Should You Buy TJX Stock At $70?

by Trefis Team
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We believe that Citi Trends stock (NASDAQ: CTRN)  is currently better valued than TJX Companies stock (NYSE: TJX). TJX’s current price-to-operating income ratio of 26x is higher than levels of 9x for CTRN. But does this gap in valuation make sense? We don’t think so, especially if we look at the fundamentals. More specifically, we arrive at our conclusion by looking at historical trends in revenues and operating income for these companies. Our dashboard Better Bet Than TJX: Pay Less To Get More From CTRN has more details – parts of which are summarized below.

1. Revenue Growth

TJX’s revenue grew at an average rate of -2.4% over the last three years, as compared to revenue growth of 1.2% for Citi Trends. Both retailers benefited from strong demand in apparel and people returning to stores in the fiscal first half of 2021 – but even if we look at the revenue growth over the last twelve-month period – TJX’s revenue growth of 28% is less as compared to 34% growth for Citi Trends. While we acknowledge that CTRN’s revenue base of just $780 million (in 2020) is much smaller compared to around $32 billion for TJX, still the growth Citi Trends has posted is meaningful.

  • Citi Trends is a value-priced retailer of fashion apparel and accessories targeting a core African American and Latino families customer base. The company’s net sales climbed 10% year-over-year (y-o-y) to $237 million and were up 30% on a two-year basis. Notably, comparable store sales increased 25.6% compared to Q2 2019, despite some stores being temporarily closed due to Covid. In addition, the retailer’s gross margin came in at 40.8%, up 350 basis points from Q2 2019, while the operating margin at 6.9% was a record for the company for any second quarter which is traditionally a softer period in terms of seasonality.
  • TJX is an off-price retailer which owns Marshalls, TJ Maxx, and HomeGoods. The company’s revenues climbed 81% y-o-y to $12 billion (also up 23% on a two-year basis), thanks to a 20% y-o-y increase in comparable-store sales in Q2. In addition, the company’s adjusted EPS soared 27% y-o-y to $0.79, excluding a one-time debt extinguishment charge of $0.15 per share. That said, the retailer is selling more premium products and relying less on price cuts. The HomeGoods segment is enjoying better results as consumers continue to spend aggressively on home furnishings.

2. Operating Income Growth

The three-year average operating income growth for TJX stands at -28%, much lower than 19% for Citi Trends. Better revenue growth for the latter led to higher operating income. Looking at the last twelve-month period, CTRN’s growth in operating income also compares favorably  to TJX.

The Net of It All

Ciri Trends has seen higher growth in revenues and operating income than TJX in the last twelve months, as well as the last three years. Yet, CTRN has a comparatively lower price-to-operating income ratio. This TJX underperformance in revenue and operating income growth compared to Citi Trends reinforces our conclusion that the stock is expensive compared to its peer, and we think this gap in valuation will eventually narrow over time to favor the less expensive name, Citi Trends.

It is also helpful to see how TJX stacks up with its other peers. TJX Stock Comparison With Peers shows how it compares against peers on metrics that matter.

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