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TJX: Good Company Trading At A Decent Price

Apr. 13, 2018 3:36 PM ETThe TJX Companies, Inc. (TJX)ROST12 Comments
Joseph Harry profile picture
Joseph Harry


  • TJX benefits from a similiar "treasure hunt" atmosphere as ROST.
  • It's a capable capital allocator as well.
  • Shares appear to trade at a pretty good price based on yield and expected earnings estimates.

TJX (NYSE:TJX) is similar to Ross Stores (ROST), in that it provides a treasure hunt-like atmosphere that lures in bargain-conscious shoppers who would otherwise probably just head straight over to Amazon (AMZN). Will this insulate it from Amazon forever? I'm not sure, but it likely at least makes it more resistant than many other retailers that sell things like basic consumer electronics or books.

Return on invested capital analysis

TJX earns very high 'headline" ROIC with a healthy balance sheet.

Like pretty much every retailer, including Ross, it also utilizes a large amount of "off-balance sheet" financing in the form of operating leases, however. These leases are long-term and noncancelable in nature, and if we choose to theoretically capitalize them, we can calculate estimates for an operating lease-adjusted debt-to-equity ratio and ROIC.

First, we need to estimate their fair value, which I've done using the firm's pretax cost of debt as the discount rate.

Now we can inject them into the company's capital structure to calculate an adjusted debt-to-equity ratio.

Considering the impact of the newly capitalized leases paints a much different picture, as TJX's debt-to-equity ratio jumps from only 0.43x to over 2x. This also impacts ROIC.

Next, we can adjust operating profit, or EBIT, to account for lease-related interest and depreciation expenses.

Now taking taxes into account, we can arrive at net operating profit after tax, or NOPAT, and divide it by the previously calculated estimate for the firm's capital base.

After estimating what would happen if we capitalized the firm's operating leases, we can see that the impact would be a full 20% haircut from its impressive 'headline' ROIC. This would also shift the firm's weighted average cost of capital lower, however, which I'll illustrate below (along with a different range of equity costs).

I'd say that

This article was written by

Joseph Harry profile picture
I write to transfer all the investment ideas and concepts cluttered in my head onto (digital) paper. This helps me evaluate them with more clarity, while also subjecting them to public scrutiny. I'm also currently a CFA candidate. I passed the level 1 exam in June 2015.

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Comments (12)

Geo168 profile picture
Thank You Paul. Comprehensive answer.

Best to you,
Paul Wagner profile picture
TJX is one of only 12 companies ( out of 5,036) who currently survive my most restrictive quality screen at Fidelity. To pass the screen, a company must meet my standards for returns, for leverage, earnings growth, book value growth, dividend yield, dividend growth and valuation.

In case you were wondering, the other companies are: ALK, AMAT, GNTX, LSTR, MCK, PGR, ROST, UNH, THO, TROW, and WLK.
5ofDiamonds profile picture
Hey Paul - which criterian did BLK fail at?

Thanks for sharing that list though. Most of them show up on my screener as well. I am debating between TROW and BLK recently.

Paul Wagner profile picture
5ofDiamonds..."which criterian did BLK fail at?"

I don't know. At Fidelity, you input the metrics and out come the symbols. I would have to eliminate metric by metric until BLK is included to decide which one (or ones) BLK failed.
Geo168 profile picture

Nice list of companies. Do you put the above mentioned list in a special category, say long term hold or something else? Do you primarily see them as providing value/stability or long term growth?

Macy's has had their famous January basement sale for decades. Huge bargains. TV use to show women fighting over brand-name garments, purses and shoes.

Think Amazon will affect outlet stores more than it will TJX. Recently, a guest on FOX recommended TJX as great potential given its unique treasure hunt theme.
Nordstrom and Macys are trying to copy this retail model, does anyone think this may affect Tjx growth? Could it be neglible or a major headache for Tjx?
tizod profile picture
Much of this analysis also bodes well for Tanger Outlets (SKT). I bought that via the same premise, and I think it became a better value than TJX when the Amazon effect hit malls. In this sector, long SKT, TGT
BA Man profile picture
Started building a position recently. Should have listened to my daughters on this one, as they like going to TJ Maxx and Homegoods much more than on-line shopping. They get to touch and feel, and try it on. The treasure hunt thing I guess.
The string of hefty dividend increases is nice. Hoping that continues for years to come. With so many valuations stretched, TJX does appear to fit the definition of being a great company at a fai price.
Long TJX,and still adding.
Joseph Harry profile picture
My wife and I frequent our local Homegoods quite a bit, usually just to look around, but sometimes we find something really cool to use as a decoration for our house.
They usually have a decent amount of picture frames, furniture, dining sets, etc. and it seems to be constantly changing with different SKUs - so I definitely get the "treasure hunt" aspect, since we don't really ever go there for anything specific.
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