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TJX Companies (TJX) Boasts Solid Comps, Freight Costs High

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The TJX Companies, Inc. (TJX - Free Report) is grappling with high wage and freight costs as well as adverse currency fluctuations. In third-quarter fiscal 2019, the company performed disappointingly, which has hurt investors’ sentiment. A glimpse at this stock’s price trend also reveals that it has underperformed the industry in the past six months. Shares of this Framingham, MA-based company have lost approximately 5.2% compared with the industry’s 1.7% decline.

Nevertheless, the company’s strategies to enhance brand performance across sales channels have been benefiting TJX Companies and aiding its comparable store sales (comps) growth. Further, the company is on track with merchandising and marketing strategies to boost revenues. That said, let’s take a closer look at the factors impacting the company’s performance.

Hurdles in TJX Companies’ Path

Increased wage costs have long been a worry for TJX Companies. In the third quarter of fiscal 2019, the company witnessed escalated freight and supply-chain costs, which along with other factors dented the gross margin. Wage increases and higher freight costs are expected to negatively impact earnings per share growth by 5% in the fourth quarter and fiscal 2019. Moreover, the gross margin is expected to contract year over year in both the periods.

Also, TJX Companies provides goods at discounted prices. Notably, it has been selling coveted apparel brands such as Tommy Hilfiger and Marc Jacobs at lower prices than those offered by others. Despite rising product costs, TJX Companies, being an off-price retailer, cannot increase the price of its products, which might lead to lower margins.

Additionally, the company’s solid international presence keeps it exposed to risks associated with adverse currency fluctuations. During the third quarter, net sales growth included a 1% adverse impact from currency movements, while bottom-line growth was hit to the tune of 7%. Further, foreign currency headwinds are expected to hurt net sales growth by 1% in the fourth quarter.

Can Efforts Aid a Turnaround?

TJX Companies' strong merchandising and brand strategies combined with effective marketing efforts have been fuelling top-line growth. The company regularly opens stores and expands rapidly across the United States, Europe and Canada. While many retailers are resorting to store closures, TJX Companies added around 102 stores in the third quarter and plans to continue expanding its store base to about 6,100 stores in the long term.

Moreover, TJX Companies has undertaken several initiatives to boost online sales and strengthen e-commerce business. TJX Companies’ off-price model along with its strategic store locations, impressive brands and fashion products has been driving the company’s performance, both in stores and online. Also, the company is committed toward boosting 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 at its stores.

Apart from this, the company has been reporting positive comps for a while now. In the last reported quarter, TJX Companies’ consolidated comps grew 7% year over year, fuelled by increased customer traffic at all segments. Management is particularly impressed with the performance of its largest division — Marmaxx. Notably, the third quarter marked the 17th straight period of high customer traffic for both Marmaxx and the company as a whole.

In fact, all the segments reported higher comps, courtesy of consumers’ favorable response to the company’s brands and impressive merchandise assortments at reasonable prices.

Further, management is optimistic about fiscal 2019 performance and focuses on implementing its sales initiatives to attract traffic. TJX Companies’ stores are also expected to benefit from solid merchandise assortment and brands. Such upsides combined with a solid business momentum led management to raise its earnings guidance for the fiscal year.

Backed by these aforementioned tailwinds, we expect this Zacks Rank #3 (Hold) stock to return on its growth trajectory.

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