TJX Companies (TJX +0.69%), the off-price retailer that owns TJ Maxx, Marshalls, HomeGoods, HomeSense, and Sierra Trading Post, has been one of the most resilient brick-and-mortar retailers in America.
Over the past 10 years, TJX generated a total return of more than 200% for its investors as the retail apocalypse wiped out many of its industry peers. But will this retail giant remain a good defensive play if the U.S. slips into a recession?
Let's review three reasons to buy TJX -- and one reason to sell it.
Image source: Getty Images.
1. An evergreen business model
TJX has been a beneficiary of the "retail apocalypse" because it buys liquidated inventories from struggling retailers at rock-bottom prices. It relies on more than 1,200 associates to source its products from approximately 21,000 vendors across 100 countries, then sells them to shoppers at 20% to 60% lower prices than full-price retailers such as department stores, specialty retailers, and major online marketplaces like Amazon.
TJX also rapidly rotates its product selections to convince shoppers to regularly visit its stores. That "treasure hunt" strategy further widens its moat against online retailers and superstores and makes it a particularly attractive shopping destination during economic downturns.
The retailer's scale and evergreen business model enabled it to expand even as competitors shuttered their stores to cut costs. Between fiscal 2012 and 2022 (which ended this January), TJX expanded its global store count (across all banners) from 2,905 to 4,689 locations. During that decade, its annual revenue increased at a compound annual growth rate (CAGR) of 7.7% as its adjusted earnings per share (EPS) rose at a 3.7% rate.
NYSE: TJX
Key Data Points
2. A robust post-lockdown recovery
TJX's revenue and comparable-store sales (or "comps") declined in fiscal 2021 as it temporarily closed some of its stores throughout the pandemic, but those growth rates quickly accelerated again in a post-lockdown market.
|
Metric |
FY 2020 Growth (YOY) |
FY 2021 Growth (YOY) |
FY 2022 Growth (YOY) |
Q1 2023 Growth (YOY) |
|---|---|---|---|---|
|
Revenue |
7% |
(23%) |
51% |
129% |
|
Comparable-store sales |
4% |
(4%)* |
15%* |
16%* |
Data source: TJX. YOY =Year-over-year. *Only for open stores during both periods.
For the full year, TJX expects its U.S. comps to rise 1% to 2% on top of its 17% open-store-only comps growth in fiscal 2022. Analysts expect its total revenue to rise 7% in fiscal 2023 and grow another 6% in fiscal 2024.
TJX's gross and pre-tax profit margins plummeted in fiscal 2021 but bounced back the following year. Excluding its recent divestment of Russian retailer Familia following Russia's invasion of Ukraine, its pre-tax profit margin continued to expand in the first quarter of fiscal 2023.
|
Metric |
FY 2020 |
FY 2021 |
FY 2022 |
Q1 2023 |
|---|---|---|---|---|
|
Gross margin |
28.5% |
23.7% |
28.5% |
27.9% |
|
Pre-tax profit margin |
10.6% |
0.3% |
9.1% |
9.4%* |
|
Adjusted EPS growth (YOY) |
9% |
(97%) |
3,971% |
55% |
Data source: TJX. *Excluding its divestment of the Russian retailer Familia.
For the full year, TJX expects its adjusted pre-tax profit margin to expand to around 9.7% as its adjusted EPS increases 10% to 12%.
3. An attractive valuation and decent dividend
Based on the midpoint of that guidance and its current price of $57, TJX trades at 18 times this year's earnings. By comparison, smaller rival Ross Stores (ROST +0.30%), which is expected to post flat sales growth and a 9% earnings decline this year, trades at 16 times forward earnings.
TJX also pays a forward dividend yield of 2.1%, compared to Ross' forward yield of 1.7%. It's also raised its dividend in 25 of the past 26 years.
The one reason to sell TJX: Macroeconomic headwinds
TJX has withstood plenty of economic downturns since its IPO in 1987, but it isn't completely immune to the current macroeconomic headwinds.
Inflation will likely squeeze its margins with higher freight costs and wages, and ongoing supply chain disruptions could make it difficult to sustain a stable supply of cheaper overseas products. TJX's total inventories notably rose 22% to $6 billion at the end of fiscal 2022 and then increased another 37% year over year to $7 billion in the first quarter of fiscal 2023.
TJX says it's still "comfortable" with those inventory levels, and it's "confident" that its inventories will steadily flow through its stores and e-commerce sites throughout the summer. But if TJX can't efficiently clear out those inventories, it could end up in the same boat as Target and other retailers, which are now struggling to sell their excess products.
TJX is still a compelling buy
TJX is one of the most well-run retailers in America. It might face a few near-term headwinds this year, but it will continue to grow for decades to come as other retailers disappear. Investors should consider buying this stock as a long-term investment as well as a defensive play against a potential recession.
