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TJX Companies Shows How Off-Price is Done, Beats Q2 Earnings Forecast

TJX Companies, the world’s leading off-price retailer of apparel and home fashions, announced earnings results for the second quarter that beat expectations, and the retailer raised its guidance for the remainder of the fiscal year.

Net sales for the quarter increased 7 percent to $6.9 billion, in line with Wall Street expectations. Comparable store sales rose 3 percent, at the high end of expectations, capping 22 consecutive quarters of same-store sales increases.

Net income was $518 million, resulting in adjusted diluted earnings per share of $0.75, a 14 percent increase over the prior year period, and beating analyst consensus estimates of $0.73 per share.

CEO Carol Meyrowitz said in a statement, “We are now raising our full year adjusted earnings per share guidance to reflect our above-plan second quarter results. The third quarter is off to a solid start and we are excited about our opportunities for the second half of the year. We entered the third quarter in an excellent inventory position and see plentiful opportunities for great brands in the marketplace.”

For the third quarter and full fiscal year, the company now expects diluted earnings per share to rise by between 8 percent and 13 percent over last year’s adjusted $0.75, and 10 percent to 12 percent over $2.83 per share, respectively, based on a comparable store sales increase 1 percent to 2 percent.

Consensus estimates put full-year revenues at almost $30 billion, but management sees the long-term opportunity as significantly higher. Said Meyrowitz: “We are very confident in our ability to deliver another strong year, on top of many, as we continue on the path to being a $40 billion-plus company.”

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The 464-store Home Goods division, which represented about 11 percent of company’s net sales last year, delivered a comp increase of 5 percent in the second quarter, and a 40-basis-point increase in gross margin. Management noted that new Home Goods stores performed particularly well, which it feels is an encouraging sign that there is considerable expansion potential for the brand.

The U.S. Marmaxx division, the company’s largest with almost 1,100 TJ Maxx and 950 Marshall’s stores, collectively turned in 2 percent sales growth on a comparable store basis, but saw flat merchandise margins in the quarter. Although brick-and-mortar margins increased, declines in e-commerce margins offset those gains.

In the quarterly earnings conference call, Meyrowitz said that management was pleased with the improvements in apparel at Marmaxx, noting that in the first quarter, execution issues in juniors and dresses weighed on the category.

News of the better-than-expected results was tempered somewhat by that of presumably declining store traffic at Marmaxx in the first two months of the quarter: management reported that traffic was positive in July compared to the same month last year, though flat overall for the three months. Increasing store traffic is a key initiative for the second half of the fiscal year, as is capturing a larger share of the holiday gift-giving market.

Plans for an only 1-2 percent increase in comparable store sales for the rest of the year underscores the difficult competitive environment in discretionary retail today. However, the company feels that its expertise in inventory management, flexible business model that offers exceptional value to a deal-hungry consumer, ability to appeal to a wide range of demographics, and tremendous opportunity internationally position it to continue to gain market share. Though store traffic is challenging, average transaction size is on an upward trend, thanks to the company’s ability to secure compelling product from its 16,000 vendors (and growing) worldwide.

The company operates around 860 international stores, divided almost evenly between Canada and Europe, under the Winners, HomeSense, TKMaxx and Marshall’s nameplates. In the third quarter, Canadian comps rose 3 percent, and European 6 percent. Management is extremely pleased by improvements in the international stores, and sees huge growth potential in these markets, particularly in Europe, where store count could eventually double, but warns that each country must be approached carefully, with the right management teams in place to assure that all parts of the marketing mix, particularly product, are executed appropriately.

TJX Companies’ two e-commerce brands, and Sierra Trading Post, the latter acquired by the company in 2012, represent a little over 1 percent of total sales. The company hopes to differentiate the product offering from that of its stores. The move to accept online returns at stores has shown promise as a good traffic driver.

The company sees Sierra Trading Post as a key growth vehicle for it, and feels there is tremendous opportunity to bring its off-price concept to outdoor and active lifestyle customers, a growing segment with a higher male component than its current customer base. Next week, the company will open a new 20,000 square-foot prototype store for the brand in a South Denver store that will  feature a beautifully designed layout, interactive shopping stations to help customers find products, an order online/pick up in store e-commerce option, and an in-store mobile app scan feature that provides additional product information.