With The TJX Companies, Inc. (NYSE:TJX) braking out to new all-time highs, it’s understandable if investors are hesitant to buy shares at these prices. Luckily for us, there’re plenty of reasons to consider picking up TJX.
Great growth story
TJX sits in a retail sweet spot by offering sought-after clothing and home furnishing brands at discount prices. And while the company has delivered 18% compounded earnings growth over the past 15 years, TJX still has a large growth runway. Three factors are driving the company’s earnings:
Same store sales: Last week, The TJX Companies, Inc. (NYSE:TJX) reported impressive 8% increase in April comparable store sales which is nearly the best in the retail space. Management plans to sustain a 2% annual growth clip by improving the shopping experience, better marketing, and appealing to a younger demographic.
Better margins: Since 2006, TJX has improved in adjusted pre-tax margins by 520 basis points since 2006. The company can continue to drive margin growth by improving inventory turnover, investing in its supply chain, and cutting costs.
Rewarding shareholders
The great thing about The TJX Companies, Inc. (NYSE:TJX) is that management has a great policy of rewarding shareholders.
While income investors may not be impressed with the stock’s 1.10% dividend yield, please note that patience is a virtue. TJX has grown it dividend payment 23% annually over the past 15 years. The dividend is also safe with the company paying out less than a quarter of profits.
In addition, management is aggressively buying back share of its own stock. Over the past ten years management has reduced the number of outstanding shares by nearly 30%.
Reasonably priced
Now unlike the apparel in its stores, The TJX Companies, Inc. (NYSE:TJX) is exactly marked for the bargain bin.
TJX trades at 16 times forward earnings. Given the company 13% EPS growth rate the stock trades at a reasonable 1.25 PEG ratio. Not cheap, but given the company’s exceptional growth story it deserves a premium.
How does the stock compare to its closest rival Ross Stores, Inc. (NASDAQ:ROST)? It’s tough picking a winner between these two excellent companies.
Like TJX, Ross Stores is posting some great results. Last week the company reported excellent same store sales numbers up 7% in April. Ross Stores, Inc. (NASDAQ:ROST) has a long growth runway with plans to open 500 new discount stores doubling its store count. In addition, management has increased that dividend every year for the past 18 years.
My only slight concern with Ross Stores: valuation. While the stock trades at a lower 15 forward multiple, the company is growing earnings at a slower 11% clip. This gives Ross Stores, Inc. (NASDAQ:ROST) a slightly higher 1.35 PEG ratio.
So by the slimmest of margins I’m going to award TJX best of breed status in the space. Feel free to disagree in the comments.
Foolish bottom line
TJX has two catalysts that can propel shares higher near term.
First, The TJX Companies, Inc. (NYSE:TJX) is poised to benefit from the collapse of J.C. Penney Company, Inc. (NYSE:JCP). Ex-CEO Ron Johnson’s strategy to cut coupons has plunged the department store into a (irreversible?) tailspin. Last week in the company’s preliminary first quarter numbers, it reported a 16.6% drop in same store sales. Those sales are going somewhere and TJX is poised to pick up a lot of that decline due to the company’s similar strategy and merchandise.
Second, TJX acquired Sierra Trading Post last year for $200 million giving the company instant scale and expertise online. The T.J. Maxx website is expected to be launched in the back-half of this year and could provide a big boost to results.
The article 3 Reasons to Buy This Retailer originally appeared on Fool.com and is written by Robert Baillieul.
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