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TJX Companies (TJX), an apparel and home goods retailer, beat analyst estimates for Q2 2013 EPS by 2% according to its latest quarter's report. The company also raised its FY2013 earnings guidance. The shares are up 1.76% since the earnings release. The company also reported its July 2012 same store sales of 7% recently, which beat analyst estimates of 5%, due to increased traffic in all segments. This follows an 8% increase reported in June 2012. In July 2011, this figure was 4%. These impressive same store sales were not alone, as the management raised the guidance for its second quarter and full year EPS. We recommend buying TJX in view of its off-price retail model resonating well with consumers in the present economic uncertainty.

Earnings Surprise:

The company's second quarter (Q2 2013) guidance was $0.55/share, the same as mean analyst estimates. The company posted $0.56/share.

The company posted revenues of $5.92 billion. The average analyst estimate for Q2 2013 revenues was $5.99 billion. TJX had given a guidance range of $5.7-$5.8 billion earlier this year. Below is a table showing the revenue and earnings surprise history for TJX, including the ones for the most recent quarter (Q2 2013).

Data source: Thomson Reuters

Business Overview:

Percentage of revenues (last fiscal year)

Business Segments

No. of Stores as of April 2012

United States

76%

Marmaxx + HomeGoods

2,261

Europe

12%

T.K Maxx + HomeSense

318

Canada

12%

Winners + HomeSense

359

HomeGoods and HomeSense are off-price home fashion store chains with similar mix of products on offer. HomeGoods (383 U.S. stores) formed 10% of the revenue stream, meaning that the company derives its revenues primarily from off-price apparel, including footwear and accessories. The number of stores has been increasing, reflecting the growth potential of the company. 33 net stores were added in total across all three geographic segments in the last quarter ended April 2012.

Even the same store sales from Europe are expected to be higher by 4%-5% for the fiscal year 2013. The company plans to operate in that region with a minimum number of stores till the situation gets better. In the words of the CEO, "We will play it by the ear and we can react very quickly." 10 new stores are to be added to the European region this year and each following year, according to guidance given in February. European operations, although showing YoY growth, can be a drag for U.S. operations because of the strengthening dollar.

Back to school and college spending season is expected to be bigger this year, second only to the holiday season. The healthy July same store sales is one indicator of the buying potential of consumers, especially in the apparel sector, where the July comparable store sales figure of 8.2% comprehensively beat analyst estimates of 4.4%, according to Thomson Reuters. According to the National Retail Federation, discounters are going to be one of the top destinations for shopper for back to school spending. Given the economic situation in the U.S. and Europe, discount chains will certainly fare far better than mid-tier stores like Kohl's (KSS). The lower and middle income consumers are likely to be more price conscious, and will look for better deals when it comes to apparels. TJX, Ross Stores (ROST) and Target (TGT) are in a good position to benefit. JC Penney's (JCP) misfortunes and not very popular current restructuring of stores might also lead customers towards TJX, ROST and TGT.

Below are graphs showing TJX's operating margins as compared to Ross Stores and Target. These operating margins compare with KSS' April and July 2012 quarterly margins of 7.6% and 10.9% respectively. The net margin (7.1%) too is slightly below that of ROST (7.8%), but is more than KSS' 5.6%, Gap's (GPS) 5.7% and Macy's (M) 5% for the last twelve months.

Moreover, we see that the lower price outlet stores of even luxury brands like Coach (COH) and Ralph Lauren (RL) are doing better than their full priced outlets. This reinforces our thesis that discount apparel chains resonate well with customers in the current economic situation, as people are more discrete in their spending.

The company has a low beta of 0.44, so it is less affected by the economic scenario as compared to other full price apparel retailers. This can be seen from the inventory turnover of 5.8 as compared to ROST's 5.9, TGT's 6, Sears' (SHLD) 3, Macy's 2.7 and KSS' 3. This inventory position has helped the company maintain fresh stock in stores round the clock.

The company has also started working on its e-commerce initiative, according to the earnings call transcript for last quarter. The company will test its ideas before launching any service in this regard, and does not expect it to contribute to the top line growth in 2012. We believe that going forward this is a good initiative, in line with the consumer trend of doing comparison and online shopping.

Guidance Summary:

With the Q2 2013 results, the company issued EPS guidance for the third quarter of FY2013 of $0.56 to $0.59/share, based on a same store sales increase of 2%-4% and revenues of $6.1-$6.2 billion. The analysts are expecting $0.62/share.

The Q4 guidance for EPS is $0.72-$0.75/share. This compares with last year's $0.62/share.

The company raised its EPS guidance for the whole fiscal year by $0.01. With the announcement of July comparable store sales, the company had raised its full year EPS guidance to $2.38-$2.44 from an earlier guidance of $2.31-$2.39. Now the latest guidance is between $2.39-$2.45/share based on comparable store sales growth of 4%-5%. Thus, there were two guidance raises within this month. Currently, the mean for analyst estimates is $2.46 per share. This would mean a strong 17%-20% EPS growth over last fiscal year. Using Reuters' smart estimates for EPS of $2.48, a potential surprise of 0.81% can be seen.

Valuations:

The company is trading at almost its 52-week high of $45.5. It is up 39% YTD. The forward P/E for TJX is 17x, compared to ROST's 18x and TGT's 14x. The company has a dividend yield of 1%, higher than ROST's 0.8%, and it has a dividend growth rate for the last 5 years of 22%.

The growth rate for the past 5 years was roughly 19%. The long-term EPS growth rate for TJX is 12.5%, compared to ROST's 13.5%, Wal-Mart's (WMT) 8% and TGT's 11%.

Recently, there have been a few upward revisions in the target price by sell-side analysts, which now range from $42 to $55, according to analyst price targets compiled by Thomson Reuters. Based on a forward P/E of 17x, the valuation comes out to be:

To reiterate, we advise a long position in TJX based on its appeal for price-sensitive lower and middle income consumers. In our earlier article, we had also recommended buying TJX's peer, Ross Stores , based on the same criteria as TJX.

Source: Buy TJX On Improving Consumer Spending Trends Towards Discount Chains