TJX (NYSE: TJX)
Trading at $23.32 as of 2/6/04
This article is part of our annual Stocks Fools Love Valentine's Day special.
Quick! What is the biggest competitor to off-price name-brand retailer Marshall's? Did you say T.J. Maxx? You're right. Yep, there are plenty of others in this space, and some good companies, but no one else out there has its finger on the pulse of this market like these two. And they, by the way, are not separate at all: They're owned by the same company, TJX(NYSE: TJX).
In fact, as of the end of 2002, TJX was comprised of 1,300 T.J. Maxx and Marshall's stores, 146 Winner's stores (a Canadian off-price retailer), 160 HomeGoods and HomeSense stores (home fashions), 123 TKMaxx stores (a U.K.-based retailer), and 75 A.J. Wright stores (a medium-income fashion retailer).
How dominant is TJX in this market? Try five times larger than the next competitors, among them Stein Mart(Nasdaq: SMRT), Ross Stores(Nasdaq: ROST) or Loehmann's(Nasdaq: LHMS). And, no, the market we're talking about isn't that of "discounter." TJX stores are not competing against Wal-Mart(NYSE: WMT), which typically offers inexpensive goods lacking much in the way of branding. Instead, TJX stores may sell inexpensive items, but they're not "cheap."
T.J. Maxx and Marshall's offer the same clothes you'll find in a Saks Fifth Avenue(NYSE: SKS) or Neiman Marcus(NYSE: NMG.A), but in a no-frills store, and perhaps later in the fashion run for the garments. The model has been magic, as the TJX companies have focused on shoppers who are value-conscious but skew toward the upper-income levels. Essentially, this company has socked away the most desirable demographic of all for clothing retailers: wealthy, price-conscious females, crossing most of the age strata. With the exception of its A.J. Wright concept, each of its franchises focuses on the same group. Fabulously so.
The problem with an investment in TJX is that its excellence is well recognized. At present, its stock trades at a multiple to earnings of 20 and 31 to free cash flow, so you're not talking about a company that offers a substantial discount to today's operations. But wouldn't you know it. TJX is still growing at a very healthy clip. It views some additional growth opportunities for T.J. Maxx and Marshall's, but more growth potential comes in the form of its smaller brands, particularly TKMaxx in Great Britain and Europe.
And that's the thing, isn't it? Investments discount future cash flows, not past ones. I don't think that the average investor can picture T.J. Maxx and Marshall's expanding much more. But not so fast, my friends. First, these brands have some meat left on the bone. Second, TJX has a multiple concept strategy similar to the one employed by Outback Steakhouse(NYSE: OSI). Even if its flagship brands are pushing limits on their growth (they aren't), its satellite brands are still ascendant.
You might not think of TJX as a growth company, but grow it has, nearly doubling revenues since 1997, to $12.7 billion. Similarly, its earnings per share have risen by nearly 100% over the same time period -- its healthy growth, too, with nearly 40% returns on equity. TJX largely finances its growth from cash flows, though it took on a $400 million slug of long-term debt in 2001 to expand. Its earnings cover its interest payments many times over, however. As a bonus, the company, which is valued at about $11 billion, has repurchased close to $1 billion in stock on the open market over the last two years, decreasing the number of shares outstanding. That's a good thing, when the shares are bought at a good price.
TJX also offers a bit of countercyclicality, and that's where I think its catalyst for growth lies in the future. Because it competes for the same dollars with the full-freight department stores, it will suffer substantially smaller declines in demand (it may even see increased demand) during tougher economic times as people try to stretch their dollars further. When the economy is perking along, however, the gap in prices between TJX stores and similar items at the full-price competitors widens, thus creating a cushion that more savvy shoppers exploit. TJX has done this better than anyone, and there's little reason to suggest this will not continue.
Retail is a tricky beast for investment analysis. You have fashion risk, where a company's wares can suddenly be "out." You have leverage issues, where companies with working models attempt to rapidly expand, and you have minimal sustainable competitive advantage. But that doesn't mean that every retailer has the same exposure to the same issues, nor does it imply that retail is a sector that investors should avoid lock, stock, and barrel. TJX stores don't care what the fashion trends are -- they'll market whatever happens to flow down from the fashion houses regardless.
Bill Mann does not own any of the companies mentioned in this article. The Motley Fool is investors writing for investors.
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