TJX's 'aggressive growth strategy' puts it in ideal retail spot

US retail sales unexpectedly rose in August, signaling a resilient consumer. Zacks Investment Management client portfolio manager Brian Mulberry joins Josh Lipton for the latest edition of Good Buy or Goodbye to discuss the best and worst performing retail players.

Mulberry views TJX Companies (TJX) — the parent of chains TJ Maxx, Marshalls, HomeGoods — as a buying opportunity, highlighting its positive growth story. He notes that the company's revenue growth is up 6% year-over-year as its brands capture more of the consumer's wallet share.

TJ Maxx and Marshall's, in particular, make up 62% of TJX's revenue, while HomeGoods makes up about 17%. Mulberry believes that TJX has adopted an "aggressive growth strategy" as it seeks to open up to 1,300 locations globally. In addition, he points out that the company has great margins, which have increased 0.8% year over year.

"[TJX is] growing revenue faster than the retail sales market but also capturing more of it with better cost controls. This is a very strong story, in our opinion, over the next year or so," he tells Yahoo Finance. However, he notes that as the Federal Reserve eases interest rates, there may be some currency headwinds the company will have to face, creating some potential downside risk.

Meanwhile, Mulberry is bearish on Target (TGT), explaining that same-store sales are down nearly 4% year over year.

"This is obviously a clear sign of a retailer that's not connecting with consumers in a positive way," he explains. The portfolio manager argues that Target has opened a "two-front war with the big box retailers Costco (COST) and Walmart (WMT)," leading the company to discount 5,000 essential goods. He adds that "consumers have kind of wobbled in their spending" at Target as they don't know what to expect price-wise.

Mulberry also points to consumer confidence stalling amid heated competition as a further reason investors should stay away from Target. "Obviously, they had some issues with inventory control coming out of COVID. They've tried to discount a lot of that inventory to keep it moving off of the shelf, but that's opened up again another line of competition. And if the economy does start to smooth out or stall, it's going to be an even more competitive environment for those consumer dollars," he explains.

However, it's not all bad news for Target. Mulberry explains that the company is "aware of these obstacles that they need to deal with and they are embarking on a digitization and optimization program that will help control some of these costs and rightsize the inventory." Thus, he believes the upside for Target in the near term could be in its approach to cost savings.

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This post was written by Melanie Riehl

Video transcript

It's a big noisy universe of stocks out there.

Welcome to, goodbye or goodbye.

Our goal to help cut through that noise to navigate the best moves for your portfolio.

And today we're looking at the retail industry, us, retail sales did unexpectedly rise in August as investors keep an eye on signs of a consumer spending slowdown.

So what's the best way to play the current state of retail?

I'm here now with Brian Mulberry Zach's investment management, client portfolio manager, Brian.

Good to see you, my friend.

Thank you.

All right.

So we got, let's sort of on a, on a, on a positive note, we can talk about what you like, Brian and you like for the first one here, this would be a buy in your opinion TJ X.

Let's go through some of the reasons here, Brian, your first point is a positive growth story.

Walk us through it.

So on the headline number we got today for retail sales, you're talking about year over year 2% growth in retail sales.

We look at TGX companies and their revenue growth is up 6% on a year over year basis.

So you're seeing a lot more capture in terms of the consumer wallet share happening at TJ X.

Now, that's traditionally in TJ.

Maxx and Marshall's their primary brands capturing about 62% of that revenue.

But home goods represent 17% of that revenue and it's their fastest growing segment.

So we see that 6% earnings growth as durable over the next several quarters.

All right, home goods.

Second point here growth is promising over the long term, you say.

So they're developing a really aggressive growth strategy at TJX opening as many as 1300 new locations globally.

It will be primarily in North America and the Eu but they see that there's going to be more of a value oriented consumer stretching a dollar as it were looking for better values when they're out looking for those essential goods.

This is a great marketplace for, for TJ X.

All right, final point here, the reason you think this is a buy solid margins.

Absolutely.

So their margins have been pretty solid at a pre tax level at 11% but they actually went up 0.8% on a year over year basis.

So again, growing revenue faster than the retail sales market, but also capturing more of it with better cost controls.

This is a very strong story in our opinion over the next year or so.

And Brian this, you know, it's had a nice run already this year.

It's up about 25%.

But you obviously think valuation at these levels still attractive.

I think the real earnings growth is there and that will attract those investors that are actually looking for that better relative earnings growth compared to their peer group.

All right, let's final point here.

Let's look at talk about maybe some downside risk that viewers need to be aware of growth plans, you say could be disrupted.

Well, it's one of those things where if their primary growth manner is going to be outside of the US, that means that they are ripe for some currency headwinds.

If our central bank cuts rates slower and lower over a longer period of time, that means the US dollar could remain stronger for longer.

And that creates some headwinds that they have to deal with just in the sheer currency exchange.

All right.

So that's when you like, let's turn to one, you're not a fan of this is one you would avoid.

That would be target.

Uh Let's go through the reasons for this one.

The first one softening same store sales, Brian.

So in that same relative comparison where you see TJ X gaining wallet share target is losing it, same store sales down almost 4% on a year over year basis.

And this is obviously a clear sign of a retailer that's not connecting with consumers in a positive way.

One of the things that they have done is open up a two front war with the big box retailers, Costco and Walmart and now they discounted 5000 essential goods items and that creates another battlefront against things like Burlington and TJ X.

So what is Target going to be?

And that's one of the reasons I think consumers have kind of wobbled in their spending there because they're not really sure where to go or what to expect from a price point at target second bullet point.

Brian.

The reason you would avoid this one, you say consumer confidence stalling.

So the long term picture of retail sales up 2% that's good.

But the shorter term month, over month seems to be starting to stall.

We're not getting the same month, over month type of growth.

And so in that moment in time, if there is a peak in consumer confidence or maybe even some wobbling consumer confidence, that means there's gonna be even more competition for those dollars from the consumer and they want to have confidence that they're gonna be able to stretch their dollar as much as possible.

So again, just all the signs pointing negatively against target's future in the near term and final reason, you would avoid this name, relentless competition.

Like I said, they've kind of brought this to themselves.

They've opened up a two front war against the big box retailers and the discounters and Target really needs to choose a path forward on where they see themselves going.

Obviously, they had some issues with inventory control coming out of COVID, they've tried to discount a lot of that inventory to keep it moving off of the shelf.

But that's opened up again, another line of, and if the economy does start to smooth out or stall, it's going to be an even more competitive environment for those consumer dollars.

And it's unlike TJ X, Brian, this one has not done much this year.

You pull back the chart, you a stocks up what, 6 7%.

But even there, you don't want to kick the tires.

I don't, again, it's the real revenue and the real earnings that are a warning sign here for the company.

It doesn't mean it's going to go away forever and ever.

But in the near term, they have some obstacles they need to overcome.

All right.

So finally, let's talk about this.

What's the upside risk to this call?

The upside is targets aware of these obstacles that they need to deal with and they are embarking on a digitization and optimization program that will help control some of these costs and right size, the inventory, those benefits are seen far down the road, but the upside could be those cost savings materialized sooner than expected.

Brian.

Great to have you.

Great discussion and great picks.

Thank you so much.

Thank you and thank you so much for watching.

Goodbye or goodbye.

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