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.

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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. consuming for competitors to replicate. - Retailers Increase in wages Large retailers like WMT, TGT and TJX have recently increased the RISKS wages for their low-income employees this year. This increase, among - Merchandise Margin Compression: many other factors signals an improving economy, especially in the Purchasing its products from its 1000+ low-end consumer, which can benefit off-price retailers if companies distributors is essential to keep its profit continue to raise their minimum wages. margin consistent. If distributors would raise the price of the goods that TJX purchases for - West Coast Port Disruption - Benefits for Off-Price Retailers their inventory, investors would simply react A long running dispute between dockworkers and operators of the big and the stock would see significant losses. West Coast ports have hit retailers hard on their ability to gain goods imported from Asia. The average ship time of 4 days is now taking 14- - Data Breaches 35 days for deliveries. Analysts believe this slowdown may cost the Since the information related to customer overall retail industry $7 Billion this year. In the first half of 2015, transactions relies on the systems, and apparel stores will likely begin to dump excess spring inventory software, TJX uses, failure to contract and because they may be out of style. Off-price retailers like TJX will maintain steadfast security system will benefit from ample product selection and lower costs to purchase the jeopardize the security of the confidentiality shipments. This should lead to stronger merchandise margins. of customer’s information.

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TARGET PRICE PEER GROUP IDENTIFICATION

TJX is currently trading at a 14.9% discount to its 5 year - Ross Stores (NYSE: ROST): historical premium to Ross Stores. We multiplied Ross’s Ross Stores, Inc. operates two brands of off-price retail apparel current P/E of 24.4x by the mean factor of 1.06 to reach a and home accessories stores. target multiple of 25.6x. By multiplying our target P/E by NTM EPS of $3.31 we reached a target price of $84.58, - Burlington Coat Factory (NYSE: BURL): yielding a return of 22.78% Burlington Stores, Inc. owns and operates discount clothing retail stores. Historical P/E Spread Valuation Price - Kohl’s Corp. (NYSE: KSS): Target= $84.58 Department store featuring mid-tier apparel, footwear and Target Multiple: 25.6x accessories. Current Multiple: 21.9x

SEGMENT OVERVIEW

Marmaxx: Marmaxx segment includes T.J Maxx and Marshalls which together make up the largest off-price retailer in the United States. Customers can find high quality brands at a significantly discount prices. Products in these stores include apparel, footwear, accessories, accent furniture, lamps, rugs, wall decor, and giftware. Home products are found primarily in Marshalls while TJX is solely an apparel outlet. These stores inventories are constantly changing and the uncertainty gives consumers a treasure hunt experience every time they visit a TJ Maxx and Marshalls. Marmaxx also includes the e- commerce segment, TJMaxx.com. We believe that this segment will see continued positive results as the company continues to add stores to their most profitable segment in the midst of favorable economic factors increasing discretionary spending. Also, as the company adds Marshalls.com we anticipate seeing slow and steady growth from the new e-commerce platform. HomeGoods: HomeGoods is the leading retailer of discounted HomeGoods in the U.S. This segment focuses on home decor alone. Each one of their 450 stores offer a wide arrange of changing accent furniture, rugs, lamps, home basics which still uses implements the treasure hunt experience. We see the most potential upside for the company from expanding their HomeGoods due to its unique position as a large discounted retail store. TJX Canada: TJX Canada consists of Winners, HomeSense and Marshalls brand chains in Canada. Winners is the leading off-price retailer in Canada across their 227 stores. HomeSense operates in 91 stores and consists of the same concept as HomeGoods in the U.S. and Marshalls. Despite slow comparable store sales, we believe the company with the increased reward programs will assist the company’s comparable store sales. TJX Europe: TJC Europe includes T.K. Maxx and HomeSense stores in Europe. They are the largest brick-and-mortar off price retailers in the continent. Its 371 stores operate under a fusion of the same model as the Marmaxx and HomeGoods segments. They are mainly located in U.K., Ireland, Germany and Poland as well. TJX Europe includes its e-commerce website at TKMaxx.com. As with the Marmaxx and HomeGoods segment we believe that store expansions accompanied by the macro tailwinds involved with increased discretionary spending will drive top line for the segment. Internationally, TJX is the first and only off-price retailer which has allowed it to build a foundation that will continue to expand before the next entrant.

