Company Reports

While already boasting a leading position in the domestic off-price retail industry via its T.J. Maxx and Marshalls banners, we believe TJX Companies is well positioned to continue leveraging its procurement scale and existing footprint to drive growth. The company’s go-to-market strategy is difficult to replicate, in our view, as its network of over 21,000 global vendors and decades of procurement expertise serve as barriers to entry. Unlike traditional retailers that obtain inventory via defined purchase orders and replenishment deals, TJX opportunistically procures excess inventory made available from manufacturing overruns and retail closeout sales at prices 20%-60% lower than conventional outlets. With an ever-changing assortment of brand-name merchandise and minimal depth per stock-keeping unit, the retailer’s stores embody a treasure-hunt shopping experience for consumers searching for bargains. As such, we view TJX’s brick-and-mortar model as well insulated from digital competition.

Wide-moat TJX Companies capped off a strong fiscal 2024 as the firm’s unique value proposition that consists of selling excess branded merchandise at steep discounts to full price again attracted consumers to its portfolio of banners. The off-price retailer delivered 5% comparable sales growth during the fourth quarter (driven entirely by gains in transaction volume) and posted adjusted earnings per share of $1.12, landing closely in line with our expectations. We were also unsurprised by the firm’s prosaic fiscal 2025 guidance that consisted of 2%-3% comparable sales growth (we acknowledge further upside is plausible) and a steady pretax profit margin of 10.9%-11.0%. We reiterate our view that TJX’s more than 21,000 global vendor relationships and vast supply chain scale give it a procurement advantage over traditional retailers, allowing it to stock its stores with a dynamic assortment of cheap merchandise. We think the firm is well positioned to continue attracting value-conscious consumers to its banners even as a choppy demand environment has affected many apparel retailers. We plan to modestly raise our $71 fair value estimate, though we currently view shares, trading at a roughly 40% premium, as overvalued.

Even amid a challenging retail backdrop, we now award wide moat ratings (from narrow) to leading off-price retailers TJX Companies and Ross Stores as we have confidence each will generate excess returns for 20 years without infringing on one another’s market share. In our view, the firms boast an intangible asset due to global vendor relationships and unique procurement models that are difficult for conventional retailers to replicate. We think the retailers also hold a cost advantage over smaller peers due to their impressive scale.

While already boasting a leading position in the domestic off-price retail industry via its T.J. Maxx and Marshalls banners, we believe TJX Companies is well positioned to continue leveraging its procurement scale and existing footprint to drive growth. The company’s go-to-market strategy is difficult to replicate, in our view, as its network of over 21,000 global vendors and decades of procurement expertise serve as barriers to entry. Unlike traditional retailers that obtain inventory via defined purchase orders and replenishment deals, TJX opportunistically procures excess inventory made available from manufacturing overruns and retail closeout sales at prices 20%-60% lower than conventional outlets. With an ever-changing assortment of brand-name merchandise and minimal depth per stock-keeping unit, the retailer’s stores embody a treasure-hunt shopping experience for consumers searching for bargains. As such, we view TJX’s brick-and-mortar model as well insulated from digital competition.

We believe TJX’s stellar fiscal 2024 third-quarter marks testify to its ability to navigate the tough macroenvironment, thanks to its high-quality value offerings and scavenger hunt shopping experience. During the quarter, TJX saw 9% top-line growth, to $13.3 billion, and a 12% pretax profit margin (up 80 basis points annually on higher sales and benefit from expense timing), outpacing our $12.9 billion and 11.3% preprint estimates, respectively. Still, the updated fourth-quarter outlook of 10.4%-10.6% pretax profit margin (from 10.7%-10.9% prior) and reiterated 3%-4% comparable sales imply more margin pressure than previously anticipated due to higher expenses. In aggregate, this should lead to a modest lift in our outlook for sales of $54 billion and EPS of $3.66, which will bring us in line with updated full-year guidance for 4%-5% comps and $3.71-$3.74 in EPS. As such, we don’t plan a material change to our $73 fair value estimate. Shares still strike us as rich at a 20%-plus premium, even after a 3% drop after the print.

