TJX Companies - Reassuring Quarter From This Long-Term Value Creator

Aug.20.14 | About: TJX Companies (TJX)


TJX reports relatively strong second quarter results as many were preparing for a disappointment.

The company has a great long term track record of solid operational growth combined with margin expansion.

All of this combined with a steady pace of share repurchases has created a long term value creating company, providing appeal at market-equivalent multiples in my eyes.

Investors in TJX Companies (NYSE:TJX) were very much pleased with the company's solid second quarter results as many were preparing for soft results following the disappointing price developments of the shares recently.

The warning of Macy's (NYSE:M) last week, often regarded as a very strong performer in a very difficult retail environment, has lowered the expectations of investors across the wider retail sector ahead of the report.

TJX has a great long term track record of showing growth and more importantly creating a lot of value for its investors. I like the long term appeal of the shares, being a buyer at market-equivalent multiples which translates into a $50-$55 targeted buying opportunity.

Second Quarter Headlines

TJX posted second quarter revenues of $6.92 billion which was a 7.4% increase compared to the year before and came in a little bit ahead of consensus estimates at $6.88 billion.

Reported earnings rose by 7.9% to $517.6 million, largely in line with reported topline sales growth. The company did manage to reduce its outstanding share base by little over three percent, adding to earnings growth on a per share basis.

Diluted earnings rose by 10.6% to $0.73 per share while non-GAAP or adjusted earnings came in two pennies higher. Analysts were looking for non-GAAP earnings of $0.73 per share.

Looking Into The Second Quarter Performance

The company was pleased with the performance, posting overall comparable sales growth of 3% for the past quarter. Reported comparable sales growth looked favorable versus consensus estimates calling for growth of 2.4%.

The growth marked an acceleration compared to recent trends as CEO Carol Meyrowitz was very pleased with the results as momentum accelerated throughout the quarter. This resulted in a solid start to the third quarter.

Overall gross margins compressed by 20 basis points to 28.6% of sales against very strong comparables last year. The impact from mark-to-market adjustments on hedging instruments had an effect on margins as well. This was more than offset by a 50 basis points reduction in selling, general and administrative costs which fell to 16.2% of sales on lower insurance claims and cost savings.

Sales at T.J. Maxx and Marshalls grew 2% on a comparable basis increasing to $4.49 billion, with total revenue growth of the unit increasing by 4.6% thanks to store openings as well.

Sales at Homegoods were up by 12.0% to $773 million driven by 5% comparable sales growth. The real other impressive growth was reported at the European operations, aided by favorable foreign exchange rates among others. Revenues in Europe were up by 22.6% to $954 million, driven by 6% growth in comparable store sales.

Looking Into The Remainder Of The Year

For the current third quarter, earnings are foreseen between $0.81 and $0.85 per share, down from the $0.86 per share as reported last year which included a $0.11 per share tax benefit. Overall, comparable store sales are seen up between 1 and 2% for the quarter.

For the full year, TJX sees a similar pace of comparable store sales growth. Reported earnings are now seen between $3.08 and $3.16 per share on a GAAP basis versus $2.94 per share as reported last year. Given the second quarter strength the hike in the full year guidance from $3.05-3.17 is actually not that aggressive.

Adjusting for last year's tax benefit this would imply a 10-12% increase in anticipated earnings on an adjusted basis. This is in line with the company's longer term target of 10-13% growth in earnings per share despite a difficult retail environment this year.


At the end of the quarter, TJX held nearly $2.5 billion in cash, equivalents and short term investments. This results in a very comfortable net cash position given the fact that the company has just $1.6 billion in long term debt.

For the entire year revenues of $29 billion are most likely attainable as the company forecasts earnings of about $2.2 billion. With 705 million shares outstanding and shares currently trading at $59 per share, equity is valued at $41.5 billion.

This values operating assets at around $40.5 billion, the equivalent of 1.4 times annual revenues and 18-19 times anticipated earnings.

A History Of Growth

TJX has a strong history of operational growth, essentially doubling sales from $14.9 billion in the fiscal year of 2004 to anticipated sales of $29 billion this year. Even more impressive, these revenue gains have been accompanied by margin gains with EBITDA tripling over this time period as earnings are seen as high as $2.2 billion this year.

This is only part of the good news as the company furthermore reduced its outstanding share base by some 30% over this time period, adding significantly to reported revenues and earnings on a per share basis.

Besides excellent past performance, the company remains very upbeat about its future. In a recent investor presenation the company stresses is flexibility and long term focus on creating value. The company furthermore has global sourcing capabilities and is an innovator having embraced e-commerce opportunities while seeing plenty of potential for new store growth at the same time.

For the coming years another period of double-digit earnings per share growth is projected driven by 2% comparable store sales growth, 4-5% increase in store footage and a 1-2% increase in margins. All of this should be complemented with a 3-4% pace in annual share repurchases.

Final Recommendation

Back in May after the company posted its results after a difficult first quarter, I last had a look at the company's prospects. Shares traded at equivalent levels as now as I praised the company's business model based on aggressive pricing and high turnover. As a matter of fact, since 1982 the company has only seen its comparable store sales fall in one single year.

At the time I found shares a little too rich for me. At the moment shares trade at a roughly 10% premium compared to the overall market despite operating in a difficult environment.

I think a partial premium is very much deserved given the historical operational growth, the very substantial and steady pace of share repurchases, while maintaining a very healthy balance sheet. In hindsight recent levels have been an obvious bargain opportunity. I am willing to pay 17 times earnings of about $2.2 billion for this year, with the multiple being roughly in line with the general market.

This translates into a targeted buying opportunity around $53 per share, leaving me hoping for a pullback in the coming weeks or months.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.