You generally wouldn’t think of a discount clothing retailer in the same sentence as technology titans such as Amazon (NASDAQ: AMZN) and Apple (NASDAQ: AAPL).
But over the past five years the stock of TJX (NYSE: TJX), the largest U.S. discount apparel company, has outperformed both of them. During that period TJX had an annualized return of 21%, compared to 9% for Amazon and 18% for Apple.
So what is the secret for this company that includes T.J. Maxx and Marshalls clothes stores and HomeGoods home-related goods stores?
For one, it gets much of its product stock from manufacturers dumping their excess inventory and from retailers’ closeout sales, notes Morningstar analyst Jaime Katz. That product comes at prices 20% to 60% lower than those charged by conventional sources. Regular retailers, by contrast, acquire their wares through traditional purchase orders and replenishment deals.
“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,” Katz said. As a result, she views TJX’s brick-and-mortar model as insulated from digital competition. TJX has more than 5,000 stores across nine countries.
Expansion for the clothiers
T.J. Maxx and Marshalls can grow to about 3,000 locations combined over the next 10 years from 2,600 now, Katz says. The company’s other main unit is HomeGoods, whose products she views as “attractive.”
HomeGoods’ store count has more than doubled for the last decade to more than 950. And sales have tripled thanks to low prices. Katz thinks the store count will continue to increase.
As for the persistent inflation of the last five years, it’s obviously not good for retailers, as it discourages consumers from spending. But TJX, with its ethos of quality goods at low prices, is well situated to take market share from higher-priced competitors.
Tariffs may not hurt the company as much as others because about 90% of its purchases come from third parties, meaning TJX isn’t the direct importer. “We have to just market up off of what we’re paying,” CEO Ernie Herrman said in the company’s earnings call last month.
‘Recession proof’
Some investors and analysts are concerned about a weakening economy. However, again TJX’s business model puts it in good position to absorb such a blow. TJX is a “recession-proof trade down winner,” according to Bernstein analyst Aneesha Sherman.
The company’s strength shows up in its earnings numbers. Revenue rose 6% to $27.5 billion in the six months ended Aug. 2 from a year earlier, and net income gained 5%. In the most recent quarter, gross profit margin climbed to 30.7% from 30.4% in the year-earlier quarter.
TJX also raised its full fiscal-year estimates for sales, profit and profit margins. It anticipates comparable sales will increase 3%, up from its earlier estimate of 2%-3%. It forecast earnings per share of $4.52-$4.57, compared to $4.34-$4.43 previously. Last year’s figure was $4.26.
And many see good times ahead for the company. “TJX is well positioned to continue leveraging its procurement scale and existing footprint to drive growth,” Katz said.
So an old-school discount retailer can apparently do just as well as top tech companies.
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