Off-price retail company TJX (NYSE:TJX) beat analysts' expectations in Q2 FY2024, with revenue up 7.73% year on year to $12.8 billion. The company also lifted its full-year revenue and EPS guidance. TJX made a GAAP profit of $989 million, improving from its profit of $809.3 million in the same quarter last year.
TJX (TJX) Q2 FY2024 Highlights:
- Revenue: $12.8 billion vs analyst estimates of $12.4 billion (2.51% beat)
- EPS: $0.85 vs analyst estimates of $0.78 (9.38% beat)
- Free Cash Flow of $882 million, up 237% from the same quarter last year
- Gross Margin (GAAP): 30.2%, up from 27.6% in the same quarter last year
- Same-Store Sales were up 6% year on year
- Store Locations: 4,884 at quarter end, increasing by 148 over the last 12 months
Initially based on a strategy of buying excess inventory from manufacturers or other retailers, TJX (NYSE:TJX) is an off-price retailer that sells brand-name apparel and other goods at prices much lower than department stores.
For example, if department store Macy’s is left with a huge supply of winter coats because of an unusually warm winter, Macy’s may sell those in bulk to TJX at pennies on the dollar rather than discount the items and try to sell them individually. This is often done to clear floor space for a new season.
Because of TJX’s unique buying approach, shopping there is often a treasure hunt–what the consumer loses in reliable selection is made up for with low prices. TJX prices can be up to 50% lower than those of department stores. While the company was built on buying excessive or defective inventory, TJX is now large enough to buy directly from manufacturers. This had led to more consistent selection from brands such as Polo, KitchenAid, and Estee Lauder to name a few.
TJX operates under the brand names of T.J. Maxx, Marshalls, HomeGoods, Homesense, and Winners. The core customer is the value-conscious shopper who enjoys the thrill of the hunt. This is typically a middle-aged, middle-income woman willing to sift through racks in person to find deals because while TJX has an online presence, it is limited.
Off-price retailers, which sell name-brand goods at major discounts because of their unique purchasing and procurement strategies, understand that everyone loves a good deal. Specifically, these companies buy excess inventory and overstocks from manufacturers and other retailers so they can turn around and offer these products at super competitive prices. Despite the unique draw lure of discounts, these off-price retailers must also contend with the secular headwinds of online penetration and stalling retail foot traffic in places like suburban shopping centers.
Off-price and discount retail competitors include Ross Stores (NASDAQ:ROST), Burlington Stores (NYSE:BURL), and Ollie’s Bargain Outlet (NASDAQ:OLLI)Sales Growth
TJX is a behemoth in the consumer retail sector and benefits from economies of scale, an important advantage giving the business an edge in distribution and more negotiating power with suppliers.
As you can see below, the company's annualized revenue growth rate of 6.37% over the last four years (we compare to 2019 to normalize for COVID-19 impacts) was mediocre as it opened new stores and grew sales at existing, established stores.
This quarter, TJX reported solid year-on-year revenue growth of 7.73% and its revenue of $12.8 billion outperformed analysts' estimates by 2.51%. Looking ahead, the analysts covering the company expect sales to grow 6.84% over the next 12 months.
Number of Stores
The number of stores a retailer operates is a major determinant of how much it can sell, and its growth is a critical driver of how quickly company-level sales can grow.
When a retailer like TJX keeps its store footprint steady, it usually means that demand is stable and it's focused on improving its operational efficiency to increase profitability. TJX's store count increased by 148 locations, or 3.13%, over the last 12 months to 4,884 total retail locations in the most recently reported quarter.
Taking a step back, the company has only opened a few new stores over the last eight quarters, averaging 2.48% annual growth in new locations. Although it's expanded its presence, this sluggish store growth lags other retailers. A flat store base means that revenue growth must come from increased e-commerce sales or higher foot traffic and sales per customer at existing stores.
Same-Store Sales
TJX's demand within its existing stores has generally risen over the last two years but lagged behind the broader consumer retail sector. On average, the company's same-store sales have grown by 4.75% year on year. Given its flat store count over the same period, this performance could stem from increased foot traffic at existing stores or higher e-commerce sales as the company shifts demand from in-store to online.
In the latest quarter, TJX's same-store sales rose 6% year on year. This growth was a well-appreciated turnaround from the 5% year-on-year decline it had posted 12 months ago, showing that the business is regaining momentum.
