The retail industry is notoriously challenging and competitive, especially when it comes to apparel retailers and department stores. Lackluster demand from consumers and savage competition from both brick-and-mortar stores and online players is putting a lot of pressure on revenue growth for most companies in the space.
However, you wouldn't have guessed that by looking at TJX (TJX +0.19%), as the company keeps producing impressive financial performance in a challenging industry landscape while at the same time materially outperforming most competitors.
Dressed for success
TJX is a leading discount department store focused on apparel and home fashions. The company operates brands such as T.J. Maxx, Marshalls, Home Goods, Winners, and T.K. Maxx, among others. It owns a total of 3,594 stores in nine countries: the United States, Canada, the United Kingdom, Ireland, Germany, Poland, Austria, the Netherlands, and Australia.
TJX has delivered impressive financial performance over the years, and the company is doing much better than big competitors such like Gap (GPS 0.13%) or Macy's (M +0.84%). The following chart compares revenue growth for TJX versus both Gap and Macy's, and the difference is quite remarkable.
TJX Revenue (TTM) data by YCharts.
There is no reversal at sight in the competitive dynamics, at least according to the latest quarterly reports. TJX continues doing better than fine as of the quarter ended on Oct. 31. Total comparable sales grew 5% year over year, and it's important to keep in mind that TJX excludes e-commerce from comparable sales. This was the 27th consecutive quarter in which TJX has reported consolidated comparable sales growth, so the company is building an impressive track record of consistent performance over time.
Gap, on the other hand, is facing declining revenue. Total sales fell 3% during the third quarter of 2015, with global comparable sales shrinking 2%. Even worse, Gap is suffering from difficulties across its whole portfolio of brands: comparable sales of the Gap brand fell 4%, Banana Republic comps declined 12%, and Old Navy comparable sales fell 4% last quarter.
Macy's is one of the best-run department stores around, and yet the company is also reporting declining sales. Macy's announced a 5.2% decline in revenue during the third quarter, while comparable sales on an owned plus licensed basis fell 3.6%. When looking only at owned stores, Macy's suffered a 3.9% decline in comps during the period.
How TJX is crushing the competition
TJX relies on a smart business model and scale advantages to provide competitively low prices to consumers. The company purchases inventory from more than 17,000 vendors from all over the world, and its global presence provides TJX with the ability to source for products from different markets and brands, offering a differentiated product mix and a unique selection of products.
TJX buys excess inventory from department stores at favorable terms; the company is willing to buy less-than-full assortments of items, it pays promptly, and it usually doesn't ask for typical retail concessions like advertising, promotional, or return allowance. This gives TJX significant bargaining power with suppliers, which it translates into pricing discounts of between 20% and 60% off traditional retail prices.
Consumers clearly love this business model, and they remain loyal to the company through good and bad economic times. Over the last 38 years TJX has reported just one year of declining comparable sales, a level of consistency which is downright extraordinary for companies in the retail business.
More important, the company still has substantial room for growth. Management believes it can expand its store base to nearly 5,500 units in the long term, an increase of almost 50% from fewer than 3,600 stores today. This is the market opportunity management is seeing for its current chains and current markets alone, without considering expansion into new countries.
The company is only making 1% of its sales from the online channel nowadays. Management is taking a cautious approach to online growth, TJX wants e-commerce sales to drive incremental growth as opposed to cannibalizing sales at physical locations. However, management has highlighted e-commerce as one of its most promising growth areas in the years ahead.
The company intends to reach $40 billion in global revenue over the coming years, a significant increase from $30.7 billion in forecast revenue this fiscal year. While the target is ambitious, it doesn't sound unreasonable considering TJX's smart business model and proven track record of success.
