TJX’s price drop

TJ Companies (TJX) $125, the discount retailer owns TJ Maxx, Home Goods and Marshalls. It’s stock price has become reasonable after a 20% drop from its 52-week high of $170, but unless the company demonstrates improvement in its largest segment - MarMaxx, it would be prudent to wait.

Positives

1. Very steady decade - Sales have doubled in the last 9 years, very commendable indicating consistent growth of 8%. Better still, it increased every year, reducing cyclicality.
2. I think this demonstrates a decent margin of safety, which you don’t get in retail.
3. Sales are forecasted to grow at 6-7% for the next decade which is also excellent.
4. The latest quarter saw strong results in 40% of the company’s business including HomeGoods, TJX International and TJX Canada.
5. Like most retail chains, TJ Maxx group also returned $1.3Bn to shareholders via dividends and share buybacks.
6. This sector and segment of the market has become oligopolistic - just a few players left, and only Ross Stores (ROST) and Burlington (BURL) offer solid competition. TJ has more than 50% market share.

The big negative

Its MarMaxx (U.S.) segment, had a poor showing with sales increasing just 3% from $8.84B to $9.10B, and comps faring even worse - just 1%, dropping from a 3% increase  the prior-year quarter. With MarMaxx contributing 60% of sales, any further weakness will drag the stock down - it would mean more than poor merchandising and cast doubts on management’s execution.Unfortunately, this is also a volume problem as the number of customer transactions declined, which could indicate that customers didn’t find alternate items easily.

Management attributed this to poor merchandising. CEO Ernie Herrman -

We could have executed our store mix better, and by that I mean we could have been sharper on having the right goods in the right stores at the right time.

Management has started working on merchandising and have indicated seeing early improvements.

Buy, Sell or Hold?

Hold: It is a 12% earnings grower priced at 24 - that seems a little unusual for a retailer, especially a discount retailer, though TJX has been very successful as a cookie cutter  in a difficult environment. I think the premium is deserved because of the oligopoly, market leadership and consistency.

The low price, 20% below its 52-week high, and the dividend yield of 1.5% are appealing, but the stock’s 5 year performance is only 80%, so one has to be very careful about the entry price.

‍I would either wait for a signal on MarMaxx improvements or even a further decline to buy.