2023-03-10 18:42:02 ET
Summary
- Industry-wide destocking issues bode well for TJX.
- The company should benefit from a better assortment of items, as well as consumers trading down.
- While the stock is not cheap, I think it still has room to move higher.
The TJX Companies ( TJX ) finds itself in the perfect off-price retail operating environment, which should help drive the stock higher.
Company Profile
TJX is an off-price retailer operating in the U.S. and internationally. Its items are typically sold at -20 to -60% off full-retail price.
The company operates several brand concepts. In the U.S., it operates the T.J. Maxx, Marshalls, HomeGoods, HomeSense, and Sierra chains. In Canada, it runs Marshalls, HomeSense, as well as Winners. Outside of North America, it operates the T.K. Maxx and Homesense chains, which are similar to the U.S. chains with slightly different names.
T.J. Maxx and Marshalls, which together it refers to as Marmaxx, sells apparel, footwear, accessories, and home fashion. At the end of fiscal 2023 (ended January), the company has approximately 1,300 T.J. Maxx locations and nearly 1,200 Marshalls in the U.S. It also has over 100 Marshalls locations in Canada. In addition, it runs an e-commerce site for each brand.
Winners in Canada also sells similar items and in some stores has a high-end designer department. It has nearly 300 locations in Canada. Sierra sells active apparel, footwear, and outdoor gear, as well as home fashion and pet items. The company operated 78 Sierra concepts in the U.S. at the end of fiscal 2023.
HomesGoods and HomeSense, meanwhile, sell furniture, decorative accessories, rugs, lighting, and cookware, among other items. It had nearly 900 HomeGoods locations at the end of January in the U.S. Homesense, meanwhile, has nearly 50 U.S. locations and 150 in Canada.
TJX looks to acquire its inventory at large discounts due to industry production or selling issues. It acquires merchandise both to sell for the upcoming selling season, as well as to store for future selling seasons. It obtains its items from order cancellations and manufacturer overruns; brand and retailer closeouts; and special production direct from brands or factories.
Opportunities and Risks
Off-price retailers like TJX generally perform well when consumers begin to tighten their belts. This helps it both on the merchandise acquisition front as well as on the sales front.
When consumers turn cautious, that generally means less sales at retailers like department stores. This can lead these retailers to dump inventory into the off-price channel, as well as cancel orders from various brands, who then need to find a place for that cancelled inventory.
Given supply chain issues in 2021, the wholesale channel overbought inventory across various categories in 2022, which has led to a lot of inventory destocks at retailers. The magnitude of this issue is great for a company like TJX, as it can lead to lower acquisition costs as well as better-quality inventory.
Unifi ( UFI ), which makes fabrics for the apparel industry and thus has great insight across brands and retailers, addressed the issue on its fiscal Q2 call .
UFI CEO Edmund Ingle said:
“Last quarter, we cautioned that the higher-than-normal inventory levels across the world's largest brands and retailers would negatively impact our results in the second quarter. The magnitude of these macroeconomic trends was unforeseen, and the resulting adverse impacts to our business worsened in November and December, far beyond what we had anticipated.
“In the U.S. in particular, the demand disruption caused by destocking efforts from retailers became more and more severe. This demand decline caused a slowdown in apparel production globally and led to results that fell below our expectations. And while these challenges have created a difficult operating environment for our business in the near term, the disruptions to our business are expected to be temporary as retailers and apparel brands work through their -- normalizing their respective inventory levels and supply chains.”
At the other end of the spectrum, TJX’s stores can also benefit from a trade-down effect. In general, off-price retailers generally do well when there are macroeconomic challenges, as consumers who prefer brand names are more willing to search for them at an off-price retailer to save money.
TJX’s assortment and stores are also generally considered higher-end compared to a competitor like Ross Stores (ROST). This generally works in its favor during these times, as its regular customers are a bit less impacted and it gets full-price department store shoppers into its stores. At the same time, as noted above, it also tends to have a better merchandise assortment during these times.
Store expansion is another opportunity for TJX. While it has over 4,800 locations globally at the end of fiscal 2023, it sees the opportunity to add an additional 1,400 stores. Given the results TJX has been posting recently, it certainly appears the brands are healthy and it has plenty of room to grow its store base.
Turning to risks, while TJX is largely considered a recession resistant name, it can also experience fluctuations in its business. In 2021-2022, the company dealt with freight and wage costs pressures. Meanwhile, it's seen softness in its home fashion category. HomeGoods has particularly been affected, seeing some large quarterly same-store sales declines in FY2023, albeit off extremely tough year-ago comps.
Freight costs, meanwhile, have come down recently, and was actually a positive in fiscal Q4. Freight could turn into a tailwind in fiscal 2024 as expenses ease.
Valuation
TJX stock currently trades just under 15x the FY 2024 (ending January) consensus EBITDA of $6.41 billion. Based on FY25 analyst estimates of $7.0 billion, its trades at ~13.5x.
It trades at a forward PE of 21.5x the FY24 consensus of $3.54.
The company is projected to grow revenue 6.5% in FY24 to $53.1 billion.
TJX trades at a similar multiple to competitor ROST and at a discount versus Burlington Stores ( BURL ). The latter is smaller and growing more quickly, with more white space opportunities to grow its store base. Compared to ROSS, TJX tends to have nicer stores and a higher-income customer.
Conclusion
TJX is essentially the blue chip name in off-price retail. And at this time, off-price retail is really finding itself in the midst of an ideal operating environment. Retail destocking is giving off-price retailers better assortments at cheaper prices, while the companies should see a nice trade down effect. Given its customer base, TJX is particularly well situated to take advantage of this. Meanwhile, last year’s freight headwind looks like it will turn into a tailwind in FY2024.
Add it all up, and TJX is a solid stock to own right now. From a valuation perspective, I think the stock is relatively fairly valued, but this is a name that should continue to work in this environment given its tailwinds. I believe a little multiple expansion and outperformance could get it to $100 a share, which is about a 17.5x multiple based on the FY25 consensus.
For further details see:
TJX Companies Could Be Riding The Perfect Wave In 2023