Quick Background:
The TJX Companies (TJX) is an off-price retailer of clothes and home furnishings. Founded in 1965 and based in Framingham, MA, USA, the company operates 3,300 stores in seven countries. The company also operates 3 separate e-commerce sites. Stores under the TJX umbrella include TJ Maxx and Marshalls (Marmaxx), HomeGoods, and Sierra Trading Post (all in the US); Winners, HomeSense, and Marshalls (TJX Canada); and TK Maxx and HomeSense (TJX Europe). The company is known for low pricing and high turnover; the average shelf time of inventory is only two weeks. The company sources brand-name and designer products from over 17,000 vendors in 100 countries. TJX’s main competitors include Target (TGT) and Wal-Mart (WMT).
For more basic information, check out the company’s website and the 2014 annual report.
An investment of $10,000 in December 1995 would be worth $1,014,474.62 today, all dividends reinvested. This yields an annual rate of return of 25.7%, which tripled the S&P 500’s return during this time frame. (Source: FAST Graphs)
Sparknotes Analysis:
Let’s run our screening criteria on TJX to see how it fares as an investment.
- Pays a dividend: Yes
- Has a dividend yield >= 2.25%: No (1.24%)
- Has 5+ years of dividend increases: Yes (19 years)
- Has not frozen dividend for over 8 quarters: Yes
- Has a Chowder number of 12 or more: Yes (24.6)
- Has am EPS payout ratio of less than 70%: Yes (26.25%)
- Pays a dividend monthly or quarterly: Yes (Quarterly; March, June, September, December)
- Has an S&P Quality Ranking of ‘A-‘ or better: Yes (A+)
- Has generally increasing earnings over the past 10+ years: Yes
- Is fairly valued/undervalued according to the Normal P/E ratio (blue line): No
- Is fairly valued/undervalued according to the Intrinsic P/E ratio (orange line): No
Other Ratings:
- S&P Capital IQ: 4-star buy
- Scale is 1-5, 1 being ‘strong sell’, 5 being ‘strong buy’
- Thompson Reuters StockReport: 9 (optimized score of 7)
- Scale is 1-10, 10 being best, 1 being worst
- Optimized scores weight insider trading and price momentum heavier than other criteria
- Value Line: 1 for safety; 2 for timeliness
- Scale is 1-5, 1 being best, 5 being worst
- Morningstar:
- Moat: Narrow
- Stewardship: Exemplary
Financial Overview:
TJX’s dividend yield is 1.24%, nothing impressive. The dividend per share is $0.21 quarterly, $0.84 annually. What really is impressive, however, is the dividend growth rate. Only once since 2000 has the dividend growth rate been less than 10% annually. The compound annual growth rate is an astounding 15.9%. Keeping that up for a few years is nice, but keeping that up for 19 years is insane. And still, the payout ratio is only 26.25%. That implies that the dividend can easily grow by double digits solely by expanding the payout ratio. The free cash flow payout ratio is also excellent: $0.84 annual dividend / $2.94 FCF per share = 28.57%.
The company has $2.494 billion in cash and cash equivalents on the balance sheet. With $4.264 billion in equity and only $1.623 billion in debt, we get a debt/equity ratio of 0.38. This, combined with one of the highest interest coverage ratios I’ve seen (90.22), clearly indicates debt isn’t an issue for the company.
Making things better, TJX is a serial share purchaser. In 2010, TJX had 801.32 million shares outstanding; now, they have 680.38 million. A cumulative reduction of 15.09% of outstanding shares is very impressive. The company also splits pretty often, usually a 2:1 split. The most recent splits were in 2002 and 2012.
TJX’s P/E ratio is 21.1, and Morningstar’s one-year forward P/E ratio is 18.5. Given current growth rates (according to the company, “our annual comparable store sales have declined only once” (source)), I fully expect this to be the result of earnings growth, not share price decreases. Margins are best in class for the peer group – TJX excels in gross (28.64%), operating (12.31%), and net profit margins (7.59%). Compare this to the peer group’s averages – 27.34%, 6.45%, and 3.79%. TJX nearly doubles the operating and profit margins, which is fantastic.
As we know, we can’t really predict future earnings of a company with high accuracy. This holds true if we try to predict earnings a few years out. However, if we try, we can use estimates to get a ballpark figure for how a given stock will perform in the near term. With that, let’s use FAST Graphs to estimate how TJX and it’s competitors will perform over the next few years. TJX is estimated to grow earnings by 11.2%, and assuming a reversion to the five-year historical P/E ratio of 18.56, our total annual rate of return will be around 7.80% by 2019. TGT’s AROR is 7.57%, and WMT will return 7.53%. This tells us that TJX will perform relatively in line with its peers, making it neither a stellar nor terrible investment in the short term.
