend before Thanksgiving, they seeded their stores with a few score of iPads, bought retail and advertised for $100 less as a loss leader, forcing Steve Jobs himself to waste precious time denying any sort of a relationship. No matter: the ploy garnered publicity and store traffic ahead of the crucial Black Friday.

Also, Burberry sued TJX last year for selling checkered patterns resembling its own. Such are the costs of the rag-trade arbitrage.

What really matters is that margins are up despite increased marketing efforts and inventories lean, reducing the need for discounts. Same-store sales were up a strong 4% in September, and the company had to tamp down expectations for an even stronger year-end than it’s already forecasting.

No business is without flaws, of course. TJX Canada (owner of Winners and HomeSense, among other Canadian brands) has underperformed of late, the AJ Wright down-market expansion in the US had to be aborted, and this classic Onion article says a lot about the chain’s stocking and customer-service problems.

But what’s really funny is how shareholders have cleaned up on those messy stores. At 13 times next year’s earnings, the stock’s a bigger bargain than the merchandise.

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