For a massive brick-and-mortar retailer that’s booked nearly $38 billion in sales over the last 12 months, TJX Companies (NYSE: TJX) has recently exhibited an almost mystifying ability to grow at a rate typically associated with smaller, e-commerce-focused outfits. Through the first six months of this year, the company has expanded revenue by 11% against the prior-year period. During the fiscal second quarter of 2019, the company’s year-over-year comparable sales rose 6%, accelerating from a 3% lift in the first quarter. Management observed — as it has in recent quarters — that over the last three months, “customer traffic was the primary driver of the comparable store sales increases at every division.”
What’s driving so much traffic to TJX stores? During the second-quarter earnings conference call, management pointed primarily to its traditional expansion drivers. In the words of CEO Ernie Herrman, “Clearly, our terrific brands, eclectic merchandise mix and great values continue to resonate with consumers around the world.” TJX noted that it’s also attracting a younger cohort of shoppers across its brands.
For shareholders curious about the bets the company is placing to sustain future growth, we can peer into TJX’s current allocation of capital. While fashion remains king, home furnishings may rise as TJX’s most promising division over the next few years.
An investment priority
The home furnishings industry is presently enjoying robust demand, as a moderately expanding global economy lifts household spending power. According to various estimates, the industry is slated to grow at a compounded annual growth rate, or CAGR, of 5% to 6% over the next several years.
Indeed, TJX’s second-largest operating segment, HomeGoods’ sales rose by 16% in fiscal 2018, to $5.1 billion, making it the company’s fastest-growing segment. (TJX’s three other operating segments are Marmaxx, consisting primarily of U.S.-based Marshalls and T.J. Maxx stores; TJX Canada, and TJX International.)
The HomeGoods segment is comprised of the namesake HomeGoods brand and the newer Homesense store concept. The company bills HomeGoods as “the leading off-price retailer of home fashions in the U.S.” The brand’s stores focus primarily on ancillary fashions, including accessories, rugs, cookware, and lighting.
Homesense sells more large-scale home furniture, and it places a heavier emphasis on artistic yet affordable decor. Homesense locations also include a rustic “general store” department undoubtedly aimed at millennials’ love of nostalgic design elements. The company launched Homesense with four stores in 2017, and it’s doubled its unit count so far this calendar year.
Management is tapping into home furnishings demand not simply by launching the specialty brand Homesense, but also by plowing dollars into TJX’s total retail home furnishings selling area. Below is a breakdown of TJX Companies’ total retail square footage at the end of the second quarter. The table is based on a square footage report TJX regularly provides each quarter, which analyzes space not by segment but by brand within each geographical region. My version sorts the list in descending order from the highest square footage count (TJ Maxx U.S.) to the lowest (the newly launched Homesense U.S.). I’ve also added in the percentage growth of each brand’s retail selling space over the last 12 months. The final column indicates the relative contribution of each segment to total square footage growth:
As you can see, management is scaling HomeGoods U.S. at a double-digit clip. Due to its size, HomeGood’s 13% growth rate means that it was responsible for more than a third of the organization’s total year-over-year square footage growth. HomeSense Canada and Homesense Europe are also approaching double-digit square footage expansion. It’s important for investors to realize that without management’s proactive expansion of selling capacity into the trending home furnishings market, TJX’s overall revenue growth rate in recent quarters wouldn’t have crested to current levels. The organization is reaping the benefit of resource allocation decisions made years in advance.
Of course, TJX continues to invest in its bedrock fashionista-fix, treasure hunt experience: Marshalls U.S. and Marshalls Canada were responsible for 9% and 8% of total square footage growth during the period, respectively. Note that Marshalls Canada, at 2.2 million square feet in Q2 2019, is just a fraction of the size of its U.S. counterpart (31.4 million square feet), but its 22% growth rate allowed it to add nearly as much space (400,000 square feet) as Marshalls U.S. (500,000 square feet).
While we’re dwelling on selling space trends, what else jumps out from the table? It’s evident that the U.S. and Europe still hold primacy in TJX’s yearly revenue puzzle. Between them, the two continents contain more than 87% of total selling area and boasted 79% of total expansion over the last 12 months. And finally, Sierra Trading Post, which is both an e-commerce and physical store concept, achieved a rapid annual square footage expansion rate of 75%, as 17 new stores were opened against a beginning base of 16 locations.
To sum, keeping a bead on TJX Companies’ investments in the retail space over the next few years should reward investors with valuable insight into its prospects. Often thought of as simply a discount clothing chain, the organization is swiftly branching out into a revenue stream, which should benefit from the long-term global trend of rising household income growth.
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