Gross Margin & Pricing Power
As you can see below, TJX has averaged a paltry 34.1% gross margin over the last two years. This means that the company makes $0.34 cents for every $1 in revenue before accounting for its operating expenses.
TJX's gross profit margin came in at 30.2% this quarter, marking a 2.5 percentage point increase from 27.6% in the same quarter last year. This margin expansion was comforting to see as it could signal that the company was operating in a less competitive environment with higher pricing power, less pressure to discount products, and more stable input costs (such as distribution expenses to move goods).
Operating Margin
Operating margin is a key profitability metric for retailers because it accounts for all expenses that keep the lights on, including wages, rent, advertising, and other administrative costs.
From an operational perspective, TJX has done a decent job over the last eight quarters. The company has produced an average operating margin of 9.64%, higher than the broader consumer retail sector. On top of that, its margin has remained more or less the same, highlighting the consistency of its business.
The company's profitability was particularly impressive because of its low gross margin. This margin is mostly a factor of what TJX sells and it takes tectonic shifts to move meaningfully. Companies have more control over their operating margins, and it signals strength if they're high when gross margins are low (like for TJX).
EPS
Earnings growth is a critical metric to track, but for long-term shareholders, earnings per share (EPS) is more telling because it accounts for dilution and share repurchases.
In Q2, TJX reported EPS at $0.85, up from $0.69 in the same quarter a year ago. This print beat Wall Street's estimates by 9.38%, a welcome development that should delight shareholders.
Between 2021 and 2024, TJX's adjusted diluted EPS grew 245%, translating into an astounding 81.8% average annual growth rate. This EPS growth is materially higher than its revenue growth over the same period, indicating that TJX has excelled in managing its expenses (leading to higher profitability), bought back a healthy chunk of its outstanding shares (leading to higher PER share earnings), or did some combination of both.
Cash Is King
Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can't use accounting profits to pay the bills.
TJX's free cash flow came in at $882 million in Q2, up 237% year on year. This represents a 6.91% margin, which is 4.7 percentage points higher than its free cash flow margin in the same period last year.
Over the last eight quarters, TJX has shown solid cash profitability, giving it the flexibility to reinvest in growth initiatives, pay down debt, or participate in shareholder-friendly schemes such as share buybacks or dividends. The company's free cash flow margin has averaged 4.9%, well above the broader consumer retail sector. Furthermore, its margin has averaged year-on-year increases of 7.1 percentage points. This positive momentum likely pleases the company's investors.
Return on Invested Capital (ROIC)
TJX's has a solid track record of investing in profitable projects and is more likely to get better terms with financiers if it wants to raise or borrow capital. Its five-year average return on invested capital (ROIC) is 18.3%, higher than most retailers.
We like to track ROIC because it tells us how much return (profit) a company makes on the money it invests into its business, shedding light on its prospects and its management team's decision-making prowess. ROIC can also be used as a tool to benchmark a company's performance versus its peers, and just like how we focus on long-term investment returns, we care more about analyzing a company's long-term ROIC because short-term market volatility can distort results.
Key Takeaways from TJX's Q2 Results
Sporting a market capitalization of $98.6 billion, more than $4.55 billion in cash on hand, and positive free cash flow over the last 12 months, we believe that TJX is attractively positioned to invest in growth.
It was good to see TJX beat analysts' revenue and EPS expectations this quarter, driven by strong outperformance in same-store sales. That really stood out as a positive in these results. The company also lifted its full-year revenue and EPS guidance. Overall, this was a favorable quarter for TJX. The stock is up 2.39% after reporting and currently trades at $87.78 per share.
Is Now The Time?
When considering an investment in TJX, investors should take into account its valuation and business qualities as well as what happened in the latest quarter. We think TJX is a solid business. Its revenue growth has been mediocre, but at least that growth rate is expected to increase in the short term. But on a positive note, while its mediocre same-store sales performance has stunted total revenue growth, the good news is its strong free cash flow generation allows it to invest in growth initiatives while maintaining an ample cash cushion, and its ROIC suggests it is a decent quality business.
There are definitely things to like about TJX, and looking at the consumer retail landscape right now, it seems that it trades at a reasonable price point.
Wall Street analysts covering the company had a one-year price target of $92.2 per share right before these results, implying that they saw upside in buying TJX even in the short term.
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