I know you want to buy the dip in TJ Maxx (TJX) that occurred after the second quarter earnings release Tuesday. But wait this one out for now.
On the surface, TJ Maxx, whose parent company TJX Companies is a holding in the Action Alerts PLUS charity portfolio, had another bang up quarter, the type of three-month performance that reaffirmed it has a best-in-class retail business model (maybe better than Walmart (WMT) ). It's a model -- sourcing products through 18,000 vendors worldwide and offering it cheaply to deal seekers through three relevant concepts -- that continues to impress in light of the digital shopping movement that is disrupting rivals such as Macy's (M) and Kohl's (KSS) .
Same-store sales trounced competitors in the second quarter, per the usual. The company lifted its full-year earnings guidance. Execs once again waxed poetic on the potential to double the store count in the U.S. over some undefined period of time. Traffic growth is driving the company's sales (traffic has increased for an amazing seven straight quarters). I can't tell you how crazy this trend is for the company in the face of considerable online competition.
But despite the many positives, TJ Maxx served up a few less apparent negatives in its report and earnings call. With shares trading at about 22x forward earnings on a P/E basis, compared to a historical 18x, the market is unlikely positioned correctly in front of some medium-term headwinds.
Wage increases: TJ Maxx stuck in two bombshells when it comes to hourly wages for its workers. First, it would likely hike wages by 3% this year as it competes for low-level talent with Walmart (which has raised wages) and restaurant companies (Chipotle (CMG) paying $15 an hour in some places...). Second, TJ Maxx will hike wages by a similar amount next year, too. Wall Street indeed knew these hikes were coming to TJ Maxx, but they chose to ignore them and instead focus on the litany of fundamental positives.
I think like so many other retailers, the floodgate has now been opened on TJ Maxx entering a period of rising hourly employee wages. And that isn't great news, considering its business model is predicated on keeping costs ridiculously low and passing on the savings to consumers. The stock has to be re-valued for this new fundamental reality.
Average ticket: The material increase in hourly wages arrives as TJ Maxx continues to battle average ticket deflation. I am hard pressed to precisely understand what is happening here, seeing as TJ Maxx is notoriously secretive and evasive on earnings calls (a practice that has to stop, especially when looking at the horrible news from Hain Celestial (HAIN) ). But from my understanding, TJ Maxx is emphasizing lower-ticket goods in its stores (think more t-shirts as opposed to jeans) in order to drive volume.
Moreover, it may be getting more promotional than it wants to be, in order to gain market share from others in retail and online. Either way, average ticket deflation coupled with wage inflation is a recipe for profit margin compression. Alongside peak valuation, that isn't a good combo.
Supply of goods: TJ Maxx did its best job Tuesday to emphasize it has access to a boatload of products for the foreseeable future. The continued pounding home of this message was no surprise, as big apparel vendors such as Polo Ralph Lauren (RL) -- which for years have fed the sales floors of TJ Maxx and Marshall's - are now entering a period of tighter inventory management.
Moreover, department stores such as Macy's continue to focus on opening their own giant clearance sections in their full-price stores to drive sales and profit instead of sending stuff off to the off-price channel. While TJ Maxx isn't at risk of losing out on merchandise or paying way more for scarce merchandise in the near-term, I think it could become a holiday 2017 issue (and then into 2018) that the market is not factoring into their estimates.TJ Maxx thrives on excess, but that excess in retail is slowing starting to evaporate.