Inside the TJX machine

In the age of Amazon and the rise of e-commerce, many brick-and-mortar retailers are facing pressures. Traffic in many US shopping malls is not what it used to be. And yet, there is a particular segment of the US brick-and-mortar retail space that is thriving right now: the off-price discount retailers, including The TJX Companies (NYSE: TJX), which owns the enormously popular TJ Maxx; and Ross Stores (NASDAQ: ROST).

We recently met with senior management from TJX and continue to be impressed with the quality of this business and attractiveness in this space in general. The easiest way to think of a business like TJX or Ross Stores is as an army of highly-skilled and opportunistic merchandise buyers. In the case of TJX, the company employs approximately 1,000 buyers all around the world that sources merchandise opportunistically on highly favourable terms. Sourcing from over 18,000 global vendors, businesses like TJX and Ross Stores provide an outlet for brands to move excess stock quickly. Even if TJX cannot sell the merchandise immediately: if they can buy it cheaply enough, they will pack it away to sell in future periods.

TJX’s promise to customers is to sell high quality merchandise at prices 30-60% below the level at which it could be purchased from regular department stores. Given this value is delivered to customers via opportunistic buying, every store’s offering is slightly different and there is limited availability of each item. This creates a “treasure hunt” for customers and a sense of unpredictability which brings customers back to the store time and time again, driving significant top line growth.

TJX has delivered staggering same-store-sales growth at an average of +4% per annum over the last 12 consecutive quarters. And this growth has been consistent across new stores and old stores.

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It is quite remarkable that TJX has been able to deliver such strong top line growth in a retail space that is becoming dominated by Amazon. Furthermore, millennials are now used to buying their merchandise online. So why is TJX Amazon-proof?

The answer, in our opinion, lies in the nature of the relationship between TJX and its 18,000 vendors. These brands need TJX, Ross Stores and others to move excess production quickly. But they do not want attention drawn to the fact that their merchandise can be acquired by customers so cheaply: this would impair the equity of the brands. This is why TJX and Ross Stores have very limited online offerings. Brands cannot stand for their heavily discounted merchandise being easily searchable online. And this is why this business model is not conducive to Amazon.

TJX has been an incredible value creator for shareholders. Its high-quality and well-executed business model consistently delivers unlevered returns of more than 45%, after tax. This has resulted in an average +24% per annum return for shareholders over the last 10 years (which includes the GFC period).

TJX share price (US$/share):

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Source: Bloomberg

Montaka owns shares in The TJX Companies (NYSE: TJX) and Ross Stores (NASDAQ: ROST).

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