TJX Companies Inc Beats the Retail Slump With a One-of-a-Kind Business Strategy

In this segment from Industry Focus: Consumer Goods, the cast takes a look at TJX Companies' (NYSE: TJX) unique brick-and-mortar stores that generated more than $33.2 billion in sales last year. With the help of 1,000 buyers and 18,000 vendors, the company offers the merchandise and value that keeps shoppers coming back again and again.

A full transcript follows the video.

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This podcast was recorded on June 27, 2017.

Vincent Shen: What I hope to be a more positive and uplifting outlook after covering, like I said, a lot of those beaten-down department stores, those restaurants and other retailers. These are the companies that are defying retail headwinds and putting up a strong results and returns for our investors. First, we have the TJX Companies, the apparel and home-goods retailer. While other department stores lay off employees, reduce their store footprints, and try to squeeze the value out of their real estate, TJX is putting up incredible results and returns for their shareholders. Sarah, Addie, for any Fools who are not quite familiar with TJX and the various chains included in its store portfolio, can you give us a quick overview of the company, its scale, and so on?

Sarah Priestley: TJX owns T.J. Maxx, Marshalls, HomeGoods, Sierra Trading Post, and Winners in Canada. They also own HomeSense, which is in Europe. So they have a lot of different brands. They're kind of a global company. As you said, they sell apparel; they also sell footwear, home goods, and stationery, makeup. They cover a huge spectrum. A lot of things you would expect to find at a department store, you'd probably find there. But they sell about 20% to 60% cheaper than what you would find elsewhere. They have about 3,800 stores. What makes them great for the purpose of this discussion is that last year, they sold $33.2 billion in sales, and e-commerce was 1% of that. So in all the discussion about how e-commerce is dominating and killing, causing the retail apocalypse, T.J. Maxx is really bucking the trend.

Shen: Yes. This is as close as you can really get to a pure-play brick-and-mortar operation. And they've been really killing it in terms of the results. Their share returns also quite strong. I personally really enjoyed following this company. When I was younger, my grandmother actually loved shopping at T.J. Maxx and HomeGoods, and I remember going with her all the time. She would really patiently browse through each rack looking for just the right items, and we would end up spending over an hour there in the afternoon before we made our way through the whole store.

Investors will often hear management and analysts talk about this appeal of their stores, kind of like a treasure hunt. They have these popular brands, they have low prices, and a product selection that's constantly changing based on their buying habits and their vendors, what their vendors are essentially offering. That's obviously helped the company to deliver some strong results. I'd like to dive more into exactly the mechanics of how TJX is outperforming, and how it's able to deliver this experience and value for customers.

Priestley: I think the biggest thing for them is their inventory and supply-chain management, which you touched on. I think the real selling point is the fact that you can go into a T.J. Maxx and spend a couple of hours there browsing, because it's never going to be the same inventory that you've seen before. So what allows them to do that is this inventory and supply-chain system, which is unparalleled. They custom-built their own supply chain system. That means they can go to their vendors, they can buy smaller quantities than they would normally, they can buy different sizes, maybe don't take a lot of the perks that other retailers would in terms of the promotion expectations, returns expectations. So they have a lot of freedom to do this. What that means is that they end up with huge choice, huge selection.

And this is the crux of it: They can distribute that well globally, and they have the knowledge of the individual stores to make it suitable for that local area. And they talk a lot about having no walls. Their stores have no walls; they can make the content exactly what they expect people want to buy in that locality. And it's really hard to explain how unique that is and how difficult that is to replicate. Supply-chain systems are notoriously very cumbersome and hard to operate. The fact that they manage 18,000 vendors worldwide on their system and manage to deliver the granularity that they do for the individual stores is incredible. I think some of that is through the fact that they have a thousand buyers worldwide. That number of buyers, plus the relationships they're establishing, is a huge plus.

Shen: So really, they have this army, essentially, of buyers out there, ready to connect with whatever vendor it may be. The 18,000, I think, is really impressive, in that it shows how much less they might rely than some of their competitors on certain key brands, because ultimately what customers go in when they look for is something new, that treasure hunt. They don't need to always necessarily have the same amount of some major brand. I think, in terms of what shoppers see when they enter a Marshalls or T.J. Maxx, you mentioned the no walls, and how the floor plan is very flexible. That's also similar to the fact that in terms of the way they stock their stores, their buying habits, the fact that some of the things that they buy, they will put on the floor that very same season, if not the next season, whereas traditional department stores will often make their purchases months in advance. And what that basically allows the company to do is stay on top of popular trends, see what's selling well, and that information flows back to the vendors as well, as valuable data and feedback.

