INITIATING COVERAGE REPORT William C. Dunkelberg Owl Fund March, 22th 2015 Victor Fallas: Lead Analyst [email protected] Mike Soforic: Associate Analyst TJX Companies Inc. [email protected] Maria Villamar: Associate Analyst Exchange: NYSE Ticker: TJX Target Price: $84.58 [email protected] COMPANY OVERVIEW Sector Outperform TJX Companies Inc. is the leading off-price retailer of Recommendation: BUY apparel and home fashions worldwide. The company operates 3,395 stores in three geographic regions: the Key Statistics: United States (76% of FY 2014 Sales), Europe (14.1% of Price $67.47 52 Week Low $51.91 FY 2014 Sales), and Canada (9.9% of FY 2014 Sales). In Return 22.78% 52 Week High $69.87 the United States, stores include 1,119 T.J. Maxx, 975 Shares O/S (mm) 695.9 Yield 1.03% Marshalls, 487 HomeGoods, and 6 Sierra Trading Post Market Cap (mm) $48,138 Enterprise Value $46,986 stores, as well as tjmaxx.com and SierraTradingPost.com. Internationally, TJX operates 234 Winners, 96 1 Year Price Graph HomeSense, and 38 Marshall’s stores in Canada, and 407 T.K. Maxx and 33 HomeSense stores, as well as SPECIALTY RETAIL tkmaxx.com in Europe. INVESTMENT THESIS TJX is currently trading at a 14.9% discount to its 5 year P/E spread against Ross Stores, its primary competitor in the off-price retail industry. The company is also trading at a 7.3% P/E discount to the S&P 500 Specialty Retail Index. The discount against Ross occurred during 4Q of Earnings History: FY 2015 earnings where Ross’s P/E Multiple expanded Quarters EPS Δ Rev. YoY Δ Price from 21.1x to 24.0x on an 8% earnings surprise. We also 1Q15 $0.64 5% -7.62% believe Ross benefited from TJX releasing conservative 2Q15 $.075 7% 8.65% guidance for their FY 2016 outlook. We believe TJX’s 3Q15 $0.85 6% 0.16% diversity in products through their HomeGoods segment, 4Q15 $0.93 6% 3.31% overall product offerings, and wide economic moats of bargaining power with suppliers and inventory Earnings Projections: management systems makes it the strongest holding in Year Q1 Q2 Q3 Q4 Total the off-price retailer sector. Moreover, we believe the off 2014 $0.62 $0.66 $0.75 $0.81 $2.83 price retail space has many economic tailwinds, mainly 2015 $0.64 $0.75 $0.85 $0.93 $3.15 increased consumer discretionary spending due to lower 2016e $0.67 $0.78 $0.89 $0.89 $3.68 gas prices and increasing minimum wages. Increased 2017e $0.74 $0.86 $0.99 $1.10 $3.68 global store count, innovative online e-commerce segment, and a new non-credit card reward programs will cause TJX to reap the benefits of the macro factors and All prices current at end of previous trading sessions from date of drive TJX back to trading at its historical 5% premium to report. Data is sourced from local exchanges via CapIQ, Bloomberg Ross. For these reasons, we believe that TJX will expand and other vendors. The William C. Dunkelberg Owl fund does and its P/E multiple from 21.9x to their 5 year historical P/E seeks to do business with companies covered in its research reports. average spread against Ross Stores of 25.5x, yielding a target price of $84.58 and a total return of 22.8%. CONSUMER DISCRETIONARY: Spring, 2015 CATALYSTS - Store Count Growth TJX is adding TJ Maxx, Marshalls and HomeGoods stores across the world, expanding its presence as the leader in off-price retail. TJX currently has 3,395 stores in 6 countries: 2,021 domestic TJ Maxx and Marshalls stores, 450 HomeGoods stores, 227 TJ Maxx Canada, and 371 TJ Maxx Canada Stores. Looking forward, the company plans on expanding store count from 3,395 stores to 5,475 globally. They will also enter two new countries, Austria and the Netherlands by mid-2015. Out of the 2,080 new stores, approximately 1,000 will be domestic TJ Maxx and Marshalls, 500 will be HomeGoods, and the remaining 500 will be T.K. Maxx outside of the US. We believe that this increase store count will favorably affect top line across all segments. The company plans to add 181 stores this year. We are most bullish on the increased store count for the HomeGoods segment. In Q4 of 2014, HomeGoods recorded 11% comparable store sales due to increased traffic and average ticket size. Moreover, profit margin increased 120 basis points due to higher merchandise margins, a trending we see continuing. We believe the HomeGoods segment will continue to outperform and be the highlighted segment due to favorable macro tailwinds, along with the increased store count. Another opportunity for TJX is the recent acquisition of Sierra Trading Post, a sports and outdoor online retailer which has recently expanded into brick and mortar to much success and currently holds six stores. TJX looks to expand more stores to the Northeast in 2015 and analyst believe it may serve as a 4th brand for the company’s US and Canada business. - Online Retail TJX currently has retail websites for three of its stores: Domestic TJX, Sierra Trading Post, and TKX in the UK for online ordering and e-commerce transactions. 