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Morningstar | TJX Should Weather the Changing Retail Landscape, Capitalizing on Its Scale and Off-Price Strength

Across its apparel and home fashion banners, we believe TJX's value proposition should continue to resonate even as the retail sector becomes increasingly competitive. Consequently, we expect TJX's competitive advantages will prove durable even as the landscape evolves, with bargain-hunting consumers continuing to drive returns. While digital retailers are a threat, we see the off-price channel as relatively well protected, as the low-frills shopping experience and significant discounts (around 20%-60% relative to the full-price channel) result in competitive prices and superior economics after considering shipping and return costs.With a global presence that extends across apparel and home décor and furniture categories, TJX leverages an extensive merchandising operation and proprietary inventory management system to maintain a rapidly changing product assortment at significant discounts across its banners. We believe TJX's ability to deliver a high-value assortment while maintaining strong returns (10-year average return on invested capital in the low 20s) is driven by its sourcing and distribution agility, characteristics that are difficult to replicate. By accepting incomplete assortments without return privileges, paying promptly, and stocking brands discreetly (preserving labels' conventional-channel pricing power by avoiding the stigma of a consistent discount presence), we believe TJX is a valued partner for its network of over 21,000 vendors. As a result, TJX can opportunistically offer a fast-changing, high-value assortment to customers, creating a treasure-hunt experience that digital retailers have been hard-pressed to replicate.We anticipate TJX has ample room for growth in its domestic market and abroad, fueled by continued availability of attractively priced products. Manufacturers should continue to struggle to forecast demand (which can vary as a result of uncontrollable factors such as the weather), particularly as customers' tastes change quickly and the proliferation of alternative distribution channels adds complexity. As a result, we expect TJX should be able to source product attractively, capitalizing on durable vendor relationships.