The TJX Companies: Pursuing Value at a Discount

I'll admit it. I love shopping at T.J. Maxx and Marshall's, the two leading stores of The TJX Companies, Inc. (TJX). I don't always find something good there, but it's so much fun to stop in and see if there are any bargains; and when I do find something, it's much more gratifying than finding that nice dress at Barney's or Saks (SKS). In fact, I can go as far as saying that I have an addiction to browsing and buying at T.J. Maxx and Marshall's.

Obviously I'm not the only one; TJX's revenues have been growing steadily for the past few years, and it looks like 2007 won't be any different. It won't announce fourth-quarter results until February 21, but it has announced that same store sales were up 4% over the fourth quarter in 2005, a good sign for a solid quarter.

Margins have also been good: TJX has great relationships with companies like Ralph Lauren (RL), and it's mastered the art of buying at super-cheap prices to maximize profits. These margins may get tighter over time, as its suppliers are developing better systems for managing inventories, and TJX has instituted a new buying process whereby it tries to purchase goods closer to the time they're sold. This aims at cutting costs, but it will also leave less time to sell inventories and it could end up hurting margins rather than helping them.

TJX is also finding that growth at the flagship T.J. Maxx and Marshall's stores is slowing, which means it will have to focus on other stores to try to keep growth strong. This may be difficult to accomplish, especially with a store like Bob's, which operates on a different model from the discount stores like T.J. Maxx. It will also see a dip in profits in the fourth quarter as the company deals with the fallout from having its computer network compromised by a hacker.

TJX does have to worry about these threats to its profitability, but its margins have been so good that there's some room for tightening. The company clearly believes in itself, as it has announced it will engage in up to $1 billion in stock repurchases. This is in addition to an outstanding $436 million from a previous billion-dollar commitment; and it's part of a ten-year trend that has seen TJX repurchase nearly $5 billion in stock.

Type of Company: By far the largest discount-store company, TJX owns highly profitable stores like T.J. Maxx and Marshall's.

Price Target: While I believe in this company, I think there won't be much room for growth at $28. If you see this drop to around $25, it's worth grabbing. Keep an eye out for fourth-quarter results on February 21. If the costs from the security breach prove enormous, you might see the stock dip because of these one-time expenses.