TJX (NYSE:TJX) generated weak stock performance and middling earnings growth as the company wrestled with higher entry level wages and the continuing adverse impact of foreign currency translation on earnings sourced outside the United States. Over the past few years, TJX has generated solid growth in store traffic and sales, but the company has struggled to convert that into satisfactory earnings growth.
Looking forward,TJX ought to be a major beneficiary of tax reform, as the company generates more than $3 billion of operating profit in the US. As the US corporate tax rate moves from 35% to 21%, TJX could generate more than $400 million of incremental net income from tax relief. Some of this no doubt will be reinvested in the business or passed on to consumers, but we would note that TJX is far more profitable than most apparel retailers. This means it receives greater tax savings, both in percentage and absolute terms. Under the old tax regime, TJX generated outstanding margins and returns on capital, while offering great value to consumers. Thus, we see the company potentially keeping most of the tax savings, which could boost earnings per share in 2018 by about 15%. Recently, the euro, British pound and Canadian dollar have all strengthened considerably versus the dollar. If these gains hold, TJX would get an added lift to 2018 earnings. We are comfortable that TJX will continue to deliver outstanding value to shoppers and we expect tax reform to end up benefiting the strongest US retailers and accelerating the demise of less profitable stores.
From Ruane Cunniff (Trades, Portfolio)'s Sequoia Fund 4th Quarter 2017 Manager's Commentary.
