TJX Companies: It Really Could Be the Weather

Many retailers use the weather as an excuse for sub-par results. In this case, the weather looks to have had a legitimate impact, which could provide an investment opportunity.

Jun 20, 2014 at 3:38PM

Nothing is more annoying than watching a retailer blame the inclement weather for a poor quarter. This is often a ludicrous (yet convenient) excuse because stronger retailers will deliver strong results despite the poor weather. What's unique about TJX Companies (NYSE:TJX) is that the weather did drive its sub-par results. This will be proven below. If this angle is correct, then it could present an investment opportunity in a beaten down stock but an unbroken company -- which is what savvy investors like to see.

Quick update
TJX Companies delivered a solid net sales gain of 5% for its first quarter year over year. However, before you get too excited, this primarily resulted from new store openings. Between the company's two biggest brands -- T.J. Maxx and Marshalls -- the company opened 74 new stores. That's why it's better to look at comparable-store sales. In most cases, this pertains to sales at stores open for at least one year. For TJX Companies, it refers to stores open for at least two years. 

TJX Companies reported a comps gain of 1% for the quarter. This isn't thrilling, but given the current retail environment, it's not terrible, either. Value of average ticket improved, but traffic weakened due to weather.

Atmospheric pressure
Traffic weakened in the U.S. and Canada, but didn't weaken in Europe. That's the first hint that weather might have truly played a role in the company's first-quarter results. But a more telling clue is that domestic T.J. Maxx and Marshalls stores on the West Coast, in the Southwest, and in Florida outperformed stores in other regions. The West Coast, the Southwest, and Florida didn't suffer inclement weather this past winter. 

In other words, while there are no guarantees, don't be surprised if TJX Companies' stores show improved results in the second quarter. If you exclude the weather component, then TJX Companies is right where it needs to be as an off-price retailer offering significant discounts to today's (and likely future's) value-conscious consumers.

As an off-price retailer, TJX Companies sells quality products at 20%-60% off department store and specialty store prices. This format is appealing to today's consumers because it gives them an opportunity to purchase fashionable merchandise without paying full price. On top of that, the merchandise mix at TJX Companies changes rapidly. That being the case, a customer never knows what she is going to see the next time she enters the store. This, in turn, leads to repeat traffic and sales.

The changing merchandise mix has played a key role in the company's consistent profit margin improvements over the past five years, and consistent margin improvements is what long-term investors want to see. Also notice in the chart below that its biggest competitor and another off-price retailer with changing merchandise mix, Ross Stores (NASDAQ: ROST), has been even more impressive in this regard.

TJX Profit Margin (Annual) Chart

TJX Profit Margin (Annual) data by YCharts

Breaking down the 1% comps improvement, Marmaxx (T.J. Maxx + Marshalls) saw comps come in flat, HomeGoods delivered a 3% comps improvement (primarily thanks to an increased average ticket), TJX Canada's comps slid 1% (the Canadian dollar declined), and TJX Europe shot 8% higher (increased traffic and average ticket). Overall, diluted earnings-per-share increased 3%. Therefore, if you see the company's stock price suffering, then you might be looking at a long-term investment opportunity.

That said, the company's closest peer, Ross Stores has been driving earnings growth at a faster pace for years:

TJX EPS Diluted from Continuing Operations (TTM) Chart

TJX EPS Diluted from Continuing Operations (TTM) data by YCharts

Before declaring Ross Stores the better investment option, let's look at some other comparisons.  

TJX Companies vs. Ross Stores
TJX Companies is currently trading at 19 times earnings, whereas Ross Stores is trading at 17 times earnings. This makes TJX Companies slightly more "expensive," but Foolish investors don't get caught up in splitting hairs. Another note is that both companies offer dividend yields of 1.2%, but this isn't significant, and it's a wash anyway.

Neither company has shown an ability to consistently drive free cash flow higher over the past several years, but both companies do consistently drive positive free cash flow:

TJX Free Cash Flow (Annual) Chart

TJX Free Cash Flow (Annual) data by YCharts

In addition to total free cash created, it's important to consider how efficiently a business converts sales into profits. A good way to determine efficiency is to see if a company's top line is outpacing its selling, general, and administrative expenses. TJX Companies has managed to deliver in this regard over the past five years, but only by a hair:

TJX Revenue (TTM) Chart

TJX Revenue (TTM) data by YCharts

Now compare that to the efficiency of Ross Stores:

ROST Revenue (TTM) Chart

ROST Revenue (TTM) data by YCharts

This is a much wider and more consistent gap, which is what investors want to see. As TJX Companies has kept expenses in check related to top-line growth, Ross Stores CEO Michael Balmuth, Vice Chairman and Chief Executive Officer, recently stated that the company has been "focused on strict inventory and expense controls."  l 

The Foolish conclusion
As off-price retailers, TJX Companies and Ross Stores are both in line with consumer trends by targeting the value-conscious consumer, but Ross Stores has been moderately more efficient over the past several years. That said, the sub-par first-quarter results of TJX Companies might relate to inclement weather, which would present an opportunity to invest in an unfairly punished company. Over the long haul, it would be difficult to go wrong with either TJX Companies or Ross Stores.

Off-price retailers offer long-term investment potential, but nothing like this....
Have you ever dreamed of traveling back in time and telling your younger self to invest in Apple? Or to load up on at its IPO, and then just keep holding? We haven't mastered time travel, but there is a way to get out ahead of the next big thing. The secret is to find a small-cap "pure-play" and then watch as the industry -- and your company -- enjoy those same explosive returns. Our team of equity analysts has identified one stock that's ready for stunning profits with the growth of a $14.4 TRILLION industry. You can't travel back in time, but you can set up your future. Click here for the whole story in our eye-opening report.

Dan Moskowitz 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information

Compare Brokers