Krause Fund Research Spring 2020 April 17th, 2020 The TJX Companies, Inc. (NYSE: TJ X) Consumer Discretionary Stock Rating: BUY Analysts Target Price: $60-$68 Deborah Destahun Kanishk Puranik Stock Values [email protected] [email protected] DDM $ 62.98 Aaron Nibaur Jacob Hines DCF/EP $ 67.97 [email protected] [email protected] Relative Valuation (P/E ’21) $ 46.22 Stock Performance Highlights Investment Thesis 52 Week High $ 63.99 52 Week Low $ 36.76 We recommend a buy rating for The TJX Companies, Inc. We believe the stock is Current Price $ 49.73 undervalued due to COVID-19 market volatility. We anticipate TJX to experience Share Highlights continued high growth after Fiscal 2021. The coronavirus-induced recession provides TJX a unique opportunity to grow market share from department stores and traditional Market Cap (M) $60,305.96 retailers because consumers will be turning to bargain-priced goods. Shares Outstanding (M) 1,212.67 Beta 1.28 Investment Drivers EPS (2021E) $ 1.17 • TJX’s 29.7% market share in off-price retail will grow as consumer demand P/E Forward 40.01 for bargain home and fashion goods increase. We expect COVID-19 to Company Performance Highlights continue to decrease consumer spending and increase unemployment. ROA (’21) 5% • TJX is well positioned with its inventory management and low-cost ROE (’21) 20.1% operations. Additionally, the company is better suited to take market share Financial Ratios than its peers because of its global presence. Current Ratio 2.06 Debt to Equity 3.12 Investment Risks • COVID-19 threatens TJX’s FY 2021 net income with stores and e-commerce Company Description platform expected to be closed till summer 2021. We forecast that net sales will decrease by 13.83% while COGS percentage of net sales increases by The TJX Companies, Inc. (NYSE: TJX) is the leading off- 4.57% from Fiscal Year 20. Our model assumes that TJX will recover from the price apparel and home fashion retailer in the United pandemic after 2021. If this does not occur, we could fall short of our target States and worldwide. TJX was founded in 1977 with price the launch of T.J. Maxx to develop an off-price chain; • We predicted that TJX stores will grow slightly despite COVID-19. Our the company has since grown with global expansion, revenue decomposition relies on the assumption that stores grew by 1.33% acquisitions and new chain launches while still during FY2021. We are anticipating that TJX already began adding new stores maintaining its off-price model. TJX earns revenue before the COVID-19 pandemic. through four main segments: Marmaxx, HomeGoods, Earnings Estimate TJX Canada and TJX International (composed of Europe and Australia). Globally, there are 4,529 stores including 1,921 T.J. Maxx stores, 1,227 Year 2018 2019 2020 2021E 2022E 2023E Marshalls stores, 809 HomeGoods stores (US only), 247 HomeSense stores, 279 Winners stores (Canada EPS $2.05 $2.47 $2.71 $1.17 $2.23 $2.82 only), 46 Sierra Trading Post stores (U.S. only).1,2 Growth 16.8% 20.5% 9.7% -56% 89.8% 26.5% 12-Month Performance Relative Financial Performance 50 15% TJX S&P 40.01 40 5% 30 21.07 17.79 -5% 20 15.47 12.81 11.4 10 5.54 -15% 3.05 - -25% Ross Nordstrom Burlington TJX 4/17/19 6/17/19 8/17/19 10/17/19 12/17/19 2/17/20 4/17/20 P/E EV/EBITDA Economic Outlook The retail industry and small businesses have lost significant revenue with a stay at home orders in place. In response, the U.S. Congress has passed 3 Coronavirus Coronavirus Disease 2019 (COVID-19) stimulus packages since March 3rd including a $2.1 trillion Emergency Aid Bill mostly comprised of loans to businesses 7 At the end of December 2019, a virus outbreak was first and direct relief to US individuals. Now that at least 42 identified in Wuhan, China. By the end of January 2020, states and several countries are advising or enforcing China was in lockdown, other countries reported their first people to stay home, corporations impacted have cases of COVID-19 and the World Health Organization announced dividend suspension and paused stock 8 (WHO) declared a global health emergency.3 China shutting repurchases. We expect most corporations not to have down its economy had negative implications on its trading any stock repurchases in 2020 and be 50% compared to partners’ economies including the United States, Japan, historical amounts in 2021. However, we do not foresee South Korea and Europe. Additionally, large corporations that COVID-19 will be the end of stock repurchases. We with a strong China presence and global supply chains were foresee stock purchases to return to historical amounts disrupted by the virus. By the end of February, China was