Current Price: $56 Price Target: $83
Position Size: 3.7% TTM Performance: -6%
Key takeaways:
- Stock is trading down today after ROST gave a weak outlook. No news on TJX. While ROST is also an off-price retailer, they have different merchandising strategies, a different core customer (higher income at TJX) and ROST has less than half the scale of TJX. Quote from ROST call: “escalating inflationary pressures had a larger impact on lower-income households.” ROST had -7% SSS, while TJX SSS were flat.
- Managing current/inflationary environment better than peers; their margins are going up while others are going down – slight miss on top line but beat on earnings given better than expected margins and gave higher full year EPS and margin targets. Their strong mark-on aided by their nimble merchandising strategies, recent pricing initiatives and expense management are helping offset higher freight.
- TJX’s agile business model gives them a big advantage as consumers are shifting what they are buying…
- TJX can adapt and be opportunistic…they are constantly in the market buying and flowing in-season goods to stores w/ shorter lead times than traditional retailers and they have the ability to pivot merchandising based on current trends. Other retailers don’t have the same agility, which is leading to excess inventory that TJX can opportunistically buy.
- For instance, TGT got hurt by having inventory in the wrong categories. On their call they simultaneously talked of excess inventory and also out of stocks and having to find temporary places to store bulk inventory…i.e. too much furniture and TVs and not enough luggage and on-trend apparel. They’re also seeing shift to lower margin essential items where they may limit passing through price increases. In the current environment, with tight shipping capacity, there is a stiff penalty to shipping stuff you can’t sell right away, storing (cost and extra labor) and expediting shipping on other stuff leaving them more exposed to things like spot trucking prices where diesel costs are surging (while gas prices have come down recently diesel prices have continued to go up).
- Excess inventory at other retailers is an opportunity for them – inventory is up across retailers as shortages, shipping delays and changes in what consumers are buying (reflective of a shift to spending on services over goods…i.e. buying luggage for travel, clothing for events).
- In a recessionary environment, off-price value proposition increases as consumers’ wallets tighten and higher quality inventory becomes more available.
- Higher labor costs should be stickier than freight. When freight pressures abate, this will be a tailwind to margins –While higher wages will stay, freight pressures are expected to improve, which should be a tailwind to margins, particularly for the companies that were able to raise prices to offset.
- Valuation: strong balance sheet, 2% dividend yield as they just raised the dividend 13%; in fiscal ’23 they plan to buyback $2.25B to $2.5B of stock (or about ~3.5% of the market cap), and the valuation is reasonable at ~5% forward FCF yield, cheaper than the S&P. They are growing the top line mid-single digits and w/ margin expansion and buybacks, they’re compounding FCF/share double digits.
- Quotes from the call..
- “in today’s highly inflationary environment, we believe our value proposition is as appealing as ever.”
- “We still have plenty of open-to-buy for the second quarter and second half of the year. We remain well positioned to take advantage of excellent deals we are seeing in the marketplace and flow fresh merchandise to our stores and online throughout the year.”
- “we continue to see significant store growth opportunities ahead for all of our divisions. As we have seen over the last few years, demand for our exciting and inspiring in person shopping experience remains strong. We see our flexible buying supply chain and store formats as tremendous advantages, which allow us to open stores across a wide customer demographic. All of this gives us confidence in our long-term plan of opening more than 1,500 additional stores in our current markets with our current banners.”
- “we are planning to grow our sales and open new stores, while many other retailers are closing stores, we offer vendors a very attractive solution to clear their excess product.”
- Long-term thesis intact – Relative to other brick-and-mortar focused retailers, TJX continues to have a superior and very differentiated model. They acquire their inventory from an enormous (and growing) network of vendors, acting like a clearing mechanism for the retail industry…essentially opportunistically buying leftover/extra product that constantly flows from retailers, branded apparel companies etc. Growth of e-commerce has led to better inventory opportunities/ selection, not worse. They leverage their massive store footprint and centralized buying to merchandise their stores and e-commerce sites w/ current on-trend product. No one else does this at the scale they do. Their immense buying, planning and allocation, logistics teams are helping them navigate the current environment. They have very quick inventory turns and can be nimble and re-active w/ their inventory buys and are an important partner to their sources of inventory…and becoming even more important. It’s a powerful model that continues to take share and, while they have a growing e-commerce business too, their store model has been very resistant to e-commerce encroachment. Moreover, they have a thriving Home business, a growing e-commerce presence, an expanding international store footprint and a track record of steadily positive SSS. Prior to 2020, in their 44 year history they only had 1 year of negative SSS (this is unheard of!). So, with steadily positive SSS, a slowly growing store footprint and an emerging e-commerce business, TJX steadily grows their topline w/ consistent margins that are about double that of department stores.
Sarah Kanwal
Equity Analyst, Director
Direct: 617.226.0022
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square, Suite 500
Boston, MA 02109
$TJX.US
[tag TJX]
[category earnings]