Investors have a few good reasons to be worried about the short-term business outlook for TJX Companies (TJX 0.76%). The off-price retailer just reported its worst start to a fiscal year in decades. Meanwhile, COVID-19 store closures put it in enough of a cash crunch to pause its dividend payment and threaten management's growth investment plans over the next nine months.
Look beyond that troubled period, though, and you'll see how a TJX Companies stock purchase could generate strong returns over the next five years or longer. Let's go over a few reasons why the owner of the Marshall's, TJ Maxx, and Home Goods brands is such an attractive buy right now.
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Dominating a nonessential industry
Despite its commanding position in apparel sales, TJX entered the pandemic period with two drawbacks that cost it some serious sales growth opportunities in recent weeks. Thanks to its focus on clothing and home goods, it had to close its stores through most of the social-distancing months of March, April, and May. Rivals like Target (TGT 1.03%) and Walmart (WMT 0.46%) remained open because they sold essentials like groceries in addition to clothing and home furnishings. Both chains said the nonessential categories were key to their surging growth rates after late March.
TJX also temporarily shuttered its tiny online business, which meant it couldn't benefit from the 100% sales bounce from digital orders that cushioned the sales pinch at retailers like Bed Bath & Beyond or sent revenue soaring at Wayfair. Overall, TJX's revenue plunged by over 50% in the fiscal first quarter to $4.4 billion.
Those drawbacks aren't likely to continue harming the business under normal industry conditions, though. The chain's focus on apparel and home goods allowed it to boost comparable-store sales for 24 consecutive years heading into this crisis, after all. Fiscal 2020 was a blowout success, too, with annual comps rising 4% to mark only a slight slowdown from the prior year's 6% spike.
Cash-rich in normal times
The company's financial wins in the last full fiscal year also demonstrate how much of an outlier its dreadful Q1 performance was in this arena. Improving profit margins, plus strong cash flow, helped TJX fund $2.6 billion of direct returns to shareholders through stock buybacks and a quickly growing dividend in fiscal 2020. These increases came despite an industry-leading commitment to higher employee compensation through rising wages and paid leave benefits.
TJX Cash from Operations (Annual) data by YCharts. Data is for the most complete fiscal year and doesn't include the impact from COVID-19 closures in early 2020.
TJX Companies was winning market share before the pandemic and was easily generating enough cash to boost profits, wages, and cash returns while still investing in the business. Each of those impressive trends disappeared in the three-month period that included the most intense impact of COVID-19.
The case for a rebound
But the consumer discretionary chain added $10 billion of annual sales (or 33%) to its business in the four years leading up to fiscal 2020, and there's no reason to expect that momentum to end simply because of eight weeks of store closures.
Sure, TJX isn't going to get close to the 2% to 3% sales uptick management had predicted before the novel coronavirus hit. But this is a quality business that's going through temporary struggles that have pushed the stock lower than retailing peers like Target and Walmart. That pricing dip might amplify the long-term returns for investors willing to sit through some more volatility over the next few months as they wait for the business to recover.
