Message Font: Serif | Sans-Serif
No. of Recommendations: 14
Another long one….


TJX versus ROST. First some background. I first heard about TJX and ROST back
in January from Whitney Tilson (WT). At the time I think (this is from memory
as usual) WT was discussing how rare it is to find businesses with good ROIC
selling at less than 15x earnings. I think he ran a screen on Value Line and
came up with a bunch of companies including ROST and TJX (in fact he talks about
this in his boring article on ROST). I promptly forgot all about this.
Then around the beginning of May I had a “brilliant” idea - why
not run a screen and look for companies with growth greater than 15% a year over
the last 5 years, P/E less than 20x, ROE > 20x etc. I say “brilliant” because
of course it's something I should have done a long time ago, I mean it's not
exactly an original idea – but I had completely forgotten that WT had already
done this.

So I found a bunch of companies and started checking 10-Ks. I decided TJX and
ROST were worth a further look and started comparing some basic figures. Before
we get to that here is a brief description of TJX (from the most recent 10K).
For an overview of ROST see WT's article in the Boring Archives – Jun 19.

The TJX Companies, Inc. (TJX) is the largest off-price retailer of apparel
and home fashions in the United States and worldwide. We operate 632 T.J. Maxx
stores, 505 Marshalls stores and 100 Winners Apparel Ltd. stores, a Canadian
off-price family apparel and home fashions chain. We also operate HomeGoods, a
U.S. off-price home fashions chain with 51 stores, and T.K. Maxx, an off-price
family apparel and home fashions chain in the United Kingdom, the Republic of
Ireland and the Netherlands, which has 54 stores. In addition, A.J. Wright, a
new United States chain of off-price family apparel and home fashions stores
begun in 1998 and targeted to moderate income customers, operates 15 stores.


T.J. Maxx was founded in 1976 and is today the largest off-price retailer
in the United States. We acquired Marshalls in 1995, which is the second largest
off-price retailer in the United States. TJX has successfully retained the
separate identities of the T.J. Maxx and Marshalls stores through merchandising,
product assortment, marketing and store appearance. This has allowed us to give
our customers reasons to shop at both chains.

TJX has successfully integrated many administrative and operational
functions of T.J. Maxx and Marshalls. These chains operate with a common buying
and merchandising organization and have consolidated administrative functions,
including finance, real estate, human resources and systems. The combined
organization, known as The Marmaxx Group, offers us increased leverage to
purchase merchandise at favorable prices and allows us to operate with a low
cost structure. This is key to T.J. Maxx's and Marshalls' ability to sell
quality, brand-name merchandise at substantial discounts.

Initial Numbers I compared:

Initially I did a comparison of the following figures based on 10K for YE 2000 –
both TJX and ROST YE is end of Jan.(by the way, for definitions of some of the
terms/calculations see end of post):

. ROA ROE Rough Ent. Owner's EV/OE Inv. Flowie
. ROIC Val.(1) Earnings Turns
TJX: 18.8% 49.4% 34% 5.50 B 420.6 M 13.07 5.35 1.05
ROSS: 15.8% 38% 28.7% 1.72 B 131.6 M 13.07 3.4 1.26

(1) Enterprise Value calculated around first week of May 2000. I think if you re-calculate at today's prices you will find that ROST is selling at a good discount to TJX – but ROST has issued a profits warning – TJX have said recent SSS came in lower than expected but didn't say anything about earnings – mind you I didn't track down if they do conference calls or if they do if they are open to the public – maybe they are like WWY who don't play the earnings game at all?

Both companies display some great numbers but based on these figures I decided
that TJX was the one to investigate in more detail. I especially liked the
faster inventory turns. Anyway, I investigated and went back over previous 10Ks
and eventually invested in TJX. So I was very interested to see WT's article on
ROST – excellent work as usual, but was surprised there was not more of a
comparison with TJX. So I have now spent some time comparing TJX + ROST and
present my findings below. I will also e-mail WT to see if he would be kind
enough to discuss why he decided on ROST and not TJX. My guess is Whitney liked ROST's very consistent past performance going back to 1987.