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FINANCIALS Revenue Since FY 2012, revenue has grown from $23.2 billion to $30.5 billion in FY 2015, growing at a 7.3% CAGR. Total sales for FY 2015 increased 6% from $27.4 billion to $29.1 billion due to a 4% increase from new stores, a 6% increase from comparable store sales. Looking at FY 2014 comparable store sales were 3%, all attributed to increased average ticket size. The company reported that the lack of traffic growth was due to severe weather in Q1 and Q4 of FY 2014 while its newly added higher end products, such as jewelry, was the primary factor in the 3% ticket growth. Looking forward revenue is forecasted to grow from $29.1 billion to $35.8 billion in FY 2018, illustrating a 7.2% CAGR. We believe this growth will be driven by increased global store count, market demand for discount retailers, increased discretionary spending, and increased online sales. - Marmaxx (Domestic TJ Maxx and Marshalls) (64.3% of FY 2014 Sales) The Marmaxx segment has grown from $15.3 billion in FY 2012 to $18.7 billion in FY 2015 representing a 7.3% CAGR. In FY 2014, Marmaxx reported 6% comparable store sales along with increased store count, drove 4.2% YoY top line growth from $17.9 billion to $18.7 billion. The 6% comparable store sales for Marmaxx was driven by increased ticket size, with negligible increase in transactions due to severe weather in Q4 of FY 2014. Marmaxx sales were aided by the introduction of TJX’s first e-commerce platform, TJMaxx.com. Looking forward we see the Marmaxx segment driving top line as the company continues to add stores and launches other ecommerce platforms. Presently, online sales comprise 1% of revenue, however as TJX add more stock keeping units to TJMaxx.com, and launch other brand e- commerce websites such as Marshalls.com and HomeGoods.com, we believe that the online segment will add a valuable alternative to brick and mortar stores. - HomeGoods (11.7% of FY 2014 Sales) The HomeGoods segment has grown from $2.2 billion in FY 2012 to $3.4 billion in FY 2015 representing a 14.9% CAGR. This growth driven by additional stores and average comparable store sales of approximately 7%. Sales increased 13% YoY from $3.0 billion in FY 2013 to $2.7 billion in FY 2014 due to newly added stores and 3% ticket size and 3% transaction growth. HomeGoods is the fastest growing segment held by TJX and we believe that, as the macro tailwinds in the home improvement industry and increased consumer discretionary spending, we will continue to seek discounted housing products growth. Going forward, we HomeGoods will be the highlighted segment for the company and the largest driver of value. - TJX Canada (9.9% of FY 2014 Sales) The TJX Canada segment has grown from $2.7 billion in FY 2012 to $2.9 billion in FY 2015 representing a 3.6% CAGR. Sales decreased by 2% in FY 2014 as weather in Q4 FY 2014 adversely affected revenue by 4%. In FY 2015 revenue growth was attributed to newly opened stores as the company recorded flat comparable store sales and adverse effects from the declining Canadian dollar. Going forward, TJX’s new loyalty program will drive comparable store sales and increased store count will drive revenue but we believe this segment will be the least value driving segment. - TJX Europe (14.1% of FY 2014 Sales) The TJX Europe segment has grown from $2.8 billion in FY 2012 to $4.1 billion in FY 2015 representing a 14.9% CAGR. In FY 2014 revenue increased 10.3%. This growth is due to the increase in store count along with 6% comparable store sales. Comparable store sales growth was driven by an equal increase in customer traffic along with an increase in the average ticket. FY 2015 sales grew 13.0% from $3.6 billion to $4.1 billion with comparable store sales growing 2%. Looking forward we believe that TJX will continue to see high growth as management is planning to double its stores according to its long term growth strategy.

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Margins - TJX Margins In FY 2015, TJX had gross margin of 28.5%, EBITDA margin of 14.0%, and net income margins of 7.6%, which all improved yearly since FY 2012. Improved gross margin is attributed to increased merchandise margins and lower markdowns. The company’s margins as a whole are very dependent on its inventory margins. Due to the nature of the off price industry, TJX is unlikely to raise its prices to expand margins, thus the company is focusing on lowering cost of apparel purchased. Looking forward, gross margin is forecasted to expand from 28.5% to 29% in FY 2018, EBITDA margin is forecasted to expand from 14.0% to 15.0%, and net income margin is forecasted to expand from 7.6% to 8.0%. For FY 2016 the company is anticipating margins to expand significantly due to labor disputes at key ports. On the west coast, labor protests at key ports are projected to slow shipments from average delivery times from 4 days to 14 to 35 days. Therefore, retail outlet stores whose supply is delayed, will be receiving the current fashion late and begin to sell off their late spring inventory because it will be out of style. Off-price retailers like TJX will benefit from ample product selection and lower costs to purchase the shipments. This should lead to stronger merchandise margins thus driving overall margins for TJX.

