Cheap Chic to the Maxx

12/08/2009 1:00 pm EST


Vahan Janjigian

Editor, Bottom Line's Money Masters Stock Report

Vahan Janjigian, editor of Forbes Growth Investor, says leading discount retailer TJX has done well meeting thrifty consumers’ desires for value, and that should continue. 

The TJX Companies (NYSE: TJX) operates off-price apparel and home furnishings stores. It has 2,747 locations across the US, Europe, and Canada. Products consist of brand-name merchandise selling at 20%-60% discounts to original prices.

Traditional retailers must order their inventory many months in advance. However, this planned supply rarely matches current demand. This allows off-price merchandisers like TJX to opportunistically purchase current-season goods from manufacturers and retailers at significant discounts. This also allows TJX to rapidly respond to shifting consumer trends and quickly turn over inventory.

As economic conditions deteriorated, more budget-minded consumers have turned to TJX, which has allowed them to trade down on price while maintaining brand-name goods. This is evident in its comparable-store sales results, which are up 5% in the first nine months for fiscal 2010.

The Marmaxx segment generated 66% of sales. It consists of 889 T.J. Maxx and 811 Marshalls stores, which sell clothing, footwear, accessories, home furnishings, and other merchandise. T.J. Maxx stores offer larger jewelry and accessories departments, while Marshalls offers a wider selection of footwear and men’s and children’s clothing. Both stores target middle- to upper-middle-income consumers.

The HomeGoods segment produced 9% of sales and consists of 324 stores [that sell] furniture, lighting, dining and kitchen wares, bedding, rugs, and storage products. The A.J. Wright segment was responsible for 4% of sales and consists of 148 stores that are similar to T.J. Maxx and Marshalls stores but target lower-income customers.

Europe accounted for 11% of sales. It consists of 262 T.K. Maxx stores across the UK, Ireland, and Germany and eight HomeSense stores in the UK. T.K. Maxx stores follow the T.J. Maxx retail format. HomeSense stores follow the HomeGoods format.

Canada accounted for 10% of sales. It consists of 206 Winners and 75 HomeSense stores. Winners stores follow the T.J. Maxx retail format.

Comparable-store sales growth accelerated in fiscal third quarter, jumping 7% year over year with all segments contributing. This helped net sales increase by 10.1% year over year to $5.25 billion, as growth was supplemented by a 5% increase in square footage.

Gross profit margin expanded 179 basis points to 27.51%, [while] operating profit margin expanded 228 basis points to 11.03%. Adjusted for a one-time gain in [last year’s third quarter], income from continuing operations jumped 36.1% to $347.8 million, or 81 cents per share.

We believe economic conditions will remain favorable for TJX at least in the near term. Management expects fiscal-fourth-quarter comparable store sales to rise 5% to 7% year over year. Thanks to persistently strong merchandise margins, per share earnings from continuing operations should rise at least 18% year over year.

Even if recovering economic conditions encourage consumers [to trade up], TJX believes the preference towards value will continue. Indeed, management expects the combination of resilient comparable-store sales, square footage growth, and improved profitability to deliver 12% annual earnings per share growth through 2013. (The stock closed just below $37 Monday—Editor.)

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