TJX Companies (NYSE:TJX) is still recovering from the disruption of COVID-19. The company's outlook for Q3 still highlights a decline in open-only comp-store sales between a range of minus 10% to 20%. The lackluster sales outlook is mostly driven by the uncertainty in the current environment and the impact on consumer behavior, demand, and store traffic from the pandemic. Additionally, a delayed back-to-school season is expected to impact TJX's top-line.
That said, from the three main off-price retailers in the marketplace, we believe TJX has better probabilities to surprise on the upside than Ross Stores (ROST) and Burlington Stores (BURL). The strength in home decor and the possibilities to gain market share in that market should bode well for HomeGoods and HomeSense. Before the pandemic, TJX was rapidly increasing the expansion of these two retail chains, and given the recent trends, management might take the opportunity to accelerate growth.
Trading at a forward earnings multiple of 21.5x, we believe TJX offers an opportunity to start a position. For context, the company has traded at a P/E multiple of approximately 24x in the last 5 years. Competitors, BURL, and ROSS trade at forward earnings of 29.5x and 21.5x respectively.
Although we like off-price retailers in general due to our belief they possess material advantages over full-price retailers, at this moment, we would favor an investment in TJX over ROST and BURL. We believe TJX has a clearer growth picture while selling at a lower forward multiple. We are bullish on the company.
Weak second-quarter numbers, but still better than the competition
TJX reported second-quarter sales of $6.7B, down 31.8% on a year-over-year basis but beating analysts' expectations by $90M. The company also reported GAAP EPS of minus $0.18, missing the consensus by $0.08.
While the decline in revenues was severe and highlights the impact of COVID-19, TJX outperformed their peer group. For example, Q2 sales were down 32.7% for ROST, and BURL's Q2 sales were down 39% compared to their prior-year periods. The relative strength of TJX can also be observed in their open-only comp-store sales, which the company defines as follows:
Open-only comp store sales includes stores initially classified as comp stores at the beginning of Fiscal 2021, and reports the sales increase or decrease of these stores for the days the stores were open in the current period against sales for the same days in the prior year. - Q2 Press release.
For the quarter, TJX's open-only comp-store sales were down 3% versus last year. For ROST and BURL, open-only comp sales were down 12% and 14% respectively. The outperformance in open-only comps can be attributed to the strong growth seen in TJX's HomeGoods and HomeSense chains, which delivered double-digit open-only comp sales increases in each month of the quarter.
Where we see growth coming from
The reason we feel more bullish about TJX compared to other off-price retailers is the interesting position the company has in the home decor market with banners such as HomeGoods and HomeSense.
With COVID-19 impacting the daily lives of people, and with more time spent at home, discretionary spending in categories such as entertainment and travel shifted towards home renovation projects and outdoor activities.
COVID-19 also took supply out of the home decor market with the bankruptcy of Pier 1 being a clear example. Last year, that company made $1.8B in sales; with the complete liquidation of the business, the standing players are given the opportunity to grab market share.
Between J. C Penney, Tuesday Morning, and Pier 1, approximately 1,000 stores are estimated to be closed permanently, representing a good opportunity for HomeGoods and HomeSense to expand its footprint:
I will also tell you we have the utmost of confidence that as we go through this and we start to come out midterm into next year, given all the store closures, we just think we are going to begin to take major market share. - Q2 call
A clear winner from the shift in the competitive landscape has been At Home Group (HOME). At Home is a large box home decor retailer that saw Q2 sales increase by 50% on a year-over-year basis. At Home's management is highly optimistic about reaching its new store expansion target of 600 stores. That compares to the 765 HomeGoods stores in 2019 with a projected target of 1,400 stores, as disclosed in the TJX annual report.
We see no reason why HomeGoods would not enjoy the same tailwinds seen by At Home during Q2. The scale TJX already has is an important competitive advantage, as they could leverage their size to get better supply terms and product availability, while also leveraging advertising expenditures across all of the company's three banners.
We also believe the disruption caused by COVID-19 is having a positive impact on companies looking to expand from a real estate perspective. For example, there were comments by management from Floor & Decor (FND) about the favorable real estate locations and better rent rates as weaker competitors exit the market:
So we were -- the last few years, we've probably been paying rents closer to somewhere in the $12 to $15 range. And it looks like the class of '21 is going to be sub-$10 per square foot in rent. And so we are seeing lower rents. - Floor and Decor at Goldman Sachs 27th Annual Global Retailing Conference Sept 10th
How is this positive for TJX? Well, we believe TJX has a lot of leverage to negotiate at least the same terms seen by other retailers. Let's not forget TJX is a $64B market cap company with a solid balance sheet. Landlords would see them as a favorable tenant with low financial risk while acting as an "anchor" to drive traffic. Given the tailwinds from the home decor market and the potential for 1,400 stores for HomeGoods, management might be willing to accelerate its store expansion strategy to take advantage of the opportunities.
While it is too early to tell if consumer behavior is permanently changed due to COVID-19, there are good probabilities that work-from-home could remain for a few more quarters, sustaining the tailwinds seen in Q2 for home decor products.
The Bottom Line
We believe TJX can give us a good surprise down the road. The company is already rebuilding its inventory levels with items that should resonate with current trends. Management is also taking advantage of the packaway opportunities they are seeing in the marketplace, by buying "more packaway than the same time last year".
The opportunity to grab market share in the home decor market is also very appealing. The brand awareness already enjoyed by TJX could benefit the company as they try to position more HomeGoods stores in areas where competition left.
That said, the current environment makes it difficult to predict how Marshalls and T.J. Maxx are going to perform. Continued weakness in both retail chains could be more than enough to offset any advances made by HomeGoods.
However, at forward earnings of 21.5x, we believe TJX offers the most value out of the other two off-price retailers and with better growth opportunities ahead. We are bullish TJX.
