This Retail Giant Will Keep Steamrolling Department Stores

On Wednesday, off-price retail giant TJX announced strong results for the fourth quarter and full year. The 2015 fiscal year was a momentous one for TJX as it grew revenue by 6% to $29.1 billion. This vaulted it past Macy's: the No. 1 department store company in the world by sales.

In all likelihood, TJX will continue terrorizing department stores and gaining market share -- both in the U.S and abroad -- for the foreseeable future. This makes it one of the best retail stocks for long-term investors to own.

The power of the off-price modelAs an off-price retailer, TJX looks to opportunistically purchase goods that are available at a discount, rather than offering full collections like a department store. This allows it to offer lower prices than department stores for comparable merchandise. TJX has trained its core customers to embrace the "treasure hunt" atmosphere.

Over the past few decades, TJX has been able to make this concept work with a variety of brands -- including T.J. Maxx, Marshalls, and HomeGoods in the U.S. -- and in several countries. TJX's revenue has more than tripled since 2000.

TJX Revenue (TTM), 2000-present; data by YCharts

TJX continues to see opportunities to expand the off-price model. TJX is already the only major off-price retailer in Europe, and it plans to add 2 more markets there in the coming year: Austria and the Netherlands. It is also testing a fourth brand in the U.S. -- Sierra Trading Post, which sells sporting goods and outdoor gear.

Double-digit profit growth againIn the recently ended 2015 fiscal year, TJX's EPS grew 12%. This was its sixth consecutive year of double-digit EPS growth. This EPS growth was driven by a 6% increase in revenue, modest margin expansion, and a more than 3% reduction in the average share count.

TJX's management believes that this type of profit growth is sustainable in the long run. By gradually opening new stores, boosting sales at existing stores, shrinking the share count, and driving operational leverage, TJX intends to grow EPS 10%-13% annually (on average).

A little bump?Despite this optimistic long-term forecast, TJX's FY16 guidance was significantly worse than what analysts had expected. TJX is projecting adjusted EPS growth of just 0%-3% and comparable store sales growth of 1%-2% for this year.

There are 2 main factors that will impede the company's profit growth in FY16. First, the strong dollar will weigh on earnings from TJX's international markets, which account for about 24% of company revenue. Second, TJX is raising the wages of entry-level workers in the U.S. to at least $9/hour in June -- matching a similar increase by Walmart.

That said, TJX's revenue forecast seems ultra-conservative. Falling gas prices and strong job growth are boosting consumer confidence in the U.S., and TJX posted 4% comparable store sales growth in Q4: its best performance of the year.

Comparable store sales growth accelerated last quarter at TJX. Photo: The Motley Fool

At HomeGoods, comparable store sales jumped 11% in Q4, and 7% for the full-year. This was the third consecutive year of 7% comparable sales growth for HomeGoods. Despite this strong momentum and the improving consumer demand picture, TJX's guidance assumes -- unrealistically, in my opinion -- that comparable store sales will rise just 2%-3% at HomeGoods this year.

The other segments are also likely to outperform TJX's sales guidance in FY16. This would offset some of the inevitable margin headwinds from the wage increase and the strong U.S. dollar. Earnings growth may fall short of the long-term 10%-13% target this year, but not by as much as TJX's initial guidance implies.

A long-term growth juggernautTJX has a long runway for growth ahead of it as it gains market share from department stores in a wide variety of categories, including apparel, footwear, and home.

On the company's recent Q4 conference call, the management team raised its estimate of long-term store growth potential from 5,150 stores to 5,475 stores. Of that total, 4,000 would be in the U.S.: compared to fewer than 2,600 today. Furthermore, TJX will probably continue raising its store growth estimate over time. As it has grown, it has identified new opportunities.

TJX CEO Carol Meyrowitz often talks about growing the company to $40 billion in annual sales and beyond. In the long run, the company's potential is far larger. Between its store growth and steady rise in sales per square foot, TJX could double its sales again in the next 10-15 years. This will keep the pressure on department store chains that are already struggling to generate revenue growth.

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Adam Levine-Weinberg is long January 2016 $55 calls on The TJX Companies, The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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