Loyal Customers Drive Growth At Off-Price Retailer TJX

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Prevailing wisdom holds that when the economy is shaky and unemployment high, a rising tide of skittish consumers will scramble for bargains around every corner.

That's true for some consumers, anyway. Well-heeled folks who don't have to worry about counting nickels and dimes will still shop wherever they like, merrily ignoring price tags and discount bins along the way.

For others, bargain-hunting isn't something that fluctuates with the economy. It's a way of life. They look to save money through good times and bad, regardless of whether the economy is pumped up or passed out.

These are the kinds of customers who have helpedTJX Cos. ( TJX ) establish itself as one of the most consistent performers in the retail world.

TJX operates the T.J. Maxx, Marshalls and HomeGoods chains. It's the nation's largest off-price retailer of brand-name apparel and home fashions with 1,006 T.J. Maxx, 892 Marshalls and 393 HomeGoods stores in the U.S. It also has 220 Winners, 87 HomeSense and 12 Marshalls stores in Canada; and 337 T.K. Maxx and 24 HomeSense stores in Europe.

Financial Crisis

While many other retailers suffered a slowdown during the financial crisis and ensuing recession, TJX kept right on growing.

About the worst you could say about its performance is that it grew annual earnings only 5% and sales only 4% in fiscal year 2009. Since then, annual earnings have grown at least 14%. Only once since 2008 has the company reported a decline in same-store sales.

"TJX's ability to continue to refresh its merchandise means they can attract the same customers quarter after quarter, year after year. They appeal to higher-end-income people who are looking for high-end brands but at better prices," said Jaime Katz, an analyst at Morningstar.

TJX sells brand-name and designer merchandise at 20% to 60% discounts off regular store prices. It can do so because it typically gets its merchandise about a season late. Fall clothes that are sold during the summer at department stores likeMacy's ( M ) are not available at TJX until the fall.

Plenty of consumers are willing to wait a little longer for such hefty savings, Katz says.

"Even though they are behind the regular retailers, the merchandise is still in season at TJX," Katz said. "They've done a good job getting the right merchandise at the right time."

The strategy has helped TJX produce some of the most consistent financial returns in the retail industry. Outside of the rare hiccup, the company churns out double-digit earnings growth with mind-numbing regularity. Same-store sales growth is usually in the mid- to high-single digits.

"TJX has been consistently reporting increased comparable store sales for the past several quarters," Zacks Equity Research noted in a report. "This reflects increased customer traffic and demand."

On July 3, TJX reported a 7% gain in June same-store sales. That was well ahead of the 4.2% increase expected by Thomson Reuters analysts. Total revenue climbed 9% to $2.3 billion. TJX said same-store sales are up 8% year-to-date.

"Transactions continue to be the biggest comp driver (and) average ticket prices have been trending up slightly," JPMorgan analyst Brian Tunick noted in a recent report.

The better-than-expected June report prompted TJX to raise its second-quarter and full-year earnings guidance. It now expects Q2 profit of 52 cents or 53 cents a share vs. earlier guidance of 47 cents to 50 cents. It raised its fiscal 2013 earnings guidance to a range of $2.31 to $2.39 from earlier guidance of $2.27 to $2.37.

"We are encouraged by the company's flexible off-price business model that allows it to react according to market trends," Zack's noted. "TJX has a low-cost structure compared to many other traditional retailers."

Earnings Growth

Last quarter, TJX posted earnings of 55 cents a share, up 41% from the prior year and a penny above consensus views. Revenue climbed 11% to $5.8 billion, slightly ahead of estimates. Same-store sales climbed 8%.

Meanwhile, TJX's stock price continues the steady climb that began three-and-a-half years ago. Shares touched a record high of 45.39 July 17. The stock is up nearly 40% since the beginning of the year.

TJX competes in a pretty thin field when it comes to large chains that offer discount prices on quality name-brand goods.

Its main competition comes fromRoss Stores ( ROST ), which operates about 1,500 Ross Dress For Less stores. Like TJX, Ross pumps out double-digit earnings growth with regularity and continues to see its stock price set new highs.

The rest of the field is largely made up of smaller regional chains.

"Ross and TJX are really the only players at this scale who can lever vendor relationships to get merchandise at good prices," Katz said.

She expects TJX to keep getting bigger in coming years. The company has about 1,900 T.J. Maxx and Marshalls stores in the U.S. Katz reckons that number can grow to around 2,300. She also sees the HomeGoods chain growing to 750 locations in the U.S.

"TJX Canada probably has 30% growth left, and the operation in Europe can pretty much double," Katz said. "TJX is still very much a growth story."

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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