EUR 850.00 For Business Accounts Only

Morningstar | TJX Should Continue to Perform and Build Its Footprint Despite Competition; Shares Fairly Valued

Although lackluster third-quarter profitability led us to trim our fair value estimate for narrow-moat TJX to $45 per share from $48, we have a favorable view of the business and its ability to deliver long-term returns. Across its apparel and home fashion banners, TJX features a fast-turning assortment of high-value items that should still draw customers despite retail's turmoil. We anticipate the firm will deliver mid-single-digit top-line growth and 11% adjusted operating margins, on average, over the next decade, using its vendor relationships and favorable cost position to keep returns on invested capital in the low 20s.

TJX's rapidly changing and deeply discounted product offering is enabled by an extensive merchandising operation and proprietary inventory management system. We believe the firm's flexibility allows it to be a partner of choice for vendors looking to sell excess inventory, as TJX does not demand the return privileges, long payment terms, and promotional and delivery concessions that full-price alternatives require. As a result, TJX is able to opportunistically buy product at significant discounts, enabling prices that undercut the full-price channel by 20%-60% and that we believe are competitive with digital rivals, particularly after considering shipping and return costs.

We believe the fast-turning inventory spurs traffic, and that bargain-hunting customers are not limited to the United States. We anticipate TJX's international unit to spur top-line growth as it builds density in Europe and Australia and enters new markets. The ensuing cost leverage should help fuel what we believe will be a persistent need for TJX to keep prices low in the face of a changing retail landscape. As a result, we do not plan for significant margin expansion during our 10-year explicit forecast; still, we believe the growth prospects and steady profitability merit investors' attention, should a more attractively priced buying opportunity emerge.

We continue to believe that TJX's competitive standing is stable, despite persistent competition throughout the apparel and home fashion retail sector. While the competitive landscape is evolving quickly, TJX should accrue sourcing and cost leverage benefits as it scales, particularly outside its more established U.S. and Canadian markets (although even domestically, we anticipate the expansion of Homesense into the United States will prove beneficial). As it grows, TJX should become a more valued partner for vendors, increasing its access to high-quality inventory at attractive prices. Furthermore, we anticipate TJX's discretion will have appeal to a wide variety of vendors leery of brand degradation in the full-price channel, should their labels be viewed as persistently discounted (rather than advertise the brands it offers, TJX's marketing focuses on the treasure-hunt shopping experience and the store banners). However, the need to keep prices low and value high should require TJX to reinvest savings.