While the store-based sector of the retail industry stumbles in the face of an explosion in online commerce,TJX Companies (NYSE:TJX)continues to allay shareholder fears. The organization reported vibrant fiscal first-quarter 2019 earnings on May 22. Revenue jumped 12% during the last three months to $8.7 billion, a function of both new store openings and a 3% improvement in comparable-store sales. Notably, TJX’s largest segment, “Marmaxx,” which is composed of T.J. Maxx and Marshalls stores in the U.S., expanded comparable sales at a rate of 4% over the prior year.
As an off-price retailer, TJX tends to perform especially well during periods in which it can scoop up desirable inventory being offloaded by manufacturers, prestige labels, small brands, and even fellow retailers. We seem to be in one of those stages, as abundant supply is a theme that has dominated the company’s earnings recapitulation this week. Take the following statement from TJX’s earnings press release, “The Company is in an excellent inventory position entering the second quarter and has plenty of liquidity to take advantage of the terrific opportunities it sees in the marketplace for quality, branded merchandise.”
CEO Ernie Herrman echoed this idea during TJX’searnings conference call with analysts on May 22: “We see a marketplace that is loaded with quality branded merchandise.”And CFO Scott Goldenberg used similar language to describe TJX Companies’ current inventory position, as well as its balance sheet capability to acquire additional merchandise for its fashion and home goods stores.
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Opportunism as a business model
Of course, the comments above obliquely refer to the treacherous climate facing brick-and-mortar retailers, especially those primarily based in dying shopping malls across the U.S. A wave of retail bankruptcies shows little sign of abating in 2018. Notable names that have filed for creditor protection in the first few months of 2018 include shoe retailer Nine West, jewelry and accessories chain Claire’s, and department storeTheBon-Ton.
Declining sales and bankruptcies benefit TJX Companies in several ways. Most obviously, the winnowing of shopping destinations helps drive traffic to chains that can offer a compelling value proposition to customers — i.e. Marshall’s, T.J. Maxx, and HomeGoods. For example, in the current quarter, management noted that traffic was the primary driver behind comparable-store sales increases in each of the company’s four segments: Marmaxx, HomeGoods, TJX Canada, and TJX International.
Second, diminishing retail space gives TJX an opportunity to embrace new vendors globally, thus maintaining the variety that informs the characteristic “treasure hunt” ambience of its stores. Herrman explained during the earnings call that as retailers close stores, TJX offers vendors a viable means to increase their revenue and gain access to new markets.
Finally, as you can glean from the quotes at the outset of this article, at the moment it’s a buyer’s market for TJX Companies. Poor sales and bankruptcies have translated into what management describes as an almost unprecedented availability of merchandise it can acquire across”most every category, across most every tier or brand.”
Is there a danger of absorbing too much of a good thing? Management acknowledged on the call that TJX needs to exert discipline over the quantity of goods it acquires, and the pace of purchasing.
TJX Companies’ consolidated inventories have already increased 7% year over year as of its most recent balance sheet date. While this is a function of higher sales, it also stems partially from the supply bounty noted above.
As I’ve recently discussed,TJX thrives on moving inventory rapidly.The organization boasts one of the fastest rates of inventory turnover in the retail industry. Thus, it should strive to stay lean, maintain its fast sales cycle, and avoid over-investing in inventory, despite the attractiveness of goods available to its global buyers.
On another point of caution, management acknowledged during the earnings call that as consumer preferences change and more shopping shifts online, vendors and manufacturers could cut back on their output, shifting inventory supply in the opposite direction.
This potential reversal is perhaps more of a threat to TJX’s fashion-anchored Marmaxx segment than other business lines. But the company has nicely counterbalanced fashion risks through expansion of its HomeGoods segment, which presently comprises roughly 15% of total company revenue.
Overall, however, despite these few risk factors, retail disruption is enhancing TJX’s prospects. The company bumped up its full-year diluted earnings-per-share outlook this week and rewarded shareholders with a 25% dividend increase. In an environment of retail doom, TJX is “Maxx”-imizing its market position.