First, a review of the sales figures. Sales for December were $2.5 billion, up 10% from $2.3 billion in December 2005. Same-store sales for the combined eight chains were up 6%, on top of a 6% increase in the prior period. Results varied across the chains: T.K. Maxx, TJX's presence in Europe, had the best results with an increase of 10% in local currency and 23% in U.S. currency.
Although I would have guessed Home Goods to be the laggard, Bob's Stores was, with a drop of 1% in same-store sales. Most importantly, though, was that Marmaxx, which includes Marshall's and T.J. Maxx and is the company's largest group, managed a 3% increase in same-store sales.
One negative in the sales release was the inventory buildup caused by the unseasonably warm early winter. (It's hard to sell parkas to people walking around in T-shirts.) At this point, it's unclear how much this will affect margins.
Still, with comps back on a positive trend, the stock has rebounded from its lows of the summer. With TJX trading at roughly $29, I think the question is, how much future growth is discounted, and is the company undervalued?
As for the quality of the company, one only has to look at TJX's financial records to see that this is a solid Y company. The retailer earns more than its cost of capital, but it's not growing fast enough to reinvest all of its profits. Therefore, the free cash flow has been returned to shareholders in the form of share buybacks and increasing dividends. I estimate that if TJX can maintain its economic profits, it's worth $25, even if it doesn't grow.
That gets us to future growth. Let's face it -- the Marmaxx division's 1,577 stores leave less room to grow. Internationally, both in Canada and in Europe, growth is solid, but not enough to make a significant impact now. Still, I think the $4 per share of estimated growth underestimates TJX's future value creation.
On a relative basis, TJX also looks moderately priced. The retailer's enterprise value-to-EBITDA multiple is in line with competitor Ross Stores
The bottom line is that expectations are conservative for TJX in 2007, giving its stock some appeal. However, the expectations aren't low enough for this Foolish investor's need for a margin of safety.
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