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Does TJX’s Q2 Suggest a Spending Slowdown by the Aspirational Crowd?

TJX Cos. Inc. rarely misses a topline estimate, and it even posted positive comparable store sales against a difficult retail environment. Yet despite the tough comparison to year-ago results, there’s still some concern on Wall Street over whether the aspirational consumer will still be out shopping as she has in the past when fall and holiday roll around.

In a Nutshell: Wall Street was expecting sales of $9.9 billion, and the slight miss at $9.78 billion was the first red flag on Tuesday. The second was a lower comp at 2 percent, even though last year’s 7 percent increase was a tough compare, due in part to unseasonable weather in May. The company said traffic trends accelerated in June and July.

Janine Stichter, a Jefferies equity analyst, said margins at TJX peaked for now, most likely as freight and wage headwinds will likely continue to “stymie margin upside in the near term.” The analyst also said that fiscal year estimates only included the tariff impact from items on List 4 that the company is already committed to.

“We believe the dislocation in the market the tariffs may create could ultimately prove to be an opportunity, as TJX can take advantage of excess goods,” she concluded.

Ike Boruchow, analyst at Wells Fargo Securities, noted that the 2 percent comps “came in at the low-end of guidance for the first time since [third quarter of 2017]. Most of the comps decrease was due to May’s lackluster selling results and miscues at HomeGoods, suggesting that at least apparel and accessories sales at TJX and Marshall’s held their own against a tough retail backdrop.

He also noted that because the retailer hasn’t yet committed to most of the inventory it will buy in the fourth quarter, “it will be difficult to forecast” the impact from the tariffs. Also, freight rates–a wildcard today–could drop, which would benefit the next fiscal year.

UBS’ Jay Sole, who last month said the continuation of deflationary trends could hurt the off-price sector, continued to rate TJX stock as a “Sell,” noting that the off-price channel’s performance continues to converge with department stores.

Net Sales: For the period ended Aug. 3, net sales rose 4.8 percent to $9.78 billion from $9.33 billion.

By business segment, comps at Marmaxx in the U.S. for its TJX and Marshall’s nameplates posted a 2 percent increase in comparable store sales, on top of the 7 percent increase a year ago. Comps at the HomeGoods business was flat for the quarter. TJX Canada comps were up 1 percent, while TJX International, covering stores in Europe and Australia, saw comps up 6 percent.

Earnings: Net income increased 2.6 percent to $759 million, or 62 cents a diluted share, from $739.6 million, or 58 cents, a year ago.

Wall Street was expecting adjusted EPS of 62 cents on revenue of $9.9 billion.

For the third quarter, TJX raised diluted EPS guidance to between 63 cents to 65 cents, above the prior estimate of 61 cents. The forecast is based on an estimated comp growth of 1 percent to 2 percent, versus a 7 percent increase in the same 2018 quarter.

For the full fiscal year ending Feb. 1, 2020, diluted EPS is still expected in the range of $2.56 to $2.61.

CEO’s Take: Ernie Herrman, chief executive officer and president, said, “This quarter marks the 20th straight quarter of customer traffic increases at TJX and Marmaxx. This speaks to the consistency and fundamental strength of our treasure-hunt shopping experience through many types of retail and economic environments.”

Herrman added that the third quarter is “off to a solid start,” and that the team is seeing “terrific availability” in the marketplace for branded, quality merchandise that the company can capitalize on. “We are excited about our many initiatives underway to keep driving sales and customer traffic throughout the fall and holiday selling season, and have great confidence in our potential to keep gaining market share around the world,” Herrman said.

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