Summary
- The TJX Companies is set to report quarterly and year-end results on Wednesday, the 22nd.
- In advance of their release, shares are trading in a narrow range and are up just over 1% YTD. This trails broader market indexes.
- The stock, however, is up over 20% over the past one year. The markets, perhaps, view shares as fairly valued in light of this.
- Despite the slow start, the stock is likely to head higher in 2023. In fact, it wouldn't be surprising if the stock hit new record highs during the year.
The TJX Companies ( TJX ) is set to release their Q4FY22 earnings results on Wednesday, February 22.
Heading into the release, shares are off to a muted start in 2023, up just 1% YTD. This compares unfavorably to the broader S&P 500 ( SPY ), which is up 6% over the same period, and both the VanEck Vectors Retail ETF ( RTH ) and SPDR S&P Retail ETF ( XRT ), which are up 4.6% and 19%, respectively.
Seeking Alpha - YTD Returns Of TJX Compared To Broader Indexes
TJX stock is, however, outperforming over the past one year, with shares up over 20% during this period.
Seeking Alpha - 1-YR Return Of TJX Compared To Broader Indexes
And since a prior update on the stock just before their Q3 release, shares have gained 9% versus the SPY's 2.5% gain over the same period.
Seeking Alpha - Change In TJX Since Prior Update
With shares little changed in advance of their earnings, perhaps markets view shares as fairly valued. After all, the stock is trading near the top end of their 52-week range at 25x forward earnings. While the multiple is still lower than their five-year averages, it is not that far off. Investor anxiety over the current retail environment could also be holding some back from new initiation. TJX's off-price business model, however, will likely remain in vogue in relation to their full-price counterparts. For investors, the rally in shares is likely not out of steam just yet.
Current State Of Retail Environment
According to the monthly retail sales report released by the U.S. Commerce Department, retail sales jumped 3% in the month of January. This followed two months of declines in the final months of 2022. And this bump higher was broad-based, with spending up in virtually all major reported categories.
In addition, this jump coincided with a surge in job growth at the start of the year. In January, for example, the unemployment rate reached a new multi-decade low after adding more than half a million jobs during the month. Furthermore, manufacturing output was also up in January after two consecutive months of decline in the final months of 2022. And lastly, inflation has exhibited continued signs of cooling after reaching multi-year highs in earlier periods.
The combination of these factors is likely one reason the Federal Reserve Bank of Atlanta increased their estimate of Q1 GDP to 2.5% from a previous estimate of 2.4% and 2.2%.
For the month, the 3% increase handily beat consensus estimates, which was for a 1.9% gain. The gains were also the largest percentage increase since March 2021. In individual categories, consumers boosted spending at restaurants and bars by 7.2%. This, too, was the most since March 2021.
The gains could also be partly attributable to greater redemptions of gift cards, which is a measure that is included as sales by the Commerce Department when redeemed and not when they are initially purchased. Given the rise of these cards in recent years, this could have been one factor affecting the timing of the increase.
Furthermore, the boost in social security benefits went into effect at the start of the year. And the increase of 8.7% was the largest inflation adjustment in years, decades in fact. As such, the rise in incomes paired with cooling core inflation likely provided a temporary reprieve to most following an expensive holiday season.
Prior Quarter Earnings Recap
In Q3, TJX reported a beat on earnings of $0.06/share but missed revenue expectations by +$130M. This was followed by a lowered revenue outlook in FY23 to a range of +$49.3B to +$49.5B from a previous range of +$49.6B to +$49.9B. The new range is also lower than consensus estimates for +$49.8B.
While overall revenues didn't meet the targets, comparable sales in the U.S. came in better than expected, driven by strong performance in their Marmaxx unit, which posted profit margins of 13.5% and a comparable store sales increase of 3%. Additionally, sales in this unit were positive each month and improved throughout the quarter.
The increase mitigated weakness in their HomeGoods segment, which turned in a 16% decrease in comparable store sales. At the same time last year, in contrast, they posted a 34% increase in open-only sales. This was due, however, to anomalous spending patterns, as consumers prioritized spending on their homes over other discretionary alternatives.
