There are two potential concerns when it comes to TJX Companies Inc (NYSE:TJX). The first is the health of the overall off-price space. As with all areas of retail, Amazon.com, Inc. (NASDAQ:AMZN) and other e-commerce providers create a potential competitive threat. The second is TJX’s competitiveness within that space.
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So far, the first risk hasn’t really played out. TJX news in terms of traffic has been pretty solid, with the figure rising 2% even in what looked like a disappointing Q3 report last week.
Rival Ross Stores, Inc. (NASDAQ:ROST) saw its customer count rise as well, meaning the defection to online shopping seen in other areas of retail hasn’t played out — yet.
The second risk might not get the same coverage, particularly given TJX’s reputation. But it’s a concern nonetheless. TJX stock has underperformed its space badly of late. Since Ollie’s Bargain Outlet Holdings Inc (NASDAQ:OLLI) went public in July 2015, OLLI stock has gained 118%. Burlington Stores Inc (NYSE:BURL) has doubled, and ROST has risen 43%.
In contrast, TJX stock has gained less than 8% in those 26 months. Of course, there are two ways to view that underperformance. It does leave TJX stock relatively cheap and perhaps “due” to catch up with the rest of the space.
But, from here, the weakness of late even in a strong sector is a major concern. If this is how the company performs with its sector healthy and the economy strong, what happens if and when the external environment gets worse?
The Amazon Threat to TJX
It’s worth pointing out that the concern about e-commerce competition for brick-and-mortar retailers like TJX isn’t just a concern about Amazon, or other players, taking all of their revenue.
What’s been seen at mall retailers, for instance, generally is a 10-20% reduction in revenue. But given the fixed expense of rent and the increasing cost of labor, that seemingly modest pressure is enough to decimate profits. Even flat sales, for a retailer, eventually will cause profits to decline as expenses rise and margins erode.
So far, the off-price channel has held up just fine. TJX same-store sales rose a strong 5% in FY17 (ending January) and have gained 1%+ through the first nine months of FY18, even with what the company admitted was a series of merchandise misses in Q3. Other names in the industry continue to grow sales and profits as well.
The question is whether that will change. And I still believe it might, even if a shift to e-commerce so far hasn’t had the same devastating impact seen at department stores and mall retailers. So far, no one really has replicated the off-price model online (not even TJX or Ross, both of whom drive a minimal percentage of revenue through their respective websites). And it’s possible no one will.
But it’s also possible that direct online competition will arise. The obvious, and concerning, potential parallel here is in the auto parts space. A year ago, that sector looked something close to Amazon-proof. Since then, Advance Auto Parts, Inc. (NYSE:AAP) has fallen 44%, and rivals O’Reilly Automotive Inc (NASDAQ:ORLY) and AutoZone, Inc. (NYSE:AZO) have fallen 16-17%.
Again, the Amazon effect isn’t binary; it’s not a matter of all, or even most, sales moving online. A point here and a point there starts to make a big dent on profit, as retail stocks have shown over the past few years. That’s a potential risk to TJX stock going forward.
The Off-Price Market
To some extent, that risk does seem priced into TJX stock. It still trades for about 18x FY19 analyst estimates, despite guidance suggesting ~8% growth this year (excluding the impact of an extra week) and 6% growth a year ago.
But the broader concern is that TJX is lagging both rival Ross and its younger, smaller peers. Ross has grown comps 4% in each of the last two years, and is guiding toward a similar number this year. EPS is guided to rise roughly 15%.
Burlington grew adjusted net income 33% last year and expects a 28% increase this year. Ollie’s posted 50% non-GAAP earnings growth last year and 32% in the first half of this fiscal year.
Those stocks are more expensive than TJX on an earnings basis, but investors so far have gotten what they’ve paid for. As noted, the company has underperformed.
The key question is: will that change? And, if so, how? TJX’s HomeGoods concept is performing well but generates roughly 10% of revenue. The core “Marmaxx” (Marshalls and T.J. Maxx) banners are losing share. Margins are compressing, albeit modestly.
The trajectory of the business really isn’t that great at the moment. That means there’s a bit of a turnaround already priced into TJX stock, even though news really hasn’t been that impressive of late.
Q3 results showed that issue, with ROST outperforming TJX both in terms of fundamentals and stock price gains. And that gap has to narrow, at least, for the company to see upside. On this site, Nicholas Chahine made a good argument for buying the post-earnings dip in TJX stock. But there’s more to consider here than just the price.
Simply put, TJX isn’t performing as well as it should be, or as well as its reputation suggests. That’s a bigger risk than the one posed by e-commerce, and it’s one I’m not yet interested in taking.
As of this writing, Vince Martin has no positions in any securities mentioned.