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TJX Companies (TJX) – Nearly Picture Perfect

August 10, 2014 | About:

TJX Companies (TJX)—Nearly Picture Perfect

Overview

TJX Companies (TJX) is the largest discount retailer in the US. Through its four divisions (Marmaxx, HomeGoods, TJX Canada and TJX Europe), TJX sells clothing apparel and home accessories. As of fiscal 2014, TJX operated a total of 3,200 stores, of which 2,021 were T.J. Maxx and Marshalls chains and 450 stores were HomeGoods chains situated in the United States. Just under a quarter of its stores are located in Canada and Europe.

TJX's chains target both cost and brand conscious women and men primarily between the ages of sixteen and sixty. TJX's target customers are mainly middle-income households, but always stock an assortment of products priced to reach lower income households. The company's selections of store locations have been strategically placed to reach these customers. TJX offers higher-quality, seasonal, designer and branded clothing apparel, shoes, accessories, home fashions, furniture, artwork, cookware, luggage and other products at prices that are typically 20-60% lower than regular department and specialty store prices on comparable merchandise. TJX's competitive strategy is to offer superior value to target customers by providing a diversified mix of in-season branded products at superior prices to the competition.

Recent Financial Highlights

The financial crisis and great recession did not phase this company at all, with annual sales growing steadily since 2005. Sales growth has slowed somewhat but remains in the high single digits, growing by 9% in 2014. Earnings are also well ahead of their 2013 levels, helped by management’s aggressive buy-back strategy and greater inventory and operating line cost controls. Specifically, EPS grew by 15% in fiscal 2014. Quarterly April 2014 EPS are up 3% year-over-year, a solid result in the face of intensified competition from Ross Stores Inc. The market expects EPS of $3.16 for fiscal 2015 and $3.56 for fiscal 2016. The company is also expected to continue to reduce share counts, which have fallen by 43% since fiscal 2000. We also expect management to continue to raise dividends, which have grown by 134% since fiscal 2010.

Purchase Considerations

The financial crisis/recession has helped TJX build further traction as consumers in many high-income households shifted their buying behaviour towards lower cost stores. Price discounting and constrained inventory sales have allowed specialty stores to draw-back many of these consumers in recent years as the economy stabilized; nonetheless, TJX's has won more consumer's minds as a top place to shop for designer products. Company initiatives over the last few years to further control costs and limit inventory and receivables build-up have proven effective and have helped the company amplify its earnings.

The company's growth prospects remain favourable as it plans to continue to open stores across the U.S., Canada and Europe. Management believes that long-term there is still room to open 60% more stores than are currently in operation. While we think this is overly optimistic, we do agree that TJX's growth potential remains positive.

We like that this company has struck a great balance between capital utilization for growth and capital deployment for shareholders. That is, management has deployed a reasonable share of company cash for dividends--which are only expected to increase--and has aggressively repurchased shares despite being what many would consider a "growth company." We also like that the company has minimal long-term debt.

Cautionary Notes

A point of concern (to some depending on investment philosophy of course) surrounds the company's recent weak stock performance. That is, there has been recent negative momentum behind the company's stock as investors take profits and express concerns regarding the extent to which customers might defect back to full-priced specialty stores as the economic recovery takes full-hold. Concerns also always surround the firm's ability to acquire inventories at acceptable price points to protect margins as foot-traffic in department stores and specialty stores improves and excess inventories shrink. The stronger the economy, the more this will become a problem. It must also be recognized that TJX's success depends to some extent on weaker inventory management systems among the specialty retailers. As they attempt to improve cash-flow and control costs, greater and more sophisticated inventory management systems are being put in place.

Return Estimation

TJX’s per share earnings has grown by 19% annually over the last 10 years and holds a dividend payout rate of approximately 20%. Using econometric methods, we project that TJX will have per share earnings of $4.82 in 2024 reflecting stable volume, slight margin compression, and moderate capital expenditures.

Based on a historical assessment of the distributional properties of TJX’s P/E multiplier, if TJX trades at Bear multiples, then the market price for the stock in 2024 will be $48.20 (Figure 1). If TJX trades at Bull multiples, then the market price will be $110.86. Based on historical data, in normal conditions TJX trades at 17-times earnings. The price of the stock will then be worth $81.94. Bought today at $54.94, TJX would produce a before-tax compound annual rate of return of 4.1% excluding dividends. Assuming dividends remain at current levels, they would generate $8.01 in additional income over the forecast horizon. Added to the price of $81.94, the before tax compound rate of return estimate jumps to 5.1%.

Figure 1: Terminal Multiplier and Return Estimate

Projected EPS (2024)

$4.82

P/E--BULL

23

P/E—BEAR

10

P/E--NORMAL

17

Expected Dividends

$8.01

Compound Annual Return %

5.1%

The question that remains for investors is: is a 5.1% long-term rate of return sufficient to qualify for investment.

About the author:

SEENSCO
SEENSCO, a Canadian Corporation founded by Daniel Seens, CFA, is an investment research firm located in Ottawa, Ontario. Our Safety-First approach to identifying and evaluating companies helps investors to protect their principal and generate exceptional rates of return.

Visit SEENSCO's Website


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