A Bargain Is Found at TJX - TheStreet

A Bargain Is Found at TJX

The discount retailer is facing near-term issues, but it has strong prospects ahead.
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TJX Cos.

(TJX) - Get Report

didn't give investors much to cheer about Wednesday.

The discount retailer, owner of chains such as T.J. Maxx and Marshall's, reported a 29% drop in profits for its recently ended fourth quarter. Adjusted earnings per share of 52 cents topped analysts' mean estimate of 50 cents, but a penny of that beat was due to a lower-than-expected tax rate.

Additionally, TJX's forecast for fiscal 2008 earnings of $1.80 to $1.85 a share was below Wall Street's target of $1.86

To make matters worse, the company revealed that the computer security breach reported in January was more extensive than previously thought. Management said its computers were hacked as early as 2005 -- not starting in May 2006, as stated before. Credit and debit card data, along with driver's license information, were likely compromised.

The security issues didn't have much of an impact on fourth-quarter results, save for a $5 million charge related to the investigation. However, the cost going forward, including the possibility of lawsuits, is unknown at this time.

Shares of TJX fell 44 cents, or 1.5%, to $28.18 Wednesday. As nerve-racking as the report was, I suspect that long-term investors in TJX will be fine. Its brand-name merchandise should attract customers in both good and bad economic times.

Same-store sales for the quarter grew 5%, up from the 3% rate a year ago. The quarterly results included disappointing showings by several of its businesses including Bob's Stores and A.J. Wright.

But some of the losses at Bob's could be blamed on warmer weather in the Northeast in December. All of Bob's locations are in the Northeast and had a lot of cold weather outerwear in their inventory. (Then again, when was the last time a retailer

didn't

blame the weather for something?)

Management said it expects to hit its three-year annual growth target of 12%. In fiscal 2008, the company projects 3% same-store sales growth and a 4% increase in square footage.

TJX could also be helped by its buyback plan. The company can buy back up to $1 billion worth of stock, in addition to the $436 million remaining from the previously announced buyback. Management halted the purchase of shares while it is investigating the security breach.

The current guidance doesn't include more buybacks. TJX management is known to be conservative, so if sales or margins wind up better than expected or if the company repurchases its shares, future earnings could exceed the guidance released Wednesday.

TJX also plans to increase spending on marketing, including extending its brand. To help with those efforts, the company hired John Gilbert as chief marketing officer. Gilbert comes from Dunkin' Donuts, which clearly had a brand revival over the past several years. If Gilbert can work some of his magic at TJX, I'd expect results to be stronger than expected.

TJX trades at 17.2 times trailing 12-month earnings, in line with its historical 10-year average. Should TJX hit its guidance in fiscal 2008, and maintain its price-to-earnings ratio, that would indicate a share price of roughly $31.50, a gain of over 12%.

Competitor

Ross Stores

(ROST) - Get Report

trades at over 20 times expected fiscal 2007 EPS of $1.69. Comparatively, TJX is a bargain. Despite some of near-term issues, being the clear leader in its space is deserving of some premium.

The analyst community is not exactly enamored with the company. There are currently 10 buys, eight holds and one sell rating.

From a technical perspective, there is clear support at around $26. Any weakness into that area is a good buying opportunity.

The stock has a good combination of factors that I like to see in a bullish call -- a solid business with loyal customers, reasonable valuation, good technicals and room for upgrades from the sell side.

In keeping with TSC's editorial policy, Lichtenfeld doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships.

Marc Lichtenfeld was previously an analyst at Avalon Research Group and The Weiss Group and a trader at Carlin Equities. He holds NASD 86, 87, 7 and 63 licenses. His prior journalism experience includes being a reporter/anchor for On24 in San Francisco and a managing editor of InvestorsObserver, a personal finance Web site. He is a graduate of the State University of New York at Albany. He appreciates your feedback;

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