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Why TJX Could Deliver Stock Price Growth

Even though it has gained 7% in the last six months, TJX Companies Inc (NYSE:TJX) could deliver further capital growth.

The budget retailer is investing in its online growth capabilities, capitalizing on its improved sourcing opportunities and utilizing its loyalty program to boost customer engagement rates.

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Sourcing opportunities

TJX reported in its second quarter results that it is benefitting from relatively high product availability across a range of its categories and brands. This is due to a weaker-than-expected performance for many major retail markets across the globe.

This provides the company with the opportunity to become increasingly selective regarding the types of products that it stocks across its stores, as well as the prices it pays for them. This may increase the company's customer conversion rates and improve its margins, as it stocks only the most appealing items that are currently available.

Digital growth potential

TJX experienced increasing demand in the second quarter within its US and UK e-commerce businesses. They are providing greater convenience for its customers, such as through being able to return items purchased online via its physical stores and vice-versa. This could help to differentiate the company from its value retail peers and may increase its competitive advantage.

The company is preparing for the e-commerce launch of its Marshalls subsidiary, which it expects to take place in the second half of the current year. This could further strengthen its market position relative to its sector peers.

Increasing customer loyalty

The company reported in its second quarter results that it has recorded customer growth in its loyalty programs across the US, UK and Canada. TJX's loyalty program provides it with a variety of data on its customers and their spending habits that can be used to refine its sourcing initiatives and its pricing. Its increasing number of loyalty program members may lead to higher customer conversion rates as it integrates increasingly personalized recommendations into its loyalty scheme.

Additionally, TJX is seeking to become a year-round gifting destination, rather than focusing its gifting products for major holidays. This could enable it to target a broader customer demographic, and may increase the size of its total addressable market.

Potential risks

The company's Marmaxx and HomeGoods segments reported declines in their profit margins of 20 basis points and 170 basis points respectively in the second quarter. This was largely due to the business recording increased costs in its supply chain, as well as higher markdowns compared to the same period of the prior year.

The business anticipates that tariffs placed on Chinese imports will have a small negative impact on its full-year performance. Since it does not commit beyond the near term to its product sourcing, tariffs could create additional cost uncertainty for the company over the medium term that impacts negatively on its sales and margins.

In response, TJX reported in its second quarter results that it has a strategy to improve its efficiency in the upcoming quarters in order to offset recent declines in its margins. This may improve investor sentiment towards the stock and boost its near-term financial forecasts.

The company could leverage its flexible store format and distribution network to increase its market share during a challenging period for the wider retail sector. Its diverse portfolio of retail businesses may allow it to capitalize on attractive real estate locations should they become available due to store closures among its sector peers.

Outlook

Analysts forecast that TJX will record a 9% increase in its earnings per share in fiscal 2021. Its forward price-earnings ratio of 22 suggests that it offers investment appeal given its long-term growth outlook.

Disclosure: the author has no position in any companies mentioned.

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This article first appeared on GuruFocus.