Over the last 3 years, TJ Maxx Companies (NYSE:TJX) has successfully met or exceeded every estimate that management or the streets laid out. Results were no different on August 2, when TJX Companies reported second quarter earnings that were largely in line with estimates. What most investors didn’t expect was the impressive international same store sales. What was unexpected was a 10% increase in same store sales in Europe. Initially I thought my eyes were playing tricks on me after reading 10% growth in same store sales in Europe. Nearly every European retail operator has struggled quarter after quarter, how could 10% comp store growth be right?
The truth is TJ Maxx did have a very impressive second quarter in Europe. The discount retailer benefitted from uncertain economic conditions that caused shoppers to sprint to the best bargain and shy from full prices. Another factor that could have played a part in TJX’s success in Europe, and other discount retailers success in America, is the Lipstick Effect. The lipstick effect evolved from various studies on human behavior when they are in financial distress. A new study in the Journal of Personality and Social Psychology claims to be the first to demonstrate the existence of the lipstick effect. The study used both historical spending data and rigorous experiments, where they examined how and why economic recessions influence women’s consumer behavior. The research showed that recessionary conditions decrease people’s desire for most products (like electronics and furniture), but increase women’s desire for products that aid in their appearance.
We believe that TJ Maxx will continue to benefit from a struggling European market, and national clothing discount retailers will continue to benefit from a weakening middle class and a slow economic recovery in America. It’s evident that TJ Maxx has developed enough scale in their core American market, but how sustainable is their competitive advantage? The store metric table listed below shows a few key metrics that are helpful in assessing discount retailers’ cost models, and a good method to gauge TJ Maxx’s advantage over domestic competitors.
Competitive Analysis
The largest clothing discount retailer, TJ Maxx, is an international company that has a mission to offer quality designer clothing at prices generally 20% to 60% below department and specialty store regular retail prices. Of the 2,900 TJ Maxx stores, 2,200 are located in the United States, while the remaining 700 are located in a number of other countries. TJ Maxx buys most of their inventory directly from manufacturers, with some coming from retailers and other sources. TJ Maxx is typically willing to purchase less-than-full assortments of styles and sizes in various quantities. The store experience is much like a treasure hunt, where it often takes customers an ample amount of digging to find what they are looking for. Customers often find a style or brand they like, but cannot find the item in their size, or vice versa. With distribution centers in four countries totaling 11 million sqft, they are able to disperse inventory across their geographically diverse network of stores or to specific markets. Importantly, they provide vendors an outlet with financial strength and an excellent credit rating. TJ Maxx has smaller stores and higher cost per sqft than most of their competitors, but they have developed scale in America and have the second highest sales per sqft. The number of hedge funds with holdings in TJ Maxx increased from 26 in the first quarter of 2012, to 39 by the end of the second quarter. Citadel has the largest interest in TJ Maxx among those hedge funds (see why billionaire Ken Griffin likes TJ Maxx). TJ Maxx is not cheap, it is trading at 20.3 times earnings. The market has bid this discount retailer up because of its dominance in a favorable industry and its strong international presence.
| Competitor Analysis: Store Metrics | ||||
| TJX | KSS | ROST | GMAN | |
| 2012 Lease Expense | 1.1 B | 522 M | 380 M | 39.4 M |
| Locations | 2905 | 1127 | 1125 | 74 |
| Locations Leased | 2905 | 724 | 1122 | 74 |
| 2012 Annual rent per store | 373,838 | 720,994 | 338,681 | 532,432 |
| Sq feet per store | 29,231 | 72,960 | 23,200 | 58,108 |
| Cost per sq/ft | 12.79 | 9.88 | 14.60 | 9.16 |
| Sales Per Store | 7,983,289 | 16,685,004 | 7,653,333 | 7,540,541 |
| Sales per sq/ft | 273.11 | 228.69 | 338 | 129.77 |
Kohl’s (NYSE:KSS) stores are located in “easy to park” neighborhoods. They have fewer departments than traditional, full-line department stores. The physical layout of the store and their focus on strong in-stock positions in style, color and size are aimed at providing a convenient shopping experience for an increasingly time-starved customer. Though their expansion rate has slowed in recent years, their new store program continues to target profitable growth opportunities. They expect to increase their store count by approximately 20 stores in fiscal 2012. They believe the transferability of the Kohl’s retailing strategy, their experience in acquiring and converting pre-existing stores and in building new stores, and their substantial investment in management information systems, provide a solid foundation for their existing operations and further expansion. The number of hedge funds with interest in Kohl’s decreased from 31 in the first quarter to 27 in the second quarter. Stephen Mandel’s Lone Pine Capital is the largest hedge fund holder of Kohl’s (see Mandel’s top picks). Kohl’s trading at 12.3 times earnings and they are the cheapest among the discount retailers mentioned in this article. Their low P/E relative to their competitors could be indicative of their weak expansion policy.
