TJX: Maybe Retail Isn't Dead?

| About: TJX Companies (TJX)

Summary

After a series of terrible earnings reports from retailers, TJX surprised many by beating earnings and raising guidance.

Unlike the classic department store model, TJX's discounted retail model continues to flourish and drive in new customers, as other retailers feel the heat from Amazon.

Even with bold expansion plans, it's hard to call TJX cheap at these prices.

After a series of terrible earnings reports from retailers such as Macy's (NYSE:M), JC Penny (NYSE:JCP), and Nordstrom (NYSE:JWN), the world has begun to assume that Amazon's (NASDAQ:AMZN) reign as King of Retail has officially started. But is the classic retail model truly dead? TJX (NYSE:TJX) reported earnings on Tuesday, and to the surprise of many, actually beat earnings. While Amazon is certainly a large threat on the horizon, it looks like TJX has some room to run before Amazon takes over.

Q1 Fiscal 2017 Earnings

  • Sales increased 10% year-over-year, and comparable sales increased 7% year-over-year
  • Pretax margins dipped slightly to 10.9% in the first quarter
  • The company spent $375mm to buy back 5 million shares in the quarter. TJX still plans to buyback $1.5 billion to $2 billion in Fiscal 2017
  • The dividend was increased by 24% in the first quarter
  • TJX increased its store count by 47 for a total of 3,661 stores
  • EPS guidance was raised to the range of $3.35 to $3.42 for fiscal 2017

Dominating Off Price Retail

If there's one segment of retail that's actually performed well, it's the off-price retail space. Who's the market leader? That would be TJX. This is retail though. The competition is cutthroat, yet somehow TJX is continuing to find ways to outperform while its peers struggle. So why has it been so hard for classic department stores like Macy's and JC Penny to start grabbing share?

  • Shoppers Know They're Getting A Good Deal: The off-price section of a department store is usually a pretty sad place. Essentially, the department stores take all the unwanted items in one area, mark them down, and pray that shoppers buy them. There's an obvious problem with this concept though. Shoppers don't want to buy the left over junk. T.J. Maxx and Marshall's approach the situation very differently: they carefully select the items that they believe are actual bargains that customers want and bypass the terrible items that didn't sell for a reason. By consistently putting quality, discounted items in their stores over and over, shoppers have come to learn that they are always getting a deal at a T.J. Maxx or Marshalls.
  • The Thrill of the Treasure Hunt: What keeps shoppers coming back time after time? It's the thrill of hunting for a bargain. TJX knows that this is what customers love, and they continue to capitalize on it. If there's anything that's going to keep shoppers visiting the stores in an Amazon dominated retail world, it's this.
  • Off-Price Cannibalizes Full Price Items: It's a bit counter-intuitive for a classic department store to offer an off-price section. The products get sold at lower margins and essentially cannibalize full price items. To counter-attack this, some retailers like Nordstrom are taking an unique approach by trying to use their off-price stores to entice customers to visit their full price stores. Has that worked so far? Things are a bit up in the air for Nordstrom.

Going Forward After Earnings

TJX doesn't plan on slowly down anytime soon. TJX's CEO stated that they see the potential to have 5,600 stores, which is close to 2,000 more than they currently have. Even with the potential to grow, is TJX worth buying now?

At a price of $75.60, you'd be paying close to 22x earnings to buy TJX right now. Is it really worth it when you could be a retailer like Nordstrom for 11x? Sure, they aren't a discount retailer like TJX, but that give you an idea of what some of these distressed retailers are trading at. Think about it, if TJX slipped up and had a bad quarter, you can be sure to see its price plunge like some of these other retailers. While they still have that massive buyback to complete, it feels like there's more downside than upside here at these levels. I'd revisit in a few quarters and wait for a slip-up before thinking about jumping in.

Conclusion

In a world of beaten-down retail stocks, a contrarian investor's first thought may be to start looking around bargains. At 22x earnings, TJX doesn't come close to fitting that build. While their model is much different from your classic department store and slightly more insulated from the threat of an Amazon-dominated world, their valuation certainly doesn't reflect that.

Disclosure: I/we 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.