TJX reported a great Q4 amid a difficult retail environment. Sales were up 8% on 4% SSS and 4% square footage growth. Notably, traffic was the primary driver of SSS at all of their concepts. Comp store sales exclude e-commerce, which is still small but “grew significantly.” Total global store count now stands at 4,070. They clearly have the model in brick and mortar that is working. They opened 250 stores in 2017 as other retailers continue to shrink their store count. They plan to grow stores 6% this year with most of the growth coming from their home concepts. They increased their dividend by 25% to $1.56, putting them close to a 2% yield.
- Marmaxx, their largest division, had 3% SSS on positive traffic and negative ticket.
- Overall merchandise margins are strong though there was some contraction at HomeGoods.
- Same store inventories were up in-line with sales.
- Wage increases negatively impacted EPS growth by about 1%.
- 2018 FCF was $2B and they returned $2.4B to shareholders.
- They plan to repatriate $1B in cash in 2019
Current Price: $84 Position Size: 2%
Price Target: $84 TTM: 5.4%
Guidance:
- 2019 sales of $37.7B, +5%. Assumes SSS of 1-2% and 6% store growth.
- 2019 EPS: $4.04, +5%, assumes an increase in merchandise margins.
- Wage increases will negatively impact EPS by 2% and will continue to have a negative impact beyond 2019.
- Fx should be about a 1% benefit.
- For SSS by division they expect:
- Marmaxx +1-2%
- HomeGoods +2-3%
- Canada +2-3%
- International 1-2%
Inventory Availability:
- There have been investor concerns that inventory is getting more rationalized at retailers resulting in fewer closeouts and less available inventory in the off-price channel.
- Management addressed this on the call saying that, “availability has never been an issue for TJX in over our 41-year history. Throughout 2017 overall availability of inventory from top vendors was as good as it has ever been.”
- They are one of the most efficient and discrete channels for vendors to clear inventory, whereas clearing inventory online is not as discrete and can be brand damaging.
- Their sourcing scale is part of their competitive advantage and they source from 20k vendors in 100 countries.
- Additionally, on the call management pointed to online vendors as a new source of inventory.
Future growth will rely increasingly on the Home category and International:
- Given this, management is looking towards the home category as their next leg of growth. They are accelerating store openings and are bring the Canadian HomeSense concept to the US.
- One the call they introduced a long-term store target for HomeSense in the U.S. of 400 stores, from the 4 stores today.
- They also expect to add 483 HomeSense stores in Canada, bringing the total there to 600.
- In Europe, they are the only major off-price retailer.
Valuation:
- Their balance sheet is strong with no net debt.
- Store openings will bolster top line growth.
- They have been steadily FCF positive with LT FCF margins averaging about 6-7% and high ROIC.
- Assuming a normalized FCF margin, they trading at about a 5% forward yield.