Yesterday, TJX (TJX 0.03%) announced a strong showing in its first quarter. The company increased earnings per share and comparable sales. It also laid out its long-term goals, which aim at increasing sales and product availability to help move merchandise with fewer markdowns. The company managed a bit of that over the last quarter, and operating margin held its 2012 position, even in bad economic conditions.
TJX stock is now up 29% over the last 12 months, barely edging out the S&P 500. Here's a look at what the company did last quarter, and what investors have to look forward to over the next year.
TJX focuses on full-price
For a discount retailer, TJX is spending a lot of time working on selling products at their full price. The company's long-term goals include new operational systems that will allow stores to fill the shelves with product that is selling without promotion. Management said that it's planning on rolling the system out through the company's Marshalls brand, with a goal of having it systemwide in the next two years.
That focus on full-price is the core of TJX's strategy. The brand is known as a discounter, but hitting higher margins is the key to increasing comparable sales and income. Over this last quarter, gross margin came in 28.4%, which is in line with competitor Ross (ROST 0.84%), which had a gross margin of 27.8% in its last quarter.
The result at TJX this quarter was due to a focus on inventory management. Comparable sales grew 2%, which is not enough to generate a big jump on the bottom line. Instead of relying on sales, TJX had to focus on inventory to generate the 13% increase in earnings per share that it had this quarter.
Does this count as strength?
It's not clear to me that this counts as either success or failure. The comparable sales growth isn't stunning, and even the work done to manage costs seems relatively minimal -- remember that operating margin ended up flat on last year. Considering that the stock has a P/E of 20 -- about average for apparel retailers -- I think the market has pretty accurately priced TJX.
Investors just need to decide if they love the business model. TJX did well during the downturn, and while it's only just beat out the S&P recently, over the last five years it's made a killing. If you're worried about another drop sometime soon, TJX may be the way to go.
If you aren't, then you might be better off considering a middle-of-the-road retailer, like Macy's (M +0.33%). Macy's P/E is only 14, and the company is doing a great job of engaging customers. In its last quarter, Macy's increased comparable sales by 3.8% and grew earnings per share by 30%. In short, there are a lot of good companies out there -- I'm not sure I'd settle for "OK."
