CEO Ted English resigned from TJX Companies (NYSE:TJX) late yesterday, the company announced. There's little point in speculating on whether he was asked to step down or did so on his own. Instead, let's take a look at what happened during the five-plus years that English was at the helm and what may be next for the company.
If you focus solely on financial metrics, English's tenure was certainly a lot better than that of many CEOs. Returns on assets, capital, and equity declined slightly, but many companies would still kill for a return on capital of more than 20%.
The company also has a solid balance sheet. Like Motley Fool Stock Advisor pick Gap (NYSE:GPS), Limited (NYSE:LTD), and to a lesser extent Ann Taylor (NYSE:ANN), TJX's same-store sales and growth have been soft of late, but it's not the end of the world. And yes, TJX carries a slug of debt, but it has no problem paying the interest and, with the company's solid balance sheet and cash flows, debt is a fine way to finance growth.
Through its Marshalls and T.J. Maxx stores, TJX has been and still is a free cash flow (FCF) machine. Unfortunately, the downside to English's tenure has been expansion efforts, which have nibbled away at the company's free cash flow without bearing much fruit. A.J. Wright, HomeGoods, and Bob's Stores all performed poorly last year -- and another six months of unimpressive results have rolled in so far this year. I've come to believe that store growth for these three TJX ventures should be curtailed; the expansion is costing money, but isn't generating material growth in free cash.
Still, TJX is far from broken, primarily because of the strength of T.J. Maxx and Marshalls. Efforts to add a broader line of shoes at Marshalls and jewelry at T.J. Maxx have been driving increasing sales at the two stores. I recently stopped in at a Marshalls not too far from my house, and I liked the mix of affordably priced shoes it had on display. I even made a mental note to go back and check Marshalls before I look at DSW (NYSE:DSW) if I'm in need of some basic shoes or boots for everyday wear.
It will be interesting to see how TJX's chairman, former CEO, and now Acting CEO Ben Cammarata proceeds in the near term with the expansion and funding of the newer concepts. I'd be surprised to see the company give up on them, but I think it makes a great deal of sense to slow down the expansion and get the stores consistently profitable before attempting to move forward again. This isn't a process without pain, but the company can continue to return value to shareholders by keeping its share repurchases in place and dividend payments growing while it gets the non-Marmaxx pieces of the business on track.
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Nathan Parmelee has a beneficial interest in shares of Gap, but no financial interest in any of the other companies mentioned. The Motley Fool has an ironclad disclosure policy.
