TJX - A Dominant Off-Price Retailer
Background
In the advent of the COVID-19 pandemic that practically forced the global economy to a halt, a significant number of American citizens have lost their jobs or have been furloughed and many businesses have struggled to stay afloat following the significant drop in demand. As of May 6th, 2020, an estimated 23,000 (both public and non-public) filed bankruptcy cases were reported by U.S courts (1). In the retail industry alone, bankruptcies included popular brands such as J.C. Penney, Aldo, and J. Crew.
In the advent of the COVID-19 pandemic that practically forced the global economy to a halt, a significant number of American citizens have lost their jobs or have been furloughed and many businesses have struggled to stay afloat following the significant drop in demand. As of May 6th, 2020, an estimated 23,000 (both public and non-public) filed bankruptcy cases were reported by U.S courts (1). In the retail industry alone, bankruptcies included popular brands such as J.C. Penney, Aldo, and J. Crew.
As industry experts try to grapple with the effects of sudden drops in both supply and demand, it’s evident that there still lies great uncertainties ahead. As businesses await for a resurgence in demand, I believe some companies will be better positioned to come out of this crisis. An example of such an opportunity lies in the retail space, where some off-retail price companies will be better positioned (relative to their full-price retail peers) to return to profitability despite losses incurred in 2020.
Thesis
In the off-price retailing space, there aren’t many dominant performers like TJX Companies Inc. (NYSE: TJX), Burlington Stores Inc. (NYSE: BURL) and Ross Stores Inc. (NASDAQ: ROST). Their business model revolves around the strategy of opportunistic buying wherein they take advantage of situations such as order cancellations, manufacturer overproductions, and brand/retailer/manufacturer closeouts to purchase merchandise at a bargain and resell at a mark-up that’s typically 20-60% lower in price than most department or specialty stores. Operational efficiencies such as distribution and inventory management are key to successfully running such operations. Off-price retailing provides a “treasury hunt” experience to consumers wherein at any given time, a variety of branded, designer and quality merchandise could be offered at a discount; compelling shoppers to customarily hunt for bargains.
Off-price retailers maintain similar business models with a differentiation in successful execution of adequate distribution/inventory management, effective buying operations and provision of good shopping experience; among many other things. However, my recommendation today will hone in on TJX, primarily due to its size and online presence that adds sustainable structure to its business operations in a 21st century e-commerce world. Taking this advantage in account, I believe that TJX is better positioned to continuously grow their operations due to the following reasons:
1. The off-loading of inventory across the apparel industry will be of benefit to TJX, as they’ll be able to ramp up opportunistic buying operations and acquire more branded, designed and other quality merchandise at greater discounts,
2. Following an estimated 13% unemployment rate (seasonally adjusted) of 21million persons (non-farm) as of the BLS unemployment report of May 2020 (2), consumer spending will likely be very selective as shoppers will look to get more for less,
3. TJX, being the only off-price retailer of its size with an online presence, is better suited to service shoppers who may be more inclined to shop online as a result of the COVID-19 pandemic.
Industry
TJX is a leading off-price apparel and furniture retailer in the United States. It operates under its chains including TJMaxx, Marshalls, HomeGoods, Winners, Sierra, HomeSense, and TKMaxx; offering products ranging from family apparel and home fashion to furnitures and gourmet foods.
Like other off-price retailers, it leverages its size to buy merchandise at deep discounts for a resale to shoppers at a mark-up that’s typically 20-60% off retail price.
Comparing the three companies (TJX, Ross Stores, and Burlington), it’s no doubt that off-price retailers have been among the best performers of the retail sector, continuously taking market share from department stores and other specialty retailers. The global apparel and footwear sector recorded $1.8trillion in sales in 2018 (3), with the U.S. accounting for ~$342billion during the same year (4). With a combined revenue of $65billion in 2019, these three companies are set to gain more market share as department stores and other specialty retailers continue to bleed out. However, what sets TJX apart from the rest is its size and capability to gain e-commerce market share. With a total of 4,306 stores in North America, Europe and Australia (compared to 727 and 1,805 total stores for Burlington and Ross Stores in the US, respectively), 19million square feet of distribution capacity in six countries, TJX is greatly advantaged to efficiently conduct online operations ranging from shipping merchandise to buy-online-pick-up-in-store activities.
