TJX hits an all-time high as reason we own off-price retailer played out in the quarter
Club holding TJX Companies (TJX) reported stronger-than-expected fiscal third-quarter 2023 earnings and U.S. sales before the opening bell Wednesday, boosting shares of the off-price retailer by nearly 4% to an all-time high. The inventory glut at full-price chains played out as we had expected, proving to be a boon to TJX, whose brands include T.J. Maxx, Marshalls and HomeGoods. Adjusted earnings-per-share of 86 cents beat expectations by 6 cents and were well above management's own EPS guidance of between 77 to 81 cents due to certain expenses previously expected to be realized during Q3 were pushed out to the fourth (current) quarter. The adjusted number also excluded a 5-cent per share tax benefit related to the divestiture of the company's minority investment in Russian low-cost apparel retailer Familia. While global revenue dropped 3% year-over-year to $12.17 billion and was a bit short of estimates of $12.3 billion, U.S. sales of $9.4 billion, down 1% annually, exceeded the $9.23 billion expected. Bottom Line It was a solid quarter from TJX, and management was able to reiterate the midpoint of their full year fiscal 2023 guidance range, despite needing to trim the high end of the range due to an estimated currency headwind that had not been previously factored into the forecast. While U.S. customer traffic was down in the quarter, management noted that it improved sequentially and improved throughout the quarter. Moreover, the average basket size in the U.S. increased. Speaking to the inventory glut at full-price retailers, TJX management said on their post-earnings call, "The marketplace is absolutely loaded with quality branded merchandise across good, better and best brands." As a result, the team added that they believe they're entering its fourth quarter in a strong position "to take advantage of the tremendous buying environment and to flow fresh exciting assortments to our stores and online this holiday season." Given those tailwinds, along with TJX being the place to shop for a more price-sensitive consumer due to a slowing economy and normalizing household balance sheets, we're raising our Club price target on the stock to $84 per share from $74. That reflects roughly 24x fiscal 2024 (calendar year 2023) earnings estimates, a slight premium to the slightly greater than the 22x five-year average multiple. However, that's a premium we believe is warranted considering how incredibly supportive the operating environment is for TJX's business model. Q4 guidance Management now expects fourth quarter sales to be in the range of $13.9 billion to $14.1 billion, below the $14.26 billion consensus estimate. EPS for Q4 is expected to be in the range of 85 to 89 cents per share, below the 94 cent consensus and down from the 92- to 96-cent per share range implied by the third quarter and full year guide provided with TJX's fiscal second quarter earnings back in August. Shortly after that fiscal Q2 release, the Club started a position in TJX and, as of Wednesday has an unrealized gain of more than 20% on the 950 shares we own. Management expects expense timing that benefited the reported quarter's results to reverse in the current (fourth) quarter. Put another way, expenses that got pushed out to the benefit of Q3 results will be realized in the fourth quarter. U.S. same-store-sales are expected to be flat to up 1% in the fourth quarter, better than expectations for no change, at the midpoint, and representing an upward revision versus the flat to down 1% guide offered up with the Q2 release. Full-year guidance Given the fourth quarter outlook, management expects full year sales to come in between $49.3 billion and $49.5 billion, down from the $49.6 billion to $49.9 billion range forecast. The company, on the call, attributed the downward revision to "unfavorable foreign exchange rates" that will negatively impact Q4 results. The guide is below the $49.78 billion consensus estimate coming into the print. Full-year adjusted diluted earnings are expected to be in the range of $3.07 and $3.11 per share, below expectations of $3.10 per share at the midpoint. That guide also represents a tightening around the $3.09 midpoint versus the $3.05 to $3.13 per share range provided with the prior quarter's release. On the release, management noted that the trim at the high end is due to an expected 2-cent per share foreign exchange headwind. Additionally, management upwardly revised their U.S. same-store-sales outlook to a range of down 1% to down 2%, an improvement versus the down 2% to down 3% result previously expected. Q3 results Total fiscal third-quarter U.S. same-store-sales fell 2%, smaller than estimates for a 4.4% decline. As a reminder, management defines same-store-sales as sales at stores that have been in operation for all or a portion of two consecutive fiscal years. In other words, we're talking about stores that are starting their third fiscal year of operation. This excludes new stores, stores closed permanently or closed for an extended period of time as well as e-commerce results. On the call, management stressed that due to the impact of Covid same-store-sales were up 14% on a three-year stacked basis. They also said U.S. same-store-sales "improved each month of the quarter on that same three-year stacked basis." U.S. Marmaxx sales, including T.J. Maxx, Marshalls and Sierra brand stores, rose 3% to a better than expected $7.46 billion, benefiting from 3% same-store-sales growth. U.S. HomeGoods, including HomeGoods and Homesense brand stores, saw sales drop 14% to a lower expected $1.95 billion, suffering from a 16% same-store-sales decline Looking abroad, TJX Canada sales of $1.29 billion, down 1% annually (or up 4% on a constant currency basis), were short versus the $1.39 billion estimate; while TJX International sales (which includes Europe and Australia) of $1.48 billion, down 16% annually (or down 1% on a constant currency basis), came up short versus expectations of $1.65 billion. Total inventories ended fiscal Q3 at $8.3 billion, up from the $6.6 billion level seen in the year ago period with management commenting on the release that they are "very comfortable" with their inventory position and are set up "extremely well to deliver" what they describe as exciting brands and gifts to stores and online this holiday season. Lastly, TJX Companies generated operating cash flow of $1.1 billion. As a result, management was in a position to return $843 million to shareholders with $500 million via the repurchase of 7.7 million shares and the remaining $343 million via dividends. With this, TJX bought back $1.8 billion worth of stock and continues to anticipate repurchasing a total of $2.25 billion to $2.5 billion in fiscal 2023. We're not the only ones interested in TJX. As we wrote Tuesday , Daniel Loeb's Third Point amassed a 1.75 million share position in TJX over the three months ended Sept. 30. Loeb's stake was among several Club stocks revealed in quarterly filings to be on the radar of Third Point and other high-profile hedge fund managers. (Jim Cramer's Charitable Trust is long TJX. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. 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The reflection of shoppers are seen in a window at a TJ Maxx store in Peoria, Illinois. Daniel Acker | Bloomberg | Getty Images