Charles McDulin
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Take Gains in Macy's & Buy the Dip in TJX

Macy’s shares have popped 25% to the low 40’s since we recommended buying the name a couple weeks ago. With much of the bull case now in the name and the headwinds that still face department stores it is time move on as the risk/reward is more balanced.

We do believe there is opportunity in TJ Maxx (TJX) the discount retailer owning TJ Maxx, Marshalls, and HomeGoods. We believe TJX can continue its momentum and post comps of 4% as far as the eye can see. TJX is a direct beneficiary — and cause — of the weak sales environment at department stores. By moving from Macy’s to TJX we are following the old maxim “if you can’t beat em, join em”.When department stores have excess inventory from weaker than expected sales they then turn to off-price retailers (Ross & TJX are the largest) to sell their excess inventory in bulk and make room for new styles and things that are selling well. Shoppers are getting smart and realize they can visit TJ Maxx/Marshalls/HomeGoods and find brand name merchandise at half the price of department stores who rely on high margins — TJX relies more so on volume, and provides more value to the consumer. What we will continue to see is people regularly visiting these discount stores as more items flow from department stores to the racks of TJX stores. TJX being the biggest player has the scale and brand to continue to perform in any retail environment. Why don’t department stores catch on to this concept — some have in a minor way such as Nordstrom Rack and Macy’s Backstage — but if too many of these stores pop up it will inevitably cannibalize their core department stores and cause price deflation limiting their profitability.

TJX is a secular winner that is ‘un-Amonazonable‘ and will see many tailwinds continue to work in its favor.

While the stock is not cheap (neither is the overall market) –it is at a reasonable 20x 2017 earnings — this darling dividend aristocrat will continue to be sought after by Mr. Market as its earnings and dividends continue to rise. TJX raised its dividend 24% earlier this year and continues to buy back stock — exemplifying managements focus on returning capital to shareholders even as they grow the store count. Below is the tremendous growth and momentum shares of TJX have shown over the past year.