So this product selection and the discounts that the store offers, is powering the strong foot traffic, and keeping customers coming back. To quantify that, I think it's important for investors to look at one metric, and that's inventory turnover. I covered this metric in detail last May. Basically, what it tells an investor is how many times a retailer will sell through its entire inventory in a given period of time, usually a year, and usually the higher the better for this number. TJX boasts an inventory turnover for the last 12 months of 6.2 times. To give you a little bit of perspective, Macy's is just 2.7 times, Nordstrom 4.4 times, and Kohl's 2.9 times. In other words, while it might take TJX about 60 days to sell through their entire inventory, Macy's and Kohl's would need over 125 days, and Nordstrom would need about 80 days. When you put that in perspective, what it amounts to is that, it takes more time for the competition to convert that inventory to revenue and essentially cash, while TJX is moving on to their next season or collection of apparel to offer their customers.

Listeners now have a better understanding of why TJX is leading the pack. I think it's a natural question, though, to ask, you mentioned their digital business is only 1% of their revenue. I think a lot of people are wondering at this point whether it can maintain that kind of balance to its business and also scratching their heads wondering why, while Amazon is eating everyone else's lunch, they haven't managed to do the same with TJX. And is, essentially, the company's moat big enough to hold off online competition and maintain the success that it's seen with this pure brick and mortar operation? Is the moat big enough to do this?

Priestley: I think so. I think there's a few things that protect them from the Amazon effect. One, which you kind of touched on, is the choice. They're not reliant on one particular brand. This isn't Nike trying to sell through its own website. They have Nike and they have Under Armour and they have every sports-apparel company you could want. And that's the benefit, because they can move with the trends, as you were describing. I think the other thing is the fact that the average ticket size for TJX generally is so small, it doesn't necessarily make sense for people to make those purchases online. The third thing is the experience. They offer value and they offer the whole treasure hunt experience, and you can't necessarily get that online. I generally believe people don't think they know what they want when they go to T.J. Maxx or Marshalls or even to HomeGoods. But the fact of the matter is, you get in there, you see these great deals, you find something that you want, and they give people a reason to go to the stores.

Shen: I think that makes a lot of sense. Last thing I do want to touch on, besides what we're bullish on, is some of the risks that the company faces, in terms of, some of the things that come to mind for me are the fact that it has over 3,000 stores, I think management has spoken to a long-term target or runway of over 5,000 potentially across it geographic footprint. But ultimately, there's always concerns in terms of, a lot of its competitors are hurting now, because they went through this huge period of overexpansion. There's more retail space in the United States than any other country. Is that a concern? Is that something that TJX might have to deal with in terms of, they reach a point where they have so many stores that they can't even find all those good deals from vendors, for example, to keep items on the rack and fill them out?

Priestley: It is definitely a concern, especially when you consider that Macy's has started Macy's Backstage, and there's Nordstrom Rack, and you've got [Saks Off Fifth], so there's a lot of competitors that are rising that are going to be competing for the same inventory. And that's where that whole vendor relationships really comes into play. I do think there is the potential for risk of overexpansion here. At the minute they are 5% of the U.S. apparel and footwear market.

Shen: So still a very small portion.

Priestley: Still very small. If they're on track with their projected expansion, it would be 7%. Again, still small. I think they should be careful of it. One thing to note is they've had this question, they've been challenged on this for the past 40 years.

And if you look on their investor-relations website, they actually have a chart that shows that, through multiple downturns, they haven't been affected. They have had 21 years of comps improvement, 21 years of sales improvement, 20 years raising the dividend. So I think that you have to give them some credit to the fact that they know how to navigate these choppy waters.

Shen: Sure. Yeah, those are two decades, those are long-term results, and I think investors definitely have a lot to follow and a lot to be excited about when watching this company going forward.

Sarah Priestley owns shares of Under Armour (C Shares). Vincent Shen has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Nike and Under Armour (A and C Shares). The Motley Fool recommends Nordstrom and The TJX Companies. The Motley Fool has a disclosure policy.