In the last year, shares of TJX (TJX) are up about 17%. I think it's time for Maxxinistas to take a break on the stock. The company reports third-quarter fiscal 2017 results Tuesday.
In mid-August, after TJX reported second-quarter results, the stock dipped almost 6%. Second-quarter earnings were 84 cents per share, 3 cents better than the consensus estimate. Revenue rose 7% to $7.88 billion. Same-store sales rose 4% vs. the 2% to 3% guidance. Traffic was the primary driver of same-store sales. The company is convinced the additional traffic demonstrates TJX is taking market share from other retailers. According to the company, same-store sales would have been over 5% if not for the Brexit vote in the U.K., where business slowed around the vote.
Management lowered guidance for the third quarter and year end. The discount retailer said third-quarter earnings would be between 83 cents and 85 cents per share, vs. the consensus estimate of 90 cents. The revision reflects the assumption that wages will continue to increase. The company believes wage growth will negatively impact earnings by about 3%. In addition, the strong dollar continues to pressure results by about 3%. The company stuck to its previous 2% to 3% comp guidance.
For the third quarter, analysts are at 87 cents per share on $8.22 billion in revenue.
Jim Cramer, TheStreet's founder and manager of the Action Alerts PLUS portfolio, wrote to subscribers on Friday that "we believe shares are priced for the worst and continue to be inspired by the company's unique business model and diversified brands." Cramer and Research Director Jack Mohr said they have an $85 price target on the stock. "We expect that its off-price offerings were enticing for consumers as they tended to remain cautious throughout the election season and the recent period of uncertainty. Heading into the holiday season, the outlook appears even brighter," they commented.
But I have four problems with the stock: 1) sequential decline in comps; 2) difficult comps ahead; 3) margin pressure from higher wages; and 4) high valuation.
First, same-stores have been sliding lower all year. In the first quarter, TJX put up a 6% increase in comps. Same-store sales were 4% by the second quarter, and analysts are looking for a 3% this quarter and 2% in the fourth quarter.
That leads me to my second point. Since TJX reports the third quarter on Tuesday, investors will begin to look at fiscal 2018. The consensus same-store figure for first-quarter 2018 is 2%. That's up against a 6% comp. If that estimate is right, that's not enough to drive the stock higher. Tough (or unbeatable) comps ahead do not drive a retail stock higher.
In fiscal 2016, TJX reported an operating margin of 12%, total sales growth of 6.4% and earnings per share growth of 5.3%. Selling, general and administrative expenses were 16.8%. Those numbers are going to be very difficult to repeat with continuing margin pressure from higher wages and foreign currency playing havoc with earnings. Management told analysts to take 3% out of their model for higher wages and 3% out for currency, but I don't think analysts have adjusted their models enough.
At the current price, the stock is trading at 21.5 times fiscal 2017 consensus estimates of $3.48 per share and 19.7 times 2018 estimates of $3.80. The five-year average multiple for TJX is 20 times. You're already there. To get to the consensus price target of $84, you have to be willing to pay at least 22 times estimates.
It seems like it's going to be hard for the stock multiple to expand under the conditions I outlined above. TJX has to have a blowout holiday season to drive the stock higher -- or it's time to take a break on the stock.