First purchased in late 2012, TJX Companies (ticker: TJX) has become a portfolio stalwart. More recently, we believe the company’s resilient performance in an increasingly turbulent end market provides an excellent case study in the importance of business model differentiation and competitive advantage.
Investment Thesis Remains Intact
TJX is the largest off-price retailer in the world, with more than 3,000 stores in North America, Europe, and Australia. The company’s well-known concepts include T.J. Maxx, Marshall’s, and HomeGoods. Off-price retail occupies a unique niche within the broader retail landscape, and is characterized by sophisticated merchandising practices which allow practitioners to acquire and sell name brand merchandise at deep discounts to traditional department store prices.
The size, scale, and scope of the company’s supply chain form the foundation of TJX’s competitive advantage. With more than 1,000 buyers, 18,000 vendors, and 100 countries of origin, the company’s supply chain dwarfs that of any competitor, be it other off-price retailers, traditional department stores, or e-commerce merchants.
Sourcing prowess combined with a non-conventional, cost-effective real estate strategy enable TJX to offer an enduring value proposition to its customers. That same formula has resulted in attractive business and shareholder returns.
Over the past five and ten years, TJX posted annualized EPS growth of 12% and 16%, respectively, while producing an average Return on Equity (ROE) in excess of 40%. Further, the company boasts of 21 consecutive annual dividend increases and same-store-sales growth in all but one of the last 35 years. Since the time of our initial purchase, TJX shares produced a total annualized return of 21%, besting that of the S&P 500 Index by 200 basis points.
Whither Retail Armageddon?
The traditional retail industry is currently under tremendous pressure. In the first four months of 2017, sales at Department Stores, Clothing Stores, and Electronics Stores declined year-over-year by 5.2%, 1.1%, and 3.0%, respectively. Further, fourteen retailers have filed for bankruptcy protection in the past five months.
This tumult is reflected in recent stock price movements. On a year-to-date basis, the S&P 500 Apparel Retail sector has declined 5.82% on a price basis, compared to a 7.79% gain for the S&P 500 Index. TJX shares have demonstrated relative buoyancy but have not completely escaped the downdraft, declining 0.37% when measured over the same time period.
As we discussed in our 2014 piece Catching Up on TJX Companies, growth in e-commerce continues to disrupt ‘brick-and-mortar’ retailers. That disruption appears to be accelerating as sales at non-store retailers increased 10.7% through April of this year. In our view, e-commerce platforms resonate with consumers primarily due to superior convenience but their increasing ubiquity also creates a meaningful new level of price transparency. As a result, traditional retailers are being squeezed on both the top- and bottom-lines.
Importance of Differentiation
We expect online retail sales will continue to flourish and that ensuing pressure on conventional retailers is unlikely to abate in the short run. However, we do not believe in-person shopping experiences are headed for complete extinction. Rather, we expect a new equilibrium to emerge in which winners will be defined by differentiation and value proposition.
For TJX, differentiation is based on value and rapidly changing inventory. A recent call with company management confirmed that the company’s targeted price gap of 20-60% versus department store retailers remains intact, despite heavy discounting in that channel. Importantly, TJX has been able to maintain a similar price spread relative to mainstream e-commerce competitors. The company’s industry-leading inventory turnover is a function of its efforts to cultivate a ‘treasure hunt’ shopping experience.
Following our initial purchase of TJX shares in 2012, we methodically added to our stake through mid-2014 to take advantage of perceived valuation opportunities. As a result, TJX reached a top-five position in the Fund at the end of that year. Subsequently, we elected to take profits after strong share price performance in 2015, thereby reducing the position. At present, TJX shares currently represent an approximately average portfolio position.
Investing is always an exercise in uncertainty. Given the rapid changes in the retail landscape, we recognize the need for increased scrutiny of evolving industry dynamics. While we remain confident in TJX’s ability to stave off competitive threats and continue to create business and shareholder value, we are closely monitoring the health of TJX’s suppliers, the company’s ability to maintain margins within expectations, and the consistency of sales trends.
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Fund holdings are subject to change and should not be considered recommendations to buy or sell any security. For a listing of the funds current holdings, please click here. Earnings Growth is not a measure of the fund’s future performance.