Should you buy TJX shares at $ 70?

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We believe Citi Trends (NASDAQ: CTRN) stock is currently better valued than TJX Companies (NYSE: TJX) stock. TJX’s current price-to-operating profit ratio of 26x is above the 9x levels for CTRN. But does this valuation gap make sense? We don’t think so, especially if we look at the fundamentals. Specifically, we come to our conclusion by examining the historical trends in revenues and operating results of these companies. Our dashboard Better bet than TJX: Pay less to get more CTRN has more details – parts of which are summarized below.

1. Income growth

TJX

TJX
revenue grew at an average rate of -2.4% over the past three years, compared to revenue growth of 1.2% for Citi Trends

CTRN
. Both retailers benefited from strong demand for clothing and people returning to stores in the first half of fiscal 2021 – but even as we look at revenue growth over the past twelve months – TJX’s revenue growth of 28% is less than 34% growth for Citi Trends. While we recognize that CTRN’s revenue base of just $ 780 million (as of 2020) is much lower than that of around $ 32 billion for TJX, the growth recorded by Citi Trends is nonetheless significant.

  • Citi Trends is a value-priced clothing and fashion accessories retailer targeting a core clientele of African American and Latin American families. The company’s net sales climbed 10% year-over-year to $ 237 million and increased 30% over two years. Notably, same-store sales increased 25.6% from the second quarter of 2019, despite the temporary closure of some stores due to Covid. In addition, the retailer’s gross margin stood at 40.8%, up 350 basis points from the second quarter of 2019, while the operating margin of 6.9% was a record for the company. for any second trimester, which is traditionally a milder period in terms of seasonality.
  • TJX is a low cost retailer that owns Marshalls, TJ Maxx and HomeGoods. The company’s revenue soared 81% year-on-year to $ 12 billion (also up 23% year-over-year), driven by a 20% year-on-year increase in same-store sales in the second trimester. In addition, the company’s adjusted EPS rose 27% year-on-year to $ 0.79, excluding the one-time debt extinguishment fee of $ 0.15 per share. That said, the retailer sells more premium products and relies less on price cuts. The HomeGoods segment performs better as consumers continue to spend aggressively on home furnishings.

2. Growth in operating income

The three-year average operating profit growth for TJX is -28%, well below 19% for Citi Trends. Better sales growth for the latter led to an increase in operating profit. Over the past twelve months, CTRN’s operating profit growth also compares favorably with that of TJX.

The net of everything

Ciri Trends has experienced higher revenue and operating profit growth than TJX over the past twelve months, as well as the past three years. Yet CTRN has a comparatively lower price / operating income ratio. This underperformance of TJX in terms of revenue growth and operating profit relative to Citi Trends reinforces our conclusion that the stock is expensive compared to its counterpart, and we believe that this valuation gap will eventually narrow. over time to favor the cheaper name, Citi Trends.

It’s also helpful to see how TJX stacks up against its other peers. TJX Stock Comparison With Peers shows how it stacks up against its peers on the metrics that matter.

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