Tag: US Market
Near-term sales face headwinds outside the United States, with ongoing store closures in Europe and Canada (roughly 300 units as of May 1). However, we still believe TJX and its peers benefit from durable advantages over full-price apparel and home décor sellers, with strong brands, store experiences, and scale working to keep returns on invested capital high (high-20s average over the next decade).
TJX’s value proposition should resonate even as retail competition intensifies. While digital retailers are a factor (particularly if the pandemic durably increases e-commerce adoption), we see the off-price channel as relatively well protected, as the low-frills buying experience and 20%-60% discounts relative to the full-price channel result in competitive prices and superior economics after considering shipping and return costs. Vendors’ desire for discretion also favors physical stores that can discreetly sell merchandise without diluting top brands’ cachet.
With a global presence, TJX leverages an extensive merchandising operation and proprietary inventory management system to maintain a fast-changing assortment at significant discounts. We believe TJX’s ability to deliver a high-value lineup while maintaining strong returns is driven by its difficult-to-replicate sourcing and distribution agility. By accepting incomplete assortments without return privileges, paying promptly, and stocking brands discreetly (preserving labels’ conventional-channel pricing power by avoiding the stigma of a consistent discount presence), TJX is a valued partner for its more than 21,000 vendors, in our view. As a result, TJX can opportunistically offer a fast-changing, high-value assortment in a treasure-hunt format that is hard to replicate digitally.
Financial Strength
TJX’s financial health is sound, and we expect it to weather the COVID-19 crisis. The firm drew $1 billion from its revolver and subsequently issued $4 billion in long-dated notes to bridge the crisis, and, with the worst of the pandemic seemingly passed, has since repaid the revolver and nearly $3 billion of other indebtedness. The firm has a historically conservative approach to debt that we do not expect to change. Management states that its maximum store count potential is 3,000 units at Marmaxx (from 2,450 at the end of fiscal 2021), 1,500 at HomeGoods (from 855), 650 in Canada (from 525), and 1,125 in its existing other international markets (from 742).
Bulls Say
- With an agile merchandising and distribution network, TJX keeps store inventory fresh, spurring traffic while minimizing risks associated with fashion trends and freeing capital.
- We believe digital retailers will have a more difficult time in encroaching on the off-price channel, particularly given the sector’s already-low prices and vendors’ demand for discretion.
- TJX’s international operations should offer ample runway for growth and associated incremental cost leverage, with the store banners and off-price concept translating well abroad.
Company Profile
TJX is a leading off-price retailer of apparel, home fashions, and other merchandise. It sells a variety of branded goods, opportunistically buying inventory from a network of over 21,000 vendors worldwide. TJX targets undercutting conventional retailers’ regular prices by 20%-60%, capitalizing on a flexible merchandising network, relatively low-frills stores, and a treasure-hunt shopping experience to drive margins and inventory turnover. TJX derived 79% of fiscal 2021 revenue from the United States, with 11% from Europe (mostly the United Kingdom and Germany), 9% from Canada, and the remainder from Australia. The company operated 4,572 stores at the end of fiscal 2021 under the T.J. Maxx, T.K. Maxx, Marshalls, HomeGoods, Winners, Homesense, Winners, and Sierra banners.
(Source: Morningstar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
With third-party cookies not blocked on Google’s Chrome browser, targeted advertising, which has used cookies for more than two decades, will remain effective longer than anticipated. The use of cookies allows for more effective targeting, increasing the return on ad spending and thus resulting in higher demand by advertisers. This type of targeting allows for an increasing role and revenue for adtech Criteo. Plus, Criteo, other ad-tech firms, and Google will have more time to develop and test replacements for cookies. We increased our projections and now expect Criteo’s top-line growth to average 9.5% annually through 2025 (higher than our previous assumption of 8%), which will also create operating leverage and expand average operating margin to 13.3% (compared with 15% prior to the pandemic, and higher than our previous 12.6% assumption).
In reaction to Google’s decision, Criteo stock jumped more than 12% and is trading at 1.3 times our fair value estimate. The firm’s current market capitalization of $2.7 billion is not far off from the $2.8 billion it hit in the second half of 2017, when the market expected 5-year average net revenue growth in the mid-teens off a higher base.
Criteo’s Future Outlook
We think today’s reaction clearly displays the firm’s dependency on Google’s digital advertising platform and supports our no-moat and very high uncertainty ratings for Criteo. In our view, uncertainties surrounding possible alternatives and their effectiveness remain, and they could force advertisers to allocate less toward targeting and retargeting as we approach the second half of 2023.
