TJX Companies' Share Price Is a Little Off

Great companies don't always make great stocks.

That's how I feel about TJX Companies (TJX Quote) at $32.90. TJX, which operates the T.J. Maxx and Marshall's chain of stores plus several others, is by far the leading off-price retailer in the country -- way ahead of competitors like Ross Stores(ROST Quote). It's a hard story to knock because the company seems to do a lot of things right. It has a great management team, headed by CEO Ted English, an impressive 28% compound annual earnings growth rate over the past three years, a solid balance sheet, strong free cash flow and a great image.

TJX's strength has been to stick with high-quality department store merchandise instead of lower-quality discount store items. When department stores cut back their orders with the apparel manufacturers or return unsold goods, TJX swoops in and picks up all that discounted brand-name merchandise for a song. TJX then marks these goods up again and sells them in its stores at very attractive margins.

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The problem is the stock. It's not cheap. In fact, if anything, it's on the expensive side. At a P/E of 16.7 times this year's estimates and 14.6 times next, TJX is valued right in line with its 10-year average median forward P/E of 14.4. Yet this company faces a couple of challenging quarters, not the least of which is the current one. And if it disappoints, prepare yourself for a major clearance sale. I remember not that long ago -- February 2000, in fact -- when TJX was selling at around $14, for a forward P/E at the time of just 7.5!

Unlike many other retailers, whose stock prices have come down recently to reflect a likely falloff in consumer spending, TJX has held fairly steady. This despite the fact that earnings estimates of $1.97 per share for the fiscal year ending Jan. 31, 2002 are already down 10% from where they were a year ago. And even that figure may still be too high, because some analysts believe same-store sales growth will decelerate from mid-single-digit percentage growth currently down to roughly 1% to 2%. The slowing sales combined with the WTC attack couldn't have come at a worse time for TJX, because the third quarter is its most critical of the year. If the company misses earnings, it'll have a very hard time making them up.

Why has the stock held up so well with all this uncertainty in the retail environment? Part of the answer has to do with one of the company's strengths, which ironically is another one of my concerns: share repurchases. Thanks to its strong cash flow, TJX has been a big buyer of its own stock, snatching up to 4 million shares in the second quarter alone. As a friend of mine commented, though, "share repurchases are a good thing until they're not."

If things get tough, TJX may decide to hold onto its cash. Who'll be there supporting the stock when the company's gone?