Morningstar | Freight, Wage Costs Weigh on TJX, but Long-Term Outlook Remains Favorable; Shares Trade Fairly
We plan a low- to mid-single-digit cut for our $48 per share valuation for narrow-moat TJX after somewhat lackluster third-quarter profitability. The results do not materially alter our long-term thesis (mid-single-digit sales growth, operating margins near fiscal 2018's 11% over the next decade), which gives credit to TJX's strong merchandising operation despite a competitive retail environment. With the shares trading near our valuation (including the likely reduction), we counsel investors to await a more attractive entry point.Year-to-date revenue rose 12% against a 10.8% pretax profit margin. Management revised its fiscal 2019 EPS target to $2.41 to $2.43 from $2.42 to $2.44 (split-adjusted), versus our $2.47 pre-announcement mark.
Quarterly comparable sales growth was strong across all divisions, with Marmaxx (about 60% of fiscal 2018 sales) leading with a 9% mark. The chain continues to post strong results throughout its apparel offerings, improving on disappointing comparable sales performance in the same period last year (down 1%). We believed last year's shortfall, which management attributed to weather and missed fashion trends, was transitory and are encouraged that Marmaxx has reestablished its strength in fiscal 2019. While TJX is susceptible to the vagaries of fashion trends, we believe its agile buying infrastructure and rapid inventory turnover lends resilience.
HomeGoods (roughly 15% of sales) was similarly strong on the top line, posting 7% comparable sales growth. However, the unit is more susceptible than the rest of the organization to freight costs, which, along with the expense of expanding the new Homesense chain, have led segment margins down a little over 180 basis points thus far in fiscal 2019, to 11%. While we were not surprised by management's indication that cost pressure should continue into fiscal 2020, we expect long-term recovery as Homesense becomes established and the unit leverages its nimble merchandising effort.
TJX Companies is an off-price apparel and home fashions retailer. The company's segments comprised of: Marmaxx, which sells family apparel (including footwear and accessories), home fashions (including home basics, decorative accessories and giftware) and other merchandise; HomeGoods, which provides a range of home fashions, including home fashions, including furniture, rugs, lighting, soft home, decorative accessories, tabletop and cookware as well as pet, kids and gourmet food departments; TJX Canada, which operates the Winners, HomeSense and Marshalls chains in Canada; and TJX International, which operates the T.K. Maxx and HomeSense chains in Europe and the T.K. Maxx chain in Australia.
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