While we think Criteo is overvalued, we remain pleased with the firm’s efforts to minimize impact of cookie-less browsers. We are skeptical about the adoption and possible success of the Unified ID solution, but we do see possibly attractive ROIs generated from campaigns that combine first-party data (data from Criteo’s clients) with contextual marketing. We think with access to a large amount of its client’s first-party data, Criteo is well-positioned to leverage nearly any new solution. In addition, we applaud what appears to be the firm’s main strategy–to not invest in designing and creating another version of third-party cookies. Criteo continues to invest in solutions based on contextual advertising which we think will be welcomed by Google, publishers, and ad buyers now and in two years.
Lastly, we remain pleased with the firm’s efforts to diversify its revenue with the retail media segment, which represented 10% of total net revenue in the most recent quarter. The retail media business not only helps retailers market their products and services on other sites or apps (demand for ad inventory), but it also allows them to further monetize their own online properties by selling more ad inventory (supply of ad inventory).
Company profile
Headquartered in Paris, Criteo is one of the leading ad-tech companies in the growing digital ad market. Its technology, mainly the Criteo Engine, allows advertisers to launch multichannel and cross-device marketing campaigns in real time using retarget digital display ads. With real-time return on investment analysis of the ads, the firm’s clients can adjust their marketing strategies dynamically.
(Source: Morningstar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
). Although the present environment poses unique challenges, the off-price sector has performed well in such situations historically (Ross and TJX saw low- to mid-single-digit percentage comparable growth in 2008-09), and we expect Burlington to exit the crisis in better shape than full-price retailers.
Burlington’s strong inventory management operations hold inventory turnover above that of full-price stores, driving traffic with a fast-changing assortment. We believe off-price chains are valuable to manufacturers looking to sell excess product, as they offer flexibility, prompt payment, and discretion by avoiding advertising the brands they carry (important to producers looking to protect conventional channel pricing power). Product availability should stay high, as vendors’ production forecasting is complicated by factors such as mercurial customer preferences, channel diffusion, and unpredictable weather.
We believe off-price retailers such as Burlington are better positioned than other physical sellers to fend off digital rivals. The treasure hunt experience and low-frills environment enable steep discounts relative to the full-price channel (up to 60% for Burlington), limiting price gaps. Shipping and return costs (in addition to vendors’ restrictions) also limit the discounts digital sellers can offer.
Financial Strength
Burlington had reduced leverage meaningfully since its 2013 initial public offering (fiscal 2013 net debt was around 3.3 times EBITDA, versus a 0.7 mark in fiscal 2019, before the pandemic), and we expect growth and ample cash flows to keep the balance sheet strong despite ambitious expansion plans. We expect Burlington will take more than a decade to reach its 2,000-unit footprint target, in addition to relocations of existing stores. Considering Burlington’s store network is mostly leased and its payback period averages less than three years, we expect the firm to dedicate around 4% of sales to capital expenditures over the next decade (roughly $500 million on average annually). We expect the firm will continue to return excess capital to shareholders via buybacks after a pandemic-related pause; however, we expect this to eventually be augmented by a dividend approaching 40% of earnings (which we forecast the firm to initiate in fiscal 2023). We assume roughly 45% of long-term annual operating cash flow is returned to shareholders via repurchases. Burlington could pursue acquisitions of regional chains or other concepts (including operations outside the United States) to accelerate its growth, though we do not incorporate any such purchases into our forecasts because of the uncertain timing and nature of any deal.
Bulls Say
-With low prices spurred by efficiency, relatively high inventory turnover, and a differentiated value proposition to customers, Burlington should be relatively well protected from digital rivals.
– As Burlington’s assortment shifts toward more advantaged categories for the off-price channel (such as ladies’ apparel and home), performance should continue to improve.
– Burlington should be able to downsize its locations’ average square footage as it adds new, smaller stores and relocates existing inefficient units, boosting margins and the customer experience.
Company profile
The third-largest American off-price apparel and home fashion retail firm, with 761 stores as of the end of fiscal 2020, Burlington Stores offers an assortment of products from over 5,000 brands through an everyday low price approach that undercuts conventional retailers’ regular prices by up to 60%. The company focuses on providing a treasure hunt experience, with a quickly changing array of merchandise in a relatively low-frills shopping environment. In fiscal 2020, 21% of sales came from women’s ready-to-wear apparel, 21% from accessories and footwear, 19% from menswear, 19% from home décor, 15% from youth apparel and baby, and 5% from coats. All sales come from the United States.
(Source: Morningstar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
