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  • TJX Companies (NYSE:TJX) is emerging from the last recession with one of the most beneficial opportunities in company history. Bargain shopping has become at least a temporary state of mind for U.S. consumers and is likely to remain for millions of consumers well into the future.
  • Although off-price retailers perform best during recessions, the employment situation has created frugal consumers who are likely to continue to shop at these stores well into the future.
  • Corporate focus has shifted to two main initiatives: Improving branding image by focusing on price perception via price matching initiatives and advertising.

Valuation

  • TJX shares rallied 20% in 2010, outperforming the S&P500 by over 5%.
  • 2011 target price is $55, representing a potential upside of 15% over the next 12 months.
  • Trading at 13x forward EPS, TJX temporarily lost momentum as investors were convinced that consumers had returned full force to big box retail. However, given the question of sustainability for recent holiday shopping trends, TJX is a great hedge for continued frugal shopping behavior.

Outlook

  • U.S. retail sales, excluding automobiles, rose 5.5% between Nov. 5 and Dec. 24, compared with a year ago. Whether or not this trend is sustainable is yet to be known, but it is a positive sign nonetheless.
  • Stubbornly high unemployment and rising costs, especially cotton, could prove to be difficult hurdles to overcome in 2011. However TJX is less exposed to these negative events than other retail names.
  • Rising cotton costs may actually benefit TJX given the method in which the company purchases inventory from other retailers. Buying at a discount from other retail companies' excess inventory reduces exposure to high prices since they're not actually producing any products themselves, or even buying from the producer directly.
  • Retail sales missed forecasts in the month of December, perhaps indicating that the consumer went on a binge in November, rather than creating a sustainable new recovery.
  • The slower the pace of recovery for both the U.S. consumer and the employment picture, the more likely it is for shares of TJX to continue its outperformance. With retailers building inventories in anticipation of sustained sales increases, and a rapid increase of input materials for apparel, there is a good chance that TJX will have a plethora of excess brand name inventory from large-box retailers to buy at bargain prices.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Consumer Rebound Temporary or Not? Either Way, TJX Benefits