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The Silver Lining in TJX Companies’ Wretched Earnings Report

By Timothy Green – Updated May 21, 2020 at 4:14PM

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Sales fell off a cliff, but the off-price retailer is having no problem securing inventory for its post-lockdown recovery.

TJX Companies (TJX -1.57%), owner of the T.J. Maxx, Marshalls, HomeGoods, Sierra, and Homesense retail chains, did even worse in the first quarter than analysts were expecting. Sales crashed 52% to $4.4 billion, about $540 million short of the average analyst estimate. The loss per share was $0.74, a full $0.59 worse than analyst expectations.

TJX's first quarter ended on May 2, so its stores were closed for about half the quarter due to the coronavirus pandemic. Gross margin turned negative, and while the company was able to cut operating costs substantially, it burned through a ton of cash. Free cash flow was a loss of nearly $3.2 billion. The company believes it has sufficient liquidity to sustain it for the rest of the year.

It has so far reopened around 1,600 of its more than 4,500 stores. At stores that have been open for more than a week, sales are tracking higher than at the same time last year. TJX expects to have most of its stores reopened by June, although it cautioned that sales could fluctuate as the quarter goes on.

While TJX is suffering just as much as other hard-hit retailers, the company may be in a better position to bounce back in the coming months. Here's why:

A woman looking a clothing.

Image source: Getty Images.

Plentiful opportunities

TJX is an off-price retailer, which means some of its inventory comes from other retailers looking to dump merchandise that can't be sold easily. Clothing retailers have been hit especially hard by the pandemic, with demand for apparel falling off a cliff. Clothing stores suffered a 78.8% sales decline in April, according to government consumer spending data.

While apparel sales should rebound to a degree as retail stores reopen across the country, it's likely that sales will remain depressed. This will do two things. First, it will cause some retailers that were already struggling before the pandemic to fail outright, unleashing a flood of heavily discounted merchandise that TJX and other off-price retailers can scoop up. Second, it will prompt surviving retailers to pare down inventory, especially inventory that is now out of date. That's another opportunity for TJX.

"We are currently seeing plentiful off-price buying opportunities, which, as we look to the remainder of the year, gives us confidence in having excellent brands and quality merchandise available to us," said CEO Ernie Herrman, adding that the company will be pursuing these buying opportunities.

As the U.S. economy reels from the pandemic, there's a good chance that consumers will become more cost-conscious in the coming months. Job losses are piling up, and immense economic uncertainty will likely put a lid on consumer optimism. With TJX having no problem securing quality merchandise, its rock-bottom prices should be a strong draw for consumers strapped for cash.

How quickly TJX's sales recover as its stores reopen is difficult to predict. The initial sales surge at reopened stores may be a short-lived case of pent-up demand, with consumers eager to get out of the house after a long lockdown. It's likely that TJX will fare better than full-price apparel retailers, but it's also likely that it will take some time for sales to fully recover.

With TJX stock surging following the first-quarter report, shares are now up over 65% since bottoming out in March. There are good reasons for investors to be optimistic about TJX's results in the post-lockdown era. We'll learn soon enough how strong a comeback the off-price retailer can stage in the latter half of the year.

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

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