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Growth Slowed at TJX Last Quarter, but It's No Big Deal

By Adam Levine-Weinberg - Updated Aug 22, 2019 at 9:34AM

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The leading off-price retailer saw a slowdown in comp sales growth last quarter, but it remains on track for strong long-term growth in sales and earnings.

A lot of retailers have been struggling in 2019, but TJX Companies (TJX -1.04%) started the year with a stellar 5% comparable-store sales increase in the first quarter. The off-price retail giant raised its full-year guidance slightly on the back of that strong performance.

However, comp sales growth slowed last quarter. TJX still achieved its guidance, which was very conservative -- as usual for the company -- but it fell short of analysts' expectations. Despite this small setback, TJX is well positioned to bounce back and deliver stronger sales and earnings in the quarters (and years) ahead.

A subpar quarter by TJX's standards

Comp sales rose 2% at TJX in the second quarter, compared to the company's forecast for a 2% to 3% increase. Analysts had been expecting a 3.1% increase. Total sales rose 4.8% year over year to $9.78 billion.

For the second consecutive quarter, TJX's international segment, which consists of its operations in Europe and Australia, dramatically outperformed the rest of the company. International-segment comp sales rose 6%, while comp sales increased 2% for the domestic T.J. Maxx and Marshalls chains, grew 1% in Canada, and came in flat year over year for HomeGoods.

A woman with a full shopping cart in front of a Marshalls store.

TJX's off-price chains are still posting healthy sales results. Image source: Marshalls.

EPS rose 7% to $0.62 last quarter, reaching the high end of management's outlook and matching analysts' expectations. TJX's adjusted pre-tax margin dipped to 10.4% from 10.6% a year ago, despite an easy year-over-year comparison due to IT restructuring costs that impacted last year's second quarter. The HomeGoods and Canada segments experienced the greatest margin pressure due to higher markdowns in the former -- driven by some merchandise planning mistakes -- and exchange-rate headwinds in the latter.

While TJX didn't crush its guidance last quarter like it usually does, the off-price leader's results were rock solid. Most retailers would be delighted to be posting mid-single-digit revenue growth and high-single-digit EPS growth.

Management expects sequential improvement

TJX's third-quarter guidance was fairly unimpressive. Management is calling for a 1% to 2% comp sales increase and EPS between $0.63 and $0.65, compared to adjusted EPS of $0.63 in the prior-year period. Of course, given the conservatism typically embedded in TJX's forecasts, there's a good chance that the company will surpass these targets.

Furthermore, TJX's full-year forecast implies comp sales growth of 2% to 3% and EPS between $0.74 and $0.77 in the fourth quarter. That would represent a 9% to 13% increase relative to the $0.68 per share that TJX earned in last year's fourth quarter.

Some of the expected acceleration in EPS growth relates to a one-time tax break expected in the fourth quarter. However, TJX also expects to achieve significant savings on freight costs. Most of the retailer's freight contracts will come up for renewal in the next few months, and there is currently a glut of freight capacity in the U.S. compared to the very tight market that existed at this time last year. In addition to benefiting TJX's fourth-quarter results, freight could be a key cost tailwind for much of next year, supporting strong EPS growth.

The long-term growth story remains intact

TJX ended last quarter with more than 4,400 stores around the world, and management sees room to grow to more than 6,000 stores over time -- just with the company's current retail concepts in its current markets. Additionally, the off-price giant has a long track record of squeezing more sales out of its existing stores through consistent comp sales growth.

Executives at TJX aren't worried about the disruption sweeping across the retail sector in the U.S. and many other countries. If anything, they see this as an opportunity. Rising costs for labor and other inputs along with growing competition have spurred an ongoing wave of store closures and retail bankruptcies. TJX is likely to make substantial market share gains in the years ahead as weaker competitors are driven out of business.

Thus, while TJX's growth slowed during the second quarter, investors shouldn't be too concerned about this marking the beginning of a new trend. Rapid market share gains are likely to resume for the No. 1 off-price retailer before long.

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