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TJX Companies Talks Tariffs and Market Share Wins

Demitrios Kalogeropoulos, The Motley Fool

TJX Companies' (NYSE: TJX) fiscal 2019 is off to a good start. The owner of the T.J. Maxx, Marshalls, and Home Goods brands just posted surprisingly strong sales growth while raising its earnings outlook for the year.

The gains imply that the chain is finding ways to expand its relevance even as more shopping shifts online. They also suggest management has a good shot at reaching long-term goals that include opening many more stores spread across key markets like the U.S. and Europe.

CEO Ernie Herrman and his team discussed those ambitious targets, and the off-price giant's latest demand trends, in a conference call with investors. Below are a few highlights from that presentation.

Two women share a secret while shopping.

Image source: Getty Images.

Standout performers

We are convinced that we're capturing significant market share [internationally] as other major retailers across Europe report slower sales growth and close underperforming stores.
-- CFO Scott Goldenberg

It's no surprise that TJX managed to grow sales this quarter given that comps have increased in each of the last 23 years. But the pace of expansion surprised executives. A big part of that outperformance came from the Marmaxx division, which includes T.J. Maxx and Marshalls in the U.S. The segment expanded comps by 6% as customers responded with enthusiasm to the chain's constantly shifting assortment of apparel and home goods.

TJX's international division did even better, with sales jumping 8% in Europe and Australia, versus 3% over the prior 12 months. Management believes that success translates into market share growth, which is good news since the chain sees these geographies as pivotal in its goal of boosting the global store base to 6,100 from 4,300 today.

Modest disappointments

Importantly, while merchandise margin was down, it was above our plan and would've been up without the incremental cost pressure from freight.
-- Goldenberg

It wasn't all good news in this report, as the retailer saw sluggish growth in a few areas and rising costs overall. The Canadian division's sales were flat and Home Goods' 1% uptick was below management's target. TJX posted weaker gross profit margin that, combined with rising supply chain costs, pushed operating margin down to 10% of sales from 11% a year ago.

Management highlighted the fact that these cost pressures are being felt across the industry. It maintains confidence in the long-term growth outlook for the Home Goods segment in the U.S. and the broader Canadian unit. Thus, investors will be looking for improved results from these banners over the next few quarters.

Tariffs might be a long-term win

Historically, disruptions in the marketplace have created off-price buying opportunities for us. Further, because of our great values, if retail prices overall increase, that may create an opportunity for us to attract new customers. Above all, we will always maintain a value gap versus other retailers.
-- Herrman

The potential for a dramatic escalation of prices on Chinese imports in the weeks to come has TJX executives on edge. "As you would expect, we are monitoring the developments here very closely," Herrman said. At a minimum, the company sees trade skirmishes potentially reducing sales growth and profitability during this fiscal year, with future impacts difficult to predict.

It's possible that the tariffs could strengthen TJX's market position, though, as higher prices elsewhere in the industry drive more shoppers toward its off-price options. The industry turmoil, meanwhile, could create a flood of opportunities for its buyers to snap up quality inventory as retailers fine-tune their offerings.

As a result, the company could be in a position to meet or exceed its growth outlook, which calls for comps to rise by between 2% and 3% this year. Big challenges remain with much of the year still to come. But TJX is off to a strong start, having doubled that projected annual increase in the fiscal first quarter.

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Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool recommends The TJX Companies. The Motley Fool has a disclosure policy.