Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche


TJX: Department Stores that make money what’s up with that?

The TJX Companies (NYSE: TJX) have become an anomaly in the world of department stores for a very disturbing reason: they actually make money. More intriguingly TJX has a respectable stock price in a sector that has become ground zero of the Retail Apocalypse.

Three things stand out about TJX’s earnings report; first, it makes money, the company reported a net income of $2.317 billion on 31 July 2017. Second, it posted a great stock performance with a share price of $72.39 on October 11, 2017, and a return on equity of 51.75% on July 31.

Third, it actually pays a dividend investors are scheduled to receive a payout out of 31.25¢ on November 8, 2017. That dividend has actually increased over the course of 2017, in February investors received 26¢.

TJX is now bigger than Macy’s or Sears and JC Penney Combined

The billion dollar question here is how is TJX achieving this miracle? The answer is; with a steadily growing revenue that’s now larger than Macy’s (NYSE: M).

TJX, which owns Marshalls, TJX Maxx other stores, posted a revenue of $33.9 billion on 31 July 2017. Macy’s posted revenues of $25.03 billion on the same day. That means TJX is now America’s largest department-store operator in terms of revenue.

What’s more impressive is that TJX’s revenues are now larger than those of Sears (which owns Kmart) and JC Penney’s combined. Sears Holdings (NASDAQ: SHLD) reported revenues of $19.75 billion on July 31, 2017, JC Penney (NYSE: JCP) recorded revenues of $12.49 billion on the same day. The total of those two figures is $32.24 billion or more than $1 billion less than TJX’s revenues of $33.90 billion.

Intriguingly, TJX’s revenues are growing dramatically while other department stores are shrinking. TJX reported $32.14 billion in revenues in July 2016 and $29.90 billion in revenues in July 2017. TJX had $4 billion in over the last two years.

Why is TJX Growing, is it Amazon?

During the same period, Macy’s revenues fell by $2.86 billion and Kohl’s (NYSE: KSS) revenue dropped by $580 million. Macy’s revenues fell from $27.89 billion in July 2015 to $26.38 billion in July 2016, to $25.03 billion this last July. Kohl’s reported revenues of $19.10 billion in July 2015 that fell to $18.97 billion a year later, and $18.52 billion in July 2017.

An obvious conclusion here is that TJX is sopping up a lot of business and revenue that companies like Kohl’s, Sears, and Macy’s are losing. TJ Maxx and Marshall’s might be just as destructive to competitors as Amazon (NASDAQ: AMZN).

A fascinating possibility here is that Amazon’s growth is somehow driving TJX’s success. One way this could occur is that Amazon is drawing away the middle-class customers that brands like Kohl’s, JC Penney’s and Macy’s depend upon. That leaves the working-class customers that are TJX’s core demographic.

By weakening and destroying competitors, Amazon is also driving more merchandise to TJX which is something of a reseller. TJX stores function as a sort of giant bargain basement selling off merchandise other retailers cannot unload. This makes TJX more like Big Lots (NYSE: BIG) or (NASDAQ: OTSK) than a traditional department store.

A darker possibility is that many Americans no longer have the money to shop at Macy’s or JC Penney’s because of income inequality. That means they have to shop at Marshall’s instead.

Finally, deep discounters like Amazon and Walmart (NYSE: WMT) have so conditioned Americans to getting bargains – that they simply no longer tolerate paying full price. That certainly benefits TJX’s business model, but how long can it survive?

How Long Can TJX Survive?

Skeptical value investors will wonder how long TJX can survive in a retail environment that being is being dramatically disrupted by Amazon. The answer is longer than you might expect because this company has a lot of float.

TJX reported $2.952 billion cash and short-term investments and $3.521 billion in cash from operations on July 31, 2017. It is a cash-rich company in a struggling industry – which is a great place to be in. That allows TJX to pay a nice dividend and to grow.

TJX opened a new store called Home Sense in August 2017 and entered the hardware business putting it a position to capture customers from the dying Sears. It also has plans to open 100 stores under its HomeGoods brand in the next year. One way TJX can do this is to take advantage of all the empty locations left by dying competitors which makes the cost of expansion low.

A final possibility for TJX is an acquisition, a smart move would be buying JC Penney, which is well-run but dying fast. Another might be to gobble up Big Lots or, when they are cheap.

A Department Store Thriving Amidst the Retail Apocalypse

Although cynics will wonder how long this can go on. After all, the retail apocalypse is sure to end sooner or later, probably after a total collapse of most department stores. Amazon and Walmart are likely to mount direct challenges to TJX at some time, as is Target (NYSE: TGT).

My take is that TJX’s growth can last far longer than most people assume. Many of its competitors are simply badly run, and it has access to something they do not: extra cash. TJX reported a free cash flow of $406.26 million on July 31, 2017.

Therefore, TJX is an interesting investment that will retain its’ value for a long time to come. TJX might survive because it is one of the few well-run department stores left in America, which allows it to make money while others die.

By shrewdly taking advantage of the opportunities created by the retail apocalypse, TJX has grown into America’s dominant department store brand. It is liable to remain in that position for a long time to come because of the sheer ineptitude of the competition.

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