2023-04-19 00:33:55 ET
Summary
- TJX sales momentum remains strong riding into 2023 from a high of 2022 despite a vexatious environment.
- The company and off-price sector are perfectly positioned in the current inflationary environment as consumers prefer value while other retailers close stores with off-price retailers taking share.
- We believe the company is running on all cylinders to smash its own guidance and beat consensus. We maintain a buy on dips strategy.
Background
TJX ( TJX ) has been one of the best performing retailers, up about 27% in last year, after it came back from an existential crisis during COVID where it had a minimal e-commerce exposure while other retailers with robust e-commerce infrastructure chimed in. The off-price retailer is positioned in a perfect spot in the current environment as consumers prefer value with its unique offering of attractive inventory, consumer-centric in-store experience with the treasure hunt strategy, and a wider reach.
Earnings Recap
Q4 2022 earnings ended on a strong note for the company where it reported comp store sales growth of 4% over a higher base in Q4 2021 (where it grew over 13%), smashing its own guidance. Growth was primarily driven by Marmaxx (up 7%) on the back of strong sales in apparel and accessories categories while Home goods witnessed a degrowth of 7% after two phenomenal years when consumers focused on purchase for their homes during the pandemic. Higher shrink was the biggest drag in Q4 which took of some luster off the strong sales trajectory leading to merch margin being disappointing, also worse on account of it being against Q4 2021 where the markdown levels was below pre-pandemic levels in Q4 2018. We expect merch margin to improve going in 2023 as the shrink effect will ease along with favorable base. Management guided for gross margins to improve by 130 bps in FY24 driven by tailwinds from freight as well as from strategic price increases, which has been successful about 95% of the times. For FY24, it expects EPS of $3.39-3.51, below consensus estimates, which we believe it to beat convincingly on the back of its wide store network, innovative marketing strategies such as treasure hunt generating superior sales/ sq. footage, grabbing market share off other store closures and consumers push to trade down.
Current Trends
As highlighted in my previous article , TJX is a beneficiary of the current macroeconomic uncertainty as brand conscious consumers tighten their purses due to stretched budgets pushing them to the off-price retailers offering cheaper deals and better value for money. During the 2008 Global Financial crisis amid recessionary headwinds, it reported robust comp sales growth in 2009 and 2010 along with other off-price retailers despite weak consumer confidence as customers flocked to the retailers' bargain hunting brand deals.
Company filings
It has also reported strong continued momentum in foot traffic compared to other retailers, even among the off-price segments, with foot traffic growing about 9% YoY on average weekly, while Burlington (BURL) and Ross (ROST) witnessed an average foot traffic increase of 7.7% and 0.3% respectively and mall-retailers such as Macy's (M) and Nordstrom (JWN) witnessed a continued degrowth in foot traffic.
Placer.ai
Also, the company is likely to be amongst the beneficiaries of store closures by several major chains which has been unable to withstand the current downturn.
Chain | LTM Sales () | Total Stores | Other competitors vs Off-price retailers |
JCPenney (est.) | ~9,000 | ~650 | TGT, WMT, KSS |
Bed, Bath and Beyond | ~6,200 | ~725 | TGT, WMT, KSS, WSM |
Belk | ~3,700 | ~300 | ROST, BURL, KSS |
99 Cents Only (est.) | ~2,200 | ~350 | TGT, WMT, KSS, DG, DLTR |
Source: Company results. Note: Off-price retailers include TJX, Burlington stores and Ross Stores.
We're attracting new customers, we're opening new stores, and we're likely to benefit from other home store closures. Even if you factor in that half of those stores, only half of the categories marry up and create a visit to us, that's still a big number when you count the hundreds that are now slowing down or closing hundreds of stores.
Ernie Herrman, CEO, TJX Companies
JCPenney was acquired by Simon Property Group (SPG) in 2020 while Belk had announced bankruptcy in mid-2021 with Bed, Bath and Beyond (BBBY) among the latest casualty making some desperate moves to stave off bankruptcy , although some may argue it was inevitable as the company was bleeding share over some time. Moody's downgraded 99 Cents Only to Caa2 in late 2021 due to increasing default risk and weaker than expected operating performance which has constrained liquidity while Belk has filed for bankruptcy and is undergoing restructuring. Off-price retailers are expected to be a beneficiary given the influx of the inventory at the cost of other retailers which are struggling to keep inventory on the shelf. While others are shuttering stores, TJX plans to open about 150 stores, while Ross and Burlington plans to open 100 and 80 new stores respectively, on the back of strong continued momentum. Even if we factor in 30% of the share shifting to other retailers, it is a $6bn opportunity and assuming TJX to gain ~15% off the opportunity seems a reasonable assumption yielding to ~$1bn in incremental sales.
Besides, heavy discounting is also just not enough among the off-price retail segment, but to provide a good mix of high end brands. Nordstrom reported EPS of $1.5 compared to its initial outlook of $2.3 - $2.6, as heavy discounting failed to lure people shopping at its off-price Rack stores with sales declining over 8% in 2022, due to inventory mismanagement. Burlington stores disappointed investors after its sales tumbled 7% YoY in 2022 while its CEO described the company's results as an outlier within off-price. TJX has been a beneficiary with its ability to leverage its vast store network compared to its peers, strong product assortment leading to generate superior sales/ sq. footage and better margins.
SEC filings
Note: TJX includes only US operations.
Valuation
TJX currently trades at 22.7x 1Y Fwd P/E at the lower end of its EPS guidance of $3.39 and in line with its peers (historically it has traded at least 10-15% premium to its peers). We believe the company is poised to beat its own guidance and consensus driven by improving gross margins as shrink effect eases, SG&A deleveraging on freight tailwinds and grabbing further market share on the back of increasing footfalls in its stores. We rate TJX stock as a buy with TP of $90 at 25x 1 Y Fwd P/E on the upper end of its guidance.
Risks to the rating include 1) challenges in inventory availability and inventory mix compared to previous years would entail supply chain issues that can create further challenges for the off-price retailers as witnessed in recent past 2) possible risks to margin upside due to wage increases, freight or higher SG&A expenses as was witnessed during the company's Q4 earnings where shrink dragged merch margins and higher freight costs further pressured operating performance. Other risks include e-commerce business to drive traffic away from stores and any change in promotional or pricing strategy to impact traffic.
Conclusion
TJX is perfectly positioned in a multi-year cycle that will benefit the off-price retail segment with its strong network and customer centric approach. Its consumers being among the mid to high income also bodes well for the margins. It has witnessed strong continued momentum in foot traffic coming into 2023 where as other retailers have lost share and is also likely to benefit from the store closures and struggles of other retailers such as JCPenney and Bed Bath and Beyond among others. Despite the run up last year, the company is still undervalued compared to its peers due to its premium positioning and strong margins and has further room to grow. We rate this as buy on dips opportunity.
For further details see:
TJX: Firing On All Cylinders, A 'Buy On Dips' Opportunity