Morningstar | On-Track Start to Fiscal 2020 Leaves Our Outlook in Place for TJX; Shares Slightly Rich
With first-quarter results largely as expected, we do not plan a large change for our $48 per share valuation for narrow-moat TJX. We still call for mid-single-digit sales growth against roughly 11% adjusted operating margins over the next decade. We have a favorable view of the firm and its prospects, but suggest investors await a more attractive entry point.TJX saw 7% sales growth (slightly better than our 6% target), spurred by 6% comparable store sales expansion at Marmaxx. Management lifted guidance, calling for $2.56 to $2.61 in fiscal 2020 EPS, up $0.01 on both ends of the range and in line with our $2.61 forecast prior to the announcement (or $2.58 excluding expected share repurchases).
Marmaxx (62% of fiscal 2019 sales) highlighted results, and we are encouraged that sales growth was traffic driven. We believe the performance aligns with our view that Marmaxx (and the broader off-price channel) can deliver strong top-line results despite the turmoil caused by digital sellers’ rapid growth. While margins slipped slightly (less than 25 basis points to 13.7%), we expect the segment to leverage costs over time as freight expenses normalize. While we do not expect Marmaxx to reach fiscal 2013-15’s 14.6% average margin, we foresee a mark just below 14% long term despite competitive and wage pressure.
Results were softer at HomeGoods (15% of fiscal 2019 sales), which posted 1% comparable store sales expansion. Management partly attributed the sluggishness to weather conditions and an assortment that was slightly off the mark. Still, we are encouraged that traffic grew and believe that the chain’s fast-turning inventory allows for quick recoveries after missteps occur. While segment margin was pressured by distribution costs and freight to a greater extent than we expected (9.8% versus our 10.3% first-quarter target), we still anticipate performance will accelerate into the low-teens long term as the cost of building the U.S. Homesense store network abates.
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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