- Segment Profit Margins In FY 2014, Marmaxx profit margin was 14.6%, consistent with FY 2013. Excluding the extra week last year, the improvement in segment margin was primarily due to an increase in merchandise margin, despite higher markdowns taken in the fourth quarter. HomeGoods profit margin for FY 2014 was 12.9%, an increase of 70 basis points from FY 2013. This increase was driven by expense leverage on the 7% comparable store sales increase, primarily buying and occupancy costs. TJX Canada profit margin decreased 10 basis points to 14.1% in FY 2014. The decrease in segment margin was due to its expense deleverage on their 0% comparable store sales growth. Other factors included occupancy and administrative costs and the absence of the 53 week. Lastly TJX Europe’s profit margin increased from 6.6% to 7.6% from FY 2013 to FY 2014. The 1.0% increase was due to expense leverage on strong comparable store sales, particularly occupancy and buying costs and a lower incentive compensation. Overall, we believe that the West Coast port disruptions will favorably affect Marmaxx, HomeGoods, and TJX Canada margins in the next fiscal year. Ross Stores, TJX closest comparable, has similar margins. Ross has gross margin of 27.3% (TJX: 28.2%), EBITDA margin of 15.2% (TJX: 14.3%) and profit margin of 8.2% (TJX: 7.8%). We believe that Ross and TJX margins are almost identical and the current 14.9% discount TJX trades to against Ross is unwarranted and should trade at identical values Shareholder Returns TJX has been able to consistently increase its dividend and maximize its returns to shareholders. TJX plans to repurchase $1.8 to $1.9 billion of stock during FY 2016, which would be $100 to $200, million more than the previous year. In 4Q 2015, TJX purchased $407 million and retired 6.2 million shares. TJX has increased its dividend for 19 consecutive years. TJX has a dividend yield of 1.03% which is higher than the 0.79% yield of its competitor Ross. TJX 3- year dividend growth is 22.59%; most recently they increased their dividend to $0.21 per share in 1Q15. TJX’s current Dividend Payout Ratio (DPO) is 22.23% and has increased every year since 2012, compared to Ross’s DPO of 17.89%. We believe the recent implementation of an updated stock repurchase program will continue to increase its dividend and maximize its returns to shareholders.

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Earnings TJX has a strong earnings history missing only three earnings estimates in its last twelve quarters, posting 1.6% average surprise in that time. Most recently, they reported its 4Q 2015 earnings in February of $0.93 per share surpassing estimates of $0.90. Comp sales of 4% were up from the previous year’s quarter and sales increased 6%. Marmaxx comps were up 3% and comps for HomeGoods were 11%. Management mentioned that an increase in traffic accounted for the comp increases at Marmaxx and for TJX overall which was a very positive sign, average tickets were relatively flat. TJX will report their 1st Quarter 2016 results on April 15th with earnings estimates expected to be $0.66. TJX gave relatively conservative guidance for FY 2016 of $3.17-3.25 per share which were below analyst expectations due to adverse foreign exchange (4% hit) and the expected wage (5% hit) increase to $9/hr. Comps only need to improve by 0.5% in order offset the wage hit. We believe that TJX will surpass expectations due to the tailwinds for off-price retailers and its position to grow its stores presence in the US and abroad, as well its online offerings. The fact that TJX is a strong fundamental company and leader in off-price retail leads us to believe that the earnings guidance given was overly cautious and it should have no problem surprising estimates in FY2016. Beyond 2016, earnings growth for 2017 and 2018 are estimated to be 11% and 15% respectively. Cash Flows and Capital Expenditures TJX reported CFFO of $3.0 billion and FCF $2.1 billion in FY 2015, which increased from $2.6 billion and $1.6 billion respectively in FY 2014. CFFO for 2016 is expected to be consistent with last year and overall is expected to grow at a 8.9% CAGR through 2018. FCF is expected to grow at a 6% CAGR through FY 2019. Increased store count, especially in new markets and HomeGoods along with strong comparable store sales are driving cash higher. HomeGoods possess higher profitability margins with their increase domestically and in Europe, we see this adding cash flow moving forward. We also see its investment in e-commerce and expansion in product offerings online to drive new customers and increase brand awareness, as the company has already seen incremental customers in 4Q. The majority of TJX’s capex investments come from its store growth and innovation investments, FY 2015 capex $911.5 m and is projected to increase at a 5.3% CAGR through 2019. Retail Specific Metrics In FY 2015, TJX’s comparable store sales were 2%, down from 3% in the previous year. However TJX saw its best quarter at the end of the year with comparable store sales of 4% which beat expectations and were improved YoY. Ross’s comparable store sales also performed well during 4Q posting comps of 6% and 3% comparable store sales for 2015. TJX management stated that the majority of comp growth came from increased in-store traffic. Neither company disclosed productivity metrics for FY 2015. TJX’s sales per square feet were $383.02M and its gross profit per Sq. ft was $109.19M for FY 2014. Ross’s measures for both are lower than TJX at $360.86M and $101.21 M respectively. Both metrics for TJX have increased since FY 2006 as new added stores have remained profitable. Flexible and lean inventory are vital for off-price retailers to take advantage of opportune buying opportunities. TJX’s days sales of inventory (DSI) for FY 2015 was 54.2x (Ross 60.3x), and inventory turnover was 6.7x (Ross 6.04x).

