T.J. Maxx, Marshalls, HomeGoods, Sierra, and Homesense, along with the associated online sites, are the core of TJX Companies' (TJX -0.86%) retail business. All of these brands share one important thing in common: low prices. Consumers love a bargain, and TJX has established a reputation for low prices to grow its business over the years.
But right now, it's seeing a notable uptick that investors need to know about.
TJX is positioned well for a tough market
The core of this retailer's business is made up of two kinds of customers. First, there are the shoppers that visit TJX stores, and similar retailers, looking to stretch their budgets as far as possible. Then, there's another group that's usually better off financially that goes for the thrill of finding a diamond in the rough, so to speak. Together, these shoppers have been more than enough to keep TJX growing steadily over the years as you can see below (aside from the coronavirus pandemic).
Data by YCharts.
The retailer continues to expand its footprint with 50 locations added in the fiscal 2024 third quarter, bringing the total number of stores up to 4,934. At the start of fiscal 2019, roughly five years ago, that figure was 4,070.
Adding more stores will likely be the driving force for long-term growth in the future as well, but there's another important metric that investors need to watch: same-store sales.
An impressive jump in same-store sales
The same-store sales metric measures the performance of stores that have been open for a year or more. New stores can distort the picture provided by sales results because each new store adds materially to the top line. Existing stores could be struggling, and it might not be apparent because of the sales that are coming from new stores. Luckily, in the most recent quarter, TJX reported strong same-store sales growth of 6%.
That result suggests TJX is firing on all cylinders right now, but the 6% same-store sales growth was well above even the company's expectations. And according to management, all of that growth came from an increase in customer traffic. This isn't something to gloss over.
The company is drawing in new customers, and those customers are likely to be wealthier than the store's core shoppers. Although TJX didn't elaborate when asked about the makeup of these new customers during the earnings call, a trend is emerging among value-focused retailers. Dollar Tree, for example, specifically noted it was seeing a notable increase in these "trade down" customers with higher incomes (~$125,000). Management at Burlington similarly highlighted that trade-down traffic contributed to the company's comps growth.
That's good news for TJX as it means the company is well positioned in the current market. However, there's a risk here, because many of these new customers are likely to go back to their regular spending patterns when the current macroeconomic challenges ease up. And yet, investors appear to be fairly optimistic about the future of TJX, given the valuation of the stock.
It shows up in the stock's price-to-sales ratio, price to book value, price to earnings, and price to cash flow. Keeping in mind the distortions that resulted from the coronavirus pandemic, TJX is enjoying a modest premium over its historical levels across those metrics.
Good news and bad news
The clear positive here is that TJX has widened its target market during a difficult economic period. The problem is that investors appear to have already factored that into the stock price.
Going forward, investors should track same-store sales for the company, especially as the country exits its current economic weak patch.
