The TJX Companies Could Break Out To New Highs

Key Points

• The TJX Companies could break out to new highs. 
• The Q3 earnings were weak and the outlook dims, however.
• The dividend is still safe but there may be a better time to buy in early 2023. 

The TJX Companies (NYSE: TJX) could break out to new highs but it probably won’t because its Q3 results echo news from Target (NYSE: TGT), Walmart (NYSE: WMT) and Home Depot (NYSE: HD) earlier this week. While the Q3 period was OK, there are mitigating factors that take the sparkle out of the news and the outlook has dimmed. The company was able to raise its full-year outlook for revenue and earnings but inflation is still biting and EPS is expected in a range below the Marketbeat.com consensus figure. 

Assuming the coming holiday season will be as lackluster as it is expected to be, and inventories continue to build across the retail universe, earnings in Q4 2022 and the first half of 2023 could be tepid indeed. The takeaway here is that The TJX Companies is still in good shape, its balance sheet is healthy and the dividend appears safe but there is reason to believe the share prices will pull back from resistance at the all-time high and present a much better entry point in another quarter or 2. 

The TJX Companies Has a Weak Quarter 

The TJX Companies Q3 was mixed at face value but when you dig into the details it was just weak. The revenue of $12.17 billion is down 2.9% from last year and missed by 100 basis points and there are factors to offset the apparent strength in margins. On a segment basis, the company’s core Marmaxx division grew by 3.0% YOY in the US while the Homegoods business shrank by 16% to deliver a -2.0% comp in the core operating region. The 2.0% decline is better than expected and versus a 16% gain in the prior year but not news to spark a rally in share prices. 

The company’s pre-tax profit margin improved by 20 basis points which is good news but a small improvement has given the company’s reported strength in the market. On the bottom line, the $0.91 in GAAP earnings is up from last year’s $0.84 but this includes a $0.05 tax benefit not related to the core business and there is a mitigating factor in the adjusted EPS as well. The adjusted $0.86 is up $0.02 from last year but includes a positive impact from the timing of payments which the company says will reverse in the current quarter. 

Basically, the quarter was below expectations and the coming quarter will be weak too and that is seen in the guidance. The company is expecting Q4 EPS in the range of $0.85 to $0.89 versus the consensus figure of $0.95 and for full-year EPS $3.11 at the high end compared to the $3.11 consensus. The analysts gave the company a round of upgrades and price target increases after the Q2 results, those have the stock pegged at a Moderate Buy and trading at fair value, but this guidance is not likely to spur another one. 

The TJX Companies Returns Cash To Shareholders 

The TJX Companies balance sheet is still in good shape but it is losing cash. The company’s dividend and share repurchases in Q3 were in excess of operating cash flow and resulted in a 50% reduction in cash that is not made up by the inventory gain. Inventory is up by about $1.7 billion which is worth about half of the cash burn. The company says it will continue to buy shares in Q4 but investors should expect this tailwind to weaken in 2022. 

Premarket action has the shares down about 0.70% and showing signs of resistance at the current levels, just below the all-time high levels. If the market follows through on this investors should expect to see the stock top out at or near this level and begin to move sideways if not down. The best targets for support are near $70 and $67 but any confirmed bottom driven by results and outlook could be an entry point into this name.