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It’s not often these days that you hear a retail company emphasize its growth opportunities in Europe, but TJX Companies(NYSE: TJX)
is no ordinary company. The off-price retailer has been a clear winner
in the new retail reality in the US, but investors can be forgiven for
wondering if it is likely to continue in future and if relying on
European retail is a wise policy. I happen to think the answer to both
questions is yes, and here is why.
Growth Drivers at TJX Companies
The company outlined three key areas where it plans to improve prospects.
First, it is seeking to increase its attraction to a broader
demographic by appealing to them with marketing initiatives. Second, it
is aiming for supply chain efficiencies, and third it intends to
increase store count. In addition, I think the potential in the Home
Goods stores is significant. It is a good space to be in right now, as
housing is showing signs of recovery. Moreover, once consumers get
accustomed to off-price purchases in one format (clothing), they will
surely do so in another.
Pivotal to all of this is the opportunity to expand in Europe, and I
think TJX has good potential to capitalize on this. It’s easy to point
at European macro conditions and conclude that a US retailer would be
insane to look to expand there. However, if the company was able to
aggressively increase sales and margins in the US during a weak period
then why not in Europe too? I think there are three reasons why it can
do so.
First, an off-price retailer is essentially a ‘trading-down’ play,
and I’d argue that European consumers are more brand aware than US
consumers are. In my opinion, the latter tend to be more price aware. In
other words, expanding stores in Europe is likely to be even more
successful conceptually than in the US for TJX.
Second, I doubt TJX will have any problems getting inventory in
Europe. As noted above, European brands compete more on quality, and its
leading brands will not want to discount in their main branches and
normal priced stores. Therefore TJX should be able to obtain good
quality inventory and have the opportunity to extract better margins
from it than currently reported.
Third, I am a great believer in the idea that when certain behavior
becomes socially acceptable then it is likely that individuals will
accelerate their adoption of it. This is another way of saying that as
more and more consumers adapt to buying off-price clothing, it will
become more acceptable for an individual to shop there. Mainstream
journalists start writing about the shops, a few tv features appear, and
suddenly everyone is talking about it.
Sales Growth Remains Strong
Comparable same store sales growth grew 7% in the quarter, and the
company raised its full year guidance for same store sales growth from
4-5% to 5-6%. This implies the all important Q4 same store sales growth
will be 0-2%, and I think this looks a little cautious. It will be
interesting to see what its off-price competitor Ross Stores(NASDAQ: ROST)
says in its guidance this week. Although I suspect it too will be
cautious given some impact from Sandy. Ross is a competitor, but it also
helps to market the category and TJX stores are often positioned near
them.
Both Ross and TJX have been a bit weak recently as the market frets
over competition for its spending dollars from developments at the likes
of Nordstrom(NYSE: JWN)
with its discounted Rack stores. Nordstrom is aggressively expanding
roll out here and investing in e-commerce initiatives in order to drive
growth. Similarly, the department stores are beginning to start offering
discounted pricing, and a company like J.C. Penney(NYSE: JCP)
surely needs to respond to its operational difficulties. The likelihood
is that JCP will continue to offer coupons in order to encourage
footfall, and even Coach(NYSE: COH)
has had to step up couponing at some of its stores in order to get
traffic back. In essence what the developments at JCP and Coach
demonstrate is that the US consumer is getting very savvy about pricing
and promotions by retailers.
Turning back to TJX, I’ve broken out segment sales growth in order to demonstrate how well TJX is doing in Europe this year.
In fact, Europe is growing faster than the company average and
management sees full year comparable same store sales coming in at 8-9%
on a constant currency basis. Segment margins grew in Europe from 5.7%
in Q3 last year to 9.1% this year.
Where Next For TJX Companies?
I think investors should focus on the long term story here and not
get too worried about quarter by quarter movements. I don’t think that
Europe’s troubles are going away any time soon (even if weak comparables
will be lapped by many businesses), so the market opportunities for a
proven off-price retailer like TJX are significant. Moreover, the US
recovery shows every sign of being slow and drawn out for the mass
market consumer, and off-price retailers are becoming increasingly
popular in the US.
Competition is coming, but TJX is a pure-play off-price retailer. It
is one thing for department stores to want to muscle in on the act, but
another thing when they see their discounting hurting margins elsewhere.
In short, the market dynamics remain favorable and TJX is the leading
player in the category, with plenty of potential for geographic
expansion.
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