Competitive Advantages in Tact at TJX
The undervalued narrow-moat retailer's performance continues to top that of department stores.
TJX (TJX) announced 1% first-quarter comparable sales growth as U.S. weather-related headwinds and U.K. Brexit headwinds weighed on top-line performance. That said, performance continued to top that of department stores (which posted comparable sales declines), and we agree with management that the company appears to be continuing to maintain or gain market share, supporting our narrow moat rating. Further reinforcing our belief that competitive advantages are intact was an increase in merchandise margin and 7% decline in inventory on a per-store basis (constant currency), which we think speaks to the flexibility and responsiveness of the supply chain to demand levels. Therefore, we see little change to our estimates calling for about 7% compound annual revenue growth over the next five years and adjusted operating margin expansion to 11.9% in fiscal 2022 (versus 11.6% in fiscal 2017) and we view any weakness in the stock as a buying opportunity. When accounting for a new lower federal tax rate assumption beginning in fiscal 2019, our $78 fair value estimate will likely increase about $7 to $8.
By division, TJX Canada and HomeGoods continued to lead in performance, posting 3% comparable sales growth each during the quarter. Both Marmaxx and TJX International had flat comparable sales growth. We think TJX’s decision to further capitalize on the growth opportunities in the home goods market through introduction of a new brand, HomeSense, and the rollout of HomeGoods at Marmaxx locations shows management’s ability to quickly execute on high-return strategies. We view TJX as an early disruptor in the home space, bringing its treasure hunt experience and value pricing to a category where consumers are looking for fashion and are shopping impulsively. With its broadly based buying teams and supply chain, this new brand will be poised to deliver a more unique selection than many traditional home goods retailers while leveraging existing assets, in our opinion.
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Bridget Weishaar does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.