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Is TJX a Long-Term Buy?

By Amal Singh - Mar 10, 2014 at 1:44PM

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TJX underperformed in its most recent quarter; are long-term prospects enough?

Like most retailers, TJX ( TJX 0.30% ) has gotten off to a shaky start in 2014. The company failed to meet Street expectations in the fourth quarter, as an unusually cold winter season affected sales. Also, TJX faced difficult comps due to an extra week of sales in the prior-year period.

TJX is an off-price retailer, so it competes with the likes of Dollar Tree and Ross Stores ( ROST 0.03% ), which target customers looking for bargains. In addition, TJX faces tough competition from the likes of Target ( TGT -2.46% ) and Kohl's.

So, let's see if TJX could overcome its short-term issues and end up being a good bet for the long run.

Diversified business
TJX faces tough competition from its peers. But having a strong presence in Europe gives TJX an edge over the others. Its competitors are mainly focused on the U.S. and Canadian markets. This is what sets TJX apart from the rest. The company plans to hit 3,200 stores this year and has an ambitious plan of ultimately growing to around 5,200 stores.

TJX four brands, all of which, including Marmaxx and HomeGoods, are doing good business. Its European operations also turned in an outstanding performance last year, with comps up 6%, and the company sees further growth ahead. TJX plans to open 875 stores in Europe by 2015. The company recognizes better opportunity both abroad and in the U.S. It expects to grow its store base by 50% in its existing markets alone. 

TJX has raised the forecast of its Marmaxx brand by another 100 to 200 stores, encouraged by the line's solid performance. The same goes for HomeGoods, with TJX raising the store opening opportunity to 825 locations from the previous 750. 

More impressively, apart from brick-and-mortar stores, TJX is also focusing on e-commerce through its T.J. Maxx and Sierra Trading Post websites. It is offering customers 24/7 shopping, attracting new customers who shop online in the process. 

Better than peers
TJX is also investing in its supply chain to drive its revenue and margins. To deliver the best prices to its customers, TJX has worked hard to keep inventory levels lean. This allows TJX to change quickly with the trends, as it can switch to new products as required. Moreover, keeping lean inventory levels also helps TJX to drive margins on merchandise higher, as the company buys items when needed and avoids markdowns in the process. 

Such a strategy should help TJX compete effectively against the likes of Ross Stores. Ross also follows a strategy of maintaining lean inventory levels, enabling it to offer discounts to customers. However, Ross' business hasn't been going as strong as TJX.

In the most recent quarter, Ross' revenue fell to $2.74 billion from $2.76 billion in the year-ago period. Profits declined from $236.6 million in the year-ago quarter to $218 million. In comparison, TJX's adjusted earnings grew to $0.81 per share in the most recent quarter from $0.74 per share in the year-ago period, driven by a 3% increase in same-store sales. In comparison, Ross' same-store sales were up just 2% in the most recent quarter. 

But, as mentioned above, TJX must compete with other retail giants like Target for market share. Target recently had a data breach surrounding highly confidential customer information due to which many of its loyal customers seem to have departed. This caused Target's revenue to decline 5.3% in the fourth quarter, while its profit declined 46%. So, TJX could capitalize on Target's weakness by adding more customers.

Also, Target's business isn't as diversified as TJX, as it is present only in the U.S. and Canada while TJX has a presence in Europe as well, making TJX a safer pick.

Bottom line
TJX might be facing some short-term issues due to a colder winter experienced in the U.S., but its diversified business and expansion opportunities could make it a good long-term pick. Its trailing P/E of 20.7 is the highest among its peers, but its forward P/E looks attractive at 16.9. TJX's earnings are expected to increase at a rate of 11% over the next five years. Considering these factors, TJX is expected to grow at a steady rate going forward, and therefore it can be a good investment option.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Target Corporation Stock Quote
Target Corporation
$239.60 (-2.46%) $-6.03
Ross Stores, Inc. Stock Quote
Ross Stores, Inc.
$113.13 (0.03%) $0.03
The TJX Companies, Inc. Stock Quote
The TJX Companies, Inc.
$74.34 (0.30%) $0.22

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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