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TJX: More Stores, More Money

Flying past a sleepwalking retail industry, TJX Cos. of Framingham runs at a full gallop. It turns out their already impressive forecast for sales had to be adjusted upward for its third fiscal quarter, mostly on the basis of strong performances by TJ Maxx and Marshalls stores.

The newly revised expectations are robust. TJX has announced it has aggressive plans to open many more TJ Maxx and Marshalls stores, potentially capturing a 10 percent profit margin in its European outlets. Overall, TJX predicts that its annual earnings will grow by 10 percent to 13 percent for each of the next three years.

Industry analysts have certainly taken notice of the way TJX swims against the retail current these days, flourishing in a historically languishing economic environment. The company’s net income topped an impressive $479.6 million, up from $421.1 million. Additionally, sales increased a hefty 8 percent to $6.4 billion. Comparable store sales leapt 4 percent and gross margin, unlike JCP, rose 0.7% to 28.8%. The overall increase in second quarter earnings registered at a brisk 13.9%. The increasingly dominant chain raked in $932.4 million in net income for the first half of the year, up 11% from $840.3 from last year.

Carol Meyrowitz, TJX CEO, was predictably elated. “We are very pleased with our above-plan second quarter results which were achieved over high year-over-year comparisons for quarterly comp sales and earnings per share growth,”she said.

Meyrowitz  expressed enthusiasm regarding the company’s inventory as well as its growth potential for physical stores. “We are in an excellent inventory position, which gives us the flexibility to capitalize on the great brands and fashions available to us in the marketplace. We remain confident that our strong top- and bottom-line growth will continue and we will grow TJX to be a $40bn-plus company,” she said.

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Many have pointed to the rising significance of fast fashion as a seismic shift in the apparel industry, especially given the strong second quarter showings of retailers like H&M, the Gap, and Zara.

Fast fashion has appealed particularly to the so-called “millennials”, or shoppers aged thirteen to thirty.  The millennial consumer group is increasingly targeted by retailers worldwide since the demographic spends more than $65 billion a year. More than other age groups, they are keenly interested in new trends but also sensitive to value as well.

Apparel retailers have struggled with this consumer group for a variety of reasons. First, they are increasingly directing their discretionary income to electronics instead of clothing. Also, they simply have less money to part with since their parents are besieged by higher payroll taxes, an anemic job recovery that has disproportionately impacted millennials and the increasing price of transportation.

The retailers who have adjusted their strategies accordingly are the ones who have prospered. Besides H&M, the Gap and Zara, Forever 21 and Uniqlo have managed to remain profitable by relying upon an ever shifting fast fashion landscape with an eye to low discounted prices and high margins. The winning strategy seems to combine fast fashion production with off-market pricing.

Compare their performance to big ticket retailers like JC Penney’s and Sears, both of which made historically unusual entries into more high-end luxury items and both have reported the kinds of massive quarterly losses that have rattled their already jittery investors. However, the off price market, intransigently devoted to discount retail, continues to outperform its swankier rivals.

The future of the off-price market may depend upon the increasingly fickle consumer behavior of teen shoppers, both more influential than ever as a buying demographic and harder than ever to reliably target. Despite their outsized significance as a group,  there might be reason to believe the influence of teen consumers is already on the wane. Piper Jaffray, self-described as a “leading investment bank and asset management form serving clients in the U.S. and internationally,” has released the results of its 26th semi-annual report, “Taking Stock with Teens,” which seems to indicate that teen spending is experiencing a broad decline.

Speaking to the Business Wire in Minneapolis, Steph Wissink, co-director of research and senior research analyst at Piper Jaffray, said, “Our fall 2013 survey results suggest teens are experiencing general spending fatigue across key categories, specifically fashion related items. The absence of a clear product catalyst is a key contributing factor to diminished spending proclivity. Intent to spend also moderated, despite over two-thirds of teens signaling confidence the economy is stable to improving. We are also observing trends that imply teens are browsing regularly on their mobile devices, shopping less frequently and engaging with brands ‘on demand’ on their own time. This dynamic alters the assumptions surrounding the square footage and retail inventory needed to service this target demographic. A period of rationalization may be needed.”

In other words, teens are shifting the nature of their shopping habits faster than retail strategy is accommodating them, fueled by breakneck technological progress. Shopping has become a largely cyber-affair, with 82 percent of males and 78 percent of females making their purchases online. Trips to the mall are down 25 percent. Even more telling, considerably more than half of all teens surveyed reported preferring to buy apparel online.

Nevertheless, TJX’s near future remains a bright spot in the otherwise dark sky of global retail. The company expects third quarter profits to hit between 73 cents and 74 cents per share, adjusted up from 69 cents to 72 cents. Also, the yearly adjusted earnings per share is expected to land between $2.78 per share and $2.82 per share, better than previously calculated range of $2.74 to $2.80.