- Off-price retail hit its stride in Q2 and made headway in Q3, producing growth and a wider margin.
- The TJX Companies outperformed for the quarter and provided cautious guidance.
- Analysts are driving the TJX market higher and may soon push it to a new high.
The big retailers have begun to report, and news from Target (NYSE:TGT) and TJX Companies (NYSE:TJX) has their shares moving in opposite directions. Target is up nearly 15%, and The TJX Companies is down about 3% following their Q3 releases. Nevertheless, Target shares will likely hit a new low soon and The TJX Companies a new high. Here's why.
Off-Price Retail Grows and Gains Momentum
The TJX Companies results were good and showed it is gaining momentum while Target continues struggling. TJX Companies reported 9.3% in YOY revenue growth to outpace the consensus estimates, while Target contracted by 4.2%. Better yet, TJX Companies' YOY growth is accelerating sequentially and may continue in Q4 despite tepid guidance.
Details within the report more than suggest that Target is losing share to The TJX Companies, with Target losing ground in apparel and home goods while The TJX Companies shows strength in those very categories. Segmentally, TJX Companies grew 7% at Marmaxx and 9% at Homegoods, with increases driven 100% by store traffic. Compared to The TJX Companies open-only stores in 2022, the 2023 results are up double-digits across the board. Similar strength should be expected from Ollies Bargain Outlet Holdings (NASDAQ:OLLI), Kohl’s (NYSE:KSS), Burlington Stores (NYSE:BURL), and Ross Stores (NASDAQ:ROST).
Guidance Is Positive and Cautious
TJX Companies' guidance is the primary cause for the post-release share price weakness. The company raised its guidance for the year, initiating for Q4, but the top-end of the earnings range is a bit short of expectations. Regardless, the company expects mid-single-digit growth and solid margin. Because the company shows clear momentum and has outperformed guidance for several quarters, the Q4 outlook is likely cautious. In this scenario, the company may raise its guidance as the quarter progresses. Target expects to see its revenue decline by mid-single digits with a chance for a high-single to low-double-digit contraction.
Margin Improvement, or Margin Improvement, You Be the judge
Both companies showed margin improvement in their reports, but there is a telling difference between them. TJX Companies was able to leverage traffic strength to drive sales and margin, producing better-than-expected earnings and providing a positive outlook for the same. Target, on the other hand, produced a wicked bottom-line beat due to inventory reductions.
While internal efforts to control costs are aiding the bottom line, the 14% YOY reduction is worth $2.38 billion and about 45% of the YTD cash flow. This is great news but unsustainable, and Target plans to lean into new product offerings to drive traffic over the holidays. All TJX Companies has to do to drive traffic is what it has been: providing value to consumers. The TJX Companies inventory is flat compared to last year; its $1.2 billion operating cash flow is purely organic. 
Value and Yield: You Get What You Pay For
Target offers value and yield compared to off-price retailers but struggles to regain traction in a world where off-price is gaining. The risk for investors is that Target shares will remain under pressure for the foreseeable future and provide an even deeper value and higher yield.
TJX Companies trades at a relatively high 25X, near the mid-point for the group, and it has a positive outlook for distribution increase and share repurchases. The Q3 cash flow was sufficient to pay over $1.0 billion in capital returns, including $650 million in share repurchases, while leaving the balance sheet in better shape than at the end of Q3 2022. Shares of Kohl's Corporation pay over 8%, trade at an even deeper discount than Target, and have a similar outlook to TJX Companies.
Analysts Lead TJX Companies Stock Higher
The analysts have been raising their targets and rating for TJX Companies all year. They rate the stock a Moderate Buy with a price target trending higher. The current consensus target is only about 5% above the price action, but it is up 3% since the end of Q2 and more than 25% YOY and may continue to increase. As it is, the consensus target puts the TJX market at a new all-time high.
