Summary
- TJX shows a growing store count and has a record inventory level.
- However, short-term uncertainties from its slowing revenue growth versus its growing inventory level makes it a risky stock.
- Today’s positive unemployment report could be a key risk for the company.
- TJX is trading near highs and provides an unfavorable risk/reward ratio, making this stock unattractive as of this writing.
TJX Companies ( TJX ) is one of the leading bargain or discount retailers. The company shines in the consumer discretionary sector. As others cut store counts and trimmed their workforce during these challenging times, TJX continued to soar, thriving with 340,000 employees and a growing network of 4,793 stores. TJX also stands out and has demonstrated some resilience; despite having a record level of inventory, it did not recognize major inventory impairments and has received favorable comments from management. While gross margin continues to be pressured due to inflated input costs, TJX's effective control over its total operating expense helps to protect its margin from falling. Despite its impressive positive catalyst, TJX's stock has reached new highs, leaving an unfavorable risk/reward ratio as of this writing. Additionally, slowing top-line revenue growth projections for FY'23 and pretax margins below pre-pandemic levels add to the uncertainty, especially in the face of an impending recession.
Company Overview
Although TJX has continued to perform well despite a slowdown in consumer spending , a prolonged recession could pose a significant threat to the company's financials. On the other hand, analysts have noted an improvement in foot traffic during the holiday season, but this positive trend could be short-lived if the economic situation continues to deteriorate. In fact, there is a huge discrepancy in its total revenue growth relative to its inventory growth, as shown in the image below.
TJX: Slowing Top Line Growth And Growing Inventory (Source: Data from SeekingAlpha. Prepared by the Author)
This could pose a potential threat to the company, especially considering today's high inflationary environment, which could lead to a tightening of consumer wallets and a cutting back on spending on non-essential items. Furthermore, TJX's longer cash conversion cycle of 28.12 days than Ross Stores, Inc. 's ( ROST ) 9.23 days makes it more exposed to inventory buildup, raising the possibility of impairments in the worst-case scenario. Additionally, according to the management, they are confident with their inventory level, as quoted below.
Our balance sheet inventory was up 26% versus the third quarter last year. This is higher than we expected due to early receipts of merchandise as the supply chain continued to improve. On a per-store basis, inventory was up 31% on a constant currency basis. We are very comfortable with our balance sheet and store inventory levels when compared to fiscal '20. Source: Q3'23 Earnings Call Transcript
This may reassure investors that TJX will continue to be profitable and sustain its improving margin. However, the recent lower unemployment rate report provides a positive boost to the labor market. This could put pressure on TJX, as consumers may have more disposable income to spend on branded discretionary items. To summarize, today's inventory level, if not handled effectively, might represent a concern for TJX in the first half of FY'24, which is predicted to be its non-peak season.
Potential Pullback
TJX: Weekly Chart (Source: Author's TradingView Account)
TJX's weekly chart shows signs of price weakness above its $78 support level. A breach of this could attract potential bearish momentum. The huge price imbalance between its 200-day simple moving average and its price today suggests a potential near-term corrective move. If bearish pressure continues, TJX may revisit its $68 support zone, which previously acted as its resistance zone. The MACD indicator also indicates a high likelihood of a bearish crossover, which would exacerbate the current price action weakness.
Not That Attractive
TJX: Relative Valuation (Source: Data from SeekingAlpha. Prepared by the Author)
Dollar Tree, Inc. ( DLTR ), Fast Retailing Co., Ltd. ( FRCOY ), Target Corporation ( TGT )
TJX remains resilient in today's challenging operating environment, especially given that, unlike its peer TGT, the company did not incur material impairment charges. TJX also has a still-favorable forward P/E ratio of 27.36x, which is now better than TGT. However, its projected EV/EBITDA ratio of 17.91x, which is higher than the peers' average of 16.09x, may temper expectations. While there are no significant inventory impairment catalysts yet in place that could affect TJX's profitability in the near future, I believe that the Wall Street analysts' target price of $85 is a reasonable initial target. As a result, TJX does have an unfavorable risk/reward ratio as of this writing, making it an unattractive stock.
Conclusive Thoughts
With its growing store count, I believe TJX is well positioned to achieve its long-term target, as quoted below.
While we are impacted by macro factors, we have historically outperformed in both good and bad environments throughout our 45-plus-year history. We are confident that we can execute on our short- and long-term growth plans to build TJX into an increasingly profitable $60 billion plus revenue company. Source: Q3'23 Earnings Call Transcript
When looking at the company's Price-to-Sales ratio, the outlook is not that attractive. In fact, analysts expect a forward P/S ratio of 1.50x in FY'27, which represents a 16.2% discount compared to its 5-year average of 1.79x . However, it has effective control over managing its total operating expenses, as shown in the image below.
TJX: Improving Total Operating Expense Ratio (Source: Data from SeekingAlpha. Prepared by the Author)
One of the reasons for this is the reduction in incentive compensation costs. As a result, the company may be able to achieve an operating margin above pre-pandemic levels.
TJX: Operating Margin Trend (Source: Data from SeekingAlpha. Prepared by the Author)
However, short-term uncertainty from its inventory build-up, slowing top-line YoY growth to about 1.9% in FY'23, and uncertainties from possible demand shifts, as mentioned earlier, make TJX risky at this level.
Thank you for reading and good luck!
For further details see:
TJX Companies: Risky On A Positive Labor Market Report And Potential Inventory Impairments