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TJX (TJX) Down 5.5% Since Last Earnings Report: Can It Rebound?

A month has gone by since the last earnings report for TJX (TJX). Shares have lost about 5.5% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is TJX due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

TJX Companies Raises View on Solid Q3 Earnings & Sales

TJX Companies posted third-quarter fiscal 2019 results. The company’s earnings came in at 61 cents per share compared with 50 cents in the year-ago period. Excluding a pension charge of 2 cents, earnings came in at 63 cents per share. Excluding a benefit from 2017 Tax Cuts and Jobs Act, and a pension settlement charge, adjusted earnings came in at 54 cents per share. The Zacks Consensus Estimate was pegged at 61 cents.   

Net sales advanced about 12% year over year to $9,825.8 million, which beat the Zacks Consensus Estimate of $9,496 million. Sales were backed by solid comparable store sales (comps), which continued to gain strength from robust customer traffic across all segments. Also, net sales growth included a 1% adverse impact from currency movements.

TJX Companies' consolidated comps grew 7% year over year. Comps primarily benefited from increased customer traffic at all segments. Management is particularly impressed with the performance of its largest division — Marmaxx. Notably, the quarter marked the 17th straight period of higher customer traffic for both Marmaxx and the company as a whole.

Segment wise, comps rose 7%, 5%, 3% and 9, respectively, in HomeGoods, TJX Canada, TJX International and Marmaxx segments.

Gross margin fell 0.9 percentage point (pp) to 28.9% on account of escalated freight expenses, supply-chain costs and adverse comparisons associated with inventory hedges. This was partly compensated by robust expense leverage.

Selling, general and administrative costs as a percentage of sales fell 0.2 pp to 17.9%.

Other Financial Updates

The company ended the quarter with cash and cash equivalents of $2,711.8 million, long-term debt of $2,232.9 million and total shareholders’ equity of $5,256.9 million. Cash flow from operations for the 39-week period ended Nov 3, 2018 was $2,477.8 million.

Consolidated inventories on a per-store basis (including distribution centers and excluding e-commerce and inventory in transit) increased 9% (up 10% on a constant currency basis) year over year. The company is well positioned to take advantage of solid opportunities in the market for branded merchandise, particularly in the holiday season, given its impressive inventory and liquidity position.

During the quarter, the company returned approximately $841 million to shareholders. As part of this, TJX Companies repurchased 11.4 million shares for $600 million and paid dividends worth $241 million. In the first nine months of fiscal 2019, TJX Companies repurchased 34 million shares for $1.6 billion, while it paid dividends worth nearly $682 million.

For fiscal 2019, the company expects to repurchase shares worth approximately $2.5 billion.

During the quarter, TJX Companies announced a 2-for-1 stock split through a stock dividend. This was distributed on Nov 6, 2018 to stockholders of record as on Oct 30.

During the quarter, the company added 102 stores, taking its total store count to 4,296 stores as of Nov 3, 2018.

Fiscal 2019 Guidance

Management is impressed with its solid earnings and comps performance, which continued to be driven by robust customer traffic and successful implementation of the company’s off-price fundamentals. Markedly, the company’s apparel business performed exceptionally well. Consumers’ favorable response to TJX Companies’ impressive brand portfolio and consistent rise in customer traffic keep management encouraged about witnessing continued market share gains.

TJX Companies further stated that it commenced the fourth quarter on a strong note, and is focused on boosting traffic during the holiday season through its gifting and marketing initiatives. These factors along with a stellar third-quarter show led to a raised guidance for fiscal 2019.

Consolidated comps are now expected to grow 5% in fiscal 2019, up from 3-4% growth projected earlier. Management also expects Marmaxx to witness comps growth of 6% now, up from the prior forecast of 3-4%.

For fiscal 2019, TJX Companies projects adjusted earnings per share of $2.08-$2.09 (on a post-split basis), reflecting year-over-year growth of 8%. Earlier, management expected the bottom line to be in $2.05-$2.07 (on a post-split basis), representing 6-8% increase from the year-ago period.

Including benefits from tax-reforms and pension settlement charges, earnings are anticipated to be $2.41-$2.43 per share compared with $2.02 in the year-ago quarter.

However, wage increases and higher freight costs are now expected to negatively impact earnings per share growth by 5%.

Q4 View

The company expects consolidated comps growth of 2-3% in the fourth quarter. The company expects adjusted earnings of 56-57 cents per share (on a post-split basis) compared with 59 cents in the year-ago period. Including benefits from tax reforms, earnings are expected to come in the range of 66 - 67 cents per share. Further, wage increases and higher freight costs are expected to negatively impact earnings per share growth by 5%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

Currently, TJX has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, TJX has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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