TJX - Great Off-Price Stores, Yet No Discount On The Shares

May.22.14 | About: TJX Companies (TJX)

Summary

TJX faced a difficult first quarter, just like the entire wider retail industry.

The company has a long term track record of profitable growth and shareholder returns.

Yet after a big run-up in its shares over the past few years, shares have become a bit rich.

TJX Companies (NYSE:TJX) operates more than 3,250 home and family apparel stores predominantly in the US, but also in Canada and Europe. The company is well known from its T.J. Maxx and Marshalls stores.

Like many retailers, the company's first quarter results were impacted by the harsh weather triggering a correction in the stock price.

First Quarter Headline Results

TJX reported a 5% jump in first quarter revenues which came in at $6.49 billion supported by a modest 1% increase in comparable store sales which trailed consensus estimates of 2.4%. The soft performance was due to poor weather and a weak performance of the core apparel business.

Reported GAAP earnings rose by just 0.3% to $454.3 million. Thanks to share repurchases earnings per diluted share inched up by two pennies to $0.64 per share.

Looking Into The Operational Side Of The Business

TJX still relies heavily on its US operations which makes up nearly 77% of total revenues. HomeGoods delivered 3% comparable store sales growth with total sales increasing by 9.7% to $757 million. Marmaxx which is T.J. Maxx and Marshalls combined reported flat comparable store sales growth, but did manage to boost overall revenues by 2.4% to $4.24 billion.

The Canadian business underperformed with comparable store sales falling by a percent, triggering a bigger sales decline to $608 million. European operations showed a healthy 8% increase in comparable store sales with revenues increasing by 23.9% to $891 million.

The company did face a bit of gross margin compression with margins being down half a percent to 27.9% of sales. TJX noted that the company had seen strong margins in the first quarter of the last year. Operating costs remained stable at 16.5% of total revenues putting pressure on operating margins.

Looking Into The Year

For the second quarter, TJX anticipates earnings between $0.70 and $0.74 per share, which would represent 6-12% growth on an annual basis. This guidance is based on comparable store sales growth of 2-3%.

Full year earnings per share are now seen between $3.05 and $3.17 per share based on a 1-2% increase in comparable store sales. Excluding one-time items, this implies 8-12% growth in earnings per share compared to the company's fiscal year of 2014.

The full year guidance was a bit soft as TJX previously guided for earnings between $3.05 and $3.19 per share, implying the company cut the higher end of the earnings guidance by two pennies.

But What About The Valuation?

At $54 per share, TJX's equity is valued at around $38 billion. Operating with $2.3 billion in cash, equivalents and short term investments the company holds a net cash position of around $1 billion, thereby valuing operating assets at around $37 billion.

This values the company's equity at 1.4 times annual revenues of $27.4 billion over the past year and 17-18 times annual earnings which came in at $2.1 billion.

The quarterly dividend of $0.175 per share provides investors with an annual dividend yield of 1.3%.

Implications For (Potential) Shareholders

TJX offers branded merchandise at lower prices compared to specialty and department stores. This calls for a high turnover, aggressive pricing and a low cost business model. The company's business model has worked great for a long time, as TJX only once reported a fall in comparable store sales since 1982 which occurred in 1996 to be precise.

This business model has historically worked fine, although comparable store sales are slowing down again lately putting pressure on the shares. Still, combined with a steady pace of store openings, TJX continues to boost its topline results.

To offset the pain of slowing growth for investors the company has recently hiked its quarterly dividend for a yield of 1.3%. More importantly, share repurchases are anticipated to come in between $1.6 and $1.7 billion for this fiscal year, sufficient to retire over 4% of the outstanding share base at current levels. Given the solid financial footing of the company, this can easily be financed out of own means.

All in all, TJX is a quality name taking care of its investors. Unfortunately shares have seen a big run-up in recent years, trading as low as $20 as recent as 2010. Despite a 15% correction from its highs around $64 per share earlier this year, I believe shares are still valued a bit too rich for my taste.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.