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The TJX Companies' (TJX) HomeGoods Unit Aids Amid Cost Rise

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The TJX Companies, Inc. (TJX - Free Report) is benefiting from strength in its HomeGoods segment. The company is undertaking initiatives to enhance offline and online businesses. Moreover, its marketing strategies along with robust loyalty programs are noteworthy. That said, supply chain bottlenecks as well as rising freight and labor costs is a concern for the company.

Let’s delve deeper.

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What’s Working Well for The TJX Companies?

The TJX Companies’ HomeGoods segment has been seeing robust demand for a while now. Owing to store closures amid the pandemic, management came up with a temporary new sales measure — open-only comp store sales — to offer a better view. During third-quarter fiscal 2022, open-only comp store sales surged 34% in the HomeGoods (U.S.) segment from the fiscal 2020 level.

The upside can be attributed to solid growth in every major category as well as geographic regions for HomeGoods and Home Sense. The TJX Companies launched homegoods.com in the fiscal third quarter. With this launch, the company expects to offer impressive home fashion products at great value on its digital platform. With an increasing number of consumers resorting to online shopping, The TJX Companies has undertaken several initiatives to boost online sales and strengthen its e-commerce business.

The TJX Companies has fast expanded its footprint in the United States, Europe, Canada and Australia. During the fiscal third quarter, management increased its store count by 19, taking the total to 4,684 stores. This reflects square footage growth of 0.3% versus the previous quarter.

The company had highlighted that it expects to incur capital expenditures in the range of $1.2-$1.4 billion for fiscal 2022. This will be spent on opening new stores, remodeling, relocating as well as its distribution network and infrastructure. Well, The TJX Companies’ off-price model, along with its strategic store locations, impressive brands and fashion products are likely to aid its performance.

The TJX Companies remains committed toward boosting growth, through effective marketing initiatives and loyalty programs. The TJX Companies’ aggressive marketing and advertising campaigns through multiple mediums have been adding to its growth. Apart from this, The TJX Companies’ 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) have been helpful in improving customer engagement.

Hurdles on the Way

The TJX Companies’ performance in the third quarter of fiscal 2022 was affected by pandemic-led temporary closure of a few Australian stores, which were shut for almost 57% of the quarter. In total, the company’s stores were closed for nearly 1%.

During the quarter, incremental freight expense of 1.6 percentage points as well as significant investments to expand distribution capacity, higher incentive accruals, and wage growth hurt the company’s pretax margin to an extent. Net COVID costs adversely impacted pretax margin by an additional 0.5 percentage points. Management cautioned that fourth-quarter pretax margin will continue to face significant expense headwinds. The company expects incremental freight costs of about 80-90 basis points higher than the third quarter.

That said, we believe that the aforementioned upsides are likely to help this Zacks Rank #3 (Hold) company stay afloat amid such hurdles. The company’s stock has gained 13.2% in the past three months compared with the industry’s growth of 8.9%.

Some Solid Retail Picks

Here are three better-ranked retail stocks — Kohl's Corporation (KSS - Free Report) , Costco Wholesale Corporation (COST - Free Report) and Capri Holdings Limited (CPRI - Free Report) .

Kohl's Corporation, an omnichannel retailer, flaunts a Zacks Rank #1 (Strong Buy). The company has a trailing four-quarter earnings surprise of 114.5%, on average.You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Kohl's Corporation’s current financial year sales and EPS suggests growth of 24.1% and 704.1%, respectively, from the year-ago period. KSS has an expected EPS growth rate of 8% for three-five years.

Costco, which operates membership warehouses, carries a Zacks Rank #2 (Buy). The company has a trailing four-quarter earnings surprise of 8.3%, on average.

The Zacks Consensus Estimate for Costco’s current financial year sales and EPS suggests growth of 10.8% and 13.9%, respectively, from the year-ago period. COST has an expected EPS growth rate of 8.8% for three-five years.

Capri Holdings, a global fashion luxury group, carries a Zacks Rank #2. The company’s bottom line has outperformed the Zacks Consensus Estimate by a wide margin in the trailing four quarters.

The Zacks Consensus Estimate for Capri Holdings’ current financial year sales and EPS suggests growth of 33.2% and 181.1%, respectively, from the year-ago period. CPRI has an expected EPS growth rate of 32.2% for three-five years.

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