With TJX results out today, we revisit a debate we had on October 20th. Not a whole lot has changed (stock price or expectations) with today’s solid results and outlook. The reality is, for the past few quarters the process with TJX is almost like clockwork. Issue conservative guidance, beat sales month after month, pre-announce upside, exceed earnings by a penny, and reissue conservative guidance. Underlying all of this of course, is strong demand for TJX’s value offering and commensurate customer traffic gains. Along the way, we have been quick to point out that the benefits of the “perfect storm” of quality inventory supply coupled with unprecedented consumer demand for “value” have not yet been exhausted. Today’s results support our prior conclusion, but also make us ask the question “how much better can things really get.”
As a reminder, our October 20th 2009 comments:
Our internal process is one that openly encourages debate when we disagree. That’s when our hit ratio goes up… Here’s our take on TJX. The bottom line is that big cap, liquid quality in a space that will be beating for the next 3-months is not a place to source shorts -- at least at this price.
Keith: Stock looking to be way overbought now fyi… on the news… I like shorting these for a TRADE.
Brian: Yes, TJX gets put in the ‘quality’ bucket in retail. But let’s not forget that margins are at peak, and we’re coming off an 18-month period that helped off-price retailers like TJX and ROST materially. The preannounced comp was a definite positive, but in looking at the 2 and 3-year trend, there is really no change in trend. If anything, it is slightly negative. The gross margin story here will be short-lived, with one more quarter before the financial profile looks less favorable. I’m not going to get too excited about the company’s announcement about an increase in long term unit growth to 4-5% as we’re already looking at a mature company with 2,700 big box stores. There are other names I’d short before this one, but there will be a time over the next 1-2 quarters where this will make a lot of sense. If it is overbought on this news, then I won’t argue to stay away.
Levine: Recognizing that the incremental data points on TJX are likely to remain positive, I wanted to make a few points before putting the short TRADE on.
Key factors to look out for over the next 3 months: 1) EPS guidance way too low, but the Street is obviously tuned in to this, 2) they took up the square footage growth rate for next year to 5% from 4%, which is fairly respectable for a company of this size. I can’t knock them for investing into strength. And 3) the gross margin compares in Q4 are a joke (last year they got caught like the rest of retail with too much inventory).
On the flip side, the 2 year comp is holding steady but not accelerating. With that said, this is still one of a few retailers with positive 2 year trends.
Final note here, is that there may be support from other retail/apparel earnings as they begin to trickle out. We’re now seeing a handful of positive pre-announcements as well which is likely to build momentum. To the extent you view this is as a negative to being short, it is probably one of the biggest risk factors in the near-term.
Team Conclusion: Hold off at this price. Big cap, liquid quality in a space that will be beating for the next 3-months is not a place to source shorts.
Fast forward to today and management remains bullish (perhaps increasingly so) and expectations are high. We are now at the point where the Street simply doesn’t believe guidance and its embedded conservatism. Let’s use 4Q same store sales guidance as an example. Management would like the Street to consider that even with the positive commentary on traffic gains and the company’s ability to “keep” its new customers, same store sales are going to decelerate sequentially by 100-300 bps on a two-year basis. While the math doesn’t tell the whole story, the disconnect between the bullish commentary and the company’s forecast for $0.66 to $0.71 in 4Q does. Our model is shaking out at $0.89 for 4Q, and we would not be surprised to see the consensus trickling higher as the rest of the Street goes through the same exercise. Holding the two year trend out of 3Q constant, we’re expecting comps in the 8-9% range (vs. guidance of 5%-7%) and operating margin expansion of 370 bps (guidance is for +170bps). Recall that last year even TJX got caught with excess inventories (and subsequent clearance) as the overall retail environment went through a dramatic transformation.
Calling the top is a dangerous game, but we continue to inch closer to a time when increasingly elevated expectations can no longer be exceeded. Earnings are going higher and the Street knows it. Comparisons remain easy until the Spring and the Street knows it. Management is stepping up its reinvestment (store growth, marketing, share repurchase, and bonuses) and the Street knows it. So, while there is still no doubt that 4Q will likely be another quarter of substantial upside, we can’t help but wonder what happens as the same-store sales revert back to “normal” and new peak margins become harder to achieve.