Description

At current prices, the TJX Companies offers an opportunity to buy a great company at a discounted price.  TJX is an established compounder selling at a market multiple. 

The TJX Companies (TJX) is the dominant player in the off-price apparel and  home fashion business.  The company operates approximately 4,700 stores and five e-commerce websites. The company’s Marmaxx division, consisting of 2,400 Marshall’s, T.J. Maxx stores and Sierra (59 locations offering outdoor apparel and sporting goods) is the leading off-price apparel chain in the United States.  TJX also operates 850 HomeGoods stores in the U.S., and 550 stores in Canada under three banners.  Outside North America, TJX operates approximately 700 off-price stores in Europe and 68 in Australia with similar assortments to the US banners.

Marshalls and TJ Maxx took the off price, bargain basement concept that was pioneered by players like Filene’s basement to suburban strip malls.  The concept has evolved from a true “outlet” for unsold or distressed merchandise to an important channel for manufacturers.  TJX sources merchandise from over 21,000 vendors around the world. TJX buyers are actively involved in developing products for sale in the stores as well as purchasing excess goods from manufacturers and other retailers. 

The relationships that the TJX buying organization has built with such a diverse set of vendors as well as its relationship with landlords (including its A credit rating), provide a strong moat that is not easily breached.  

As shown in the table below, TJX has managed to prosper over the last two decades as Amazon and other e-tailers have laid waste to numerous brick and mortar retailers.

                           2021  2016   2011   2006   2001

Revenues ($B)    48.5   36.2   23.2    17.4    10.7

Net Income           3.3     2.3     1.5      0.8      0.5

TJX has outstanding returns on invested capital.  Net income in 2021 was approximately $3.3 billion on total assets of $28.5 billion.  If we exclude the $6 billion of cash and $10 billion of current liabilities, return on capital is roughly 25%.

A return to normalcy, particularly in Europe, should show the resiliency of this model.

US revenues in 2021 were $29.5 billion, 14.8% higher than 2019. European revenues, which had a greater number of disruptions from COVID related shutdowns, were $5.7 billion in 2021, roughly even with 2019. (TJX lost approximately 19% of total store days in Europe to shutdowns in 2022.)

The company expects roughly 10% growth in revenues this year. The company believes it can grow the brick and mortar business to 6275 units from the current 4689. About two thirds of the growth would come from the existing U.S. chains, with the remainder coming from current international markets.  

TJX’s capital structure is a bit out of whack because of actions the company took during the early days.  In April 2020, TJX issued $4 billion of long term debt, with maturities ranging from 2025 to 2050. A portion of this debt was repaid in 2021. As of January 2021, TJX had $6.2 billion of cash and $3.4 billion of funded debt.  While interest rates on the debt are low (average is around 2.5%)  the company is still operating at a negative spread vis a vis its cash balances.

TJX has a strong history of stock repurchases.  The company repurchased $2.2 billion in 2021 and has an additional $3.8 billion authorized.  

Risks

TJX stock has suffered in part because of labor and freight headwinds. Management believes they will be able to recoup many of these costs in 2022, since competitors are facing the same pressures.

TJX faces the usual array of economic risks if the economy heads into a recession.  While demand for apparel and home decor items benefited from the stimulus checks in 2021, the TJX customer tends to have above average income, and historically, TJX has benefitted from consumers trading down to lower cost retailers during recessions.  TJX also becomes more important to its vendors in a recession, since TJX is able to purchase overstocks on short notice.

Inventories at year end were approximately $1 billion higher than at year end 2019. Normally, this would be a concern for a retailer as bloated inventories usually lead to markdowns. Given current supply chain issues, the higher level of inventories, some of which is “on the water” may actually be a competitive advantage.

While management has done a terrific job of running the core business and extending it into the home decor business, they have made several bad acquisitions over the years. The most recent purchase, a 25% interest in a Russian off-price retailer will be written off in the current quarter. These acquisitions have generally been small, and maybe can be viewed as R&D expenses.

Catalyst

Cycling of Covid in Europe 

Moderation in freight and wage cost increases

Pricing adjustments to improve gross margin

Continued stock repuchases