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Tariffs Squeezing TJX Margins as Off-Pricer Invests in Russian Apparel Chain

Off-pricer The TJX Cos. Inc. had nothing to complain about for its third-quarter results, besting Wall Street’s consensus estimates, which also saw the chain take a minority stake in Familia, a Russian off-price chain. But company executives also note that it’s starting to see some margin pressure from tariffs.

In a Nutshell: While the third-quarter results were nothing to complain about, TJX does have a near-term hurdle to deal with: tariffs.

“Based on the tariffs in place now, we’ve started to see some pressure on our margins from the goods we see directly sourced in China,” CFO Scott Goldenberg told investors during a quarterly earnings conference call. “This includes the merchandise that we are committed to and the changes in tariff legislation that was announced after our [second quarter] call.”

TJX doesn’t currently plan to raise prices to offset some of the tariff pressure next year, president and CEO Ernie Herrman added, mostly because competitors haven’t boosted prices yet either. “We haven’t seen any retail, strangely enough, going up…. [By] the way, we would like to, I wish that was the case,” he said.

Addressing the quarter’s results, Herrman said “customer traffic was the primary driver of the comp store sales increases at each of [its] four major divisions.”

Buyers have been taking advantage of buying opportunities across categories for a wide range of good, better and best brands, Herrman explained. TJX expects to “be flowing fresh merchandise to our stores and online even later this year, and multiple times a week throughout the holidays,” he added.

Looking ahead, Herrman said, “Long-term, we are confident that we have a significant opportunity to continue growing our customer base and gaining market share around the world. We believe the growth we have seen in Gen Z and millennial customers across all of our major divisions for the last several years bodes well for our future.”

TJX said that during the third quarter, it returned a total of $778 million to shareholders through stock buybacks and dividends.

On Nov. 18, TJX completed a $225 million investment for a non-controlling, 25 percent minority stake in privately held retail chain Familia, Russia’s only major off-price apparel and home fashions retailer, the company said. Familia operates more than 275 stores throughout Russia.

“This transaction gives TJX an opportunity to invest in an established, off-price retailer with significant growth potential in the Russian market. The company’s ownership in Familia is expected to be slightly accretive to earnings per share beginning in Fiscal 2021,” TJX said.

Net Sales: For the quarter ended Nov. 2, net sales rose 6.4 percent to $10.45 billion from $9.83 billion. Consolidated comparable-store sales were up 4 percent for the quarter, which represented an increase on top of last year’s 7 percent gain.

Sales in the U.S. for its Marmaxx division, which includes the TJX and Marshall’s nameplates, rose 6.4 percent to $6.35 billion, while its HomeGoods business rose 8.1 percent to $1.58 billion. Sales at TJX Canada were up 4.3 percent to $1.08 billion. Overseas at TJX International, sales rose 6.1 percent to $1.43 billion.

Total inventories at the end of the quarter were $6.3 billion, versus $5.5 billion in the same year-ago quarter. TJX said it is well positioned to take advantage of the buying opportunities it sees in the marketplace.

Earnings: Net income increased 8.7 percent to $828.3 million, or 68 cents a diluted share, from $762.3 million, or 61 cents, a year ago.

Wall Street was expecting 66 cents on revenue of $10.32 billion.

For the fourth quarter, TJX guided diluted EPS to the range of 74 cents to 76 cents, compared with 68 cents in the year-ago fourth quarter. TJX said the outlook is based on an estimated comparable sales growth of 2 percent to 3 percent on a consolidated basis and at its Marmaxx operation.

For the fiscal year ending Feb. 1, 2020, the company raised its forecast for diluted EPS to the range of $2.61 to $2.63, representing an increase from $2.43 in 2018. For the year, the off-pricer is estimating comparable store sales growth of 3 percent on a consolidated basis and an increase of between 3 percent to 4 percent at Marmaxx.

CEO’s Take: According to Herrman, “Looking ahead, the fourth quarter is off to a solid start and we have many initiatives underway to keep driving traffic and sales to our stores and online during the holiday season and beyond. We are convinced our holiday marketing campaigns will position us as a top shopping destination for exciting gifts at amazing prices.

“We are seeing fantastic, widespread availability of quality, branded merchandise and are in a great position to capitalize on these opportunities,” the CEO said.

 

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