“Price is what you pay, value is what you get”.
“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”.
Both quotes by Warren Buffett (Trades, Portfolio)
Why talk about retail now when things have turned sour for retail? Because that’s what every good investor, including the likes of Buffett would do. When many are bailing or ignoring the sector, it’s time to sit up and pay attention. TJX is a wonderful company that has been valued at a fair price and now, because of a slight earnings miss (mostly to foreign currency issues), the opportunity exists to take advantage of the price pullback.
In advance, some of the metrics make this stock appear to be expensive. This is a Buffett type stock with consistent growth in every area, including ROIC, ROE, ROA, FCF, EPS, Revenue, etc. There is a premium on this stock and it will perform good in all types of markets, including recessions.
History:
The history of the company goes back to 1919, when Max and Morris Feldberg founded the New England Trading Company which was dedicated to the selling of women’s hosiery. The next twenty years saw the company expand down from New England into the nation’s capital which also included the sale of clothing. In the 1950’s, Stanley and Sumner built upon their fathers successes by opening the Zayre discount department store. Zayre is a Yiddish word which means “very good”. In 1962, Zayre stores went public and six years later purchased stores called Hit and Miss, which was an off-prices woman’s clothing store.
In 1976, Zayre hired Bernard Cammarata, formerly of Marshall’s who advanced the idea of T. J. Maxx stores. Since the opening of the first stores in 1977, they seemed to hit the ground running. With other purchases and self-innovations along the way, including BJ’s Wholesale Club and Chadwick’s of Boston they undergo a major restructuring during 1988-1989 and officially become TJX Companies, Inc.
The next several years found them acquiring Winners Apparel of Canada and a launching of Home Goods in the United States. In 1994, they launch T.K. Maxx in the United Kingdom and Ireland where they have become the largest off-price retailer in all of Europe.
In 1995, in a major move, they acquire Marshall’s 496 stores. They sold off Hit and Miss, along with Chadwick’s and launch A.J. Wright in 1998 which revolves around moderate income consumers.
Since 2000, the company has expanded T.K. Maxx into Germany and Poland with much success and brought HomeSense over to England. Marshall’s has most recently expanded into Canada.
In 2013, the company opened its e-commerce site which may provide an additional catalyst for the company moving forward.
The Company:
So exactly who is TJX Companies now?
They are the largest off-price retail company in the world. The business involves selling highly discounted merchandise (20-60%) which comes from purchasing inventory from major brands such as Calvin Klein, Tommy Hilfiger, Express and many others. Buying from these major brands at a discount, allows them to pass the savings on to their customers, who receive great brands at great prices and are able to save beyond department store pricing. This is exactly what value investors like. More specifically, TJX consists of:
Winners, an off-price family apparel and home fashions retailer located in Canada. They currently have about approximately 230 stores. They sell clothing, jewelry, home furnishings, lingerie, footwear, children’s clothing and also includes a feature called Runway which revolves around high end fashions. The goal is to open a limited amount of stores.
Europe’s only off-price retailer, T.K. Maxx continues to expand and grow at a tremendous pace. With approximately 350 stores, they believe that they can carefully double the amount of stores in the European market. They also sell similar products as their parent, including luggage and toys.
Sierra Trading Post is a leading off-price internet retailer of brand name outdoor gear and clothing for the family, along with footwear and sporting goods. TJX hopes to use this e-commerce company as a jump off to growing all other parts of the company. They have opened four stores with an additional two being planned.
HomeSense is part of TJX Canada, offering off-price retailing home and décor, including lamps and items for nearly every room in the house. This standalone business is usually seen alongside its TJX relative Winners. Similarly, HomeSense serves the U.K., with approximately 24 stores and an eventual goal of 100-150 stores.
HomeGoods is normally paired along with either a TJ Maxx store or a Marshall’s. They retail lamps, rugs, bath and bedding, accent furniture, along with seasonal merchandise and other various specialties. They two size of stores, their standalone and a superstore. With over 400 stores, they believe that the market will support double that amount.
Marshall’s is differentiated from T.J. Maxx stores by offering a full line of family foot wear, a department for both juniors and men, toys, home fashions, purses, etc. Over 900 stores, they appear ready to grow this store a little more slowly. Marshall’s in Canada has under 20 stores with a company goal of opening around 90-100 stores.
T.J. Maxx appeals to all through a full line of products including apparel, beauty products, jewelry, home fashions, etc. They currently have approximately 1036 stores with the goal of continued but careful expansion.
