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S&P Capital IQ


02/08/16 10:00:11 AM



This week's Focus Stock of the Week is The TJX Companies, Inc. (TJX: $68), which carries S&P Capital IQ's highest investment recommendations of 5-STARS, or Strong Buy. With notable brands such as as T.J. Maxx, Marshalls, Winners, HomeSense and T.K. Maxx, this leading "off-price" retailer of apparel and home fashions operates almost 3,600 store locations across the U.S., Canada and Europe. With a clear value message in marketing and frequent in-flow of new assortments that support a "treasure hunt" shopping experience, the company seems poised to consolidate its market share gains, as it successfully engages customers in a highly competitive retail environment.

In FY 15 (Jan.), the breakdown of total net sales and profit by the four operating segments are as follows: Marmaxx, 64% and 70%, respectively; HomeGoods, 12% and 12%; TJX Canada, 10% and 10%; and TJX Europe, 14% and 9%. Net sales by product categories were as follows: clothing and footwear, 57%; jewelry and accessories, 14%; and home fashions, 29%.

The company believes it derives a competitive advantage by offering rapidly changing assortments of quality brand name and designer merchandise at prices usually 20% to 60% below department and specialty store regular prices. It wields substantial buying power - with nearly 17,000 vendors worldwide - leveraging a combination of opportunistic buying, an expansive distribution infrastructure and a low expense structure to offer everyday savings to its customers.

After a recent seamless CEO transition, we see TJX steadfastly focused on its key growth pillars, including continued retail expansion (through the addition of new store locations), and growth in same-store sales (which have risen for 27 consecutive quarters through October 31, 2015). Since FY 13, the company has targeted 4% to 5% annual increases in retail square footage and 2% growth in consolidated same-store sales. Over the long term, it sees an opportunity to grow its store base by more than 50% to almost 5,500 locations across the U.S., Europe and Canada.

More recently, TJX has also expanded its international operations through a notable acquisition. In October 2015, the company acquired Trade secrets, an off-price retailer that operates 35 stores in Australia - for AUD $80 million (about US$59 million). This acquisition should provide a toehold in a new international market with a potential long-term upside. Also, TJX recently opened its first store in the Netherlands, furthering its ongoing European expansion.

Separately, with online representing slightly more than 1% of total net sales, we increasingly look to e-commerce as another growth driver. Indeed, the company sees an opportunity to leverage e-commerce to reach new customers and to expand its product offering beyond what it currently sells in its stores. Earlier, in late 2012, it acquired Sierra Trading Post, a privately held off-price Internet retailer of apparel and home fashions, for $200 million in cash. It also operates other web sites such as and

After a projected 5.6% increase in FY 16 - despite currency headwinds - net sales are expected to grow another 6.9% in FY 17. This assumes a targeted low- to mid-single digit annual increase in global selling square footage, combined with a 3%-4% growth in comparable store sales, on broad-based gains in the U.S. (HomeGoods and Marmaxx) and overseas (TJX Europe and Canada).

We forecast FY 17 operating margins of 12.0% - little changed versus a projected FY 16's projected 11.9% - pressured by higher stores pre-opening expenses, plus marketing and e-commerce investments. This should be partly offset by improved merchandise margins, as TJX generally buys inventory opportunistically to help limit its markdown risk. With ongoing share repurchases, we forecast FY 17 EPS of $3.72, up 12% versus FY 16's projected $3.33. TJX plans to report its 2015 fourth quarter and full year results before market open on February 24.

We see an attractive upside for the shares at current levels. Our 12-month target price is $80, which implies a P/E ratio of 22.4X our 2016 estimate, seen relatively ample to a projected long-term EPS growth of 11%. This forward P/E multiple - higher than the 10-year historic average of 17.6X - represents a notable premium to a peer group of apparel retailers. We believe this valuation is partly warranted by increased operating leverage and likely further market share gains on growth in comparable sales and square footage. In addition, TJX recently held about $2.1 billion in cash (over $3.10 a share), with a 1.2% dividend yield also adding to total return.

Finally, we highlight some potential risks to our recommendation and target price. First, we think the company could be vulnerable to a sharp pullback in consumer discretionary spending. Next, we see ongoing inventory exposure to reduced product availability, in the event that TJX is unable to replenish its merchandise assortments at favorable prices. Next, we would be wary of a potential stagnation in market share growth, amid intensifying competition in a challenging retail environment. Lastly, we highlight some risks of potentially severe foreign currency headwinds arising from the company's growing international operations in Canada and Europe.

S&P Capital IQ's views on stocks are constantly re-evaluated. Please refer to our most recent publication on this stock to see our current view.


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