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11/20/2018

Analysis: TJX is a retailer for all seasons

This is a stellar set of results from TJX with excellent gains on both the top and bottom lines. Within the US, the company continues to grow at a rapid clip and is adding significant market share across both the home and apparel categories. On the bottom line, net income is up by almost 19% which is a good outcome considering the company was hit with a $36 million pension charge this quarter.

The one downside came from the decrease in gross profit margin. Although TJX has carefully controlled expenses, higher freight costs - which are affecting a lot of retailers - took their toll and dragged margins down by 0.9 percentage points.

Despite this, TJX's overall success underlines the fact that even in a strong economy where disposable incomes are rising, consumers still enjoy getting a bargain. Indeed, it puts pay to the claim sometimes made that TJX does best in a poor economy where households are feeling constrained. We have never bought into this argument and have always maintained that TJX is a retailer for all seasons. There are several reasons for this.

The first is that consumers remain extremely value conscious. Even as economic fortunes have improved over the past year, our data shows that the percentage of consumers saying they like to look for bargains to make their money go further has not fallen. However, people have become slightly more aspirational and interested in brands as they look to treat themselves. This dynamic plays squarely into TJX's hands.

The second reason for TJX's ongoing success is its ability to engage customers and drive footfall to its stores. The constantly changing assortment of products, which includes may hidden gems, gives shoppers a reason to visit regularly. In an environment where core customers have more money to spend, this works particularly well and, as a result, both customer traffic and conversion have risen. This is particularly true at the lower end of the income spectrum, where we believe spending at TJX has risen strongly.

The third reason is TJX's ongoing expansion program. Although it is a sizable retailer, especially in the US, we still see scope for further store openings - especially the HomeGoods and HomeSense format. Outside of the US, expansion in Europe and other geographies still has a very long way to run before it starts getting near saturation. This should provide a nice upside to TJX's overall numbers for many years to come.

Looking in more detail at the specific businesses, we are particularly pleased with the performance at HomeGoods and HomeSense. Here comparable sales growth increased to 7% from a relatively weak 3% last quarter. In our view, this improvement is down to a better mix of products, some key fashion items, and greater traction among younger shoppers. The strong economy and a consumer focus on home projects also helped to nudge up the numbers.

TJMaxx and Marshalls both continue to perform well. As much as we believe that competition is increasing from formats like Macy's Backstage and Nordstrom Rack, we do not foresee these having a major forward impact on TJX - mostly because there is a difference in the customer base.

Looking ahead, we remain very optimistic about TJX. The company has a good strategy, an excellent understanding of its customers, and a very strong proposition. Whatever happens to the economy, we believe TJX will continue to outperform the market.