Despite ongoing inflation and an unsettled economy, we believe TJX and the rest of the off-price sector are better suited than most retailers, with potential for improved merchandise availability as shifting spending patterns upset full-price stores’ merchandise orders. We still believe TJX and its peers benefit from durable advantages over full-price apparel and home décor sellers, with strong brands, store experiences, and scale working to keep returns on invested capital high (averaging 30% over the next decade).

We plan to increase our $71 fair value estimate by a mid-single-digit rate for narrow-moat TJX after digesting second-quarter results and nudging our full-year outlook higher. During the period, sales rose 8%, bolstered by same-store sales of 8% at Marmaxx and 4% at HomeGoods and benefiting from traffic rising across all divisions. More impressively, pretax margins of 10.4% handily outpaced the firm’s 9.3%-9.5% guidance, as lower freight costs and expense leverage on higher sales took hold. Given the outperformance in the second quarter, and continued momentum in the third quarter, the firm lifted its full-year outlook to include 3%-4% same store sales growth (from 2%-3% prior), a pretax margin of 10.7%-10.8% (10.3%-10.5%), and EPS to $3.66-$3.72 ($3.49-$3.58). Even when we nudge up our preearnings-call estimates for a pretax margin of 10.5% and EPS of $3.59 toward the updated outlook to within the revised ranges, we still view shares as rich, trading at 22.5 times our fiscal 2025 estimate.

Despite inflation, freight and labor challenges, and an unsettled economy, we believe TJX and the rest of the off-price sector are better suited than most retailers, with potential for improved merchandise availability as supply chain dislocations and shifting spending patterns upset full-price stores’ merchandise orders. We still believe TJX and its peers benefit from durable advantages over full-price apparel and home décor sellers, with strong brands, store experiences, and scale working to keep returns on invested capital high (averaging 29% over the next decade).

Despite inflation, freight and labor challenges, and an unsettled economy, we believe TJX and the rest of the off-price sector are better suited than most retailers, with potential for improved merchandise availability as supply chain dislocations and shifting spending patterns upset full-price stores’ merchandise orders. We still believe TJX and its peers benefit from durable advantages over full-price apparel and home décor sellers, with strong brands, store experiences, and scale working to keep returns on invested capital high (nearly 30% average over the next decade).

We do not plan to alter our $71 per share valuation of narrow-moat TJX significantly after it announced solid (April-ended) first-quarter fiscal 2024 earnings that indicate its value proposition is particularly resonant amid economic uncertainty. So, our long-term targets remain intact (mid-single-digit percentage sales growth and low-double-digit operating margins, on average). We suggest investors await a more attractive entry point.

Despite inflation, freight and labor challenges, and an unsettled economy, we believe TJX and the rest of the off-price sector are better suited than most retailers, with potential for improved merchandise availability as supply chain dislocations and shifting spending patterns upset full-price stores’ merchandise orders. We still believe TJX and its peers benefit from durable advantages over full-price apparel and home décor sellers, with strong brands, store experiences, and scale working to keep returns on invested capital high (roughly 30% average over the next decade).

We don’t plan to alter our $68 per share fair value estimate materially for narrow-moat TJX after fourth-quarter earnings and view shares as overvalued. The negative impact on our intrinsic value from the weaker-than-expected fiscal 2023 profitability (9.3%, hindered by an unplanned 30-basis-point shrink charge) and the firm’s fiscal 2024 slightly disappointing outlook (pretax profit margin of 10.1%-10.3%, versus our 10.5% estimate) is offset by favorable fourth-quarter top-line outperformance (5% sales growth). Against the backdrop of a strong buying environment, we suspect customers reacted favorably to TJX’s value during the holiday selling season, as evidenced by quarterly comparable sales at Marmaxx (up 7%) and HomeGoods (down 7%) that were ahead of our 4% lift and 9% decline preprint estimates, respectively.

