Description

Somehow TJX has never been written up on VIC?  This is either a no-brainer or is yet another idiotic stock selection on my part.  My thesis for owning the company is as follows:  

• TJX is the off price industry leader focused on apparel, footwear, and home goods primarily in the US and Canada under the TJ Maxx, Marshall’s, Homegoods and HomeSense banners across ~3800 locations totalling 80 million sq feet (and another 700 stores/14 mn sq feet in UK/Europe).  TJX sells name brand merchandise for 20-60% below _____.  Stores are primarily located in outdoor shopping centers which have easier access, lower rents, and better traffic trends than malls.  
• While much has been made regarding online disruption in retail, on the apparel side, much of the disruption has been driven by the tremendous success of bricks and mortar discounters like TJX, ROST, and BURL.  Over the past decade, TJX has an EBITDA CAGR of 7.4% driven by expanding LfLs and growing its store count.  TJX has a pristine balance sheet which will allow it to weather the storm and ultimately emerge in a much stronger competitive position looking out 5 years.  
• While the pace of disruption in retail has been dramatic over the past 20 years, the impact of Covid-19 will accelerate the failure of many, many retailers.  
• TJX relative strength amidst a sea of weak competitors and suppliers will lead to strong growth in revenue and profitability over the next five years.  

While I’ve long been familiar with TJX I hadn’t purchased shares until March 2020.  Simplistically the situation is that TJX is one of, if not the, most successful/consistent apparel/home goods retailer in the US which came into the covid crisis with a very profitable/cash generative business, a net cash balance sheet, a history of benefitting from economic dislocation, but a valuation of ~10x trailing EBITDA and 16.5x trailing EPS.  More importantly, by 2024, I expect TJX to produce FCF in excess of $4.  At a 17-20x P/E multiple (in line w/ LT trading multiples), I get a fair value of $70-85 which implies an IRR of 11%-16% assuming a four year hold. 

It appears certain we will see an unprecedented number of bankruptcies amongst retailers as the lockdown has exacerbated the problems of the retail sector and chronic problems have now become acute.  Apparel & home retailers, given the discretionary nature of purchases, are likely to be among the hardest hit categories (home retailers are currently seeing a bump as people get used to being at home more often).  

This extends throughout the supply chain to manufacturers of branded goods as well as shopping center REITs.  TJX has numerous competitve strengths including:

1) strong brand synonymous with value

2) tremendous buying power (~$30 bn in inventory purchases pa)

3) very low cost structure - low lease costs @ 4.3% of revenue, no-service model (employees just stock & check customers out, very limited expenditure to fitout/maintain the store

4) significant clout with landlords (TJX paid over $1.7 bn in rent in 2019) and is a top 5 tenant of most shopping center REITs- discussed below

5) a net cash BS (12/31/19) and tremendous liquidity - discussed below.  

REAL ESTATE/LEASES

I became increasingly interested in TJX as I was going back through and attempting to update my SITC/BRX models.  While I consider both SITC and BRX to be very well run shopping center REITs, given the catastrophic impact of COVID on the retail/dining sector and the liklihood of significantly elevated bankruptcies for the foreseeable future, I realized I could not realistically underwrite a decline in NOI of less than 30% for these companies and that while I’d spent years understanding them, I could not buy them at 60-70% discounts to my estimates of NAV pre-Covid.  Most publicly traded shopping centers have all pared back their portfolios significantly over the past 3-5 years and over 90% of shopping centers (by GLA) are in private hands.  Private owners tend to carry significantly more leverage than their publicly traded competitors and will be in an even more desperate position.

This all sums to something everybody already knows: there is going to be so much excess space in the wonderful world of US retail real estate that traffic driving retailers with strong credit ratings like TJX are going to be even more sought after as tenants than ever before.  It seems inconceivable to me that rents for companies like TJX are going to meaningfully decline over a 3-5 year period (as leases roll but perhaps sooner).  I project that TJX’s rent declines a minimum of 25% (on a LFL basis, the company will certainly keep adding stores) looking out 3-5 years.  I suspect rent cuts could be even larger.  

BALANCE SHEET

TJX has a very strong balance sheet.  It came into this crisis with $1 billion in net cash ($3.2bn gross vs. $2.2 bn in debt w/ long maturity dates) and drew down $1 bn on March 20 when it announced the temporary closure of all stores).  On 3/31/20 TJX issued $4 bn in debt (6-30 year maturities, cost 3.5-5%) giving the company gross liquidity of $8 bn. This not only ensures long term survival during closure, inventory blow out/restock, prolonged period of weakness as customers wonder if it is safe to return (cash burn is cut as store employees are furloughed; TJX reports on 5/21 at which point I’ll update current burn rate) but is a significant competitive weapon - it will ensure fantastic terms from landlords and apparel suppliers (hey TJ Maxx can definitely pay us) as well as priority access to merchandise. 

The near term is guaranteed to be ugly but my thinking is that as long as customers eventually return to physical stores, I think this idea works over a 4-5 year horizon.  To some extent, the worse the external environment is, the better TJX will do.  

VALUATION

I assume that OP grows at a 5.7% CAGR from 2019-2024 and assume modest buybacks (buybacks currently paused) from 2H21.  This is certain to be wrong.  Of my total OP increase, 28% comes from an assumed 25% rent decrease.  at 17-20x FCF this gets me to a 2024 FCF # of $4.10 and a $70-82 share price in 2024.  On the one hand, this could be way too conservative given that OP increased 7.5% pa from 2010-19 during a period of significant retail disruption w/o a tailwind from rents.  If TJX increases OP at a 7.5% CAGR over the horizon, I guesstimate FCFPS of $4.60 which at 17-20x is $78-92.  On the other hand, I'm expecting such a weak 2020-2021 that earnings and FCF are not estimable and we could see considerable weakness in the share price if weakness is prolonged and investors question whether consumers will return to stores.  

RISKS

-TJX has almost no presence online.  Online sales were ~3% of 2019 revenue.  A transition to digital would be a clear negative as online profitability would be considerably lower than those achieved historically.  

-Lots of TJX stores are closed.  15% of US stores are located in CA w/ another 10% in NY and 5% in IL.  It seems likely that very large pockets of the company’s store base remain closed/under operating restrictions for months/quarters.  

- The next couple quarters will be incredibly ugly.  No revenue.  Some expense.  And a bunch of inventory which will have to be blown out (seasonal) aggressively at a time when all competitors are also blowing out inventory.  This will be ugly.  

-Unemployment is approaching all time highs.  While many furloughed workers will eventually return, it is hard to overstate the economic disruption created by Covid-19. 

-While lots and lots of retailers will be going bust over the next couple of years, TJX’s primary competitors ROSS/BURL are in similarly strong positions and are likely to aggressively grow their store bases over the next 5-10 years which could have a negative impact on TJX.  Ultimately I think the share taken by discounters will more offset this competitive pressure.  

Catalyst

- Stores open, customers return

- Category expansion? and optimism regarding growth opportunities