Off-price retail company TJX (NYSE:TJX) announced better-than-expected results in Q3 FY2024, with revenue up 9% year on year to $13.27 billion. Turning to EPS, TJX made a GAAP profit of $1.03 per share, improving from its profit of $0.91 per share in the same quarter last year.
TJX (TJX) Q3 FY2024 Highlights:
- Revenue: $13.27 billion vs analyst estimates of $13.07 billion (1.5% beat)
- EPS: $1.03 vs analyst estimates of $0.99 (4.4% beat)
- Free Cash Flow of $711 million, similar to the same quarter last year
- Gross Margin (GAAP): 31.1%, up from 29.1% in the same quarter last year
- Same-Store Sales were up 6% year on year
- Store Locations: 4,934 at quarter end, increasing by 141 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 Apparel and Home Goods Retailer
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)
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 6.5% over the last four years (we compare to 2019 to normalize for COVID-19 impacts) was mediocre , but to its credit, it opened new stores and grew sales at existing, established stores.
This quarter, TJX reported solid year-on-year revenue growth of 9%, and its $13.27 billion in revenue outperformed Wall Street's estimates by 1.5%. Looking ahead, analysts expect sales to grow 7.2% over the next 12 months.
Number of Stores
When a retailer like TJX is opening new stores, it usually means it's investing for growth because demand is greater than supply. TJX's store count increased by 141 locations, or 2.9%, over the last 12 months to 4,934 total retail locations in the most recently reported quarter.
Taking a step back, the company has generally opened new stores over the last eight quarters, averaging 2.6% annual growth in its physical footprint. This is decent store growth and in line with other retailers. With an expanding store base and demand, revenue growth can come from multiple vectors: sales from new stores, sales from e-commerce, or increased foot traffic and higher sales per customer at existing stores.
Same-store sales growth is a key performance indicator used to measure organic growth and demand for retailers.
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 3.8% year on year. With positive same-store sales growth amid an increasing physical footprint of stores, TJX is reaching more customers and growing sales.
In the latest quarter, TJX's same-store sales rose 6% year on year. This growth was an acceleration from the 3% year-on-year increase it posted 12 months ago, which is always an encouraging sign.
Gross Margin & Pricing Power
Gross profit margins are an important measure of a retailer's pricing power, product differentiation, and negotiating leverage.
TJX has subpar unit economics for a retailer, making it difficult to invest in areas such as marketing and talent to grow its brand. As you can see below, it's averaged a paltry 34.3% gross margin over the last two years. This means the company makes $0.34 for every $1 in revenue before accounting for its operating expenses.
TJX produced a 31.1% gross profit margin in Q3, marking a 2 percentage point increase from 29.1% in the same quarter last year. This margin expansion is a good sign in the near term. If this trend continues, it could signal a less competitive environment where the company has better pricing power, less pressure to discount products, and more stable input costs (such as distribution expenses to move goods).
Operating margin is an important measure of profitability for retailers as it accounts for all expenses keeping the lights on, including wages, rent, advertising, and other administrative costs.
in line with the same quarter last year. This indicates the company's costs have been relatively stable.Zooming out, TJX has done a decent job managing its expenses over the last eight quarters. It's produced an average operating margin of 9.5%, 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 operating profitability was particularly impressive because of its low gross margin. This margin is mostly a factor of what TJX sells and takes fundamental 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).
These days, some companies issue new shares like there's no tomorrow. That's why we like to track earnings per share (EPS) because it accounts for shareholder dilution and share buybacks.
In Q3, TJX reported EPS at $1.03, up from $0.91 in the same quarter a year ago. This print beat Wall Street's estimates by 4.4%.
Between FY2020 and FY2024, TJX's adjusted diluted EPS grew 33.9%, translating into an unimpressive 8.5% average annual growth rate. This growth, however, is materially higher than its revenue growth over the same period, showing that TJX has excelled in managing its expenses (leading to higher profitability).
On the bright side, Wall Street expects the company to continue growing earnings over the next 12 months, with analysts projecting an average 14.3% year-on-year increase in EPS.
Cash Is King
If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe in the end, cash is king, and you can't use accounting profits to pay the bills.
TJX's free cash flow came in at $711 million in Q3, up 9.9% year on year. This result represents a 5.4% margin.
Over the last eight quarters, TJX has shown solid cash profitability, giving it the flexibility to reinvest or return capital to investors. The company's free cash flow margin has averaged 4.8%, well above the broader consumer retail sector. Furthermore, its margin has averaged year-on-year increases of 7.3 percentage points. This likely pleases the company's investors.
Return on Invested Capital (ROIC)
We like to track a company's long-term return on invested capital (ROIC) in addition to its recent results because it gives a big-picture view of a business's past performance. It also sheds light on its management team's decision-making prowess and is a helpful tool for benchmarking against peers.
TJX 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 ROIC is 18.5%, higher than most retailers.
Key Takeaways from TJX's Q3 Results
With a market capitalization of $105.8 billion, a $4.29 billion cash balance, and positive free cash flow over the last 12 months, we're confident that TJX has the resources needed to pursue a high-growth business strategy.
It was good to see TJX beat analysts' gross margin expectations this quarter. We were also glad its revenue and EPS outperformed Wall Street's estimates. On the other hand, its earnings forecast for next quarter underwhelmed, driven by the shutdown of its HomeGoods e-commerce business during the quarter. Zooming out, we think this was still a decent, albeit mixed, quarter, showing that the company is staying on track. The market was likely expecting more, and the stock is down 2.6% after reporting, trading at $90.05 per share.
Is Now The Time?
TJX may have had a favorable quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.
We think TJX is a solid business. Although its mediocre same-store sales performance has been a headwind, its strong free cash flow generation allows it to invest in growth initiatives while maintaining an ample cash cushion. On top of that, its above-average ROIC suggests its management team has made good investment decisions in the past.
TJX's price-to-earnings ratio based on the next 12 months is 23.1x. There are definitely things to like about TJX, and looking at the consumer landscape right now, it seems the company trades at a pretty interesting price.
Wall Street analysts covering the company had a one-year price target of $99 per share right before these results, implying that they saw upside in buying TJX even in the short term.
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