Underpromise, overdeliver. Another solid holiday performance with all concepts gaining share and customer loyalty. Strong merchandising, higher brand penetration, and a calculated bet on the holiday toy category all drove sales, ticket, and merchandise margins. While the new generation of shoppers shuns the tired on-mall experience, when presented with such compelling value (defined as quality for price), shoppers will frequent a brick-and-mortar store. We further note that TJ Maxx’s e-commerce channel has 100% unique product from the stores, significantly reducing cannibalization risk. After success with TJ Maxx, Marshalls will launch an e-commerce site in 2019. After setting cautious EPS growth expectations for 2019 on their 3Q18 earnings call, investors were relieved to see a return to double-digit EPS growth beyond 1Q. With strong cash flow, increased dividends and share repurchases, and one of the highest ROICs in retail, we reiterate OP.
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With mall-based apparel retailers reporting “okay” holidays driven by promos, TJX comes through with significantly improved merchandise margins, “at-ticket” selling, and increased traffic/conversion, once again proving the strength and desirability of their Off-Price offering. Combining convenience, speed, and value, all concepts delivered sales upside. While the new generation of shoppers shuns the tired on-mall experience, when presented with such compelling value (defined as quality for price), shoppers will frequent a brick-and-mortar store. Further, we note that TJX’s e-commerce channel has 100% unique product from the stores, significantly reducing cannibalization risk. We note that the Off-Price model remains both offensive in upcycles and defensive in downcycles. We believe is the most attractive (and proven) business model. We do note that inventory grew faster than sales (even excluding LY’s 53rd week impact), so for the call that is an area to investigate – potentially opportunistic packaway or YoY timing differences. With strong cash flow, increases in both dividend and share repurchases, and amongst the highest ROIC in retail, we reiterate Outperform.
The January reading plummeted, falling two rankings from December’s reading of 3/10, suggesting investors started re-shorting stocks during the January rally after being sidelined at year end. In January 45.7% of retailers posted a short position >15% (up from 39.1% in December). Since we last published this report on 12/17/18, the XRT is up 1% vs. the S&P 500 +4%. We rank Sector Sentiment on a scale of “1” being the most negative sentiment to “10” being the most positive sentiment. The basis for the ranking is based on the number of retailers in the sector with >15% short positions.
Heightened supply risk for 2019. During 3Q18, retailers took a turn for the worse, as inventory increased modestly at a faster rate than sales. With no ability to raise prices to drive comp, retailers must rely on increased unit volume to drive sales growth. Note that this is a snapshot entering 4Q18. Most results, save for a few exceptions (e.g., TGT – PP, COST – PP, covered by Scott Mushkin, and LULU-OP), have missed holiday sales. We expect inventory exiting 4Q18 to show even higher inventory-related business risk.
The December reading rose for the second consecutive month, suggesting with valuations pulling in short sellers may be derisking. The November reading was 2 out of 10. In December 39.1% of retailers posted a short position >15% (was 42.2% in November). Since we last published this report on 12/17/18, the XRT is up 6% vs. the S&P 500 +2%. We rank Sector Sentiment on a scale of “1” being the most negative sentiment to “10” being the most positive sentiment. The basis for the ranking is based on the number of retailers in the sector with >15% short positions.
We believe 2018 may have been “peak season” for retailers. We continue to believe in the Retail Death Curve phenomenon. The 2018 lift in mall traffic was against easy compares and pent-up demand. Despite clean inventory in 2018, there was no evidence of broad-based pricing power. Retailers were as, if not more, promotional than prior year and “bought the comp.” Tax reform savings were reinvested in store-related wages and deferred capital spending – both contributing to a higher fixed cost infrastructure than before tax reform – adding to greater deleverage risk.
Sector Sentiment 2, on a Scale of 1 (worst) to 10 (best): The November reading rose from the October reading of 1 out of 10 with 42.2% of retailers posting a short position >15% (was 44.4% in October). Since we last published this report on 11/14/18, the XRT is down 11% and therefore investors may have taken some money off the table. We rank Sector Sentiment on a scale of “1” being the most negative sentiment to “10” being the most positive sentiment. The basis for the ranking is based on the number of retailers in the sector with >15% short positions.
3Q18 Consumer Sentiment Poll scores 5. 1 out of 10 (vs 6.2 in 2Q18). Each quarter, we send out a brief survey to gauge investor sentiment prior to earnings, where 1 is “Terrible” and 10 is “Excellent.” Thanks for replying, if you did! Survey results are completely anonymous, and the greater the response rate, the more conclusive the results, so please consider participating next time.
Today (11/20/18) BMO, TJX reported an impressive sales, comp and GM beat; Retail Earnings Quality Score 5 out of 10. 3Q18 comp came in higher than expected at an impressive +7% vs. Consensus of +4%, driven primarily by positive traffic at all banners. By division, comps were +9% at Marmaxx, +5% at TJX Canada, +3% at TJX International, and +7% at HomeGoods. The company missed on GM by 20 bps due to rapidly rising freight costs which more than offset positive merchandise margins. TJX beat on SG&A by 30 bps and the company’s diluted EPS of $0.63 (excl a $0.02 pension charge) beat Cons EPS of $0.61. Shares traded -4% during the day as forward-looking margin pressure offset the good news in the quarter. With Off-Price showing its resilience in various macro and retail backdrops, we believe the value proposition of the model resonates in both strong and weaker macro backdrops.
Since the mid-August, the XRT is -7% vs. the S&P 500 -4% as investors took money off the table after retailers may have had their best quarter during 2Q18 since 2H18 compares are tougher, economic fundamentals may be peaking despite a still robust consumer, and 2019 headwinds abound. Our promotional checks continue to suggest that demand is not translating to pricing power, even with the entire sector extremely disciplined on inventory supply. Our 3Q18 Wolfe Promo Tracker (click here to view) showed “Flat” sector promos to LY. The average current NTM P/E across our coverage universe has fallen more than 4x turns from 19x to 15x over the past three-months. With margin pressure returning in 2019 despite a still strong consumer, we opt for known winners - URBN, the Off-Price sector, LULU, PLCE being names we would look to accumulate on sector pressure. Longer-term, we remain cautious since sales upside is translating to margin upside in a select few retailers and as long as negative brick-and-mortar comps persist margin deleverage remains.
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