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Summary

  • TJX is looking to expand and open hundreds of new stores. Is this sustainable?
  • Through aggressive expansion and cost-cutting, TJX looks strong moving forward.
  • The retailer holds on to a strong business model and shows favorable margins.

At a time when the mid-price departmental stores are facing a serious crunch, it seems that off-price stores are the ones we should be looking to for sustained growth. The TJX Companies Inc. (NYSE:TJX) seems to confirm our hopes, with growth being sustained in the Q4 2013. Indeed, all four of TJX's brands seem to be going at a great pace, and when we consider that it also has a more global footprint and a more diversified business model than its competition, we can be reasonably optimistic of the company's ability to keep shareholders happy in the long run.

Growth figures growing

The recently released Q4 2013 earnings statement shows that despite an incredibly harsh cold wave and an extra week of sales in the quarter, TJX has managed to post 3% growth in comps for the 2014 fiscal, taking the total sales rise in the last half decade to over 40%. Add to this the excellent performance registered by the company's European business, which posted 6% growth last year.

Even better, growth has been divided amongst all of TJX's four brands. In particular, the Sierra Trading Post brand, which the company took over back in 2012, has been performing well as part of the company's online retail segment. At the same time, the company is planning on adding two more brick-and-mortar stores to the four already present, and will expand further if growth is promising. Similarly, the great growth of the HomeGoods stores has led TJX to raise the number of stores it plans to open from 750 to 825, and the forecast for the Marmaxx stores has also been raised by 100-200 stores.

Excellent business model

The key to TJX's success is luring bargain hunters by offering low prices. While mid-price retailers seek to maintain full collections of items, TJX can be far more selective because of the fact that its buyers are bargain seekers with a "find the best deal" psyche. Furthermore, TJX has succeeded in ensuring that its 16,000+ list of suppliers keep it well-stocked, and thus allows it to offer good bargains even when the inventories of mid-price stores are lean and they are seeking to raise their prices. This has allowed it to eat into the profits of companies like J.C. Penney (NYSE:JCP).

On the other hand, TJX has managed to keep the costs low, with SG&A costs being just 16.3% of sales last year as compared to the 30% which JCP had to spend. With JCP's profits falling, its SG&A spending has risen to 35%, thus widening the profit gap between the off-price and the mid-price stores.

Better than the competition

Though TJX is better than JCP in terms of its business model, it is not really the best comparison, since the main competitors of TJX in the off-price segment are Ross Stores (NASDAQ:ROST) and Target (NYSE:TGT). Indeed, while TJX grew, Ross's earnings actually fell slightly in the year-ago period. Target, on the other hand, suffered a profit fall of 46% in the fourth quarter, when a data leak led to loss of patrons' confidence. TJX can now pull in these disgruntled Target customers to further fuel growth.

Finally, TJX has a great presence in Europe which, as we have seen, is performing well. The competition, on the other hand, is presently focused on the US and Canadian markets only.

What should the investor do?

Though TJX has massive competition in the form of ROST and TGT, it should not be overlooked that it has performed relatively well in Q4 and is expanding aggressively. With a business model that is efficient and diversified, this expansion will only help TJX grow better in the current year. Hence, the investor who wishes to enjoy a good growing stock may safely add TJX to his/her portfolio, while those who already have it in their portfolio should hold onto it.

Source: TJX: Balancing Expansion And Stability