Retail is a tough place to invest in these days. Inventory levels are high, as are wages, and theft is a growing concern among big-box retailers. But one company that appears to be thriving despite troubling macroeconomic conditions is TJX Companies (TJX -0.06%).
The company, which owns off-price retailers T.J. Maxx, Marshalls, Homesense, and other brands, just posted an impressive quarter while also hiking its guidance for the year. Is the stock destined to go higher, or has its valuation gotten too rich?
The company's sales and profits beat expectations
On Aug. 16, TJX reported its earnings for the quarter ended July 29. Sales of $12.8 billion rose 8% year over year and came in higher than the roughly $12.5 billion analysts were expecting. On the bottom line, the performance was even more impressive with TJX's net income jumping 22% to $989 million. On a per-share basis, earnings of $0.85 topped the analysts' consensus of $0.77.
TJX sees more opportunities ahead
TJX benefits from the larger retailers sitting on excess inventory that need to get rid of merchandise. That's been a known issue for big names such as Target, Walmart, Nike, and many others as supply chain issues have led to retailers holding more inventory than they planned to. While the situation has been improving, it remains problematic.
Data by YCharts.
And in the company's earnings release, TJX President and CEO Ernie Herrman noted that "the third quarter is off to a very strong start and we are seeing tremendous off-price buying opportunities in the marketplace."
In light of those opportunities and the strong results thus far, the company upgraded its guidance for full-year fiscal 2024 (which ends on Feb. 3, 2024) as follows:
| Item | New Forecast | Previous Forecast |
|---|---|---|
| Comparable-store sales growth | 3% to 4% | 2% to 3% |
| Diluted earnings per share | $3.66 to $3.72 | $3.49 to $3.58 |
Has the stock become too expensive?
Year to date, shares of TJX have risen 13%, lagging the S&P 500's performance as the index is up nearly 16%. But despite underperforming the market, the stock trades at a multiple of 26 times its trailing earnings. That's higher than the S&P 500 average of 20. And while analysts have been boosting their price targets for the stock this month, the consensus is just under $95, implying upside of only 6% from where TJX stock trades as of this writing.
TJX is doing well, but historically, this has been a modestly growing business with the top line normally rising in the high-single digits year to year. And so while the recent results are encouraging, in terms of sales growth, they're broadly in line with how TJX has performed in the past.
Data by YCharts.
Should you buy TJX stock?
TJX is coming off a good quarter, but investors should be careful not to expect too much from the stock. Aside from the early stages of the pandemic when spending levels took off, its sales growth hasn't been all that impressive.
The retail stock can, however, be a good buy for risk-averse investors who want a steady dividend. TJX's 1.5% dividend yield is in line with the S&P 500 average, and with a low payout ratio of less than 40%, this can be a reliable income-producing stock to buy and hold. But growth-oriented investors may be better off going with other stocks where there is more upside -- or at least better value.
