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TJX Companies Faces Stressed Margins: Is Revival Likely?

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The performance of The TJX Companies, Inc. (TJX - Free Report) has been under pressure lately, due to declining pre-tax margins, currency headwinds and lack of exposure in emerging markets. However, the company has been striving to achieve growth and boost sales.

Over the past three months, shares of TJX Companies have declined 10.8% compared with the broader Retail-Wholesale sector’s gain of 4.6%. During the same time frame, shares of the company have also underperformed the Zacks categorized Retail – Discount & Variety industry which has declined 8.3%.  

Let’s now delve into some of the factors which have been impacting the performance of this Zacks Rank #4 (Sell) company and take note of the improvement initiatives that have been put in place by management.

Stressed Margins

Being a leading off-price retailer, TJX Companies, offers goods at discounted prices. As a result, increased costs cannot be offset against the profits, which lead to lower margins. Further, the company expects incremental investments, additional supply chain costs and pension costs to restrict margins in the coming quarters.

TJX Companies has also been facing margin pressure due to the hike in wages of all full- and part-time hourly U.S. store associates. The hike was announced during the fourth-quarter fiscal 2016 conference call. Higher wages are expected to keep pre-tax margins under pressure for the next few quarters. In fact, it is expected to affect fiscal 2018 earnings by 3%. 

Lack of Foothold in Emerging Markets

TJX Companies does not have any presence in the developing markets which deprives the company of the benefits from high growth opportunities in developing nations. Since the developed markets of Europe, America and Canada are already saturated, most of the U.S. companies are looking toward the emerging ones. These new markets offer growth opportunity owing to a larger population and the presence of an affluent middle class. TJX Companies, however, does not have any plans to open stores in any of these markets.

Disappointing Quarterly Performance

In first-quarter fiscal 2018, TJX Companies reported upbeat earnings, but its revenues missed the same due to disappointing comparable store sales (comps) growth. In fact, comps grew only 1% compared with the 7% rise in the prior-year period. Going forward, we also expect currency headwinds to continue affecting net sales and operating profit.

Initiatives Undertaken

Despite the aforementioned challenges, the company has been working toward expanding its business. TJX Companies has been progressing with its aggressive store opening strategies and plans to add more categories to the online shopping site. The company has plans to invest categorically in the online shopping site to differentiate from its brick-and-mortar stores.

We are also encouraged by the fact that the company is working on brand enhancing initiatives in the form of product innovation and marketing campaigns. The aforementioned ventures are expected to boost store traffic in the near term. We hope that such efforts will help TJX Companies to revive its performance and come back on the growth trajectory. Estimates of the company have remained stable over the past 30 days.

Looking for Better Stocks in the Retail Space? Check These

Investors may consider better-ranked stocks such as The Children's Place, Inc. (PLCE - Free Report) , which sports a Zacks Rank #1 (Strong Buy). Best Buy Co., Inc. (BBY - Free Report) and Burlington Stores, Inc. (BURL - Free Report) carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Children's Place delivered an average positive earnings surprise of 36.6% in the trailing four quarters and has a long-term earnings growth rate of 8%.

Best Buy delivered an average positive earnings surprise of 33.8% in the trailing four quarters and has a long-term earnings growth rate of 11.8%.

Burlington Stores delivered an average positive earnings surprise of 22.6% in the trailing four quarters and has a long-term earnings growth rate of 15.9%.

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