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Profitability Ratios and DuPont Analysis TJX ROE of 52.16% for FY 2015 was down slightly from 2014 but is higher than Ross ROE of 43.15% which was also down in 2015 and at its lowest mark since 2010. ROA for TJX in 2015 was 20.83%, also down slightly from 2014, Ross ROA was 21.51% which is likely higher do to some of the simplicities of its operations. In the DuPont analysis, we see that TJX is more profitable due to a higher asset turnover where it has been able to more effectively use its packaway strategy to generate higher revenue, although it is more highly leveraged than Ross. Kohl’s Stores (KSS) was added to the analysis as many analysts include it as a competitor but there low profitability (15% ROE) does not make it a viable comp for Ross and TJX in off-price retail.

Debt TJX debt’s increased from $1.3 billion to $1.6 billion since Q1 2014. Its current D/E ratio is 38.08%, an increase from 30.12% YoY. Its nearest competitor, Ross, has a D/E ratio of 17.48%, an increase from 7.47% YoY. Ross’ debt went from 150 to 400 million since Q1 2014. TJX debt to capital ratio increased to 27.58% from 23.15% YoY. TJX and Ross are adverse to short term borrowing. The difference between the amounts of debt is attributed to the scale difference. TJX is larger and more complex than Ross, hence, it requires more bond issuing to support its plans of expanding their online presence and their number of stores in different geographical areas. TJX ROIC was 39.77% in 2014. On February 1, 2014, TJX had two $500 million revolving credit facilities, one which matures in June 2017 and one which matures in May 2016. TJX has to make payments of $59 million yearly on interests, then principal payments of $375, $750 and $500 million in 2019, 2021 and 2023 respectively. Ross first principal payment is on 2018 when he has to pay their first principal of $85 million. TJX and Ross have a WACC of 8.5% and fairly similar capital structures with their minimal amount of debt. Current and quick ratios are 1.71x and .85x for TJX and 1.36x and .46x for Ross respectively for FY 2015. TJX has a Standard and Poor stable A+ rating while Ross, was designated a stable A- on Standard and Poor. The company’s forecasted free cash flow, and high credit rating lead us to believe that TJX’s outstanding debt is not a issue for the company. Ross and TJX possess very similar credit metrics and this also shows how similar the two companies are to each other.

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VALUATION Peer Group TJX is currently trading at a 14.9% discount to its 5 year historical spread against Ross Stores and an 11.5% discount to Ross’s current multiple. We believe that TJX should trade at its 5 year premium of 4.6% with Ross Store due to the near duopoly of the big discount retail industry, similar margins, high trading correlation, and TJX’s superior brands and inventory management. Although the largest off-price discount retailers include TJ Maxx (TJX), Ross Stores (ROST), Kohl’s (KSS), and Burlington Coat Factory (BURL), we did not include Burlington due to their low market cap of $4.4 billion (TJX: $47.2 billion) and Kohl’s due to their higher pricing of goods. TJX and Ross stores have a correlation squared value of 0.773 and identical customer base/margins, therefore we believe that Ross and TJX should trade in line. Burlington Coat Factory was the next best corporate competitor to TJX. Burlington operates as a discount retail outlet but they possess significantly different margins than TJX and Ross Stores. Moreover, Burlington has a more repetitive inventory supply than TJX and Ross. For these reasons, along with greatly different margins we chose not to value TJX against Burlington.

