TJX Is a Reliable Off-Price Retailer, But for Investors, Is the Premium Too High?
The off-price leader continues to deliver strong results, but with a mature U.S. store base, a premium valuation puts pressure on management to find new sources of growth.
By Bryan White
The TJX Companies (TJX 0.20%) has earned its reputation for providing value to both its customers and its long-term shareholders. Yet with shares up 34% over the past year and the stock now trading at roughly 32 times this year's earnings estimates, the value proposition for investors may be fading.
Operationally, the business remains strong. In the first quarter, same-store (comp) sales rose 6%, driven by higher customer traffic and spending per visit. The balanced growth across TJ Maxx, Marshalls, and HomeGoods, which posted an impressive 9% comp, shows the company continues to attract a broad range of customers.
The company's "treasure hunt" shopping experience has proven a durable advantage that resonates with younger shoppers. These Gen Z and millennial shoppers now account for a disproportionate number of its new customers, according to management.
TJX's margins are also expanding at a time when many retailers are facing pressure, with gross margin expanding by nearly 2 percentage points, reaching 31.3% in the quarter.
An opportunistic buying model
The retailer's track record stems from its ability to capitalize on shifting fashion trends. While most companies struggle with excess inventory, the off-price retailer takes advantage, acquiring merchandise at deep discounts during times of distress.
The company leverages its relationships with over 21,000 vendors, giving it unmatched access to deals on brand-name goods. This allows TJX to sell brand-name and designer merchandise at prices typically 20% to 60% below those of traditional retailers. This value proposition continues to drive consistent traffic to its stores.
With over 5,200 stores globally, extending the growth story requires creativity. Management has outlined a pathway to an additional 1,800 stores within its current markets.
A significant portion of this growth is focused on the U.S. home furnishings market, which management estimates is worth over $30 billion. The company recently raised its long-term store target for HomeGoods in the U.S. from 1,000 to 1,800 locations.
This banner, along with its growing Homesense format, offers a source of profitable growth to complement its maturing apparel business while facing limited off-price competition.
A high price for quality
While the domestic growth story is compelling, international stores continue to report below-average profitability. TJX International's segment profit margin was just 4.6% in the first quarter, compared with the low-to-mid-teens for the rest of the business.
The company generated nearly $5 billion in free cash flow last year and maintains a strong balance sheet with $2.7 billion in net cash. This financial flexibility allows management to be patient, enabling it to invest in its next leg of growth, which could include entering a new category to expand its total addressable market.
After its strong run, the company needs to deliver on continued growth and margin expansion to drive returns from here. TJX remains one of the best-run companies in retail, and the off-price category remains a compelling space to invest, but at over 30 times earnings, patience may be the best approach.