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TJX Faces Tougher Times But Looks Ready for Them

Recent results posted by TJX (TJX) demonstrate that the company really has had its own way in recent months, but circumstances will get tougher for the retailer going forward.

How it fares will say something about how fashion retail will develop in the future.

The assessment about its prospects shouldn't be taken as a suggestion TJX is going to do poorly. It has carefully positioned itself to make the most of the recovery and the economy beyond. In fact, how the company has set itself up is what makes it a bell weather for fashion retailing's future and one of the more interesting chains to watch.

In its five-week fiscal December, TJX sales gained 21 percent to $2.9 billion. That helped boost the 48-week year-to-date result to an eight percent sales gain and $19 billion total. Comparable store sales, those at locations open for at least a year, gained 14 percent in the quarter and six percent in the year to date.

Citigroup analyst Kimberly Greenberger, in a research note, raised her TJX earnings guidance for 2010 and 2011 based, in part, on a two-and-a-half percentage point expansion of gross margin. Yet she pointed out:

We believe 2009 gross margin is peaking and expect slight contraction in 2010 to 2011 as more rational inventory management across the broad retail sector should reduce the amount of distressed apparel inventory available.
The economy has contributed to success at TJX by encouraging consumers to patronize it as an inexpensive source of fashion. That conclusion is supported by the sales and earnings gains it has reported over the past few quarters, a period when retailers such as luxury department store chains have suffered declining results, with slipping apparel sales contributing to their distress. Those retailers have responded by buying fewer goods, as slower port shipments and fewer deep clearance sales around the holiday season evince.

But the economy also contributed to TJX fortunes by creating a glut of unsold merchandise TJX could purchase to sell at its stores. The glut, which became particularly pronounced around holiday 2008, meant that both more and better goods were available for bargain retailers. TJX actually played on that fact in its advertising, dramatizing how it could provide designer apparel at cut-rate prices. Now, though, as the glut shrinks back to the normal level of excess inventory, the retailer's cost of product acquisition will return to a more normal level, too.

Competition is bound to get tougher as well. More upscale retailers are looking at ways to deal with a customer who doesn't feel as free to spend on fashion. One reason that Nordstrom (JWN) and Saks (SKS) have added outlets -- where items that haven't sold quickly enough in the department stores are offered at a discount -- is to tap into the same audience that TJX has been building. Now the Bloomingdale's division of Macy's (M) plans to open outlet stores. Lord & Taylor may be considering such a move as well. A lot of retailer these days want to generate sales from consumers who still have a taste for fashion but who insist on a bargain.

As noted, however, TJX has used its period of plenty to set itself for the future. It's Maxxinista advertising has touted the company's T.J. Maxx stores especially as destinations for low-priced fashion, but generally, it has positioned the chains it operates, including Marshall's and HomeGoods, as the right locations for cost-conscious consumers to shop.
For those reasons, the fortunes of TJX should indicate just how consumers are responding to the post-recession economic climate. If they stick with TJX, as they have done so far in the recovery, price-conscious fashion consumers may prompt changes in how upscale apparel retailers approach the market. The advantages in personal service and store environment that have traditionally helped luxury retailers attract customers may not be the lure they once were. In the case of luxury department stores, expanding outlets operations could fall short. Changes to the main department store operations may be necessary to keep them viable. They might not wind up looking like T.J. Maxx, but they may be forced to redefine themselves as Macy's has struggled to do at a different stratum of the department store sector.