Is TJX a Bargain?

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Low-price retailer TJX (NYSE: TJX), best known for its T.J. Maxx and Marshall's stores, posted first-quarter earnings this morning that were in line with the preliminary results it released last week. A total sales increase of 6.2% and adjusted earnings improvement of 10.8% weren't enough to impress investors, as the stock is down more than 4% today. I, however, think this is simply a response from shorter-term investors who were expecting more upside for the quarter.

Despite the near-term share price hiccup, TJX continues to be one of the safer bets in retailing these days, along with big-box competitors like Wal-Mart (NYSE: WMT) and Costco (Nasdaq: COST). All are benefiting from consumers' search for discounts that will stretch their paychecks through higher gasoline and food prices (thanks to overall inflationary pressures). The first quarter was no exception; same-store sales at "Marmaxx" (the two flagship store brands that accounted for 64% of quarterly sales) increased a respectable 1%. The remaining stores, including T.K. Maxx, Homegoods, and A.J. Wright, all posted higher comps, with Bob's Stores the only brand to post negative same-store sales for the quarter.

As has been customary at TJX, inventory was held tight and rose just 2.5%. And despite high fuel costs on freight, gross margins slipped just 10 basis points while solid cost controls elsewhere kept SG&A expenses flat as a percentage of sales. Cash flow generation was ample enough to maintain existing stores, open new ones, and leave excess capital to repurchase shares and support a modest 1.4% annual dividend yield. And based on management's guidance, the full year should lead to steady overall same-store sales growth of 2% to 3% and a 10% to 13% earning increase from the $1.91 posted last year.

TJX is no steal at nearly 16 times trailing free cash flow, but its strong stock performance over the past couple of years speaks to the fact that it remains one of a small handful of retailers that have been able to ride out a tough domestic retailing environment. Firms such as J.C. Penney (NYSE: JCP), Kohl's (NYSE: KSS), and American Eagle Outfitters (NYSE: AEO) might have more upside when the climate finally improves, but investors in these names may have to ride out quite a bit of volatility before things settle down.   

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