By Neil Saunders
After an uncharacteristically soft start to the year, TJX’s second quarter figures come as a relief and indicate that the company has not lost momentum. High growth is all the more pleasing given that it comes off the back of stiff prior year comparatives and suggests that the company is still gaining market share.
TJX’s decision to open a new U.S. home format, HomeSense, seems particularly sound. This will allow the company to better take advantage of the strong growth in home retail and to grow its presence in categories, like furniture and larger furnishing items.
Within the U.S., total sales grew by 5.8%. This is a respectable performance that is significantly better than last quarter. Even so, the rate is below that posted in the previous year; this underscores our view that the maturity of the business, especially in categories like apparel, is now taking the edge off growth.
It is also evident that the U.S. business is now one of two halves. Marmaxx, which is TJMaxx and Marshalls, grew sales by 3.6% during the quarter. In contrast, HomeGoods’ sales rose by 17.1%. The same pattern is reflected in the comparable numbers where Marmaxx was up 2%, and HomeGoods by 7%. This contrast comes down to the relative maturity of the segments and, regarding total sales, that HomeGoods has a lot more scope for new store openings. In our view, it also reflects the underlying dynamics of the retail market where apparel is a much more challenged sector, while home is much more robust thanks to a strong housing market which is generating consumer interest.
Given the above, TJX’s decision to open a new U.S. home format, HomeSense, seems particularly sound. This will allow the company to better take advantage of the strong growth in home retail and to grow its presence in categories, like furniture and larger furnishing items, which are a relatively weak part of HomeGoods proposition. Given that these categories are not ones in which many other off-price retailers operate, we believe that HomeSense can make some substantial market share gains over a short period. In our view, the new venture will help provide a new growth vector in the U.S. just at the time when Marmaxx’s contribution to growth becomes less significant.
Canada was also an area of outperformance this quarter, with total sales up by 19.8% and comparables up by 7%. On a constant currency basis, total sales rose by an even sharper 24%. The European and Australian division also posted strong overall growth of 19% on a constant currency basis; however, the high level of the dollar depleted these gains, resulting in an 8.7% uplift in real terms and a rather slim 1% increase in same store sales. Currency challenges and inventory accounting adjustments also compressed profits from the international divisions, resulting in a profit decline of 39% in Canada and of 4% in Europe and Australia. These filtered through to the group bottom line where net income fell by 1.6%.
As we have noted before, currency pressures are likely to continue to be unhelpful — not least because they are masking and diminishing parts of the operation that are delivering some of the best rates of growth. Even so, TJX’s considerable success in the regions to which it has expanded and its continued share gains across those geographies paints a much more balanced picture of success.
Looking ahead, we remain optimistic about TJX. It is a clear winner in the U.S. market and still has considerable opportunities for further expansion both at home and overseas.
Neil Saunders is managing director of GlobalData.