TJX Companies, Inc. Gets Back on Track in the Fourth Quarter

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In November, TJX Companies (NYSE: TJX) reported uncharacteristically weak results for the third quarter of fiscal year 2018. The off-price retail giant saw a comp sales decline at its Marmaxx segment (which includes the T.J. Maxx and Marshalls chains in the U.S.) for the first time in years, due to a combination of unfavorable weather trends and some fashion missteps.

However, TJX got back to form last quarter. The company easily exceeded its sales and earnings forecasts for the period and also beat analysts' estimates. Furthermore, management expects the momentum to continue in the 2019 fiscal year.

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A strong end to the year

Most retailers ended last year on a high note as consumers opened their wallets during the holiday season. Cold weather in the Northeast and Midwest gave an extra lift to apparel retailers.

TJX was no exception. For the fourth quarter, comp sales rose 4% on a companywide basis, comfortably exceeding the company's guidance for a 1% to 2% increase. Marmaxx returned to growth, with a solid 3% comp sales gain. Management noted that the execution mistakes that had plagued this division's third-quarter performance were fixed during the fourth quarter.

Turning to the company's smaller segments, the HomeGoods chain also logged 3% comp sales growth last quarter, as did TJX's international operations in Europe and Australia. The strongest growth came in Canada, where comp sales surged 7%.

These strong sales results translated to better-than-expected profitability. Adjusted earnings per share -- excluding the benefit of an extra week in the quarter, along with some other one-time items -- reached $1.19, up from $1.03 a year earlier. TJX's forecast had called for adjusted EPS of $1.14 to $1.16.

Fiscal 2019 should be another good year

Sales trends have remained strong during February, and with U.S. consumer confidence at a 17-year high, TJX should be able to maintain its sales and earnings momentum in the coming year.

TJX is planning for 1% to 2% comp sales growth in the first quarter and for the full year. At a constant tax rate, that would drive a 4% to 6% adjusted EPS increase for both periods. However, it is important for investors to remember that TJX typically provides very conservative guidance. If retail sales trends remain strong, the company is likely to beat its sales and earnings forecasts -- potentially by a wide margin.

Additionally, TJX will benefit from a significant reduction in the U.S. corporate tax rate. Management expects this to boost full-year EPS by $0.73 to $0.75. (The benefit could be even greater if TJX beats its sales and margin plan.) The company's formal guidance calls for adjusted EPS to reach $4.73 to $4.83 in fiscal year 2019, up from $3.85 in fiscal year 2018.

Something for everybody

Historically, TJX has reliably generated strong free cash flow. It also maintains a rock-solid balance sheet. The tax reform bill will drive profit and cash flow higher, while enabling TJX to repatriate more than $1 billion from Canada with no tax consequences.

As a result, TJX is now flush with cash. The company will use a portion of this cash to pay one-time bonuses to most of its employees and make additional contributions to its defined-contribution retirement plans. It's also instituting paid parental leave and enhanced vacation benefits for U.S. employees. Furthermore, TJX recently increased its charitable giving.

This will still leave plenty of extra cash for shareholder-friendly activities. TJX plans to increase its quarterly dividend by 25% this year to $0.39. That will push its dividend yield above 2%, based on TJX's current stock price.

The company also plans a big increase in its share repurchase program. For the past two years, TJX has bought back $1.6 billion to $1.7 billion of stock annually. By contrast, it plans to buy back $2.5 billion to $3 billion of stock in the coming year. This could help drive TJX stock toward the $100 mark in 2018, assuming sales growth remains robust.

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Adam Levine-Weinberg owns shares of The TJX Companies. The Motley Fool recommends The TJX Companies. The Motley Fool has a disclosure policy.