Bright Future for this Retailer
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
During a Wednesday earnings call, The TJX Companies (NYSE: TJX) President/Chief Executive Officer Carol Meyrowitz said she’s repeatedly asked one question that I find myself positing quite a bit where the company is concerned: how can its positive operational momentum continue? When it sports a 21% five-year CAGR in EPS and steady annual gains in both sales (8.48% three-year CAGR) and operating income (16.25% three-year CAGR)—and given pundits’ ongoing worries about consumer discretionary spending in light of the Federal payroll tax increase, delayed income tax refunds, and nasty weather—the question’s popularity comes as little surprise.
Funny thing, though. Even as TJX missed consensus estimates for fiscal 2014 EPS ($2.66-$2.78/share vs. $2.84) and sales ($26.8-$27.1 billion vs. $27.32)—equating to YOY growth of 7.7%-12.6% in the former metric based on a 52-week comparison and a rise of 3.5%-4.6% in the latter—shares appreciated. Following are a few likely reasons that TJX’s adherents aren’t fleeing despite the company’s slowing growth:
- TJX sits in a retail sweet spot along with Ross Stores (NASDAQ: ROST) and Stein Mart (NASDAQ: SMRT) by offering sought-after clothing and home furnishing brands at discount prices. This operational thrust worked exceedingly well (at least for TJX and Ross) during the economic volatility of the past five years and should continue in earnest as many consumers remain cash strapped and the housing market continues its recovery, meaning value-based home goods are at a premium. Indeed, I’ve long marveled at Ross Stores’ operational prowess that includes continuous annual growth in key metrics such as sales and gross and operating margins. Through December 31 Ross Stores delivered a 10.2% five-year CAGR in sales-- sales were $9.72 billion in 2012 and $5.98 billion in 2007--and gross and operating margins have expanded every year over the same period. Stein Mart recently emerged from a lackluster early 2012 by announcing January overall and same-store sales growth of 31.3% and 4.6%, respectively, and comparative 4Q gains of 11.3% and 6%. Plus, the company's February comps came in at +0.6%, ahead of consensus estimates of flat growth. In all, Stein Mart has now achieved eight consecutive quarters of same-store sales growth. Beware, however, that Stein Mart must regain compliance with NASDAQ listing standards requiring timely filings of periodic reports with the Securities and Exchange Commission. No doubt it’s impossible to like the triumvirate equally--in my eyes Stein Mart isn't quite in the same league as TJX or Ross--but it’s easy to like the consumer value proposition they each offer.
- Meyrowitz said during the Wednesday call that the company plans conservatively and aims to beat future estimates. Last year, for example, TJX forecasted 0-2% growth in same-store sales and came in at +7%. I’m not saying such a positive surprise will repeat itself this year, but I’ve always been a big fan of a company’s goal and ability to under promise and over deliver.
- TJX said February same-store sales will likely be flat compared to +8% a year ago, certainly a disappointing admission. Yet the month ended up 1% after the company said sales picked up as March approached. Also important: Meyrowitz allayed, at least for the time being, any concerns over weakness in consumer discretionary spending by asserting that the comparative February underperformance was “absolutely a weather story for us,” adding that comps have been negative in the snow-covered northeast but positive in the sun-soaked southeast. Translation: Mother Nature can be fickle, to be sure, but the company hasn’t witnessed any meaningful hit to consumer health.
- Three growth prospects are expected to contribute handsomely to TJX going forward. Meyrowitz called the company’s vast global opportunities “nothing short of staggering,” adding that Germany is particularly hot amid “broad-based strength” across the region. The profitable division is expected to deliver 2-4% same-store sales growth this year, higher than any other, and long-term store total expectations have been raised as a result. Also important is TJX’s plan to launch a small-scale foray into e-commerce for T.J. Maxx in the second half of 2014, and that its December purchase of online retailer Sierra Trading Post will provide important scale and infrastructure for the endeavor. It’s fascinating to me how well TJX and its industry brethren are able to fare without offering an online component, of course the shopping mode du jour for consumers. Watch out when that changes. And finally, Meyrowitz said that as customer traffic has increased every year for the last five, the company’s concerted effort to lure younger demographics has proved successful—and importantly hasn’t hurt its important ladies apparel business as a result. Lining up future shoppers is the key to all businesses, and here TJX is doing a nice job, too.
I’ve been a fan of the off-price retailing space for some time because of its resonating concept, and particularly of TJX and Ross Stores because of their operational acumen amid economic uncertainty. TJX may encounter some atypical headwinds this year based on difficult comps, consumer concerns and maybe even lingering hits due to weather, but its management team is sound and continues to build for a profitable future.
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