18 months ago, TJX launched its e-commerce website TJMaxx.com, and now accounts for 1% of the company’s revenue. TJX now offers four times as many stock keeping units (SKU’s) online, 10,000 total. Also, eleven new departments were added in FY 2015. Home department was recently added to the e-commerce to TJ Maxx website with many additional categories expected to be added for FY 2016. TJX will also expanded its online offerings by introducing websites for both its Marshalls and HomeGoods segments. Not only will these stores affect top line, but a significant amount of online purchase returns are happening at the stores, which we believe will further drive sales along with additional transaction volume. Simply, the new online presence has brought new customers into stores, and we believe expanding the products available online gives customers a new avenue to have the treasure hunt experience, finding marked down items online gives consumers more flexibility to find that discounted high-end item. The company has not released any dates for their e-commerce sites for Marshalls and HomeGoods. - Reward Programs To drive more frequent visits and cross shopping, TJX initiated US and Canadian non-credit card loyalty programs in the second half of FY 2014. As customers begin joining the different reward programs, we believe customers will develop stronger brand loyalty and will frequent the store more often and increase their average tickets. Although no quantified financial results of the reward programs have been released, management stated that the results surpassed its expectations and are planning to implement similar reward programs in its international segments within the current fiscal year. The William C. Dunkelberg Owl Fund Page 2 Spring, 2015 INDUSTRY OVERVIEW - Off Price Retailers ECONOMIC MOATS: Wide & Stable Off-price retailers sell clothes and accessories from major-label brands - Bargaining Power with Suppliers: at a significant discount taking advantage of overruns, cancelled TJX achieves its Bargaining power with orders, and forecasting mistakes made by counterparts in the full-price suppliers through its off-price retail model. retail sector. When a major designer produces more clothing than can The company offers wholesalers, department, be sold or a particular line undersells, the inventory is sold at a and specialty stores the opportunity to clear significant discount to an off-price retailer like TJX or Ross. Research excess inventory at very favorable terms. With by Moody’s shows that TJ Maxx, Ross Stores and Burlington will see its leading position in off-price with 1000+ their growth rates outperform the overall apparel sector by 4% over buyers and international operations, it is the next five years (2014-2019). uniquely positioned to manage large volume and disperse merchandise across - Improving consumer confidence/additional disposable income geographically diverse network of stores Consumer confidence was 96.4 in February which was small decline targeting specific markets. Its large amount of from the previous month although the January mark was at an 11-year cash in hand allows it to pay for the quantities high (since January 2004). Many analysts see spring as a time where upfront to avoid additional charges. consumer spending will pick up due to improving job numbers as unemployment fell to 5.5%. Also low gas prices have saved on - Inventory Management: average more than $100 per month for consumers. Many believe it will A unique inventory strategy along with an take patience but consumers will begin to use this extra money on effective inventory management system has retail spending. TJX management mentioned a comps boost from a allowed TJX to achieve revenue growth and stronger consumer during 4Q 2015 and should continue throughout profitability. TJX has developed a system that FY 2016. effectively matches stores merchandise to local preferences and demographics and has - Healthy Department Store financials equate to Off-price retail positives maintained lean inventory levels. FY 2015 In 4Q 2015, department stores had their best comps since 4Q12, and inventory turnover was 57 days (Ross: 60), have increased gross margins in 5 consecutive quarters. Healthy keeping this metric low allows them minimize numbers for department stores are a positive for off-price retailers as markdown and maintain new styles in stores. this means that department stores will not have extreme clearances; We believe this gives TJX a competitive this has historically led to better comps and gross margins for off-price advantage and would be difficult and time- retailers.