Over the past few decades, the off-price business has undergone a major transformation. No longer a fragmented channel dominated by regional chains and outlet stores, the segment now has multi-billion dollar companies with thousands of stores across multiple product categories. The unequivocal international leader in this channel is TJX.

A Quarter-Century of Leadership Beginning with two successful  TJ Maxx apparel stores in 1977, the concept grew quickly. In 1996 the TJ Maxx chain, which had grown to 500 stores, acquired its closest competitor, Marshalls. Over the next 14 years it would expand its reach to virtually every state in the US, as well as to Canada and Europe. In the fiscal year just ended, the company's 2,700 stores sold over $20 billion of top-quality brand name merchandise at 20-60% below department store prices to upper-middle income consumers. This volume puts it much larger than competitors such as Ross Stores, Big Lots, Filene's Basement and Syms.

The Concept TJX's buyers buy branded overstocks and closeouts in large quantities at extremely sharp prices from  over 10,000 vendors in 60 countries. Loyal customers frequent the stores in search of high-quality merchandise at value prices.

Specialized Divisions Not surprisingly, TJX has seen its store traffic and sales increase by double-digits as the recession has intensified its customer's thirst for bargains. The TJ Maxx and Marshalls chains are run as separate retail chains, but corporately comprise the 1700-store Marmaxx Group, and share buying, merchandising, and administrative functions. This division contributed 65% of sales and 75% of profit for the first three quarters of fiscal year 2009. Key product categories include apparel and accessories, footwear, home décor, bath/body products, toys, luggage, gourmet items and jewelry. AJ Wright, launched in 1999, targets moderate income consumers. This division had 148 stores and $560M in sales through 3Q 2009. HomeGoods is the home fashion chain, selling giftware, furniture, rugs, home textiles and accessories. There are 318 HomeGoods stores in the US averaging 20,000 square feet. This division had $1.3B in sales for the first three quarters of fiscal 2009, a 15% increase from the prior year period. The company sees long-term opportunity for 500 stores in the US.

International With a total of 272 stores, Winners and HomeSense are the Canadian counterparts to the Marmaxx and HomeGoods divisions. Through the third quarter of 2009, the division did over $1.5B in sales, which was 11% of total company sales but 12% of profit in the period. Sales decreased 1% decrease over the same period in the prior year primarily due to currency fluctuations. TJX Europe operates 262 TK Maxx stores and 14 HomeSense stores, most of which are in the UK and Ireland. Though third quarter 2009 this division saw sales decline slightly from the prior year, also due to currency fluctuations, but profit soared 30%. The company’s fledgling businesses in Germany and Poland have been very successful so far. These markets hold huge potential for TJX, provided the company can successfully navigate local commerce laws, which can sometimes make it difficult for discounters. 

Growth Strategies Management seeks to increase topline sales through store expansion and increased productivity of existing stores. It must also acquire the right merchandise in sufficient amounts to keeps its stores stocked and its customers happy. State-of-the-art buying and inventory management systems have allowed TJX buyers to increase their vendor base, expand their global reach, and buy closer to need, enhancing gross margin in the process. The company feels that with its current infrastructure and untapped potential it could easily add another 1,500 stores and double sales long-term.

The Bottom Line In fiscal 2009, TJX earned $401M or $1.83 per share, 50% below prior year income. For the fiscal year just ended, the company estimates earnings per share will be an impressive 30% higher than last year. The stock currently trades in the $38 range, or 16 times earnings. There is plenty of upside potential for TJX on both the top and bottom lines. Gross margin remained stable from 2007 through 2009, but has improved by over 100 basis points during the first three quarters of this year. SG&A expenses have been fairly steady and under control. Inventory turns have improved.    

 Damage Control The company has proven it can manage through potential disaster. In early 2007, after a ring of hackers compromised its POS systems and stole credit card data on millions of customers, the company handled customer concerns professionally and effectively, causing little to no sales falloff in the process. The hackers were apprehended, and late last year the company settled claims by 41 states for $9.75 million over the massive data breach.   

Growth and Profit Outlook As the chart on the left shows, net income has been growing for the past five year. With TJX's off-pricing expertise, buying power, and efficiencies of scale, it's going to be tough for anyone to compete with them. Its flexible “no walls” business model which allows for opportunistic expansion of departments within its stores and which appeals to consumers of all socio-economic and demographic groups, still provides plenty of room for growth, even long after the current recession recedes into the distant past.

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