- TJX has evolved into a global discount retail powerhouse.
- Seasoned management team excels at providing a value proposition.
- Company has navigated pandemic in good fashion.
- Diversified sourcing will mitigate supply chain issues and concerns about access to designer brands.
- Share price looks stretched; use pullbacks to buy or add.
The concept of discount or "off-price" retailing has been evolving for years. This model flourished in the 1930s during and after the Great Depression. It was integral to the post WW2 economy. The discount retail phenomena was warmly embraced during the Great Recession (2007-2009), which popularized the term "retail slumming" by some market observers.
As consumer sentiment goes, it was the global financial crisis which instilled value as a necessary (if not indelible) virtue in the consumer psyche. Of course, last year saw the global economy put in a strangle-hold due to the Covid-19 pandemic.
TJX Companies, Inc. (NYSE:TJX) is one name in the off-price apparel and home fashions retail space I like very much.
The TJX Companies, Inc., together with its subsidiaries, operates as an off-price apparel and home fashions retailer. It operates through four segments: Marmaxx, HomeGoods, TJX Canada, and TJX International. The company sells family apparel, including footwear and accessories; home fashions, such as home basics, furniture, rugs, lighting products, giftware, soft home products, decorative accessories, tabletop, and cookware, as well as expanded pet, kids, and gourmet food departments; fine jewelry and accessories; and other merchandise. As of March 30, 2021, it operated 1,271 T.J. Maxx, 1,131 Marshalls, 821 HomeGoods, 48 Sierra, and 34 HomeSense stores, as well as tjmaxx.com, marshalls.com, and sierra.com in the United States; 280 Winners, 143 HomeSense, and 102 Marshalls stores in Canada; 602 T.K. Maxx and 78 Homesense stores, as well as tkmaxx.com in Europe; and 62 T.K. Maxx stores in Australia. The company was founded in 1956 and is headquartered in Framingham, Massachusetts. (Source: Seeking Alpha via Welcome to The TJX Companies Inc. | TJX.com)
By my reckoning, primary competitor to TJX is Ross Stores, Inc. (ROST) and this peer will be used for purpose of comparisons in this article.
What's To Like?
The short answer, plenty. One of the great attributes of TJX is its seasoned management team. Executive management tenure is impressive also with current Executive Chairman Carol Meyrowitz and CEO Ernie Herrman having worked in various capacities at TJX for a combined 70 years! Operating management also boasts a deep bench of industry talent.
More importantly, the company via strategic and synergistic acquisitions has evolved to be an integrated global retail powerhouse. It also represents TJX management's keen eye for providing a diversified product mix while maintaining the value proposition.
Navigating Through Pandemic and Supply Chain Issues
TJX, like most retailers (whether B-a-M or e-commerce) dealt with supply chain disruptions both during the pandemic and now more recently with ongoing and lingering port facilities congestion.
For example, in second quarter of 2020, inventory disruptions had a significant (negative) impact on both TJX and ROST. While both companies benefitted from "pent-up" consumer demand during the early stages of re-opening their stores, restocking new inventory to replace the aged inventories sold, proved challenging.
TJX and ROST cited a litany of reasons for a lack of inventory, but it boiled down to one primary factor:
"Both companies presented a host of reasons for the lack of inventory; however, as we have been discussing throughout the pandemic ... our vendor checks were clear that when retailers stopped ordering, they stopped producing," BMO Capital Markets' Simeon Siegel said in e-mailed comments.
And more recently, protracted congestion woes at port facilities and strained distribution capacity have added further stress to the supply chain. One noticeable trend emerging from this chaos is the lack of surplus product availability from name-brand and designer apparel companies.
If brand names have less product, they will likely take advantage of the supply/demand imbalance and sell what products they do have at full-price. Or, down-stream residual inventories via company-owned outlets. Bottom line, if you are a premium brand with limited inventory, you would likely prefer to keep it in a premium-price channel.
Whether or not brands evolve into a tighter inventory model going forward is not the greater concern in my view. TJX management seems undaunted by a potential shift of brand-name supply in their stores. Their supply chain is a well-oiled machine. Supply chain management is also a relationship business and TJX enjoys good relations with its suppliers and vendors.
If anything, I see the brand name and designer step-back as a temporary phenomenon. Currently, demand is a tailwind for premium. However, as supply issues stabilize, a combination of retail dislocation and margin pressures will likely keep the TJX's and ROST's of the world firmly anchored in the value proposition story.
Financials: Rather than focus on the more popularly discussed financial metrics of TJX (this information is readily available on Seeking Alpha), this article will examine key components of the company's cash generation capability and its relationship to earnings quality.
