Summary
- TJX has shown some very promising signs of a recovery in its latest quarter.
- Off-price should outperform in a post-pandemic retail landscape.
- Continued share gains and organic growth should continue to drive EPS higher.
As the North American off-price leader, I am positive on TJX Companies' (TJX) ability to not only weather the current COVID-19-led downturn but also benefit from several industry tailwinds during these volatile times. TJX's Q1 report unsurprisingly showed the extent of the COVID-19 impact, but the good news is that TJX is already experiencing a robust demand recovery both in stores that have reopened and online. As such, I see the latest pullback in TJX shares as an opportunity for longer-term investors, with a price target of $60.
Positive Read-Throughs From Initial Reopening
Encouragingly, TJX's sales across regions and concepts have shown strength in the c. 1,100 reopened stores (equivalent to c. 24% of the fleet). The rebound was especially impressive considering it came despite ongoing store traffic and occupancy restrictions. On that basis, the fact that sales are tracking over last year's levels highlights not only the strength in average baskets and conversion, but also customer intent.
In fact, for the 1,100-plus stores that have been opened for at least a week, sales overall have been above last year across all states and countries where we are open. We believe these strong early trends speak to our values on a wide selection of merchandise serving a wide customer demographic, also the loyalty of our valued customers and pent-up demand.
With department store peers still noting sizable Y/Y declines in reopened locations, some of the strength is likely attributable to share gains, underlining the compelling off-price opportunity amid COVID-19 disruptions. That the rebound has also been accompanied by limited marketing investment (SG&A was down c. 23% Y/Y) is also worth noting.
As expected, TJX did not guide the full-year, considering the uncertainty created by the COVID-19 pandemic. However, management did outline plans to have c. 49% of its total stores open by the end of May, which is a clear positive. Looking ahead to Q2, the company estimates stores will be open for c. 65% of normal operating hours during the quarter, with higher volume stores (NY, CA, and major cities in Canada and the UK) also set to reopen later in the quarter.
Reasons to Rotate Into Off-Price
A key reason to own TJX is the industry-wide tailwinds in off-price, which position it well to emerge from the COVID-19 disruption in a relatively stronger position within retail. Going forward, I see a multi-year period of accelerated share gains for the group (including Ross Stores (ROST) and Burlington (BURL)), as department stores and specialty retail store closures put billions of market share dollars up for grabs. According to the FT, sales at US department stores have fallen c. 23% Y/Y in March (the largest decline since 1994) off an already low base.
Source: Financial Times
The accelerated decline of department and specialty stores should provide off-price retailers with access to an improved quality of merchandise and brand-cache, as brands work through inventory imbalances over the next few quarters. Consumers' desire for value in a recessionary environment should also catalyze sales at TJX (as seen by the initial recovery), with the treasure hunt appeal perhaps even widening to new customer demographics. As a result, I think off-price is the way to capitalize on any pent-up demand in the marketplace, with the initial traction from the recent TJX reopening likely to continue in the upcoming months.
