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Will TJX Companies (TJX) Q2 Earnings Grow Despite High Costs?

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The TJX Companies, Inc. (TJX - Free Report) is scheduled to release second-quarter fiscal 2019 results on Aug 21. This off-price retailer delivered a positive earnings surprise of 10.8% in the last reported quarter and outperformed the Zacks Consensus Estimate by an average of 4.8% over the trailing four quarters. Moreover, the company has been delivering year-over-year growth in earnings and sales for quite sometime now, courtesy of its robust efforts to draw traffic and augment sales.

The TJX Companies, Inc. Price and EPS Surprise
 

The TJX Companies, Inc. Price and EPS Surprise | The TJX Companies, Inc. Quote

That said, let’s see if the company can retain its splendid past record this time around too.

Solid Sales-Driving Initiatives to Aid

TJX Companies is likely to continue gaining from an aggressive store-opening strategy. The company regularly opens stores and expands fast across the United States, Europe and Canada. While many retailers are resorting to store closures, TJX Companies added around 71 stores in the first quarter of fiscal 2019. The company plans to continue expanding its store base with plans to operate about 6,100 stores in the long term. Further, with increasing number of consumers resorting to online shopping, the company has undertaken several initiatives to boost online sales and strengthen its e-commerce business. TJX Companies’ off-price model along with its strategic store locations, impressive brands and fashion products has been driving its performance, both in stores and online.

Also, the company remains committed toward boosting comparable store sales (comps) growth, through effective marketing initiatives and loyalty programs. Incidentally, TJX Companies’ aggressive marketing and advertising campaigns through multiple mediums (TV, radio and social media) have been boosting traffic for its stores. Its gift-giving initiatives, unique among off-price retailers and loyalty card program (which offers consumers a non-credit card choice and soft benefits such as early shopping hours), also help improve customer engagement. Apart from TJX Companies, retailers like Kohl’s (KSS - Free Report) are also gaining largely from their sales-driving initiatives.

Coming back to TJX Companies, such solid efforts have long been helping the company report positive comps. During the first quarter of fiscal 2019, the company’s consolidated comps grew 3% year over year, fueled by greater customer traffic at all major segments. Customer traffic for TJX Companies grew for the 15th straight quarter. Notably, all major segments reported higher comps, courtesy of consumers’ favorable response to the company’s brands and impressive merchandise assortments at reasonable prices. Management remains optimistic about fiscal 2019 and focused on implementing its sales initiatives to attract traffic. TJX Companies’ stores are also expected to benefit from solid merchandise assortment and brands. That said, management projects comps to grow 1-2% in the second quarter of fiscal 2019. The Zacks Consensus Estimate for consolidated comps growth stands at 1.95%.  Notably, the consensus estimate for each segment reflects positive comps growth. We expect these upsides to fuel the company’s top-line growth. The consensus mark for second-quarter sales is pegged at $9,027 million, which indicates year-over-year growth of nearly 8%.

Cost Hurdles Likely to be Offset

TJX Companies announced wage increase for all full and part-time hourly U.S. store associates during fourth-quarter fiscal 2016 conference call. This has been hurting the company’s profits to a certain extent. During the first quarter of fiscal 2018, wage rise dented earnings growth by approximately 2%. Going ahead, higher wages are expected to negatively impact both second quarter and fiscal 2019 earnings by nearly 2%. Apart from this, management expects increased freight costs to weigh on fiscal 2019 results, which remain a threat to the upcoming performance. Freight costs have been posing hurdles for many companies, especially in the food space like Pinnacle Foods and Sysco Corporation (SYY - Free Report) among others.

However, we expect TJX Companies to easily overcome these hurdles with its robust growth efforts. This should help the company continue with its year-over-year earnings growth streak. For second-quarter fiscal 2019, the company projected adjusted earnings in the range of 87-89 cents per share compared with 85 cents recorded in the year-ago period. This includes expected negative impacts from restructuring costs related to the company’s IT department. Including benefits from tax reforms, earnings are expected to come in the range of $1.02-$1.04 per share. While wage increases are expected to hurt the bottom line, currency movements are likely to boost it by 4%. The Zacks Consensus Estimate for earnings has gone up by a notch over the past 30 days to $1.05, which reflects 23.5% surge from the year-ago period figure.  

What Does the Zacks Model Unveil?

To top it, our proven model shows thatTJX Companies is likely to beat bottom-line estimates this quarter. For this to happen, a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

TJX Companies’ Zacks Rank #2, combined with an Earnings ESP of +1.04%, makes us reasonably confident of an earnings beat. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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