The Federal Reserve's interest rate hikes again proved insufficient to tame inflation.
This was apparent with the latest Consumer Price Index data for August released last week. Inflation rose 8.3% year over year, which was higher than economists were expecting. If last week taught us anything, it's that this elevated inflation is a dragon that will be difficult to slay.
For investors seeking to shore up their portfolios in this tough market, off-price retailers could be a great defensive pick. TJX Companies (TJX 0.83%) is a leading off-price retailer, but should investors buy the stock? Let's take a peek behind the curtain at TJX Companies' fundamentals and valuation to decide.
A resilient quarter in light of the circumstances
The discount retailer is best known for its store brands, including T.J. Maxx, Marshalls, HomeGoods, and Sierra.
For its fiscal second quarter (ended July 30), TJX reported $11.8 billion in net sales, down 1.9% year over year. Considering the operating environment during the quarter, this wasn't such a bad outcome.
That's because there was a major headwind working against TJX for the quarter. The stimulus from the American Rescue Plan Act signed into law in March 2021 provided an artificial boost to the company's results in the year-ago quarter. Consumers had more discretionary income available to spend last year, but with the economic stimulus long dried up and inflation rising, the company saw sales decline in all of its segments with the exception of Canada.
This explains why U.S. comparable-store sales declined 5% after surging 21% in the year-ago period. That decline was partially offset by a 1.5% increase in its store count to 4,736.
The company's diluted earnings per share (EPS) still increased 7.8% year over year to $0.69 in the second quarter. Thanks to disciplined cost management, net margin increased 33 basis points to 6.8%. The company's share count also dropped 3.5% as a result of share repurchases.
Due to TJX's steadily expanding store count, improved cost management, and share repurchases, analysts are projecting 10.9% annual EPS growth over the next five years.
Image source: Getty Images.
The payout has room to run higher
TJX offers shareholders a 1.9% dividend yield, which is marginally higher than the S&P 500 index's 1.7% yield.
With the company's dividend payout ratio slated to come in at just under 40% for the current fiscal year, the double-digit payout hikes of recent years (with the exception of 2020 due to COVID-19) appear poised to continue. TJX has nearly doubled its payout in the past five years, and the company should be able to deliver dividend growth in line with earnings growth for the foreseeable future.
A discount retailer at a reasonable valuation
TJX isn't trading at a clearance sale valuation. But based on its fundamentals, it does appear to be priced sensibly enough for income investors to buy.
The stock's forward price-to-earnings (P/E) ratio of 18.2 is just slightly above the apparel retail industry average of 18. And not only is TJX's valuation similar to its peers, its price-to-sales (P/S) ratio of 1.5 is in line with its 10-year median P/S ratio of 1.6.
