There is a quote, often used in real estate, that says 'Money is made when you buy, not when you sell'. That applies to the TJX Companies (NYSE:TJX), whose business model is to source product at extremely attractive prices to then sell it at deep discounts to customers. Offering great value to customers has worked very well for the company, as its differentiated shopping experience attracts a wide range of customers, and has allowed the company to operate with excellent margins and returns on capital. Its rapidly changing mix of merchandise keeps customers coming back, and it creates a treasure hunt experience. The company also benefits from having very well located stores.
TJX operates TJ Maxx in the US and TK Maxx in Australia and Europe, along with Marshalls, HomeGoods, HomeSense, Sierra in the United States, and HomeSense, Marshalls, Winners in Canada.
There are over 4,689 discount stores in the TJX portfolio located in nine countries.
TJX is an expert in off-price retail, but what exactly is off-price retailing?
For the Q2 2023 TJX delivered GAAP EPS of $0.69 and revenue of $11.84B. Both the pretax profit margin of 9.2% and the earnings per share were at the high end of the company's plan. This is despite inflation impacting consumer discretionary spending. The company executed its off-price fundamentals extremely well, with its merchants doing an excellent job buying the right merchandise in the right categories.
For the full year, the company is guiding for total TJX sales in the range of $49.6 billion to $49.9 billion. The lower sales guidance includes lower-than-planned second quarter sales and an updated reduced sales expectation for the second half of the year. Despite the reduction in the sales plan, the company raised its guidance for the full year adjusted pretax margin to a range of between 9.7% and 9.9%. For the full year adjusted earnings per share, the company is guiding to a range of $3.05 to $3.13, which is up 7% to 10% over last year’s adjusted $2.85.
TJX commands a premium valuation over department stores, and many other retailers, due to its strong competitive advantages that allow it to earn higher returns. Among these competitive advantages, the most important are its world-class buying organization and its global supply chain and distribution network, both of which make sure the company gets the right products, in the right markets, at the right time, and at very low prices.
The company is also designed to be incredibly flexible, to adjust quickly to changing customer preferences and product availability. The company has more than 1,200 associates in its buying organization, with expertise developed over many decades, and it sources products from a universe of approximately 21,000 vendors. The company's competitive advantage is therefore the result of extreme efforts in getting the right product, at the right stores, at the right time.
Looking at the company's profit margins, it is remarkable how stable they have been over the years, with the exception of the Covid crisis. In particular, the operating margin of ~9% is extremely good for a retailer, and reflects the company's high efficiency and scale.
Despite operating in a highly competitive industry, the company has been able to use its competitive advantages to generate attractive returns on its capital. This can be seen in its impressive ROCE and ROIC.
The company is growing again after the Covid crisis, posting record trailing twelve months revenue of ~$49 billion. The company believes it still has significant growth ahead, projecting a potential for ~6,275 global stores, from the current ~4,689.
Historically the company has grown revenue about 10% per year. Covid disrupted the company's growth, but we believe the company can continue to grow at a healthy pace in the coming years.
During the second quarter, the company generated $641 million in operating cash flow and ended the quarter with $3.5 billion in cash and short-term investments. It has a little more cash and short-term investments than long-term debt, making its balance sheet extremely solid.
The company is currently trading at a discount to its ten year EV/EBITDA average of ~14.6x. We believe this ~10% discount to its historical valuation makes shares attractive, especially given the excellent track record the company has in creating shareholder value.
The company's valuation is similar to that of competitor Ross Stores (ROST), but much cheaper than that of Burlington Stores (BURL). Department store competitors, such as Nordstrom (JWN), Macy's (M), and Kohl's (KSS), are trading with much cheaper valuations, but their business models are not as strong.
Other indicators pointing to a slight undervaluation in the shares include the dividend yield, which is higher than the ten year average, as well as the net common payout yield, which incorporates share buybacks to estimate a total yield and is also significantly above its ten year average.
The main risk we see with an investment in the company is that of the business model breaking down. So far the company has been successful in sourcing items at very attractive prices and good quality, but there is no guarantee this will continue in the future. The business model also requires operational excellence, so it is fundamental that the company's culture and high performance does not deteriorate. Other than that we do not see major risks, the company has a very small percentage of its shares sold short, and a very high Altman Z-score reflecting the solid balance sheet.
The TJX Companies has a very strong business model, which rests on the company's strong competitive advantages. The company is extremely good at sourcing off-price products and getting the right products, to the right stores, at the right time. The company's strong business model and high efficiency are reflected in its high operating margin and high returns on capital. This is a quality business trading at a very reasonable price, with shares currently ~10% below their ten year EV/EBITDA average. We view shares as moderately undervalued, and we'll be adding them to the watch list.
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