You're reading an article by Simply Safe Dividends, the makers of online portfolio tools for dividend investors. Try our service FREE for 14 days or see more of our most popular articles

TJX Companies (TJX)

Founded in 1976, TJX Companies (TJX) has grown into the world’s largest off-price retailer, selling deeply discounted brand name and designer fashions. TJX's prices are generally 20% to 60% below department and specialty store regular retail prices on comparable merchandise.

The company’s core customer is a fashion and value conscious female shopper between 25 and 54 years old who makes a middle to upper-middle income. This type of customer usually shops high-end and moderate department and specialty stores, as well as online.

The company’s stores operate under the T.J. Maxx, Marshalls, HomeGoods, Winners, HomeSense, T.K. Maxx, and Sierra Trading Post brands (and three e-commerce sites).
By product category, apparel and footwear generate 52% of the company's sales, followed by home fashions (33%) and jewelry and accessories (15%).

Operating over 4,000 stores in nine countries, TJX has been the only off-price retailer to successfully expand overseas. However, 76% of the company’s revenue is still derived from the U.S.

The company reports its results in four main business segments: 

  • Marmaxx (U.S.): 62% of revenue
  • HomeGoods (U.S.): 14% of revenue
  • TJX Canada: 10% of revenue
  • TJX International (Europe + Australia): 14% of revenue

Business Analysis

Retail is a notoriously cyclical and challenging business thanks to high economic sensitivity, shifting consumer trends, and cutthroat competition leading to low margins. However, TJX has managed to drive very impressive growth over the years, in all manner of economic environments.

TJX has proven resilient in this industry thanks to its unique business model which gives it numerous competitive advantages. Specifically, TJX's focus on name brand but highly discounted merchandise appeals to bargain-focused customers who are attracted to its "treasure hunt" experience. As a result, TJX is more insulated from disruption caused by online shopping and economic downturns.

In retail, same-store sales or "comps", which measure sales from stores open at least a year, is the key metric investors watch to determine a retailers' health. TJX has managed to post positive comps in 34 of its last 35 years, including during four recessions. 
Source: TJX Investor Presentation
TJX has successfully driven strong and growing sales over time due to several factors, starting with its supply chain. TJX has over 1,000 purchase associates sourcing products from over 20,000 vendors in more than 100 countries.

When a fashion designer overproducers or other retailers buy too much inventory, TJX's buyers swoop in, negotiate the lowest possible price, and pass the savings on. Many of its rivals do not have access to these vendor sourcing networks, and TJX’s relatively low selling prices makes it even harder for new competitors to copy the business and turn a profit.

Besides being able to offer name brand goods at lower costs than rivals, TJX also provides customers with a constantly changing mix of merchandise. Each of its stores receives several deliveries each week that contain thousands of items. 

As long as manufacturers make too much product, vendors want to clear merchandise at the end of a season, and department stores cancel orders, TJX will have plenty of opportunity to continue stockpiling its locations with quality products at bargain prices.

Another factor supporting TJX's wide moat is its solid balance sheet. The company earns an A+ credit rating from S&P, which is one of the strongest in the retail industry. With excellent cash flow and financial liquidity, TJX's vendors can have a high degree of confidence in the business. 

Many of its rivals with weaker finances are forced to buy discounted merchandise (excess inventory from department stores and specialty retailers) on credit and ask for concessions, such as markdown allowances and return privileges in case the discount retailer can't sell the merchandise. 

On the other hand, TJX can pay in cash and buy in variable quantities (non-full lot shipments). The company also doesn't have to ask for concessions because of its enormous store base, industry-leading distribution network, and proprietary inventory management system. 

In other words, TJX’s massive size and access to capital mean that it is often the best partner for its suppliers to sell to, giving it an edge in sourcing unique, bargain-priced merchandise. The company’s highly diversified store base can absorb a large amount of various products and turn them over quickly. 

However, none of these advantages would be possible without TJX's unique inventory management system. The company has spent decades building an in-house data analysis system to allow it to optimize its inventory and logistics chains. TJX can quickly identify regional tastes and know exactly where to ship its low-cost merchandise with minimal risk of it not selling. 

In addition, the stores themselves embrace an open layout design with items displayed on wheeled racks and merchandise bins. Store managers can easily move products around to optimize customer traffic flow and sales. 