Ownership and Gurus:
Owning TJX Companies (TJX, Financial) puts in you plenty of good company. There is perhaps no better example of a well-known investing guru who is quite aware of the challenges that the economy faces as Jeremy Grantham (Trades, Portfolio) is. A quick look at the web will deliver articles of his prognosis for the market and the economy…and it’s not great. Grantham currently owns just fewer than 2.5 million shares of TJX. With a current share price of $54.95, a new investor has a chance to join Grantham and the other investing greats at even more of a discount. Grantham has purchased his shares at an average cost of $60.65, down nearly 10%.
In addition, owners include Joel Greenblatt (Trades, Portfolio), Steve Cohen, RS Investment Management (Trades, Portfolio), Robert Olstein (Trades, Portfolio), Chris Davis (Trades, Portfolio), Ruane Cunniff (Trades, Portfolio), Mario Gabelli (Trades, Portfolio) and Primecap Management.
Most dedicated to the company is Ruane Cunniff (Trades, Portfolio) who owns in excess of 31 million shares. In the Sequoia Funds 2013 Annual Report, they reported that:
“Other large holdings that generated significant outperformance included TJX, which rose 51%... We have owned each of these businesses for at least six years. We think our strategy of identifying great businesses, buying their stocks when they seem mispriced, then holding them as long as management continues to execute (and the share prices don’t become extremely overvalued) is working as well today as it ever has. We expect that our portfolio companies will grow earnings at a good rate in the future, but not at the 23% rate we saw in 2013.”
They conclude their remarks about TJX thusly:
“Given the extent by which TJX’s stock price gain has outpaced its earnings growth in recent years, including 2013, it is clear that the stock has been re-rated. For many years, TJX shares traded at below-average multiples of earnings, despite an EPS growth rate that has averaged
16% for the past 15 years. The company also generates very high returns on invested capital and churns out ample free cash flow, most of which is returned to stockholders in the form of dividends and share repurchases. We believe there is room to grow the store base by roughly
4%-5% per year and the company typically repurchases 3%-4% of its shares annually. TJX has reported same store sales growth in 29 of the past 30 years. As a result, we continue to expect the company to grow EPS at low double digit rates even if operating margins stop expanding.” (emphasis mine)
Other notable owners of TJX with purchases greater than 10 million shares include, Fidelity Management and Research, Vanguard Group Inc., State Street Corp., BlackRock Fund Advisors, Wellington Management Company and several others.
Management:
Carol Meyrowitz is the current CEO of the company and has been in the position since 2007, also serving as president between 2005 and 2011. She has held executive positions since joining the company in 1987. Her compensation is approximately $21 million, which includes a base salary of $1.4 million, stock and option awards of $11.4 million and some deferred compensation and incentive plan compensation. As Morningstar points out, “Although we think this is a little on the high end, TJX shares rose 32% in 2012 and net income increased 27% that fiscal year, so performance was strong”.
Cammarata still sits on the board of directors, along with Meyrowitz and other independent directors. Morningstar concludes that, “Management has actively participated in shareholder- friendly activities in the form of dividends and share repurchases”. Hence, they give the company an Exemplary Stewardship Rating.
Add to this that the company has an average return on invested capital of 34% over the last 10 years and around 40% over the last five years, this company is definitely doing something right.
Valuation:
While standard valuation metrics such as P/E and P/B appear high, this stock deserves a premium for the continued growth. TJX appears on my Lynch “fast growing” screen as a good prospect and it appears on Greenblatt’s Magic Formula stock.
Using the DCF calculator from GuruFocus, the company is cheap, in spite of high P/B, P/E, etc. Currently, with a margin of safety of 33% and a fair value of $82.05 the stock has room to run. If the market suffers another pullback, the margin of safety will simply increase. Morningstar indicates that the stock, with its current PE of 18.5, is still below its three year average multiple of 21, indicating it is still a good value. While indicating a fair value of $67, they indicate a sell at $90.
Using an earnings growth rate of 13% and discounting the earnings offers a fair value of around $85. Additionally, for those that calculate weighted average cost of capital, the WACC calculates at an average of around 9.8%, while ROIC currently remains safely above at 41%, a huge margin of safety next to their competitors. Not as cheap as Kohl’s (KSS, Financial) or JC Penney (JCP, Financial)….the ROIC is at least 4 to 5 times that of Kohl’s, which currently shows a return on invested capital of 8.29. Don’t necessarily conclude that the lower PE makes Kohl’s a “cheaper” stock. It’s not. Greenblatt’s Magic Formula and use of ROIC clearly indicates this as an outstanding stock.
