Brick and mortar retail is something that has struggled for years thanks to the rise of online based competition, especially from the likes of Amazon (AMZN).

However, that doesn’t mean that all retailers are created equal.

In fact, TJX Companies (TJX) in particular has spent decades not just successfully fending off the competition, but enriching long-term shareholders to an incredible degree.

TJX Companies has been one of the hottest stocks of the last two decades, tripling the S&P’s compound annual total returns.

TJX Companies

Source: DividendChannel.com

However, while impressive past performance may grab one’s attention, what is most impressive about TJX is that the company’s growth runway appears to remain long and its dividend growth prospects very bright.

The company has raised its dividend for two straight decades at a double-digit annual pace and will almost certainly join the S&P Dividend Aristocrats in five years. Investors can learn more about dividend aristocrats and screen the entire list here.

Let’s take a look at why TJX seems likely to remain one of America’s best long-term dividend growth stocks and could deserves a place in your diversified income growth portfolio.

Business Description

Founded over 40 years ago, TJX Companies has grown into the world’s largest off-price retailer, selling deeply discounted excess brand-name merchandise from other retailers.

TJX Companies’ core customer is a fashion and value conscious female shopper between 25 and 54 years old and making a middle to upper-middle income. This type of customer usually shops high-end and moderate department and specialty stores, as well as online.

The company’s primary chains are T.J. Maxx, Marshalls, HomeGoods, Winners, HomeSense, Trade Secret, and Sierra Trading Post, an off-price internet retailer of brand name merchandise.

TJX Companies

By product category, apparel and footwear generated 55% of total sales in fiscal 2016, followed by home fashions (30%) and jewelry and accessories (15%).

Operating over 3,600 stores in nine countries on three continents, TJX has been the only off-price retailer to successfully expand overseas.

Business Segment Q3 2016 Sales % of Sales
Marmaxx (U.S.) $5.253 billion 63.4%
HomeGoods (U.S.) $1.078 billion 13.0%
TJX Canada $855 million 10.3%
TJX International (Europe + Australia) $1.105 billion 13.3%
Total $8.292 billion 100%

Source: TJX Earnings Release

That being said, TJX’s international expansion is still young with 76.4% of sales coming from the U.S.

Business Analysis

While most retailers are highly cyclical with their fortune’s rising and falling with the economy, TJX’s business model of buying excess capacity merchandise from other retailers and offering it to customers at a 20% to 60% discount has proven a hit in both good economic times and bad.

In fact, since the company’s IPO there has been only a single year in which same store sales, or comps, declined. A combination of strong brands and reasonable prices has helped TJX power through almost all macro environments.

TJX Companies

Source: TJX Companies Investor Presentation

The strong consistency in comps, combined with steady expansion in its store count has resulted in not just highly consistent sales growth, but also overall revenue growth that is the envy of the retail industry.

The climb in TJX Companies’ net sales and profits has been steady and unstoppable for decades.

TJX Companies

Combined with an aggressive share buyback program (3.9% CAGR over the last five years), this has helped TJX to post exceptional growth in the two most important metrics for dividend investors, EPS and free cash flow, or FCF per share.

TJX Companies

Source: Simply Safe Dividends

TJX Companies

Source: Simply Safe Dividends

Of course, what makes a great long-term dividend investment isn’t just impressive growth that is a result of financial engineering. What makes TJX such a great investment is its competitive advantage, which is the world’s largest merchandising sourcing system, made up of over 1,000 purchasing partners sourcing goods from over 18,000 vendors in more than 100 countries.

This allows TJX to make sure it has a large and varied supply of name brand merchandise it can offer to its customers. Many of its rivals do not have access to these vendor sourcing networks, and TJX’s relatively low selling prices makes it even harder for new competitors to copy the business and turn a profit.

Better yet, the company has spent decades fine-tuning its supply chain, including 20 state-of-the-art automated distribution centers, to make sure that each of its stores has the right product mix to meet local customer demand.

Another one of the company’s strongest competitive advantages is its enormous economies of scale. The way off-brand retail works is that a company will purchase excess merchandise from other retailers, and then offer them at a discount to consumers.

Because of its vast supply chain, as well as financial resources, TJX is able to make deals that other off-price retailers can’t match. This includes buying odd lot orders, paying immediately (instead of on credit), and waiving return rights for products it can’t sell.

This is all due to TJX’s proprietary merchandise management system, which uses vast amounts of store level and customer data (courtesy of its popular loyalty card programs) to know just what merchandise needs to go where to maximize the rate of turnover and minimize the need to offer discounts on its own merchandise.

Thanks to the success of this system, in fiscal 2016 TJX was able to turnover its inventory every 61 days, helping it to maximize its merchandise margins, which has led to a steady improvement in profitability over the years.

TJX Companies

Source: Simply Safe Dividends

TJX Companies

Source: Simply Safe Dividends

I generally prefer not to invest in the retail industry because consumers’ preferences and tastes are continuously evolving at such a fast pace, making it difficult for companies to create long-term competitive advantages.

However, TJX Companies is built for change. Inside the company’s stores, you will notice that there are no walls and almost all of its fixtures are on wheels, making it very easy to shift in and out of product categories.

When combined with its fast inventory turnover, TJX can quickly read and react to evolving consumer preferences, making sure it has the right products available at the right time (and at the right price).

From hard-hit customers to millionaires, TJX can efficiently flex its product line to capture an even wider customer demographic base while maintaining low inventory costs.

In other words, TJX is arguably the most flexible major retailer in the world that has found a way to thrive in virtually every environment. The sales growth charts previously discussed underscore this major advantage.

However, no investment is ever without risks.

Key Risks

While TJX Companies may be one of the premier retail stocks, nonetheless there are four main risks to be aware of.

First, while TJX may have been among the first off-price retailers, and thus has created a corporate culture that has mastered the art of brick and mortar retail even in the age of Amazon, that doesn’t mean that competition isn’t rising.

For example, Ross Stores (ROST), Kohl’s (KSS), and even traditional retailers such as Macy’s (M) have

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