TJX - TJX Companies: Solid Execution With Margin Expansion Opportunities

2023-10-20 05:56:14 ET

Summary

• TJX benefits from consumers trading down in the weak macroeconomic environment, and its historical performance shows consistent revenue growth.
• The company is well-positioned to capitalize on the anticipated surge in consumer demand for home products as the economy improves.
• Overall, TJX is a buy due to its solid execution, market share gains, and potential for margin expansion.

Summary

This post is to provide an update on my thoughts on the business and stock. I am recommending a buy rating for The TJX Companies (TJX) with the view that it is going to continue growing at the current pace, supported by solid execution, market share gains, and margin expansion.

Business overview

TJX is an off-price apparel and home fashion retailer that primarily operates in the United States. TJX has a presence in both online and offline channels, offering a wide range of brand products. The two major brands that TJX competes against are Ross Stores (ROST) and Burlington Stores (BURL). I see TJX as a business that benefits in both the up and downcycle of the macroeconomy, as evident from its historical performance (~mid-to-high single-digit percentage revenue growth). Particularly for the current weak macroenvironment, TJX benefits from consumers trade-down behavior as they search for value-for-money products. TJX has historically maintained a healthy level of leverage, ~1x net debit/EBITDA ($12.5 billion in debt and $4.5 billion in cash as of the end of the July quarter), and its ability to generate profits and cash provides comfort that the balance sheet will not face liquidity issues.

Investment thesis

Based on its robust execution, notable market share gains, and potential for margin expansion, I am of the opinion that the business is poised to sustain and improve its performance in the forthcoming years. Supporting this claim is 2Q24 performance, which saw 6% comp store sales thanks to 8% growth at Marmaxx and 4% growth at HomeGoods. In terms of perspective, the comparative performance of these two entities has exhibited improvement compared to the preceding years. The average comparable sales of Marmaxx from fiscal year 2017 to fiscal year 2020 stood at 4.1%, while HomeGoods recorded an average of 3.5%. This implies that TJX is performing exceptionally well, considering the current unfavorable macroeconomic conditions. The results of this strong execution were a gross margin of 30.2% and a pre-tax profit margin of 10.4%, both of which were higher than expected.

Looking ahead, TJX should continue to grow at the current pace as the growth drivers are traffic-driven (which is way more sustainable than pricing). During the most recent conference call, the management team mentioned that there were notable increases in traffic across all divisions, which consequently contributed to a 6% overall comparable growth in the quarter. Furthermore, the consistent progress observed over the months in 2Q24 is highly promising, instilling a sense of optimism that this positive trend may persist into the third quarter of 2024. Notably, management has indicated a strong start to the third quarter of 2024, further implying a potential acceleration compared to the second quarter of the same year. Furthermore, management observed a consistent level of robustness in the low, mid, and high income store demographics during the quarter. This observation supports the notion that TJX is likely to exhibit resilience within the current macroeconomic climate due to its ability to serve customers across various income brackets. Significantly, there has been an improvement compared to the previous quarter, wherein high-income stores played a prominent role in driving the comparative improvement. This highlights the commendable ability of TJX to efficiently adapt its product offerings in response to these outcome.

"We were very pleased to see that both comp store sales growth and customer traffic improved sequentially each month of the quarter." 2Q234earnings results call

Moreover, I expect TJX to exhibit a higher rate of growth compared to its industry counterparts due to the distinctive nature of its outsized home business. In terms of reference, TJX has an approximate exposure of $18 billion to home products, while ROST has an exposure of $5 billion and BURL has an exposure of $2 billion. Considering the inherent characteristics of home products, which are relatively discretionary in comparison to daily necessity products, it is my belief that TJX is well-positioned to capitalize on the anticipated surge in consumer demand as the economy improves, leading to an increase in disposable income among consumers. As TJX continues to soak up market share, the business is incrementally better positioned to benefit from this recovery. As per management, as a result of competitor store closures and erratic performance from online home retailers, management has noticed a rise in market share. The confluence of a resurgence in consumer demand and the acquisition of market share is expected to facilitate TJX's return to its historical comparable growth rate of mid-single digits.

In light of the management's assertion regarding the exceptional buying opportunity for off-priced goods across various brands and product categories, it appears that TJX now has a path for margin expansion. I take this as an indication that they are able to pick off inventory at a good deal (lower cost), which bodes well for gross margin. In addition, it is imperative for management to maintain their focus on enhancing shrinkage reduction in stores, as this ongoing effort is expected to generate further opportunities for expanding profit margins. So far, the traction has been positive, as current indicators point to a flat shrink compared to last year.

Valuation

I believe the fair value for TJX based on my model is $107.44. My model assumptions are that TJX will grow at mid-single digits (6%) through FY26, driven by continuous solid execution, market share grains, and margin expansion from reduced shrink and better gross margin (from better inventory procurement). As I expect TJX to grow earnings faster than peers due to its outsized home product segment and margin expansion opportunities, I modeled it to trade at a premium to peers, which is where it is trading today (23x NTM PE). Aside from its growth profile, TJX is also a much larger business, with $51 billion in revenue compared to its peers at $19 billion for ROST and $9.1 billion for BURL. As scale matters a lot in this industry-the larger you are, the better terms you get for inventory procurement-TJX has a big advantage here, which I believe was a key driver of its market share gains.

Risk

The company may experience fluctuations in the pace of comparable store sales growth, which could either slow down or accelerate unexpectedly. Unforeseen disruptions in international business due to the ongoing impact of the coronavirus may be more severe or less severe than anticipated, potentially affecting performance. There is a risk of stores within the U.S. market competing with and negatively impacting each other, which could lead to unanticipated challenges. The business may face either greater or lesser-than-expected obstacles in the short term, stemming from factors such as freight costs and wage pressures, which could influence profitability and operational efficiency.

Conclusion

I recommend a buy rating for TJX based on the company's solid execution, potential for market share gains, and margin expansion opportunities. TJX, as an off-price apparel and home fashion retailer, has demonstrated resilience in both up and down economic cycles, with a history of mid-to-high single-digit revenue growth. The 2Q24 performance, marked by a 6% comp store sales increase and robust gross and pre-tax margins, reflects strong execution.

TJX's ability to attract a diverse customer base across income brackets and its substantial exposure to home products position it favorably for future growth, particularly as the economy improves and consumer demand rises. Additionally, margin expansion opportunities are evident through efficient inventory procurement and shrinkage reduction efforts.

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