Investor Essentials Daily

This company owns the discount retail world

The TJX Companies, Inc. (TJX)
November 8, 2019

There are so many choices for makeup when a woman walks into a CVS or a Wallgreens.

There’s Bobbi Brown, Clinique, Estee Lauder, MAC, Glamglow, Becca, just to name a few. There are options for any skin type, any style, and any need, it’s impressive that the drug stores carry such a diverse selection.

In reality though, all those brands listed above are actually owned by one company, Estee Lauder. Estee Lauder controls much of the cosmetics market

They do it by giving everyone what they need, from the actual product, to the right branding for each individual customer.

Estee Lauder’s strategy has led to the company becoming a $15 billion revenue empire, with a market cap of $67 billion. They and the other big cosmetics brand conglomerate L’Oreal own the market.

But Estee Lauder and L’Oreal aren’t the only companies in the consumer market that have figured out how giving customers the perception of choice in their buying can unlock significant value.

TJ Maxx (TJX) has been tremendously successful as a big box discount retailers. Many consumers desire to live the “Maxx Life” and be able to buy brand name fashion at a discount price, by buying fashion that is a season or two old.

TJ Maxx highlights their differentiation from one of their key competitors, Marshalls, on their site, by highlighting how they offer premium products under their Runway at Maxx designer store, and with their unique fine jewelry and accessories. Their big red signs are a special beacon for those hunting for a deal.

Much of Marshalls’ offerings are similar to TJ Maxx. But they try to differentiate themselves from TJ Maxx by offering more products for teenagers and a stronger footwear department, among other things. They are attempting to carve out a niche in the competitive discount market.

Other competitors in the market include HomeGoods in the discount offerings for home wears, Winners competes with TJ Maxx in the discount fashion market, and Sierra in the family market.

The big box discount retailer market is a large but fragmented market. Or so it appears.

In reality, all the businesses listed above are owned by TJX Companies (the actual name of the company with the ticker TJX). TJX owns each of those brands so, much like Estee Lauder, they can offer a tailored experience to each of their customer bases, to drive incremental sales by being “on brand” for as many groups as possible.

TJX’s successful strategy has driven significant value for the company historically. It’s why they have consistently been able to produce 15%+ adjusted returns for as long as they have.

But while consumers may not realize that TJX is playing a shell game to generate revenue from as many sources as possible, the market does, and is pricing the company as though they’re going to continue to do so. The market is pricing in returns to continue to expand going forward. However, there may be clouds gathering for TJX the market may not be recognizing. Tariffs are impacting margins, and the company may not be confident about their operations at Home Goods, or their overall ability to execute on their various strategies going forward.

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Market expectations are for Uniform ROA expansion, but management may be concerned about their strategy, tariffs, and Home Goods

TJX currently trades at historical highs relative to UAFRS-based (Uniform) Earnings, with a 28.1x Uniform P/E. At these levels, the market is pricing in expectations for Uniform ROA to rise from 16% in 2019 to 20% in 2024, accompanied by 4% Uniform Asset growth going forward.

However, analysts have more muted expectations, projecting Uniform ROA to contract slightly to 15% through 2021, accompanied by 3% Uniform Asset growth.

Historically, TJX has seen fairly stable profitability. Uniform ROA declined from 12% in 2004 to 9% in 2008, before rebounding to 16% by 2013. Since then, Uniform ROA has remained at 15%-16% levels through 2019. Meanwhile, Uniform Asset growth has been consistent, positive in 15 of the past 16 years, while ranging from -1% to 15%.

Performance Drivers – Sales, Margins, and Turns

Trends in Uniform ROA have been driven by trends in Uniform Earnings Margin, coupled with stable Uniform Asset Turns. After ranging from 5%-6% levels from 2004-2009, Uniform Margins expanded to, and stabilized at, 8%-9% levels from 2013 through 2018. Meanwhile, Uniform Turns have remained stable at 1.8x-2.0x levels since 2004. At current valuations, markets are pricing in expectations for continued stability in Uniform Turns, coupled with a slight improvement in Uniform Margins.

Earnings Call Forensics

Valens’ qualitative analysis of the firm’s Q2 2020 earnings call highlights that management is confident their European business is ramping up. However, they may lack confidence in their ability to continue expanding under their off-price model and to mitigate their tariff risk. Furthermore, they may be concerned about their brand quality across their locations and about macro pressures to their Home Goods business. Finally, they may be concerned about rising net interest expenses, and they may lack confidence in their ability to extract value from their loyalty program.

UAFRS VS As-Reported

Uniform Accounting metrics also highlight a significantly different fundamental picture for TJX than as-reported metrics reflect. As-reported metrics can lead investors to view a company to be dramatically stronger or weaker than real operating fundamentals highlight. Understanding where these distortions occur can help explain why market expectations for the company may be divergent.

As-reported metrics significantly overstate TJX’s asset utilization, one of the primary drivers of profitability. For example, as-reported asset turns for TJX were 2.7x in 2018, materially higher than Uniform Turns of 1.9x, making TJX appear to be a much stronger business than real economic metrics highlight. Moreover, as-reported asset turns have been well above Uniform Turns in each year since 2004, significantly distorting the market’s perception of the firm’s historical asset efficiency.

Today’s Tearsheet

Today’s tearsheet is for Pfizer. Pfizer trades well below market valuations. The market is expecting significant Uniform EPS shrinkage going forward. The company has historically has robust Uniform EPS growth, though it is forecast to continue to see growth going forward. The company’s earnings growth and valuations are around peer averages. The company has robust profitability, and has no cash flow risk to their dividend.


Joel Litman
Chief Investment Strategist

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