In a world where shoppers are either hesitant to go out shopping in the middle of a pandemic or have simply become habitual online shoppers, TJX has runway to benefit from the tailwind of an e-commerce market expected to grow to ~$2billion in the United States by 2024 (5).
Figure 1. 10Yr CAGR (2009-2019) of 7.47%, 8.36%, and 8.17%* for TJX, Ross Stores and Burlington, respectively.
*8Yr CAGR (2011-2019)
Figure 2. 10Yr CAGR (2009-2019) of 10.43%, 14.13%, and 51.58%* for TJX, Ross Stores and Burlington, respectively.
*7Yr CAGR (2012-2019)
Figure 3. Selling, General, and Administrative Expenses as a percent of Revenue (2009-2019)*
*Burlington (2011-2019)
Valuation
As of the date of this writing, TJX, Ross Stores and Burlington are currently valued at 12.9x, 13x, and 18x FY2020 EBITDA, respectively. TJX realized a 10Yr (2009-2019) and 5Yr (2014-2019) earnings CAGR of ~10% and 8%, respectively. Assuming a 25% contraction in sales for FY2021, subsequent growth of 7% YoY from FY2022-FY2025, and a 3% GDP long term perpetual growth rate, TJX currently provides a ~20% upside from current levels.
I take in account the margin dilutive activity of off-loading inventory and sustaining business operations in the middle of the COVID-19 pandemic during this year.
Although Ross Stores and Burlington have also put up impressive earnings growth, my preference for TJX stems from its size, which provides the company great capability to continuously gain market share both in North America and abroad, in-store and online. Ross Stores does not conduct e-commerce operations and Burlington’s size is of a disadvantage to operate online to the scale of TJX.
Risk
I believe the greatest risk this thesis runs is a mean reverting performance from TJX and a slowdown in off-price retailer growth. TJX’s central operations revolves around its ability to conduct opportunistic buys. It remains to be seen what would be of off-price retailers once supply of merchandise decrease due to tightening of full-price retailer fleet.
Resources
1. https://www.uscourts.gov/news/2020/05/06/new-bankruptcy-filings-fall-1-1-percent
2. https://www.bls.gov/news.release/pdf/empsit.pdf
3. https://www.statista.com/statistics/875708/global-apparel-and-footwear-market-retail-sales-value/
4. https://www.statista.com/topics/965/apparel-market-in-the-us/#dossierSummary__chapter1
5. https://www.statista.com/statistics/278890/us-apparel-and-accessories-retail-e-commerce-revenue/
Thesis
In the off-price retailing space, there aren’t many dominant performers like TJX Companies Inc. (NYSE: TJX), Burlington Stores Inc. (NYSE: BURL) and Ross Stores Inc. (NASDAQ: ROST). Their business model revolves around the strategy of opportunistic buying wherein they take advantage of situations such as order cancellations, manufacturer overproductions, and brand/retailer/manufacturer closeouts to purchase merchandise at a bargain and resell at a mark-up that’s typically 20-60% lower in price than most department or specialty stores. Operational efficiencies such as distribution and inventory management are key to successfully running such operations. Off-price retailing provides a “treasury hunt” experience to consumers wherein at any given time, a variety of branded, designer and quality merchandise could be offered at a discount; compelling shoppers to customarily hunt for bargains.
Off-price retailers maintain similar business models with a differentiation in successful execution of adequate distribution/inventory management, effective buying operations and provision of good shopping experience; among many other things. However, my recommendation today will hone in on TJX, primarily due to its size and online presence that adds sustainable structure to its business operations in a 21st century e-commerce world. Taking this advantage in account, I believe that TJX is better positioned to continuously grow their operations due to the following reasons:
1. The off-loading of inventory across the apparel industry will be of benefit to TJX, as they’ll be able to ramp up opportunistic buying operations and acquire more branded, designed and other quality merchandise at greater discounts,
2. Following an estimated 13% unemployment rate (seasonally adjusted) of 21million persons (non-farm) as of the BLS unemployment report of May 2020 (2), consumer spending will likely be very selective as shoppers will look to get more for less,
3. TJX, being the only off-price retailer of its size with an online presence, is better suited to service shoppers who may be more inclined to shop online as a result of the COVID-19 pandemic.