Finally, TJX has invested in state-of-the-art automation in its large distribution centers, allowing it to achieve high productivity from those workers and ultimately generate a double-digit operating margin, which is excellent for this industry.

While many brick-and-mortar retailers are struggling in an increasingly digital world, TJX believes its best days are ahead of it. In fact, management expects to eventually increase the company's store count by 50% to 6,100 locations.
Source: TJX Investor Presentation
But even with aggressive investment in growth, TJX still generates substantial free cash flow which allows it to be very generous with capital returns such as buybacks and dividends.

In the past 19 years, TJX has repurchased 51% of its shares, representing an average buyback rate of about 3.7% per year. The company has also raised its dividend for 22 consecutive years and will likely become a dividend aristocrat in 2021. 

Impressively, TJX's annual dividend growth rate over those 22 years has been 23%. And thanks to a big earnings boost from U.S. tax reform, the company raised its dividend 25% for 2018. 
Source: TJX Investor Presentation
Overall, TJX has proven that its discount retail business model, combined with industry-leading execution and competitive advantages in supply chain, inventory management, and product pricing, make it one of the best-managed and fastest-growing global retailers.

More importantly, TJX has thus far proven to be largely Amazon-proof while showing an exceptional dedication to large dividend increases that make it an appealing choice for a growth-focused income portfolio. 

That being said, TJX, like all retailers, still faces numerous challenges that should be closely considered.

Key Risks

TJX is one of the oldest discount retailers and has long enjoyed the first-mover advantage in the industry. 

However, the discount retailer space is getting more crowded with Ross Stores (ROST), Kohl’s (KSS), and Macy’s (M) opening their own discounted stores. The good news is that only Rost Stores has so far found meaningful traction because it takes a long time to replicate TJX's competitive advantages in scale, supply chain, and inventory management.

With that said, the continued growth of rivals also sourcing excess name brand merchandise means that TJX might find it more challenging to get enough inventory to satisfy customers at an ever-increasing number of global stores.

Another risk to consider is that TJX's sales can be seasonal and fluctuate based on changing consumer tastes. Specifically, management isn't always right about what merchandise to buy or which stores to stock it in. This can occasionally result in weak comps and sales growth, although it shouldn't affect TJX's long-term earnings power.

And speaking of consumer tastes, the appeal of TJX's stores, particularly the "treasure hunt" nature of its business, might not always remain popular. Online shopping is increasingly the easiest way for vendors to find customers for excess merchandise and for consumers to find the best prices.

For now, TJX's business model appears to be relatively immune from the rise of e-commerce, since many customers value the experience of physically shopping even if it's not as convenient as online bargain hunting. 

However, investors can't assume that this will always be the case. After all, Sears (SHLD) was famous as a major disruptor of department stores back in the 19th century (when it was just a catalogue). But times changed, and if a company doesn't adapt, then it can end up being disrupted.

Should the competitive environment intensify, there’s risk that the company’s aggressive expansion plans, especially in the U.S., could leave it overstored, which has been a huge issue for numerous brick-and-mortar retailers in recent years. If that were to happen, TJX's stock would lose its premium valuation multiple as investors reprice its long-term growth prospects. 

Finally, it’s worth noting that TJX has approximately 250,000 employees, many of whom work less than 40 hours per week. Potential changes to minimum wage laws and healthcare regulations could adversely affect the company’s cost structure and earnings growth rate.

Closing Thoughts on TJX Companies

Retail is a very tough industry that’s currently undergoing a lot of disruption. Naturally this makes dividend investors nervous about the safety and growth prospects of many retail stocks.

However, TJX has proven to be one of the most adaptable and shareholder-friendly retail companies in the world. The firm's deep discount business model and focus on providing an exciting customer shopping experience have thus far proven to be fairly resilient to the rise of e-commerce.

When combined with management's impressive capital allocation track record and the company's potential to grow its store base by 50% over the long term, TJX is likely to provide double-digit dividend growth for the foreseeable future.

TJX's conservatism, financial discipline, and unique merchandise sourcing advantages make it one of the few consumer retailers that conservative dividend growth investors might want to consider.

Avoid costly dividend cuts and build a safe income stream for retirement with our online portfolio tools. Try Simply Safe Dividends FREE for 14 days

More from Intelligent Income

Idea Lists