Ross Stores, Inc. (NASDAQ:ROST) operates two brands of off-price retail apparel and home fashion stores — Ross Dress for Less® (“Ross”) and dd’s DISCOUNTS. Ross offers first-quality, in-season, name brand and designer apparel, accessories, footwear, and home fashions for the entire family at everyday savings of 20% to 60% off department and specialty store regular prices. They also operate 102 dd’s DISCOUNTS stores in eight states that feature a more moderately-priced assortment of first-quality, in-season, name brand apparel, accessories, footwear, and home fashions for the entire family at everyday savings of 20% to 70% off moderate department and discount store regular prices. Hedge funds have taken a notice to Ross Stores. The number of hedge funds with interest in Ross increased from 26 funds in the first quarter of 2012, to 30 in the second quarter of 2012. Lone Pine Capital and Citadel are the top two hedge fund holders of Ross Stores. Ross Stores is not cheap; it is trading at 21.4 times earnings, indicating the market may have already taken notice their strong business model and industry headwinds.
Gordman Stores, Inc. (NASDAQ:GMAN), is an everyday value price department store retailer featuring a large selection of the latest brands, fashions and styles at up to 60% off department and specialty store prices every day in a fun, easy-to-shop environment. Gordman is just beginning to get the wheels turning and is not as recognizable as these comparables, but they are finding lots that are 15,000 sqft smaller than Kohl’s and paying less cost per sqft. We believe their leases are so cheap because they are strategically placed in mediocre locations that receive high foot-traffic stemming from their competitors presence. A Gordman store is located within one mile of 50% of Kohl’s, 55% of J.C. Penny, and 64% of Wal-Mart. Looking at the five mile radius, 89% of Gordman stores are located by Kohl’s, 76% by a J.C. Penney (JCP), and 100% are within five miles from a Wal-Mart. Not only is the company feeding off of their competitors foot traffic, they are paying lower rent per sqft and they have differentiated themselves by producing an organized and fun shopping experience. Hedge funds have taken notice to Gordman’s. The number of hedge funds with interest in Gordman’s increased from only 2 funds in the first quarter to 5 funds at the end of the second quarter. Magnetar Capital owns the most shares of Gordman’s among hedge funds. Gordman’s is trading at 13.2 times their earnings and has implemented a strong expansion policy that should help boost their earnings moving forward. This micro-cap discount retailer has the potential for vast expansion if market trends continue.
| Regional Store Breakdown | ||||||||
| TJX | % Total | KSS | % Total | ROSS | % Total | GMAN | % Total | |
| West | 398 | 18% | 0 | 16% | 507 | 45% | 10 | 12% |
| Midwest | 413 | 19% | 335 | 17% | 12 | 1% | 59 | 73% |
| Northeast | 621 | 28% | 194 | 33% | 55 | 5% | 0 | 0% |
| South | 783 | 35% | 171 | 32% | 544 | 49% | 12 | 15% |
| Pacific | 0 | 0% | 0 | 0% | 0 | 0% | 0 | 0% |
| Total | 2215 | 700 | 1118 | 81 | ||||
Global economic prosperity seems to point in favor of discount clothing retailers that can sell discounted designer items and take advantage of the lipstick effect. We are not surprised that hedge funds have taken notice to this niche market, and expect the trend to continue if discount retailers can continue to beat estimates. While we have a positive outlook for the industry, our favorites among the industry are TJ Maxx, which has established scale and the ability to serve their vast number of stores through a strong distribution network, and Gordmans, which is paying the lowest cost per sqft and has the most room for expansion.
Disclosure: I am long Gordmans stock