Despite inflation, freight and labor challenges, and an unsettled economy, we believe TJX and the rest of the off-price sector are better suited than most retailers, with potential for improved merchandise availability as supply chain dislocations and shifting spending patterns upset full-price stores’ merchandise orders. We still believe TJX and its peers benefit from durable advantages over full-price apparel and home décor sellers, with strong brands, store experiences, and scale working to keep returns on invested capital high (roughly 30% average over the next decade).

Our $64 per share valuation of narrow-moat TJX should rise by a mid-single-digit percentage (similar to the trading price’s reaction), reflecting strong third-quarter earnings and a time value of money-related adjustment. With consumers increasingly looking for value amid an unsettled economic landscape, we believe TJX is well positioned. Our long-term targets remain intact (mid-single-digit percentage sales growth and low-double-digit operating margins, on average), and we suggest investors await a more attractive entry point.

Despite store closures, inflation, freight and labor challenges, and an uncertain path to normalcy, we believe TJX and the rest of the off-price sector are better suited than most retailers to endure disruption from the pandemic and an unsettled economy, with potential for improved merchandise availability as supply chain dislocations and shifting spending patterns upset full-price stores’ merchandise orders. Store closures affected TJX’s operations outside the United States in fiscal 2022, and the emergence of new strains of the coronavirus could elongate the crisis. However, we still believe TJX and its peers benefit from durable advantages over full-price apparel and home décor sellers, with strong brands, store experiences, and scale working to keep returns on invested capital high (roughly 30% average over the next decade).

We do not plan to alter our $66 per share valuation of narrow-moat TJX significantly after it reported second-quarter (ended July 30) earnings that saw slower-than-expected sales ($11.8 billion versus our $12.1 billion estimate) but better-than-expected profitability (9.2% adjusted pretax margin versus our 9.1% forecast and last year’s 8.7%). The announcement does not alter our long-term targets (mid-single-digit percentage sales growth and low-double-digit operating margins, on average). We suggest investors await a more attractive entry point.

Although the pandemic and inflation have clouded recent earnings, we believe Ross and Burlington (both narrow-moat-rated firms) offer upside. Ross has a long history of strength in myriad economic conditions, and we believe Burlington’s turnaround should narrow the gap between its profitability and that of its large peers.

Despite store closures, inflation, freight and labor challenges, and an uncertain path to normalcy, we believe TJX and the rest of the off-price sector are better suited than most retailers to endure disruption from the pandemic and high inflation, with potential for improved merchandise availability as supply chain dislocations upset full-price stores’ merchandise orders. Store closures affected TJX’s operations outside the United States in fiscal 2022, and the emergence of new strains of the coronavirus could elongate the crisis. However, we still believe TJX and its peers benefit from durable advantages over full-price apparel and home decor sellers, with strong brands, store experiences, and scale working to keep returns on invested capital high (roughly 30% average over the next decade).

Our $64 per share valuation of narrow-moat TJX should rise by a mid-single-digit percentage (not far from the shares’ trading price move) after it reported first-quarter earnings that were less affected by the rising cost environment than we anticipated. We still expect mid-single-digit percentage sales growth and low-double-digit operating margins, on average, long term. We suggest investors await a more attractive entry point.

Despite store closures, inflation, freight and labor challenges, and an uncertain path to normalcy, we believe TJX and the rest of the off-price sector are better suited than most retailers to endure the pandemic’s upheaval, with potential for improved merchandise availability as supply chain dislocations delay full-price stores’ merchandise orders. Store closures affected TJX’s operations outside the United States in fiscal 2022, and the emergence of new strains of the coronavirus could elongate the crisis. However, we still believe TJX and its peers benefit from durable advantages over full-price apparel and home décor sellers, with strong brands, store experiences, and scale working to keep returns on invested capital high (roughly 30% average over the next decade).