TJ Maxx and Marshalls: Cheap Skates Ahead

FOR YEARS, TJ MAXX AND MARSHALLS, which sell brand-name goods at low prices, have been popular shopping destinations for consumers with million-dollar tastes and $10 budgets. But as the stores win even more fans on Main Street during the recession, on Wall the highflying stock of parent TJX is regarded as one of the best values in retailing.

TJX (TJX) has soared more than 90% in 2009, amid the retailing rally, so it must be granted that much of the easy money has already been made. But at a recent 40, the shares have another 15%-plus upside, as the retailer remains poised to beat quarterly estimates and be a winner in the holiday-shopping season.

And TJX sells for just 14.9 times this year's earnings estimate, a sharp discount to the median price/earnings ratio of 20 afforded other specialty soft-line retailers, including J. Crew (JCG) and American Eagle Outfitters (AEO). TJX might deserve to trade in the mid- to upper-40s, given its dominant position in the sweet spot of retailing and its accelerating sales growth.

TJX, the nation's largest retailer of off-price apparel and home fashion, has $19 billion in yearly revenue and a $17 billion market value. Like other off-price retailers such as Ross Stores (ROST), TJX buys brand-name merchandise at low prices from manufacturers looking to unload excess inventory. The Framingham, Mass.-based company offers a stable business model run by a well-regarded management team, led since 2007 by company veteran Carol Meyrowitz, 55 years old. During the economic downturn, Meyrowitz & Co. have been gaining market share by opening stores and expanding the vendor base both here and abroad.

The retailer plans to add about 90 stores this year, bringing the total to 2,780 locations, and has already added 2,000 vendors this year to its roster of more than 10,000. That increases TJX's purchasing power, just as department stores are consolidating and manufacturers look to alternative outlets for their goods.

Furthermore, accelerating traffic at many of TJX's stores is boosting comparable-store sales growth above expectations and driving higher profits, even as management cuts costs and deftly manages inventory.

TJX also boasts a stellar balance sheet. The company reported only $366 million of long-term debt at the end of last year, for a debt-to-capital ratio of under 15%. Management also boosted the annual dividend 9% in April, to 48 cents a share, for a dividend yield of 1.20%. Some analysts see free cash flow in fiscal 2010 almost doubling from last year's $572 million.

Credit Suisse analyst Paul Lejuez, who rates the stock Outperform, calls TJX "one of the best combinations of defense and offense in all of retail."

This past week TJX, citing stronger-than-expected October sales, raised its third-quarter and full-year earnings outlook for the second time in less than two weeks. It now expects to earn from 77 cents to 79 cents a share from continuing operations for the quarter ending Oct. 31, and from $2.46 and $2.54 for the full year, which ends Jan. 31. Some analysts think management may raise fourth-quarter earnings estimates when results are reported Nov. 17.

Earnings are being fueled by growing profit margins and relatively robust sales at stores opened at least a year. Management is also looking to cut $150 million of costs during 2009 and to buy back $625 million of company stock, which could boost earnings per share.