Ask The Rational Investor: Treasure Hunt at TJ Maxx
As a stock picker, I am constantly scouring the financial markets looking for mispriced investments. In many ways, stock pickers are on a lifelong treasure hunt; looking around the corner and under the bridge, trying to determine if value exists that others aren’t seeing.
TJX Companies, which operates stores such as TJ Maxx, Marshalls, HomeGoods, and other international brands, has built a highly profitable and consistent business model based on a treasure hunt experience. Everyday shoppers are compelled to drop-in to TJX’s stores and see what deals they can find.
The treasure hunt experience compels shoppers to visit the store often and to purchase that day. If they don’t purchase that day there is no guarantee their favorite item will be in stock the next time they return!
Compelling long-term investments usually have a niche that drives above-average profitability and operating returns to shareholders. TJX Companies are experts at sourcing products.
TJX has over 1,100 buying associates that operate in 12 countries across 4 continents sourcing name brand products at bargain prices. Perhaps more impressive, TJX works with more than 21,000 vendors in over 100 countries to find treasure-hunt-worthy merchandise. These relationships have been built over four decades and are beneficial to the vendors and TJX brands.
A strong business niche will grow market share, but for enduring profitability, management must have mastered their operations. Many retailers go through boom-bust cycles that scare long-term investors. As sales are growing, they aggressively expand their store count with debt and then during a recession or change in consumer preferences their profitability unravels.
TJX has been a rare exception in the retailing world. Strong management and growth strategies coupled with an eCommerce and recession immune business has generated strong returns for investors.
Over the last six recessionary periods (1982, 1983, 1991, 2002, 2009, 2010) TJX generated positive same-store sales (SSS) growth in every period. In fact, since 1982 TJX has only had 1 year of negative SSS growth according to company reports.
Long-term investors scrutinize how management allocates their free cash flow, as corporate managers have five different options: reinvest in the business, pay a growing dividend, repurchase shares, pay down debt, and mergers and acquisitions.
Investors tend to favor reinvesting in the core business, growing dividends, and opportunistic share repurchases as these capital allocations have generated the most consistent rates of returns for investors and are consistent with TJX’s corporate strategies.
TJX Companies could be hidden treasure, but always discuss the investment merits and risks with your portfolio manager to determine if TJX is appropriate for your circumstances.
Sources: Company reports, Goldman Sachs
Beese Fulmer Private Wealth Management was founded in 1980 and is one of Stark County’s oldest and largest investment management firms. The company serves high-net-worth individuals, families, and non-profits, and has been ranked as one of the largest money managers in Northeast Ohio.