TJX beat on revenue and EPS with better than expected SSS. Performance was solid across divisions and concerns around inventory availability were dispelled. SSS were +3% vs guidance of +1-2% with strong performance across their apparel and home categories. Traffic was the primary driver across all 4 divisions. Marmaxx division (60% of revenue) SSS were +4% driven mostly by traffic and slightly by ticket. International SSS were +1% despite a “challenging retail environment” in Europe (where they have over 500 stores). Full year guidance is 1-2% SSS (in their 40+ yr. history they’ve had only 1 year of negative SSS). They also mentioned they “have been disproportionately attracting new millennial and Gen Z customers.” Merchandise margins compressed a little, but gross margins were flat. They are seeing some headwinds from wages and “significantly higher” freight costs, offset by positive Fx and a lower tax rate. The midpoint of full year guidance was raised despite these headwinds and with a lower expected tax benefit. Full year EPS should be about $4.07 plus a $0.72 benefit from a lower tax rate.
Management was resoundingly positive regarding inventory availability. This is important and likely the reason the stock traded up after the call. A key concern with the stock is that the structural changes we are seeing in the retail landscape will limit supply and that they might see a permanent shift in inventory availability and quality. Management said they are seeing unusually good availability of supply not just of inventory generally, but of better brands. And that e-commerce only retailers are a source of product. Another concern from investors is whether the mix of inventory is shifting more towards private label from branded. This is something to keep an eye on, but based on management comments, is clearly not an issue at this point.
Currently, home is about 30% of their business and an important area of growth. In addition to the HomeGoods concept in the US, they are adding 400 HomeSense stores, a home concept focused on bigger-ticket furnishing. Sales at their first few HomeSense stores are exceeding expectations. In general, rising home values and pent-up demand in housing should aid sales in this division. Additionally, management said new store openings at had accelerated, because they found “very advantageous real estate deals in numerous pockets throughout the country.”
They have an opportunity to continue growing abroad and grow their home concept in the US. TJX sees the potential to add more than 2,000 stores globally across its banners, including 400 for the new HomeSense concept in the U.S. Their e-commerce platform, while small now, should also be a future source of growth – they operate Sierra Trading Post, tkmaxx.com and tjmaxx.com and are investing heavily in technology.
Valuation:
· Balance sheet is strong. They have no net debt.
· Store openings will bolster top line growth.
· They have been steadily FCF positive, even though the financial crisis they still posted 3% FCF margins. LT FCF margins are 6-7%.
· Assuming a normalized FCF margin, they trading at close to a 5% forward yield.
· On unadjusted EPS, the P/E multiple is 18x.
· In April they increased the dividend by 25%; div yield is 1.8%
The Thesis on TJX:
· Market leader: opportunity to benefit from a lasting paradigm shift in consumer frugality. Treasure hunters – TJX has strong brands that attract cost conscious consumers– evident through consistently strong customer traffic.
· Strong bargaining power with suppliers due to size.
· Quality: Solid and consistent execution and top line growth driving strong margins through cost cutting/inventory control.
· Shareholder returns: Strong returns (ROE +50%) balance sheet and cash flows being used for share buyback program, dividend, and store expansion.
· Attractive long term EPS growth of 10%+.
$TJX.US
[tag TJX]
Sarah Kanwal
Equity Analyst, Director
Direct: 617.226.0022
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square, Suite 500
Boston, MA 02109
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