When looking at the historical data for TJX it seems that the acquisition of
Marshalls unleashed some major synergies. For example from 1996 to 1999:

Revenues increased: 1.31 times
Net Profits increased: 2.46 times
EPS increased: 2.72 times
Total Assets increased: 1.12 times
ROA went from: 8.5% to 18.8%

Every time I look at these numbers I wonder if I missed something (a poolings of
interest or asset impairment/big bath) but I can't find anything. Marshalls was
accounted for as a purchase and the only comment on impairment is (from YE96

The Company recorded a pre-tax charge of $35 million in fiscal 1996 for the
closing of approximately 30 T.J. Maxx stores in connection with the acquisition
of Marshalls, which consists primarily of estimated costs associated with
subletting stores or otherwise disposing of store leases. During fiscal 1997,
the reserve requirement was reduced by $8 million as the actual cost of closing
stores was less than anticipated. This savings, however, was more than offset by
a $12.2 million impairment charge on certain T.J. Maxx distribution center
assets relating to a restructuring and realignment plan of the T.J. Maxx and
Marshalls distribution facilities. The net impact of these items is reflected in
selling, general and administrative expenses.

There was also a disposal during 1996:

Effective December 7, 1996, the Company sold its Chadwick's of Boston catalog
division … The sale of the division resulted in a gain on disposal of $125.6
million (net of income taxes of $15.2 million), or $1.39 per common share. This
gain includes utilization of $125.8 million of a capital loss carryforward,
providing tax benefits of $44 million (see Note G).

There was also a disposal during 1995:

Effective September 30, 1995, the Company sold its Hit or Miss division to
members of Hit or Miss management and outside investors. … The sale of the
division resulted in a loss on disposal of $31.7 million…

So there is some stuff going on here with disposals and write downs due to the
acquisition, but nothing significant in the context of Total Assets of 2.5 B at

Here are some comparison figures for TJX and ROST:

. % Chg in % Chg in ROA % Chg in % Chg in ROA
. Revs. EPS Revs EPS
1997 10.46 44.26 11.75 17.7 48.1 15.9
1998 7.58 46.59 15.77 9.74 19.7 15.4
1999 10.65 28.68 18.78 13.12 17.14 15.8

Again, both companies show pretty good figures. TJX's revenues are growing more
slowly, but this is made up for with better EPS and ROA figures.
.           TJX                                 ROST
. Rough % Chg in ROE Rough % Chg in ROE
. ROIC.* Shares Out ROIC* Shares out
1997 25% -0.3 31.3 21.9 +1.0 36.22
1998 47.5% -4.3 44.2 36.44 -4.3% 38.84
1999 33.9% -5.0 49.4 28.7 -4.21% 38.1

*The ROIC figures are uneven because I have used Owner's Earnings instead of NOPAT.

Again, both have good figures and again TJX edges out ROST.
.             TJX                                  ROST
. Gross SGA % Net Gross SGA % Net
. Margin of Revs. Margin Margin of Revs Margin
1997 23.2% 16.05 4.15 30.2 18.81% 5.91
1998 25.1% 16.18 5.45 30.63 19.03 6.13
1999 25.2% 15.40 5.99 31.04 19.15 6.08

What's interesting here is ROST's much better Gross Margin. The only thing I
can think of is that it is to do with ROST's concept of “packaways” where it
buys fashion basics after the season ends and stores them until the following
years season. TJX seems to use a more opportunistic method, buying end-of-lines
and closeouts which might be a lower margin business. This might also account
for the higher SG&A of ROST – due to warehouse costs for the “packaways” – but
I would have thought that would be in SG&A?
In any case, by the time we get to Net Margins, the impact of higher Gross
margins has almost disappeared.
.                   TJX                                 ROST
. Cost of Opts % Chg Sales per Cost of Opts % Chg in Sales per
. % of Profit in Stores. Store* % of Profit Stores Store*
1997 1.79% 3.08 6.31M 2.86 5.18 6.12M
1998 2.01% 6.40 6.38M 3.75 7.38 6.25M
1999 2.45% 8.91 6.48M 4.87 8.31 6.53M

*Sales per store is interesting because the average size of a TJX store is 30k sq. ft. and ROST is only 22.6k sq. ft. I don't really know why that is, part of it may relate to ROST's higher Gross Margins.

