Should You Take Advantage of TJX's Recent Drop?

TJX dropped the most in five years post its first-quarter results, but is this an opportunity?

Jun 13, 2014 at 11:25AM

Off-price retailer TJX's (NYSE:TJX) first-quarter results led to a massive sell-off, with the stock falling the most in more than five years. TJX's revenue and earnings trailed consensus estimates, as the harsh winter weather took its toll on the company's performance.

Moreover, rival Ross Stores' (NASDAQ:ROST) better-than-expected performance in a similarly challenged environment indicates that TJX is falling behind the competition. But, is this the case? Let's take a look.

Not as bad as it seems
TJX's first-quarter consolidated comparable store sales, or comps, growth came in at 1% versus the year-ago quarter. However, quarterly revenue increased 5% year over year to $6.5 billion, although this was below analysts' estimates of $6.6 billion. Net income for the quarter stood at $454 million, or $0.64 per share, compared to last year's $452.9 million. Analysts were expecting a profit of $0.67 per share.  

Apart from a weak performance, TJX lowered the top end of its full-year guidance. However, in spite of a weak performance, management is optimistic about the company's prospects going forward. According to CEO Carol Meyrowitz:

While sales were not as strong as we would have liked, predominantly in our apparel business, I was very pleased that overall business trends improved as the quarter progressed.

Moreover, the company properly managed its inventory and expenses, which protected its margins to some extent. 

Another positive point was that TJX entered the second quarter with lean inventory. This indicates that the company might see an increase in sales going forward, as management cited demand for quality, branded merchandise. Moreover, lean inventory should lead to lower price markdowns and support TJX's gross margin going forward.

Positive trends and moves
TJX's accessories and jewelry businesses are doing well. In addition, it is trying to improve the performance of its Marmaxx brand, which reported flat comps in the previous quarter and saw a drop of 60 basis points in the gross margin. Going forward, management will focus on aggressive marketing for Marmaxx and expects this move will help drive higher traffic in the second quarter in addition to the back half of the year. 

TJX will also need to fix its operations in certain international regions. Comparable-store sales at TJX Canada were down 1% in the first quarter, and its gross profit margin also decreased around 210 basis points. However, management will continue expanding TJX's international reach in order to target a wider customer demographic.

The company plans to open two new Sierra Trading Post stores, which will offer more categories and brands that are not in its stores today. At present, TJX operates more than 3,200 stores, but it has the potential to grow to 5,150 stores in the long run. It has similar expansion plans for its international chains in Canada and Europe. The company also plans to open its first store in Austria by 2015. 

TJX is also focusing on its loyalty program to attract more customers, retain the existing ones, and increase shopping frequency. In addition, it plans to roll out the loyalty program across the U.S. in the second quarter. The retailer is also looking to enhance the shopping experience it offers to its consumers by remodeling around 250 stores in 2014. It plans to roll out a new Marshalls prototype store as well. 

Competition is heating up
Such moves are important for TJX, as the company is plying its trade in a highly competitive environment. For example, rival off-price retailer Ross Stores recently reported decent first-quarter results and issued a robust outlook. Its performance was helped by efficient measures it took to control inventory and expenses.

Its selling, general and administrative costs improved by 10 basis points, and distribution costs decreased by five basis points. In addition, Ross also expanded its footprint by opening 26 Ross and seven dd's discount stores in the previous quarter. 

Going forward, Ross plans to extend its reach further, and it will be opening another 22 Ross and 7 dd's discount stores. Moreover, Ross' lean inventory management and cost controls will intensify competition in the off-price retail space, as this will allow the company to offer its goods at competitive prices. 

On the other hand, specialty apparel and accessories retailer Express (NYSE:EXPR) will also open outlet stores going forward. Express recently announced that it will open its first factory outlet at Tanger Outlets National Harbor in Washington, D.C. In 2014, Express plans to open a total of 30 outlet stores. Express is known for its fashion clothing lines, and it might prove to be a credible threat for the likes of TJX with its move. 

The takeaway
TJX started the new fiscal year on a negative note, but it is employing a few strategies to improve. As the warmer season approaches, TJX's performance might improve. However, TJX is an expensive stock in its industry at almost 19 times last year's earnings compared to Ross' earnings multiple of 17. It would be wise for investors to wait on the sidelines and look for a better point of entry.

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Amal Singh has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

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