after 3 years since COVID-19 social distancing could last no longer the only focal point of the virus, and the global well into 2021. economy was feeling the crippling effect of COVID-19. We believe the Coronavirus is a black swan event placing the With the potential of the second COVID-19 wave, we United States’ economy into a recession that could last believe consumers and employees could be less willing to until 2022.4 go to stores even when they return to normal business hours. Overall, we expect COVID-19 to have a negative The Federal Reserve began taking action against COVID-19 effect on economic factors and greater negative effect on financial effects on March 3rd with an emergency cut of 5 consumer discretionary stocks excluding Amazon and basis points to interest rates. However, the Fed cut rates other e-commerce discretionary companies benefiting again to be near zero on March 11th, the same day the WHO from social distancing measures. The long-term effects declared COVID-19 a pandemic. On February 12, 2020, The after COVID-19 remain a mystery but an increased physical US Stock Market was at an all-time high with the S&P 500 distancing sentiment could decrease the demand for retail Index, Dow Jones Industrial Average and NASDAQ stores entirely. Composite hitting record highs but by mid-March, the global stock market was experiencing high volatility. The Gross Domestic Product (GDP) CBOE Volatility Index (VIX) measures stock-market volatility; the VIX reached a high of $85.47 on March 16th Real Gross Domestic Product (real GDP) is an inflation- exceeding its previous record of $80.74 in November 2008, adjusted measure of the goods and services produced in which demonstrates a flight-to-safety rally.5 certain geography over a specific period and represents the overall health of an economy. A strong economy indicates that firms have the financial capability to improve U.S. Stock Market volatility peaks as U.S. operations and grow their business. GDP is highly COVID-19 cases increase correlated with the performance of the consumer 700 discretionary sector because personal consumption 600 expenditures (PCE) constitutes over two-thirds of GDP. 500 The Great Lockdown will surpass the Great Recession as 400 the worst economic downturn since the Great Depression. 300 The International Monetary Fund expects global GDP to 200 contract by 3% in 2020, drastically opposing their initial 82.69 forecast in January of 3.3% growth.9 The coronavirus 100 pandemic has forced governments worldwide to restrict 0 human movement and close businesses, crippling the 1/2/20 2/2/20 3/2/20 4/2/20 ability for firms to produce and consumers to spend. VIX ($) Total U.S. Cases (thous) Because the discretionary sector relies on consumer spending to drive revenues, the current downturn will Source: Yahoo Finance and CDC5,6 hinder the sector’s performance for the foreseeable future. 2 remain cautious of a second outbreak. U.S. personal consumption decreased before the Great Lockdown Consumer Sentiment Index reverses January 2020 sentiment Real GDP PCE 5% 110 4% 100 3% 90 2% 80 1% 70 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 60 2017 2018 2019 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Source: US Bureau of Economic Analysis10 Source: University of Michigan, Survey Research Center12 Consumer Confidence Unemployment Almost 70% of the American economy is reliant upon Unemployment is surging at an alarming rate due to consumer spending.11 The best up to date measure of COVID-19. The Bureau of Labor Statistics (BLS) measured consumers’ confidence is the Consumer Sentiment Index unemployment at 4.4% in mid-March, marking a 0.9% (CSI). The University of Michigan’s Index factors in uptick, the largest one-month increase ever aside from war consumers’ mood regarding their current financial status, times. Their report has yet to consider the last month of including their expectations for the future as well. The layoffs, which we anticipated spiked drastically. latest release on April 10th has consumer sentiment stooping to a nine-year low, from 89.1 in March to 71 in The real unemployment rate is significantly higher than the April. This was also the largest one-month decrease in current suggested rate. Millions of people whose hours got consumer sentiment ever.12 reduced or laid-off will not be counted as unemployed by the traditional unemployment measure conducted by the However, there are a couple of specific factors the index BLS because those employees are not actively looking for surveys that suggest this current sentiment is not as bad as work. Therefore, we predict the real estimate is around suggested.