Valuation:
Now that we see TJX is a company worth investing in, what’s the price we should pay for some shares? Let’s look at analysts’ estimates first. Morningstar pegs the fair value at $73.00 even. S&P Capital IQ estimates fair value is slightly lower at $68.30. FAST Graphs, usually the most conservative of the three, gives us a fair value range of $53.02 – $65.02. So all these prices indicate a fair value in the high $60s. Considering today’s price of $69.46, TJX is fairly valued, and worthy of purchase right now.
Just to verify, we’ll use the dividend discount model to determine our own fair value:
- Discount rate (DR): 19.275%
- FAST Graphs‘ historical annual rate of return with dividends reinvested, multiplied by 0.75
- Dividend growth rate (DGR): 17.8%
- The historical DGR, according to FAST Graphs
- Next Year’s Dividend Guess (NYD): $0.99
- Calculated as [this year’s annual dividend] * (1 + DGR), rounded to the nearest penny
- Dividend discount model calculation:
- Fair Value = NYD / (DR – DGR)
- = 0.99 / (1.19275 – 1.178)
- = $67.11
This number is a little more conservative than analyst estimates, but it’s close enough to be acceptable.
Risk Factors:
Qooting from Morningstar:
In a highly competitive cyclical environment, we think TJX is uniquely positioned to take advantage of consumers’ desire for discounted products and is more nimble and less exposed to fashion risk than many competitors with its lean, high-turnover inventory model. As such, we assign the company a medium uncertainty rating.
The health of the economy is uncertain, but the company has posted growth in both up and down markets. The possibility of customers cutting discretionary spending or trading up still exists, however. As spending needs shift for consumers, we think there is the potential for volatility in apparel spending. Some of this volatility could be muted as geographic diversification means that trends in one market may be offset by those of another, but the risk remains. On the store expansion front, we think there are significant growth opportunities in current markets both domestically and internationally. A bigger unknown is whether the company can continue to penetrate new countries as we believe.
We also see risk in the supply chain. We think TJX’s large worldwide presence, buyer force of 900, and base of more than 17,000 vendors enable the company to get the inventory it needs. However, as the company increases its inventory needs and more competitors expand, there could be more competition. The company may not be able to source enough for its stores or be forced to reduce its margin or the discount at which the merchandise is offered. Alternatively, the company could benefit from an even more diverse apparel selection as competition in apparel retail increases and more unsold inventory becomes available.
Personal Notes:
The real reason I wanted to analyze this company is because my girlfriend likes shopping at TJ Maxx. She got introduced to them via a golf teammate, who liked the variety and price of what TJ Maxx sold. So my girlfriend stopped by one time. One time turned into two, then three, and my girlfriend was hooked.
I’ve been there with her several times, and I have to say it’s pretty fun to shop there. The company uses the term “treasure hunt experience”, and that’s really accurate. They group items only loosely by section, then by purpose. For example, there are men’s, women’s, intimates, jewelry, and cosmetics sections. And the women’s section is divided into dresses, athletic wear, t-shirts, etc. Prob helps keep costs down due to not having to sort things too closely.
The company also says the target market is middle/upper-middle class women aged 25-54. I will testify that their target market clearly is in the store. I am disappointed that as a guy, they had very little for me. I would estimate 65% of the store was dedicated to women, 5% for kids, 5% for men, and 25% for housewares-type stuff. Also, employees there weren’t too friendly, but my TJ Maxx is in a dead mall. Store probably keeps the whole place alive.
The stock rotates extremely quickly; my mom, who’s another shopper there, regularly tells us that if we like something, buy it right there. She’s waited, and it’s almost always gone by the time she gets back. And the stock is high quality; I saw lots of Ralph Lauren, Under Armour, and Nike. Definitely not stuff that you’d be ashamed to wear at all.
Verdict: it’s a pretty good store. I like it there. They’re definitely hitting all of their objectives, and their target market likes them. Always a great thing to see in retail. And as an aside, I asked my girlfriend if I should invest in them. Her response was “yes”, no hesitation. Good enough for me.
Final Conclusion:
Strictly speaking, TJX does not meet my criteria at this time. That’s a disappointment, really, since I think this company is fantastic. Honestly, even though the company’s stock appears overpriced to my criteria, when we tried to figure out fair value, we saw that TJX is actually roughly fairly valued. It’s not quite a bargain, but it’s also not heavily overvalued. And considering what we see in the margins and dividend growth and strength, my number may actually solidly underestimate the fair value. As such, I actually do consider TJX a buy, perfectly suitable for starting a half position or so, although you may not want to buy a full position until it drops a few dollars.
Does TJX make the cut for your portfolio? Also, how can I improve future analyses?
Disclosure: Long TGT. I may also go long TJX upon receipt of my next paycheck.
All data is accurate as of market close, 7/30/2015. My stock analysis archive page has been updated accordingly. Please read my disclaimer here before choosing to invest. Company logo image source is available here. Data source is FAST Graphs, Scottrade Research, David Fish’s US Dividend Champions List, or company materials, unless otherwise indicated.
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