TJX (NYSE:TJX) Beats Q4 Sales Targets

Off-price retail company TJX (NYSE:TJX) beat analysts' expectations in Q4 FY2024, with revenue up 13% year on year to $16.41 billion. It made a GAAP profit of $1.22 per share, improving from its profit of $0.89 per share in the same quarter last year.

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)

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 6.8% over the last four years (we compare to 2019 to normalize for COVID-19 impacts) was weak , but to its credit, it opened new stores and grew sales at existing, established stores.

This quarter, TJX reported robust year-on-year revenue growth of 13%, and its $16.41 billion in revenue exceeded Wall Street's estimates by 1.4%. Looking ahead, Wall Street expects sales to grow 4% over the next 12 months, a deceleration from this quarter.

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. Since last year, TJX's store count increased by 119 locations, or 2.5%, to 4,954 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 2.5% 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

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 been relatively stable over the last eight quarters but fallen behind the broader consumer retail sector. On average, the company's same-store sales have grown by 2.1% 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 5% year on year. This growth was an acceleration from the 4% year-on-year increase it posted 12 months ago, which is always an encouraging sign.

Gross Margin & Pricing Power

TJX has weak unit economics for a retailer, making it difficult to reinvest in the business. As you can see below, it's averaged a 32% gross margin over the last eight quarters. This means the company makes $0.32 for every $1 in revenue before accounting for its operating expenses.

TJX's gross profit margin came in at 29.8% this quarter, marking a 18.9 percentage point decrease from 48.7% in the same quarter last year. Although the company could've performed better, we care more about its long-term trends rather than just one quarter. Additionally, a retailer's gross margin can often change due to factors outside its control, such as product discounting and dynamic input costs (think distribution and freight expenses to move goods). We'll keep a close eye on this.

Operating Margin

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 Q4, TJX generated an operating profit margin of 10.9%, up 1.8 percentage points year on year. This increase was encouraging, and since the company's gross margin actually decreased, we can assume the rise was driven by a magnificent improvement in cost controls or operating leverage on fixed costs.

Zooming out, TJX has done a decent job managing its expenses over the last eight quarters. It's produced an average operating margin of 10%, higher than the broader consumer retail sector. On top of that, its margin has improved by 1.4 percentage points year on year (on average), an extremely encouraging sign for shareholders.

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).

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 Q4, TJX reported EPS at $1.22, up from $0.89 in the same quarter a year ago. This print beat Wall Street's estimates by 8.3%.

Between FY2020 and FY2024, TJX's adjusted diluted EPS grew 44.2%, translating into an unimpressive 9.6% compounded annual growth rate.

On the bright side, Wall Street expects the company to continue growing earnings over the next 12 months, with analysts projecting an average 7.5% 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 $2.36 billion in Q4, down 11.6% year on year. This result represents a 14.4% margin.

Over the last two years, TJX has shown strong cash profitability, giving it an edge over its competitors and the option to reinvest or return capital to investors while keeping cash on hand for emergencies. The company's free cash flow margin has averaged 6.7%, quite impressive for a consumer retail business. Furthermore, its margin has averaged year-on-year increases of 2.7 percentage points. This likely pleases the company's investors.

Return on Invested Capital (ROIC)

EPS and free cash flow tell us whether a company was profitable while growing revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit a company makes compared to how much money the business raised (debt and equity).

TJX's five-year average ROIC was 22%, higher than most retailers. Just as you’d like your investment dollars to generate returns, TJX's invested capital has produced solid profits.

The trend in its ROIC, however, is often what surprises the market and drives the stock price. Over the last two years, TJX's ROIC averaged 12.9 percentage point increases each year. This is a good sign, and if the company's returns keep rising, there's a chance it could evolve into an investable business.

Key Takeaways from TJX's Q4 Results

We were impressed by how significantly TJX blew past analysts' gross margin expectations this quarter. We were also glad its revenue outperformed Wall Street's estimates. On the other hand, its full-year earnings forecast missed analysts' expectations and its earnings guidance for next quarter missed Wall Street's estimates. The company is, on the other hand, increasing its dividend by 13% and committed to buying back $2.0 to $2.5 billion of shares in the coming year, a testament to its strong and dependable free cash generation. As reference, the company bought back $2.5 billion in the latest year. Zooming out, we think this was still a decent, albeit mixed, quarter, showing that the company is staying on track. The stock is flat after reporting and currently trades at $100.99 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 have other favorites, but we understand the arguments that TJX isn't a bad business. Although its revenue growth has been a little slower over the last four years with analysts expecting growth to slow from here, its coveted brand awareness makes it a household name consumers consistently turn to. Investors should still be cautious, however, as its poor same-store sales performance has been a headwind.

TJX's price-to-earnings ratio based on the next 12 months is 24.4x. There are things to like about TJX and there's no doubt it's a bit of a market darling, at least for some investors. But it seems there's a lot of optimism already priced in and we wonder if there are better opportunities elsewhere right now.

Wall Street analysts covering the company had a one-year price target of $103.66 per share right before these results (compared to the current share price of $100.99).

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