TJX Gains Strength

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A year and a half ago, I thought TJX Companies (NYSE: TJX) was a great investment idea at $22 a share, and I recommended it in our 2005 Blue Chips newsletter. At the time, I expected the company's financial performance to improve and its share repurchases to boost returns.

Fast-forward to today and the company's recent third-quarter earnings release: A lot of improvement has been made. In our Fool by Numbers you'll find the year-over-year income statement, balance sheet, and cash flow statement, but it's the comparable store sales that really shine. Almost any retailer -- save young, growing specialty retailers -- would be happy with 6% comps. But for a mature retailer like TJX to deliver that level of performance is impressive. It's certainly not a performance investors should expect to become the norm at TJX, but 2%-4% same-store sale increases will serve the company and its investors well.

The company's performance was strong across the board, and all concepts had positive same-store sales. Even the struggling Bob's Stores chain, which doesn't match the rest of the company's off-price selling strategy, turned in a positive 2% performance. The performance of TJX's international operations in Canada and the U.K. was particularly impressive, with same-store sales increases of 11% and 17%, respectively, in U.S. dollars (5% and 11% in local currencies). Gross, operating, and net margins all increased as well. It's tough to find a real fault with the company's performance.

If there is a fault here, it's in the valuation. At about $29.50, TJX has a lot of the positives I expected from the company priced into the shares. I find the valuation of TJX comparable with competitors such as Ross Stores (Nasdaq: ROST) and Stein Mart (Nasdaq: SMRT), which bodes well for TJX, as it is a very good operator and merchandiser. But I think continued share price increases require a combination of continued 2%-5% same-store sales increases, margins holding steady, and sound inventory management. That's certainly possible, but when good things have to continue happening to support a valuation, it's good to be cautious before purchasing shares.

For more on these clothiers, check out:

• Catching Up With TJX
• 2 Easy Ways to Spot Bargains
• Small Concepts Come Up Big at TJX

Forty-three Motley Fool CAPS players pick TJX to outperform the market. Five say it will underperform. Where do you stand? Join more than 12,000 fellow investors in the Fool's new stock-rating service and let your voice be heard .

At the time of publication, Nathan Parmelee had no financial interest in any of the companies mentioned. The Motley Fool has an ironclad disclosure policy.