Current Price: $50 Price Target: $60 (updated for the stock split)
Position Size: 3.6% TTM Performance: 29%
TJX reported Q4 EPS that was in-line with the street and much better than expected SSS (+6% vs consensus +3.5% (guidance was 2-3%). Guidance was a little below expectations due to higher wage and freight costs and currency headwinds. For Q1 wage and freight will be a 7% drag on earnings, for the full year these are expected to be a 4% drag. It’s been a very mixed quarter of results for retailers so far. WMT, COST, TGT and now TJX have all stood out with strong results while others reported a poor holiday season, particularly department stores. TJX, along with other off-price retailers, captured market share in the US. TJX’s sales have doubled over the last 10 years despite a changing retail environment.
Key takeaways:
· TJS Q4 SSS were an impressive +6%. Traffic was again the biggest driver (SSS numbers do not include e-commerce).
· Performance was solid across all divisions and geographic regions.
· Core Marmaxx division (60% of revenue) delivered SSS growth of 7%.
· For the full year, HomeGoods was their fastest growing division with 10% square footage growth and 4% SSS.
· The margin pressure they are expecting from freight and wage increases is a continuation of trends they saw last year.
· Q4 gross margins were flat and inventories grew less than sales. For fiscal 2019 merchandise margin was essentially flat despite a significant increase in freight costs. Ex-freight, merchandise margins improved significantly.
· Optimistic comp guidance: Fiscal 2020 EPS outlook is based on SSS growth of 2%-3% (3%-4% at Marmaxx). This is notably positive because for at least the last 6 years, they have started the year with comp guidance of 1-2% and have ratcheted up that guidance as the year progresses.
· Announced they are launching e-commerce for Marshall’s later this year.
· Tariffs: when asked on the call about the impact of tariffs on product availability, mgmt. said longer term it’s probably going to be a benefit for them because any chaotic change in the way vendors manage or allocate product will ultimately benefit them.
· Continue to take share in Europe: In Europe comp sales grew 3% despite the challenging retail landscape. 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
Valuation:
· Balance sheet is strong. They have no net debt.
· Store openings will bolster top line growth. In 2020 they plan to add 230 net new stores, representing 5% store growth.
· They have been steadily FCF positive, even through the financial crisis they posted 3% FCF margins. LT FCF margins are 6-7%.
· New repurchase authorization represents 2% of their market cap. In fiscal 2019, they returned $3.4B to shareholders
· They are trading at about a 4.5% 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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