In their Canada division, performance was promising, particularly in profitability. Unit profit margin, for example, was 15.8%. This surpassed margins reported in FY20, despite the higher cost environment.
On an overall basis, total U.S. comparable store sales decreased 2%. And this was paired with a reported pretax margin of 11.2%. This was up 20 basis points ("bps") from last year. It also exceeded the high end of their guidance, though this was due mostly to the timing of their incurred expense. Furthermore, their merchandise margin was flat. This is despite significantly higher freight costs and incremental wage costs.
Current Sentiment And Quant Ratings
Seeking Alpha "SA" authors and analysts on Wall Street, alike, are bullish on TJX, with each group rating shares a "buy", even more so by those on Wall Street. Among 26 analysts over the last 90 days, for example, 14 have rated shares a "strong buy."
Seeking Alpha - TJX Ratings Summary
The bullishness is at odds with the Quant system, which is more reserved and ranks shares as a "hold" due to the current valuation of shares.
Seeking Alpha - Quant Factor Grades Of TJX
The current forward multiple of shares, for example, stands at about 25x earnings. This is well above the sector median of the apparel retail industry.
Seeking Alpha - Valuation Of TJX Compared To Broader Indexes
Despite the disparity, shares still trade in line with their closest competitors, which include Ross Stores, Inc. ( ROST ) and Burlington Stores ( BURL ).
Seeking Alpha - Valuation Of TJX Compared To Close Peers
Shares also appear to have embedded upside potential, with the consensus estimate at about $86/share. This represents about 8% upside from current trading levels.
Seeking Alpha - Consensus Wall Street Price Target Of TJX
What To Expect On The Q4 Release
Though shares missed on top-line revenues in Q3, the stock has remained rangebound.
YCharts - Recent Price History Of TJX Following Earnings Release
And the revenue miss in Q3 was not out of the norm for the year, as the company has consistently missed on this metric through the fiscal year. But they make up for this on earnings, which typically come in ahead of expectations.
Seeking Alpha - TJX Miss/Beat Record On Prior Earnings Releases
For Q4, management is expecting U.S. comp store sales to be flat to up 1%. This reflects an upward revision from prior estimates. In addition, they are expecting quarterly sales in the range of +$13.9B to +$14.1B. On this, they expect to earn a pretax margin of between 9.5% and 9.8%.
For the full year, total sales are expected to be between +$49.3B to +$49.5B, with a full year adjusted pretax margin of 9.8% to 9.9%. If they hit these targets, this would reflect achieving the high end of their full year margin guidance.
Final Thoughts
In Q3, TJX named a new CFO, with an effective date of January 29, as the company grappled with an overall decline in consolidated quarterly sales due to weakness in their HomeGoods division, in addition to the effects of a stronger dollar.
Despite the weaker sales in one of their major segments, which turned in outsized results in the year prior, their Marmaxx division performed strongly. The strength comes as consumers increasingly shift their discretionary spending habits to off-price retailers in an effort to retain more of their disposable income in the current inflationary environment.
TJX has also been able to capitalize on a favorable buying environment due to the inventory glut in traditional retail outlets. As a result of this, the company has been able to carry more desired brand-name goods that are offered at reasonable prices. Looking ahead, an increase in branded content sales is likely to be one growth driver for the company.
The accommodative buying environment has also resulted in stronger operating margins. Pretax profit margins in the current quarter, for example, were higher than the same period last year. This comes as TJX has been able to drive prices higher, which is notable since traditional retailers have been moving in the opposite direction.
At 25x forward earnings, some would cite valuation as one reason to stay away. But compared to their closest peers, Ross and Burlington, the stock is competitively priced. The company's income demographics are also more recession-proof than the profile of those in their competitor's markets.
Furthermore, off-price retail in general is likely to continue gaining share in 2023 due to current market dynamics. Though shares are currently trading near their 52-week highs, it wouldn't be surprising to see the stock hit record highs in 2023. A ride higher to the $100 range is also not out of the question, especially if margins begin trending back to their targeted range.
For investors, off-price remains the best bet in retail.
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The TJX Companies: Off-Price Remains The Best Bet In Retail