TJX Companies Can Hit New Highs; Double-Digit Upside to Follow

Key Points

• TJX Companies had a solid quarter, outperforming the bottom line and raising profit guidance.
• All segments produced growth and contributed to the strength. 
• The trend in analysts' sentiment is positive, leading the market to a new high. 

TJX Companies NYSE: TJX industry-leading position in off-price retail and quality operations will soon lead its stock price to new heights. Like Walmart NYSE: WMT, TJX Companies benefits from the high inflation and interest rate environment because shoppers are still flush but turning more to value and opportunity than ever before. The Q1 results are not robust but show growth compared to contraction, as was reported by Target NYSE: TGT, and margin strength to drive capital returns. The takeaway is that TJX Companies' business is progressing normally; it’s growing, paying its dividend, repurchasing shares, and driving shareholder value. 

TJX Companies Advances on Mixed Results

TJX Companies Q1 results are mixed relative to the analysts' consensus reported by Marketbeat, but in that special way the market likes, where tepid top-line data is offset by bottom-line strength. Revenue was as expected at $12.48 billion, driven by a 3% systemwide comp. All segments contributed to the positive comp, with Marmaxx up 2%, HomeGoods up 4%, Canada up 4%, and International up 2%. HomeGoods is the strongest segment, with positive sales growth compared to last year’s contraction. 

Margin news is also favorable. The company reported a wider gross and operating margin due to lower freight costs and favorable mark-up. The net result is a 22% increase in GAAP earnings, more than triple the top-line growth, and a cash build on the balance sheet. 

Guidance is also mixed. The company held its revenue targets steady but increased the outlook for earnings. The only bad news is that the $4.03 to $4.09 in GAAP earnings forecast for the year aligns with the analysts' consensus and would not normally be a positive catalyst. However, the cash flow, cash build, and capital returns help to offset it and have the market moving higher premarket after the release. 

TJX Companies' Robust Capital Returns are Safe and Reliable

TJX Companies' dividend isn’t all that impressive, with a yield near 1.5%, but it is above the market average, reliable, and compounded by share repurchases. Share repurchases more than double the effective yield and are significant to shareholders because the company retires shares to reduce the count. Repurchasing activity lowered the share count by an average of 1.5% diluted in Q1 and is expected to continue at a robust pace this year. The roughly $500 million spent in Q1 is 20% of the FY target, suggesting the pace will increase as the year progresses. 

Quarterly cash flow was insufficient to cover the capital return, but the annualized outlook is solid. The company’s strongest quarters are still ahead, and strength is seen in the balance sheet, reflecting the impact of last year’s results. Despite the deficit, the company’s cash position increased compared to last year, and other balance sheet details are favorable. The inventory is down, aiding the cash build, but it is still solid and total assets are up. Liabilities are flat, debt is flat, and equity is up 17%. Leverage is very low at less than 0.5X equity, leaving the company in a lean, nimble shape to pursue this year's retail opportunity. 

Analysts See TJX Companies Forecast at New Highs

The trend in analysts’ sentiment is bullish and unlikely to change with these results. The seventeen analysts tracked by Marketbeat have the stock pegged at Moderate Buy and see it trading near $107. That’s worth a 10% upside from the prerelease levels and puts the market at a new high. Because the freshest targets are above consensus. The $107 target is a minimum for this market. 

The post-release price action is favorable. The market is up more than 2.0% on the news, confirming support at the 30-day moving average and a long-term uptrend. The move has the market on track to retest the current high soon, and a new high could be set. In that scenario, the new high could trigger an influx of capital to drive this market up to the high end of the analyst's range near $130, another 20% upside from consensus.