Why This Company isn't Nuts for Expanding its Stores in Europe
Lee is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It’s not often these days that you hear a retail company emphasize its growth opportunities in Europe, but TJX Companies (NYSE: TJX) is no ordinary company. The off-price retailer has been a clear winner in the new retail reality in the US, but investors can be forgiven for wondering if it is likely to continue in future and if relying on European retail is a wise policy. I happen to think the answer to both questions is yes, and here is why.
Growth Drivers at TJX Companies
The company outlined three key areas where it plans to improve prospects.
First, it is seeking to increase its attraction to a broader demographic by appealing to them with marketing initiatives. Second, it is aiming for supply chain efficiencies, and third it intends to increase store count. In addition, I think the potential in the Home Goods stores is significant. It is a good space to be in right now, as housing is showing signs of recovery. Moreover, once consumers get accustomed to off-price purchases in one format (clothing), they will surely do so in another.
Pivotal to all of this is the opportunity to expand in Europe, and I think TJX has good potential to capitalize on this. It’s easy to point at European macro conditions and conclude that a US retailer would be insane to look to expand there. However, if the company was able to aggressively increase sales and margins in the US during a weak period then why not in Europe too? I think there are three reasons why it can do so.
First, an off-price retailer is essentially a ‘trading-down’ play, and I’d argue that European consumers are more brand aware than US consumers are. In my opinion, the latter tend to be more price aware. In other words, expanding stores in Europe is likely to be even more successful conceptually than in the US for TJX.
Second, I doubt TJX will have any problems getting inventory in Europe. As noted above, European brands compete more on quality, and its leading brands will not want to discount in their main branches and normal priced stores. Therefore TJX should be able to obtain good quality inventory and have the opportunity to extract better margins from it than currently reported.
Third, I am a great believer in the idea that when certain behavior becomes socially acceptable then it is likely that individuals will accelerate their adoption of it. This is another way of saying that as more and more consumers adapt to buying off-price clothing, it will become more acceptable for an individual to shop there. Mainstream journalists start writing about the shops, a few tv features appear, and suddenly everyone is talking about it.
Sales Growth Remains Strong
Comparable same store sales growth grew 7% in the quarter, and the company raised its full year guidance for same store sales growth from 4-5% to 5-6%. This implies the all important Q4 same store sales growth will be 0-2%, and I think this looks a little cautious. It will be interesting to see what its off-price competitor Ross Stores (NASDAQ: ROST) says in its guidance this week. Although I suspect it too will be cautious given some impact from Sandy. Ross is a competitor, but it also helps to market the category and TJX stores are often positioned near them.
Both Ross and TJX have been a bit weak recently as the market frets over competition for its spending dollars from developments at the likes of Nordstrom (NYSE: JWN) with its discounted Rack stores. Nordstrom is aggressively expanding roll out here and investing in e-commerce initiatives in order to drive growth. Similarly, the department stores are beginning to start offering discounted pricing, and a company like J.C. Penney (NYSE: JCP) surely needs to respond to its operational difficulties. The likelihood is that JCP will continue to offer coupons in order to encourage footfall, and even Coach (NYSE: COH) has had to step up couponing at some of its stores in order to get traffic back. In essence what the developments at JCP and Coach demonstrate is that the US consumer is getting very savvy about pricing and promotions by retailers.
Turning back to TJX, I’ve broken out segment sales growth in order to demonstrate how well TJX is doing in Europe this year.
In fact, Europe is growing faster than the company average and management sees full year comparable same store sales coming in at 8-9% on a constant currency basis. Segment margins grew in Europe from 5.7% in Q3 last year to 9.1% this year.
Where Next For TJX Companies?
I think investors should focus on the long term story here and not get too worried about quarter by quarter movements. I don’t think that Europe’s troubles are going away any time soon (even if weak comparables will be lapped by many businesses), so the market opportunities for a proven off-price retailer like TJX are significant. Moreover, the US recovery shows every sign of being slow and drawn out for the mass market consumer, and off-price retailers are becoming increasingly popular in the US.
Competition is coming, but TJX is a pure-play off-price retailer. It is one thing for department stores to want to muscle in on the act, but another thing when they see their discounting hurting margins elsewhere. In short, the market dynamics remain favorable and TJX is the leading player in the category, with plenty of potential for geographic expansion.
SaintGermain has a position in TJX Companies. The Motley Fool owns shares of Coach. Motley Fool newsletter services recommend Coach. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.