Current Price: $47 Price Target: $60 (updated for the stock split)
Position Size: 2.3% TTM Performance: 29%
TJX reported a good quarter amidst a tough day with retailers. They beat on revenue and were in line on EPS. There’s a theme emerging from retail generally – demand is strong but profits are pressured by rising wages, higher freight, higher cost of e-commerce fulfillment. A bunch of retailers are down today on generally strong SSS, but increasing profit pressure. SSS have been robust driven by high consumer confidence, record unemployment, rising wages, tax cuts. Retail sales growth for the holiday season is expected to be ~4.5-5%, which is really high.
· TJS Q3 SSS were an impressive +7%. This was an acceleration from +6% last quarter. Traffic was again the biggest driver. Core Marmaxx division (60% of revenue) delivering SSS growth of 9%. HomeGoods SSS were +7%. SSS numbers do not include e-commerce.
· Full year SSS guidance raised to 5% for consolidated TJX and raised to 6% for Marmaxx division. Q4 SSS guidance is 2-3%. Excluding impact of the tax act, EPS guidance raised from $2.06 to a range of $2.08 to $2.09
· For next year, they are expecting incremental margin pressure to continue from freight, wage increases, and supply chain investments. They expect freight and wage each to have about a 2% negative impact to EPS growth in fiscal 2020.
· In the Q3, gross margins were lower than expected driven by lower merchandise margin. While merchandise margin was down, it would have been up excluding freight costs. This is the same trend as last quarter. This was offset by better SG&A leverage.
· Inventory was up 17%, well ahead of sales. This is not alarming given robust SSS – it is a function of buying strategy based on inventory availability.
· Management was again resoundingly positive regarding inventory availability. They said they continue to see “abundant” availability of supply not just of inventory generally, but of better brands.
· Performance was solid across all divisions and geographic regions.
· Despite a “challenging consumer environment”, Europe continues to do well and they are taking share. International (Europe & Australia) SSS were +3% a slight deceleration from 4% last quarter. They have over 500 stores in Europe- in mainland Europe, they are in only 4 markets: Austria, Germany, Poland and the Netherlands. They also have stores in the UK.
· Canada also saw a slight deceleration to +5% from +6% last quarter.
Valuation:
· Balance sheet is strong. They have no net debt.
· Store openings will bolster top line growth.
· They have been steadily FCF positive, even through the financial crisis they posted 3% FCF margins. LT FCF margins are 6-7%.
· They trading at about a 5% forward yield.
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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