Investors were hoping that off-price specialist TJX Companies (NYSE:TJX) would show healthy sales momentum in its third-quarter report, especially as it came just days before the company enters the all-important holiday shopping season. The retailing chain surpassed those high expectations and raised its outlook for the second straight quarter, although a downbeat day on the broader market pressured the stock in trading immediately following the announcement.

Let's look at the retailer's latest results:

 Metric

Q3 2018

Q3 2017

Year-Over-Year Growth

Revenue

$9.8 billion

$8.8 billion

12%

Net income

$762 million

$641 million

19%

Earnings per share

$0.61

$0.50

22%

Data source: TJX financial filings. 

What happened this quarter? 

Rather than decelerate as management had predicted three months ago, sales growth sped up for the second consecutive quarter due to broad-based growth across its three main retailing franchises.

Two customers pick out shirts.

Image source: Getty Images.

Here are the highlights of the quarter:

  • Comparable-store sales accelerated to 7% versus 6% last quarter and 3% at the start of the fiscal year. Executives had forecast growth would slow to between 3% and 4% this quarter.
  • Customer traffic was healthy at Marshalls, TJ Maxx, and HomeGoods, and the core Marshalls and TJ Maxx brands led the way with a 9% revenue spike.
  • Gross profit margin fell by nearly a full percentage point, which executives blamed on rising expenses as opposed to pricing pressures.
  • Selling expenses declined, but not enough to offset the drop in gross margin. As a result, operating profit slipped to 12.4% of sales from 12.8% a year earlier.
  • The company added roughly 100 locations to its base during the period, reaching 4,300 stores across the U.S., Canada, Europe, and Australia.
  • Inventory climbed at a slower rate than sales, implying a lean business going into the holiday crush.
  • The retailer spent $600 million on stock repurchases and paid out $241 million in dividends.

What management had to say

CEO Ernie Herrman and his team said they were excited about the building operating momentum reflected in key metrics like customer traffic and market share, especially in its apparel segment. In a press release, Herrman said, "We are extremely pleased with our strong third-quarter results, as both sales and earnings exceeded our expectations."

Executives highlighted the Marshalls and TJ Maxx stores (which management refers to together as "Marmaxx") as a standout. "Marmaxx, our largest division, delivered an outstanding 9% comparable-store sales increase," Herrman said, marking the 17th consecutive quarter that customer traffic was up at Marmaxx.

Looking forward

TJX said the early days of the fourth quarter are off to a strong start, and so it expects to increase traffic and sales at a healthy clip. As a result, comps are now projected to rise 5% for the full year, up from last quarter's target range of between 3% and 4%. Management had entered the year predicting only modest growth of between 1% and 2%.

The company boosted its core earnings outlook as well, even though rising expenses such as wages and freight are taking a bigger bite out of profits. Adjusted earnings are now on pace to reach between $2.41 per share and $2.43 per share, up from $2.02 last year.

Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool recommends The TJX Companies. The Motley Fool has a disclosure policy.