ROST's cost of options as a percentage of profits is almost twice that of TJX's.
.                   TJX                               ROST
. Invent. CCC Flowie Invent CCC Flowie
. T/O T/O
1997 4.77 41.48 1.07 3.31 57.70 1.37
1998 5.02 37.43 0.98 3.25 53.83 1.23
1999 5.35 35.86 1.05 3.40 54.35 1.26

Again, TJX is better (significantly so?) than ROST. A RuleMaker would be proud of that Flowie!

Pros and Cons
TJX has better numbers, at least in the last few years. However, ROST has been a
very consistent long term performer. This from Whitney's article:

Revenues have grown every year since 1987, and have compounded at 12.9% for the past 10 years and at 14.4% for the past five years.

Ross hasn't lost money since 1986 and earnings per share have grown every year since 1993. Over the past five years, EPS has compounded at a remarkable 40.5%.

Gross and net margins have grown every year since 1994, increasing from 27.1% and 2.9%, respectively, to 31.4% and 6.4% in the latest quarter.

Over the past five years, sales per square foot have grown from $227 to $300, a 5.7% compounded annual increase.

Return on equity has increased from 15% in 1994 to 33% each of the past three years. Over the same period, return on assets has grown from 8% to 17%.

Ross' Flow Ratio is 1.26, at the low end of the range for the past 10 quarters (1.23 to 1.49). A Flowie of 1.26 is good for a retailer, especially one that relies on packaways, which increase inventory levels.

TJX is bigger and is expanding internationally and is exploring new concept
stores (ROST is also doing the latter). On the other hand, ROST, being smaller
could grow faster, but I have read that TJX's size gives it a lot
of leverage in getting closeouts – companies looking to unload stuff like to go
to TJX and get rid of everything in one go. ROST has a bigger stock buy-back
program, but TJX has a 1B$ program in place which is not insignificant. Also
TJX's cost of options as a percent of profits is almost half that of ROST.
However, ROST commands bigger gross margins, it is possible that the “packaway”
concept allows it to buy more fashionable (if out of season) goods – I remember
reading an article (a TMF stocks for Mom I think) about being able to get a
choice of extra small polo shirts all in lime green at TJX! This is actually
where being an overseas investor is problematic, I can't wander into my nearest
TJX or ROST - which is why I focus on the numbers so much. But I wouldn't
invest anywhere else because nowhere else in the world has America's disclosure
requirements. In any case, even if ROST is more fashionable and therefor can
charge more, this advantage almost disappears by the time we get to Net Margins.

So that's it, hopefully Whitney will be kind enough to add a few words of
wisdom. And hopefully I'll still think I'm a Fool and not a fool – but if I did miss something at least I'll have a chance to consider selling.

Regards to all Colin.

PS: I didn't adjust for operating leases or goodwill. Both companies lease
almost all their stores – so the impact of not adjusting for operating leases
should be minor. For TJX I should adjust for Goodwill due to the Marshalls
acquisition, but I don't think it makes a significant difference to the figures.

PPS: I didn't DFCF them yet. After COST I thought I'd take a rest.

PPPS: BRK's moving up nicely – all that insurance industry rates firming up most
be having an impact.

Owner's Earnings: Cash From Operations minus 70% of Cap. Exp or
depreciation x 1.2. I use 70% of Cap. Exp. as based on TJX's 10K about 30% of
Cap. Exp is for new stores. I didn't calculate the rate of new Cap. Exp for
ROST, so a bit arbitrarily (again) I used 30% and for some years where this
didn't make sense I used dep x 1.2.
FCF: Cash From Operations minus Capital Expenditure + plus proceeds
from sale of PP+E.
Rough IC: Total Assets minus NIBCLS minus excess cash, which I define (a
bit arbitrarily) as anything above 5% of Accounts Payable.
NIBCLS: Non Interest Bearing Current Liabilities.
Enterprise Value: Market Cap + Debt – Cash.
ROE: Net Profit (I like to use Net Profit sometimes in addition to OE's – should really use NOPAT) divided by Shareholders Equity + Debt – Cash.
Inventory Turns: Cost of Goods Sold / Inventory
Cash Conversion Cycle: Days Sales Outstanding + Days in Inventory –
Days Payables Outstanding where:
DSO: 360 / (Sales for Period / A/R for Period)
DI: 360 / (Cost of Goods Sold / Inventory)
DPO: 360 / (CoGs / Accounts Payable)
Flowie: (Current Assets - Cash) / (Current Liabilities - ST Debt)
Print the post  


When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.