Is TJX Companies Likely to Bounce Back?

On Apr 3, 2014, we issued an updated research report on The TJX Companies Inc. (TJX). TJX reported a mixed fourth quarter, wherein earnings beat the Zacks Consensus Estimate but revenues missed.

Adjusted earnings of 81 cents per share were ahead of year-ago results by 9% but missed the Zacks Consensus Estimate by 2.1% due to lower-than-expected sales. Sales increased 1.0% year over year but missed the Zacks Consensus Estimate marginally as bad weather hurt sales in the quarter.

Severe winter weather hit a major part of the U.S. in January and February, which consequently affected store sales. Moreover, a massive ice storm in Europe just prior to Christmas impacted the company’s Home goods and Marmaxx divisions.

Overall, we are encouraged by the strong momentum of the company in its business backed by rising store traffic that boosted comps by an average of 5% over the past five years. TJX has now produced a comps gain in 41 out of 42 quarters. In the five-year period (ended fiscal 2013), its pre-tax margins grew 400 basis points (bps). Earnings per share increased 24% during the same period.

Additionally, TJX has an optimistic outlook for the near future. Its three year program includes earnings per share growth by 10% to 13% annually, comps growth in low single-digits and square footage growth of 4–5%.

Moreover, the slow recovery for the U.S. economy, coupled with a high debt crisis in Europe, has compelled consumers to shift from high-end products to low-priced ones. Accordingly, discount stores like TJX that offer branded clothing at discounted prices are expected to prosper even during the ongoing slowdown of the economy.

However, its lack of presence in the emerging markets remains a concern. Rising input costs can also pressure margins in the upcoming quarters. Moreover, being an off-price retailer, TJX cannot raise its prices despite rising cost of sales.

However, TJX made a good start to the upcoming quarter despite the unfavorable weather. Aggressive discounts offered in January helped the company shed most of its stock, lowering inventory levels.

This will help the company to optimize its stocks with spring fashions which should boost traffic in its stores in the upcoming spring selling season. However, the scenario is different for other discount retailers like Fred’s Inc. (FRED), Francesca’s Holdings Corp. (FRAN) and Ross Stores Inc. (ROST) that are left with piles of unsold inventory from the previous quarter.

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