Fundamentals / Metrics:
Price: $54.81
PE: 18.5
PS: 1.4
P/CF: 15.7
Div. Yield: 1.1
Payout Ratio: 21
Current ROA: 21
Current ROE: 50.5
Current ROI: 42.5
Catalysts:
One must remember that while TJX competes with all other retailers, its specialty as an off-price retailer creates tremendous advantages and that it performs even better during poor economic periods. While its miss of the last quarter made the company a better buy, investors must look at what is happening to the retailing industry. TJX is in position to gain from all of this. The headlines from the last several months:
Wal-Mart Profit Plunges By $220 Million as US Store Traffic Declines by 1.4%
Target Profit Plunges by $80 Million, 16% Lower Than 2013, as Store Traffic Declines by 2.3%
Sears Loses $358 Million in First Quarter as Comparable Store Sales at Sears Plunge by 7.8% and Sales at Kmart Plunge by 5.1%
JC Penney Thrilled With Loss of Only $358 Million For the Quarter
Kohl’s Operating Income Plunges by 17% as Comparable Sales Decline by 3.4%
Costco Profit Declines by $84 Million as Comp Store Sales Only Increase by 2%
Staples Profit Plunges by 44% as Sales Collapse and Closing Hundreds of Stores
Gap Income Drops 22% as Same Store Sales Fall
American Eagle Profits Tumble 86%, Will Close 150 Stores
Aeropostale Losses $77 Million as Sales Collapse by 12%
Best Buy Sales Decline by $300 Million as Margins Decline and Comparable Store Sales Decline by 1.3%
Macy’s Profit Flat as Comparable Store Sales decline by 1.4%
Dollar General Profit Plummets by 40% as Comp Store Sales Decline by 3.8%
Urban Outfitters Earnings Collapse by 20% as Sales Stagnate
McDonalds Earnings Fall by $66 Million as US Comp Sales Fall by 1.7%
Darden Profit Collapses by 30% as Same Restaurant Sales Plunge by 5.6% and Company Selling Red Lobster
TJX Misses Earnings Expectations as Sales & Earnings Flat
Dick’s Misses Earnings Expectations as Golf Store Sales Plummet
Home Depot Misses Earnings Expectations as Customer Traffic Only Rises by 2.2%
Lowes Misses Earnings Expectations as Customer Traffic was Flat
(Source: David Stockman’s Blog)
Some of these competitors are probably going to go away. With the slow demise of the mall and them losing their anchor stores, such as J.C. Penney’s and Sears, TJX Companies is well positioned to grab additional market share.
Further, the addition of Sierra Trading Post and their e-commerce business is expected to be a key catalyst and accretive as early as this year.
Another catalyst is the company’s ability to purchase exceptional merchandise at a great discount and rapidly without having to carry excessive inventory. In fact, TJX has done exceptionally well in managing their inventories. Further, their position as leader in foreign markets, give them an edge that few of their competitors can easily match.
Morningstar concludes that this company has a narrow moat over its competitors due to its incredible inventory management and scale of operations; they hold a clear advantage over their nearest competitor. The company also exhibits a clean balance sheet, income statement, etc.
Competitors:
Without a doubt, retail is a tough business, but TJX Companies continue to hold an edge and a narrow moat at best. The closest competitor in terms of efficiency, profitability, margins, etc., would be Ross Stores, Inc. They also include Kohl’s (KSS, Financial), Sears Holdings (SHLD, Financial), J.C. Penney’s (JCP, Financial) and of course, Ross Stores (ROST, Financial). Confessions come easily, I choose to own both. But compared to other competitors, the choice is easy and the way this stock continues to perform as an all-weather stock is the perfect choice.
Risks:
Mostly include foreign currency exchange rates which may hurt them. Also, it is retail. There are others that are eyeing them and endeavoring to take market share. That remains to be seen as to which company can step up and take share from this giant.
Lastly, in theory, if the economy suddenly turns up and we pull out of the doldrums we appear stuck in, at some point, companies that charge full price may suddenly have favor. Still, who doesn’t like a bargain on great products?
Conclusion:
TJX Companies still has room to grow. While another pullback would be perfect, one should not be afraid to pull the trigger by adding this stock into their portfolio during these tough days ahead. Growth on either end….a recession or a slow growth economy is a great defense. It’s a perfect stock to add on the dips, but this Buffett, Lynch, Greenblatt, Grantham style stock should be considered for your portfolio.
Disclosure: Long TJX, ROST