TJX Suppliers vs. Ross Suppliers/Brands Another reason we believe that discount to Ross is unwarranted is due to the quality of product and superior buyer power and network that TJX holds. Both companies share popular brand Steve Madden, Brown Shoe Co, and Carters. TJX however holds network connections with higher quality brands such as VF Corp (The North Face, Vans, Timberland), Ralph Lauren, PVH Corp (Calvin Klein, Tommy Hilfiger) and G-III apparel Group (Bass, Nine West, Guess). We believe this superior quality and brands of product will continue to increase traffic growth and lead to surpassing comparable store sale estimates. TJX’s international exposure allows it to have little to no competition for targeting unique buying opportunities. As far as HomeGoods, by being the leader in home accessories for off-price, it also gives it minimal competition and allows it to buy great quality products at high discounts through economies of scale. Undervaluation TJX is currently trading at a 14.9% discount to its 5 year historical P/E spread against Ross Stores (21.9x to 24.4x). TJX, has historically traded in line with Ross Stores (.773 R^2 Correlation) and a 4.6% premium. This undervaluation occurred during 4Q of FY 2015 earnings where Ross’s P/E Multiple grew from 21.1x to 24.0x on an 8% earnings surprise. Ross benefited from TJX releasing conservative guidance for their FY 2016 outlook. Historically TJX has been extremely conservative on its guidance. We believe that TJX should trade in line with Ross due to their similar margins, profitability metrics and similar business models. TJX (market cap $47.2 billion) and Ross ($22.3 billion market cap) are the only companies larger than $5.0 billion in the off price retail space. Looking at their margins Ross and TJX’s gross, EBITDA, and profit margins, as well as ROA are all within 100 basis points within each other. We believe as consumers see their discretionary income rise, as result of lower gas prices and increased minimum wages that off price retailing will see increased sales volume. We feel very positive about the off-price retail industry moving forward as the economy continues to improve as we believe that consumers will continue to search for discounted items and remain value oriented. For these reasons we believe that TJX should be trading at its historic 5% premium to Ross stores at a P/E multiple of 25.5x.

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Discounted Cash Flow Assumptions We forecasted seven year CARG estimates for sales growth of 6.9%. We derived this number by trimming consensus estimates to reflect a more conservative outlook. Sales growth will be driven by increased store count, e-commerce web sites and increased comparable sales from their new loyalty programs. We forecasted higher margins for FY 2016 due to the disruption in the west coast ports with delayed inventories of major retailers. We lowered the following years to reflect the remedied labor dispute. We kept SG&A% consistent with incremental increases. The WACC of 8.84% was calculated using the six year average weights of 96.69% for equity and 1.24% for debt. Cost of equity was calculated to be 8.84% with an expected market return of 9.36%, risk free rate of 1.97%, and a beta of 0.93. Cost of debt was found to be 1.24% long term debt percentage of 100%, and a long term debt rate of 1.97%.

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APPENDIX

Exibit I) TJX Spread to ROST 5-Year

Exibit II) TJX Spread to Specialty Retail Industry

Exibit III) TJX Spread to ROST 3-Year

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Exibit IV) TJX vs. ROST Supply Chain Analysis

TJX ROST

Exibit V) Target Price Calculations

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DISCLAIMER

This report is prepared strictly for educational purposes and should not be used as an actual investment guide. The forward looking statements contained within are simply the author’s opinions. The writer does not own any TJX Companies Inc. stock.

TUIA STATEMENT

Established in honor of Professor William C. Dunkelberg, former Dean of the Fox School of Business, for his tireless dedication to educating students in “real-world” principles of economics and business, the William C. Dunkelberg (WCD) Owl Fund will ensure that future generations of students have exposure to a challenging, practical learning experience. Managed by Fox School of Business graduate and undergraduate students with oversight from its Board of Directors, the WCD Owl Fund’s goals are threefold:

 Provide students with hands-on investment management experience  Enable students to work in a team-based setting in consultation with investment professionals.  Connect student participants with nationally recognized money managers and financial institutions

Earnings from the fund will be reinvested net of fund expenses, which are primarily trading and auditing costs and partial scholarships for student participants.

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