Industry
TJX is a leading off-price apparel and furniture retailer in the United States. It operates under its chains including TJMaxx, Marshalls, HomeGoods, Winners, Sierra, HomeSense, and TKMaxx; offering products ranging from family apparel and home fashion to furnitures and gourmet foods.
Like other off-price retailers, it leverages its size to buy merchandise at deep discounts for a resale to shoppers at a mark-up that’s typically 20-60% off retail price.
Comparing the three companies (TJX, Ross Stores, and Burlington), it’s no doubt that off-price retailers have been among the best performers of the retail sector, continuously taking market share from department stores and other specialty retailers. The global apparel and footwear sector recorded $1.8trillion in sales in 2018 (3), with the U.S. accounting for ~$342billion during the same year (4). With a combined revenue of $65billion in 2019, these three companies are set to gain more market share as department stores and other specialty retailers continue to bleed out. However, what sets TJX apart from the rest is its size and capability to gain e-commerce market share. With a total of 4,306 stores in North America, Europe and Australia (compared to 727 and 1,805 total stores for Burlington and Ross Stores in the US, respectively), 19million square feet of distribution capacity in six countries, TJX is greatly advantaged to efficiently conduct online operations ranging from shipping merchandise to buy-online-pick-up-in-store activities.
In a world where shoppers are either hesitant to go out shopping in the middle of a pandemic or have simply become habitual online shoppers, TJX has runway to benefit from the tailwind of an e-commerce market expected to grow to ~$2billion in the United States by 2024 (5).
Figure 1. 10Yr CAGR (2009-2019) of 7.47%, 8.36%, and 8.17%* for TJX, Ross Stores and Burlington, respectively.
*8Yr CAGR (2011-2019)
Figure 2. 10Yr CAGR (2009-2019) of 10.43%, 14.13%, and 51.58%* for TJX, Ross Stores and Burlington, respectively.
*7Yr CAGR (2012-2019)
Figure 3. Selling, General, and Administrative Expenses as a percent of Revenue (2009-2019)*
*Burlington (2011-2019)
Valuation
As of the date of this writing, TJX, Ross Stores and Burlington are currently valued at 12.9x, 13x, and 18x FY2020 EBITDA, respectively. TJX realized a 10Yr (2009-2019) and 5Yr (2014-2019) earnings CAGR of ~10% and 8%, respectively. Assuming a 25% contraction in sales for FY2021, subsequent growth of 7% YoY from FY2022-FY2025, and a 3% GDP long term perpetual growth rate, TJX currently provides a ~20% upside from current levels.
I take in account the margin dilutive activity of off-loading inventory and sustaining business operations in the middle of the COVID-19 pandemic during this year.
Although Ross Stores and Burlington have also put up impressive earnings growth, my preference for TJX stems from its size, which provides the company great capability to continuously gain market share both in North America and abroad, in-store and online. Ross Stores does not conduct e-commerce operations and Burlington’s size is of a disadvantage to operate online to the scale of TJX.
Risk
I believe the greatest risk this thesis runs is a mean reverting performance from TJX and a slowdown in off-price retailer growth. TJX’s central operations revolves around its ability to conduct opportunistic buys. It remains to be seen what would be of off-price retailers once supply of merchandise decrease due to tightening of full-price retailer fleet.
Resources
1. https://www.uscourts.gov/news/2020/05/06/new-bankruptcy-filings-fall-1-1-percent
2. https://www.bls.gov/news.release/pdf/empsit.pdf
3. https://www.statista.com/statistics/875708/global-apparel-and-footwear-market-retail-sales-value/
4. https://www.statista.com/topics/965/apparel-market-in-the-us/#dossierSummary__chapter1
5. https://www.statista.com/statistics/278890/us-apparel-and-accessories-retail-e-commerce-revenue/
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