I’ve heard a lot about how traditional brick & mortar retailers are having troubles right now due to the rising prominence of online shopping.
And a lot of major retailers are defending their ground with scaling into their online presence.
But what if there’s a traditional retailer out there that is flying in the face of this logic?
And what if they sold goods that are more likely to be purchased in person, while also growing its e-commerce presence? What if the goods it sells face consistent and rising demand thanks to the ubiquitous nature of its products and the discount nature of their business?
Take a look at The TJX Companies, Inc. (TJX).
They own and operate a number of retail stores that sell off-price apparel and home fashions. These stores are located in the US, Canada, Germany, Poland, Ireland, and the UK.
Their stores include T.J. Maxx, Marshalls, HomeGoods, Winners, HomeSense, and T.K. Maxx.
As of February 1, 2014, the company operated 2,021 stores in the US, 345 stores in Canada, and 399 stores in Europe.
The US accounts for 76% of their revenue, as of fiscal year 2014. 11% was generated from Canada sales. The other 13% was generated from Europe sales.
Think about it. They sell discounted brand name clothing. When’s the last time you saw someone walking around without clothes on? Never gonna happen.
So you obviously have demand for a product that has to be purchased. Now, while one needs clothing, one doesn’t need to shop at T.J. Maxx or Marshalls. However, there’s a major value proposition at play here. The products that TJX sells are typically discounted at rates of 20% to 60% below major department store prices. So bargain hunters are almost always going to shop at TJX stores first.
And while one may question the desire for people to go through racks and racks of clothing looking for that perfect pair of pants at a steep discount, one cannot ignore their financial results and success over the last 10 years.
Let’s take a look at what this company has been able to do over the last decade. Their fiscal year ends January 31.
Revenue grew from $14.913 billion at the end of fiscal year 2005 to $27.423 billion as of FY 2014. That’s a compound annual growth rate of 7.0% over this time frame. That’s not bad at all.
Earnings per share increased from $0.65 to $2.94 during this time frame, which is a CAGR of 18.26%. That’s extremely impressive, and no doubt assisted by an aggressive share buyback program – the company has reduced its share count from 1.025 billion to 726 million during this period. S&P Capital IQ predicts EPS will grow at a compound annual rate of 12% over the next three years.
What’s even more impressive than this growth is the company’s adherence to a generous dividend policy.
TJX has increased its quarterly dividend for the past 18 consecutive years. Over the last decade alone, they’ve grown the dividend by an annual rate of 23.3%, and more recent raises indicate that trend isn’t slowing down.
18 consecutive years of dividend raises qualifies TJX as a “Contender” on David Fish’s Dividend Champions, Contenders, and Challengers list. But I have no doubt they’ll keep up the raises for another seven years and beyond, which will propel them to “Champion” status with a 25-year track record.
The one aspect of the stock that may turn off some dividend investors is the lowly yield – only 1.13% as of this writing.
However, with a payout ratio of just 23%, the odds are extremely good that TJX will continue delivering the goods when it comes to dividend raises.
They may discount apparel, but they definitely don’t discount their dividend!
Generally speaking, a proxy for total return is the sum of the yield and the dividend growth rate, assuming a static valuation. So obviously one is looking at strong total returns here unless the valuation craters, which seems unlikely. And this proxy bears fruit when looking at the stock performance over the last decade, as it has absolutely trounced the S&P 500 index over that time frame. The stock is up 452% over the last 10 years, before counting dividends. Compare that to the 70.15% the broader stock market has returned.
Their balance sheet is apparently just as conservatively run as the rest of the business. The long-term debt/equity ratio is 0.30 as of FY 2014, while the interest coverage ratio is over 70. Excellent numbers.
Meanwhile, profitability appears very sound. Net margin has averaged 6.74% over the last decade, while return on equity has averaged 48.65% over this period. These numbers compare favorably to major peers.
TJX is the biggest company in this space, by far. Their historical growth is really quite impressive, and they have a penchant for returning cash to shareholders via aggressive dividend raises and share buybacks.
I believe people will always crave a good bargain. Just like I love to buy stocks on sale, many consumers out there love to get a suit, dress, or dresser at a steep discount to its actual worth. And many of the products that TJX sells are absolutely essential. I’ve personally been in their stores, and there are rows and rows of clothing designed to cater to professionals that need to show up to work dressed correctly. Furthermore, clothing wears out, so there’s always demand for replacement.
And the wonderful aspect about their business model is that clothing is something that’s difficult to buy online. So this creates somewhat of a moat around the business in regards to e-commerce stealing away market share. It’s difficult to know exactly how a pair of pants or a shirt might fit/look unless you actually have that item in your hands and try it on at the store. This creates traffic, which TJX has obviously been quite proficient at converting into sales. Even so, TJX is growing its e-commerce platform so that its loyal customer base has even more options. This platform will probably work even better for its home goods products.
Meanwhile, their international exposure provides ample opportunity for growth since the US still comprises a lion’s share of their revenue. Their store count is increasing by the year, and the company plans to open 75 stores in the US, 20 in Canada, and 40 in Europe.
However, while TJX has been a phenomenal performer over the last 10 years, one does need to consider risks. Primarily, they do face competition in this space. The retail industry is extremely competitive, and off-price goods are no exception. Not only does TJX face competition from more traditional retailers, but also those in its same space. In addition, current fashion and styles can change quickly. Thus, the company must maintain fresh inventory to keep its customers satisfied. Lastly, they rely on consumer shopping habits, which can change or soften unexpectedly.
Shares in TJX trade hands for a P/E ratio of 20.35 right now. That’s a bit higher than the broader market and TJX’s own five-year average P/E ratio of 17.2.
I valued shares using a dividend discount model analysis with a 10% discount rate and a 9% long-term growth rate. That growth rate is a bit more aggressive than I usually like to use, but TJX’s ability to grow its earnings and dividend at rates well above that over the long term has already been clearly demonstrated. Furthermore, 9% is also lower than it’s predicted growth rate for the foreseeable future. This gives me a fair value on shares of $76.30.
Bottom line: The TJX Companies, Inc. (TJX) is a global off-price retail powerhouse. They sell products at steep discounts, which provides a value proposition that customers obviously eagerly enjoy. Their growth over the last decade has been phenomenal, and the stock price has delivered. Though their products may be sold at discounts, they don’t discount their dividends. I think the odds are strong that this company will continue growing its dividend for many years to come, and shares look attractively valued here. Ready to shop for a discount?
— Jason Fieber