Depending on how you look at them, the third-quarter results from TJX (NYSE:TJX), owners of the T.J. Maxx and Marshalls retail empires (among others), are either disappointing or fantastic. On one hand, revenue, though up 6% compared with the comparable quarter last year, came in short of analysts' estimates, and earnings were down. On the other hand, income beat analysts' estimates by two cents a share.
Here is the way this observer sees it. Earnings beat estimates because Hurricane Katrina, which closed 130 stores (approximately 5.5% of total stores) for various lengths of time, cost the company only a penny in earnings, even after figuring in self-insured losses and assistance for employees. Revenue, light by only $70 million on $4 billion in sales, is so close it doesn't need an explanation.
The outlook for the fourth quarter and the year can be read two ways, too. Life is great because same-store sales are expected to be up 1% to 2%, and fourth-quarter earnings are expected to come in at $0.41 to $0.43 a share -- in line with or above analysts' expectations of $0.41 a share. Life is not so great, though, if you consider that the company expects to earn $1.32 to $1.34 in fiscal 2006 (which ends in January). The company earned $1.34 last year. So, it's flat earnings for the fiscal year at best.
Those same-store sales numbers are nothing to write home about, either. They make the slow-but-steady growth at Wal-Mart (NYSE:WMT) look downright good. Hey, they even pale when compared with Target's (NYSE:TGT) expectations, which now fall below their earlier 4% to 6% growth forecasts.
Why bring up Wal-Mart and Target when Federated Department Stores (NYSE:FD) and Kohl's (NYSE:KSS) are better competitive examples? Because TJX's return on equity (ROE), which hovers around 40%, towers over the 12.6% at Federated and looks downright good when compared to the 16% at Kohl's. You have to talk about Target's 16.7% ROE and Wal-Mart's 23.6% to make it look like you aren't cherry-picking troubled companies. Also consider that, since TJX is a serial discounter, margins aren't going to suffer on the same order as the aforementioned retailers when economic difficulties or missed fashion/product cycles come along.
So before you toss this baby out with the bathwater because of slow same-stores sales growth, realize that TJX is a top performer when it comes to turning leverage and assets into profits. At 14 times earnings for next year (which will end in January 2007) and analysts' expectations that earnings will grow by 14% a year for the next five years, there are no two ways about it: This company is a good value in the retail sector.
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Fool contributor W.D. Crotty does not own any shares of the companies mentioned. Click here to see The Motley Fool's disclosure policy.
