TJX Focuses on International Opportunity

TJX (TJX - commentary - Cramer's Take) stock is going "off price" on a fine but unremarkable quarter. The company reported EPS of 41 cents, exactly in line with consensus, on revenue of $4.36 billion that just slightly missed the estimate.

More importantly, guidance was inline, with management indicating earnings of 40 cents to 42 cents per share on comps of 3% for the second quarter, a penny below the 42 cents Street number. Fiscal 2009 EPS guidance of $2.20 to $2.25 brackets the consensus. Despite commenting that TJX is driven to exceed this guidance and that "May is off to a very good start," investors clearly are disappointed that the company didn't offer more in an environment that plays to its strengths.

In a slow growth scenario, management is showing strong inventory discipline, limiting markdowns. The company sustained gross margins at 24% (unchanged year over year). Strong merchandising margins offset higher fuel costs and deleveraging of occupancy costs, resulting in an operating margin slightly below last year's. Dollar inventories were flat year over year, which translates to down 3% on a per-store basis. Management noted that weather impacted sales earlier in the winter, but a warm April ignited apparel sales, so the company should be able to hold pricing firm with incrementally better demand and limited supplies.

Some highlights by group:

• Marmaxx should open 450 new stores and is starting to gain traction in global initiatives -- such as jewelry, the new home prototype (Cube) and the shoe rollout.
• Home Goods did well in April despite a tough comp but needs to overcome high fuel costs, which should happen in the second half.
• AJ Wright comped at 6% (above plan) and is breaking even, with traffic up and infrastructure for growth in place.
• Bob's comped negative 3%, which management attributed to poor weather in the Northeast, but sales increased "dramatically" when it warmed up in April.

Management is highly focused on the international opportunity, since the company appears to have mastered the nuances of several foreign markets and is now ready to cookie-cutter out new stores. Management believes that the company can roll out 4,300 stores with just current concepts and in the countries in which they already operate. (Europe alone can support thousands of stores.)

So far, TJX is performing admirably in foreign markets. Winners/Home Sense comped huge in Canada, with margins well above plan. In Europe, U.K./Ireland comped 5%, and profit was up 62%, while German stores drove big traffic and showed strong inventory performance.

Net-net, TJX need not be embarrassed by its performance in a difficult environment, and certainly, being in the off-price segment is an advantage in a slowing economy. Lack of upside is a mild disappointment for investors, but they can take solace that management is running a tight ship and still delivering solid results.

For Dvorchak's preview heading into the TJX conference call, please click here.

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At the time of publication, Dvorchak had no positions in the stocks mentioned, although positions can change at any time.

Gary Dvorchak is a managing partner of Aviance Capital Management, a Sarasota, Fla.-based institutional asset manager that manages $200 million in growth and value equities and fixed income. Dvorchak holds a master's degree in business administration from Northwestern University and a bachelor's degree in computer science from the University of Iowa.