You will notice in the chart below that quarterly (YoY) revenue growth rates for both TJX and ROST largely mimic each other during the previous three year period.
For obvious reasons, fiscal 2020 revenue declines need no explanation. The approximate 200 basis point sales growth of TJX vs ROST for the period shown is not significant.
Next, let's examine the steps each company takes in converting income producing assets into cash. Inventory is considered two-steps from cash.
Inventory turnover shows a slight advantage to ROST in the quarterly periods seen below, but overall trajectory for both companies is similar.
Also, keep in mind that TJX has significant international exposure in addition to a dedicated home goods/ accessories unit.
Accounts Receivables are considered to be one-step away from cash. On the balance sheet, receivables reflect the dollar amount of products or services sold (invoiced) to a customer, but not yet paid by or collected from the customer.
This metric is important when evaluating a retail operator, as it provides clues to management effectiveness. Although ROST displays a better collection run than TJX (see below), TJX also has international business exposure which can extend (stretch) collection times on receivables.
Cash Conversion Cycle (CCC) measures how fast a company can convert cash on hand into even more cash on hand. This metric looks at the amount of time needed to sell inventory, the amount of time needed to collect receivables and the length of time the company is afforded to pay its bills (accounts payable) without incurring penalties.
As you can see in the previous three-year cash conversion cycle (quarterly), ROST clearly displays superior efficiency in its cash conversion ability. However, as was mentioned earlier, TJX has significant international operating exposure.
Despite ROST's ability to outpace TJX on inventory turn and receivables collections (particularly in FY2021), TJX does a slightly better job on the returns it gets from invested capital (below).
More importantly, when ROIC is compared to the weighted-average-cost-of-capital (or, WACC), TJX (6.83% WACC) is slightly more favorable than ROST (7.3% WACC).
Another critical area of my investment analysis is determining earnings quality. One of the most important points that investors should keep in mind, is that not all earnings are created equal.
Investors tend to pay too much attention to the "head-line" numbers (reported earnings) that drive stock returns in the short term. In a perfect world, earnings would be derived (entirely) from cash generated by paying customers.
However, in the real world, companies' net income includes many accruals, which are non-cash components of earnings. You will notice in the chart below, that quarterly changes in TJX's accruals were quite volatile when compared to a smoother ROST during the periods shown.
Despite ROST's more static accruals trend, TJX's quarterly accrual changes (by %) were significantly less than ROST through the cumulative periods shown.
Taking the accrual metric a step further, I use an accrual-ratio to compare a company to its industry / sector and peers. Based on the pioneering research of Professor Richard Sloan (more on the evolution of accrual anomaly here), the "Sloan Ratio" has been quite useful in the first-step of determining earnings quality. In other words, how much cash actually supports the underlying earnings versus non-cash components?
As to what constitutes a good Sloan Ratio, it depends on the industry / sector and/or subgroup. As a general rule of thumb, the lower the ratio the better. Using Retail-Cyclical as the industry group; Consumer-Cyclical as sector group; Retail-Apparel as subindustry, both TJX and ROST display (above) annual accrual trends within the safe zone (i.e. -5% to +5%) in four of the five annual periods shown.
In contrast, quarterly Sloan Ratio trends (below) indicate an increased reliance on non-cash contributions to the earnings picture between Q1 and Q3 of FY'21. Perhaps this is part of the retail earnings equilibrium (everybody tapped their credit lines last year to shore up cash needs), but the quarterly trends are worth watching going forward.
Source: Author's calculations with data provided by GuruFocus.com
TJX shares ended 2021 up a solid +11.17% for the year. This pales by comparison to the almost +27% gains realized by S&P 500 index.
It would be easy to consider that shares of TJX might have room to run given the disparity to the sparkling performance of the broader market.
That said, TJX investors are paying over 25 times (est.) forward earnings for a company expected to only grow forward EBITDA by less than 8% this next year. Add to that potential margin pressures resulting from rising in-put costs and the stock price looks to me, very extended at current levels.
More importantly, rising accrual ratio trends (particularly in recent quarters) suggest that managers in the discount side of retail operations are being careful with the purse strings. Note: Another balance sheet item to keep an eye on going forward would be accounts payable trends.
While I believe TJX to be a very well-managed company, and one of the best names in the value retail-apparel / accessories space, the piker in me says "wait for a pullback".
I'm not a technician, but these are my thoughts on the stock price: Initiate (partial) or add to positions up to the $68 area. Back-up the truck up to $63. Best of luck and wishing you all a prosperous 2022.
This article was written by
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