Is TJX Companies Inc (TJX) Stock Ready to Shine Again?
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Off-brand behemoth TJX Companies Inc (NYSE:TJX) is due to report its second-quarter results Tuesday morning. While investors tend to do a lot of buying and selling on the back of such announcements, second-quarter results will be a big deal for TJX stock.
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The firm has been facing a lot of negativity on Wall Street in recent months after lackluster first-quarter results gave investors reason to believe that TJX Companies was finally succumbing to the “Amazon effect” alongside the rest of its retail peers.
The wobbly first quarter sent Mr. Market into a panic and pushed TJX stock nearly 10% lower. However, the upcoming results will either confirm or deny the bears’ logic. I, for one, am rooting for TJX and I think the second quarter will prove that the firm is still on track to thrive in a new retail environment.
Their Loss Is TJX’s Gain
Retail is a scary place right now as Amazon.com, Inc. (NASDAQ:AMZN) systematically pushes brick-and-mortar businesses to the edge of bankruptcy. However, TJX stock has remained relatively insulated from the woes of its peers and in fact, TJX Companies is actually in a great position to benefit from the struggles of its department store competitors.
Since TJX sells brand name goods from previous seasons, the inventory surplus that other stores are experiencing is a boon. Not only does TJX have more inventory than ever to choose from, but desperate retailers that need to offload old inventory are willing to sell it at a deeper discount. That means the company can offer more to its customers without paying for it. It’s a win-win for TJX.
Not only that, but many believe it is insulated from the shift in consumer preferences that has given rise to e-commerce. While its true that increasingly more people prefer to order things online rather than shop around in-store, TJX offers a unique shopping experience.
The store’s constantly changing inventory makes for a bargain-hunting experience that has been compared to a ‘treasure hunt’ feel. Customers to go TJX to see what kinds of deals they can find, making its brick-and-mortar locations a unique part of the firm’s value proposition.
True Or False?
The second quarter will prove whether that theory is correct. While the company hasn’t felt the pressure that its peers have, some say that the impact of Amazon is finally making its way to TJX.
The reason for this negativity is primarily the firm’s first-quarter sales miss. TJX’s results showed that sales growth slowed to 3.2% compared to 9.9% a year earlier and 5.6% in the previous quarter.
A miss like that is definitely a cause for concern, but there is some question as to the reason behind the decline. If, like the bears suggest, Amazon is finally starting to choke TJX, then the second quarter should yield an equally as disappointing sales growth rate. However, if poor weather in the midwest — a huge market for TJX — was the reason, we should see sales growth that meets or exceeds management’s expectation of 4.1%.
What to Expect From TJX Earnings
Currency Headwinds
Another big factor in TJX’s first-quarter results was currency headwinds. TJX bulls pointed to the firm’s European operations, where the Brexit caused major fluctuations, as a big part of the firm’s first quarter miss. While unfavorable currency swings are likely to be an issue again in the second quarter, the fact that things have calmed in Europe and the pound has stabilized is likely to take some of the pressure off.
Margin Meltdown
The other problem that TJX revealed in the first quarter was deteriorating margins. Because the company sells band-name goods for discount prices, there is very little room for the firm to pass on rising costs to the consumer. For that reason, wage increases and supply chain investments hurt the firm’s margins in the first quarter.
While TJX will have to continue coping with its decision to raise employee compensation, the firm is expected to be relieved of some of its supply chain investment pressure during the second half of the year.
Growth Potential
TJX stock has a lot of growth potential for investors who can look past a rough quarter. Management is planning to increase TJX Companies’ store footprint, particularly in Europe and Australia. The brand has been able to continuously deliver steady sales growth and positive comps, even through recession periods.
Bottom Line on TJX Stock
TJX stock has a lot to prove this quarter. The firm’s Q1 miss sparked rumors that suggest TJX is headed down the same path as peers like Macy’s Inc (NYSE:M). However, when you look at TJX’s unique model and consider that the firm is best-in-class when it comes to off-brand selling, the stock looks undervalued at roughly $71 per share.
As of this writing, Laura Hoy was long AMZN.
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