Wednesday, March 6, 2013

TJX Companies Has Great Growth Prospects

f there is a word to sum up TJX Companies(NYSE: TJX) approach to guidance it would be conservative. This is definitely not one of those companies that over-promises and under-delivers, and that is exactly what you want in a company. With that said, the key question here is whether you believe there is upside to its guidance or not. In summary, I happen to think there is and am happy to hold the stock. Here is why.

TJX Companies Equity Research

To explain what I mean I would refer to a previous article that discussed the last set of results. Back then the guidance was for full year comparable same store sales to come in at 5-6% (a number raised from 4-5% previously), and this implied Q4 same store sales to be up 0-2% (note this number, you will need it later). In the end the numbers came in at 7% and 4% respectively.

Furthermore, if we go back to what they modeled last year it was 0-2% growth. Fast forward to now and the guidance for Q1 is (yes you guessed it) 0-2% comparable same store sales growth; although a frisson of excitement went through the investment community when full year guidance was for 1-2%!

Okay I am being a bit sarcastic, but it is in order to make a few points.

Firstly, the company has upside potential provided you think it can beat this guidance. Second, in an environment where the market is worried about tax increases, fuel price hikes, the Sequester and a generally slow economy it is easy for naysayers to hook onto the 0-2% guidance and conclude that times are tough at TJX. Third, it can model these numbers because its business model means it can bring in extra merchandise at relatively short notice. In other words, if sales are better than expected it won’t necessarily suffer from not having sufficient stock available.

A quick look at how comparable same store sales have moved across its stores:




There are some tough comparables in Q1 & Q2, but if the economy holds up then I think 1-2% overall looks conservative. Furthermore, note how well Europe is doing. A good sign for its expansion plans.

TJX Companies Growth Opportunities

TJX describes itself as modeling for a $50,000 income customer and as such this places it more in the mass market consumer than say, more up-market retailers like Nordstrom (NYSE: JWN) or Coach (NYSE: COH). Indeed, looking at Nordstrom it is planning to significantly increase its Rack (discounted price stores) outlets relative to its traditional full price stores. This is a sure sign that a new retail reality is having a lasting effect on consumer behavior. Once consumers get used to a lengthy period of austerity, trading down and general economizing (while everyone around them is also doing this) it seems to become a ‘sticky’ activity. I like the way Nordstrom has adjusted, but it is proving tougher for Coach. Its niche of ‘affordable luxury’ is being challenged by new entrants like Michael Kors, and as the retail landscape shifts downwards in the mass market, companies like Coach will have to adjust.

For now, TJX and its rival off-price retail rival Ross Stores (NASDAQ: ROST) both have good prospects. Both are expanding their home goods operations (I note TJX raised its long term view of Home Goods stores from 750 to 825), and with a stronger housing market this strategy makes sense. Ross Stores saw comparable same store sales up 6% in the last quarter, and I would expect it to report good numbers in its forthcoming results.

Is TJX Companies a Stock to Buy?

Internal full year guidance is for 3-5% revenue growth and EPS of $2.66-2.78 when analysts have 5.9% and $2.84 penciled in. TJX has upside from its European expansion plans (Germany is doing particularly well), Home Goods and its nascent e-commerce operations. All of which, of course, are being rolled out conservatively.

Moreover, its business model is highly cash generative with $4.45 billion generated in free cash flow over the last three years. This is while capital expenditures have averaged 1.7x depreciation in that period as TJX invests in rolling out new stores and remodeling existing outlets. With a current enterprise value of $30.7 billion I think the stock is cheap. Happy to hold.