Taking TJX back to the max
Getting the "max for the minimum" has taken on new meaning at the Framingham-based TJX Cos. Inc., undergoing a corporate makeover to kick up passion and profits at its off-price retail empire.
Under the leadership of off-price pioneer and company Chairman Bernard "Ben" Cammarata, who came out of retirement to become acting CEO last fall, the company rang up its second consecutive quarter of improved results last month. Q1 2007 profits climbed 21 percent and earnings per share were up 24 percent over last year.But as Cammarata noted in a May 16 conference call with analysts regarding the quarter that ended April 29, there is still work to be done. While TJX buyers are taking more risks, snagging more off-price deals and infusing excitement back into its core MarMaxx business of 801 T.J. Maxx, and 721 Marshalls stores, the company is struggling with flat comparative sales at stores more than one year old (or same-store sales.) And it still needs to figure out the future of its newer divisions, the less profitable A.J. Wright and HomeGoods stores and the non-off-price Bob’s Stores, which remain in the red.
Sherry Lang, vice president of investor and public relations, noted in a recent WBJ interview that the biggest challenge for TJX going forward is "to stay focused on execution. Execution, execution, execution." The company, she says, had "become a bit less entrepreneurial in our thinking and our culture" and is striving to get back on track.
Improving in-store merchandizing, infusing stores with more exciting products, and generally "driving profitable sales" by returning to the fundamentals that grew TJX into the leading off-price retailer of apparel and home goods in the U.S. and worldwide are key to the execution mantra, Lang indicates. What’s more, the company will be beefing up its characteristically low advertising budget by $15 million to $20 million this year to put out more hard-hitting campaigns about specific bargains.
Hardly in dire straits
It’s not like TJX needs a major overhaul, says Jeffrey Stein, an analyst at KeyBanc Capital Markets who follows the company. He notes it is "still an incredibly profitable company."
To some degree, Stein says, TJX has become a victim of its own success. Highly regarded on Wall Street for its business model and earnings track record, the company has had trouble figuring out how to reinvest its free cash flow to insure future growth. Its core business, centering on T.J. Maxx and Marshalls, is mature, growing at a respectable, if slower, mid-single-digits rate. So TJX has tried to expand A.J. Wright, HomeGoods and Bob’s Stores.
But the company has rapidly expanded those new divisions, Stein says, without "having validated those business models." HomeGoods, Stein says, targets a retail segment that is under pressure from plenty of competition. And, he contends, home furnishings don’t have the brand recognition that apparel does and that TJX has centered its off-price strategy on so successfully. Customers who recognize the value T.J. Maxx offers in designer jeans have a more difficult time determining if they’re getting a deal on a lamp or end table.
A.J. Wright’s quest to be the off-price store for the lower income customer is also a tough market, according to Stein. Such customers are under duress right now with rising costs.
And Stein considers TJX’s acquisition of Bob’s Stores in 2003 just a plain "mistake." The casual sportswear stores are not off-price and are generally geared toward men.
Over the next several months, Stein and other analysts indicate, the company needs to decide which of its smaller divisions are "keepers" and which it needs to shed.
Lang says TJX does still see some room to grow its T.J. Maxx and Marshalls to as many as 1800 stores in the U.S. — nearly 300 more than it has now. She acknowledges that A.J. Wright and HomeGoods have become a bit too spread out in the course of their rapid store expansions and that the company will pursue a much slower growth strategy in 2006.
Bob’s Stores need to "make dramatic improvement" but do have synergies with TJX’s retail niche, Lang insists. Bob’s is a big-box retailer that sells branded apparel, she says, adding, "We like the business."
Changes underway
TJX has undergone a series of changes since last September, when Cammarata took over the helm after former CEO Edmond English resigned in the midst of lackluster results (profits fell by 14.8 in Q3 2006 and same-store sales were flat). English had taken over as CEO from Cammarata in 2000 and opened more than 900 stores during his tenure. Cammarata — who orchestrated TJX’s success as CEO from 1976 to 2000 – is joined in his makeover efforts by new TJX President Carol Meyrowitz. Meyrowitz is a 20-year TJX veteran, having served as a senior vice president and the president of the MarMaxx division before leaving the company in January of 2005.
Besides returning to what he calls "sweaty palms" buying, Cammarata and his team cut expenses, eliminating 250 positions at the company headquarters. Company officials took a 10 percent pay cut. TJX also substantially cut back its store expansion plans. It will add only one Bob’s Store in 2006; 10 A. J. Wright stores, down from 25 last year; and 15 HomeGoods, down from 40.
TJX notes continued strong performances at its divisions outside the U.S. In Canada, it operates 174 Winners and 58 HomeSense stores. In Europe, it has 198 T.K. Maxx stores.
Cammarata also closed TJX’s e-commerce website venture last October after a little more than a year of operation, citing limits in the merchandise it could offer and disappointing results. Lang says scrapping the Internet sales effort was part of TJX’s efforts to "narrow" its focus and "not spread ourselves so thin." She says the company may revisit the e-commerce concept in the future. The "jury is still out," Lang says, on how well the Internet works for off-price retail.
Lang would not comment on whether more staffing cuts are in the wings. She says the company will continue to hone expenses.
TJX is also coping with another factor that has some analysts expressing concern. It seems its push to do more aggressive off-price buying netted so many good deals that the average ticket price for Q1 sales dropped, causing the same-store sales to stay fairly flat. TJX stores in operation for more than one year saw sales edge up by 1 percent compared to Q1 in the previous quarter. Last year, first-quarter same store sales were up 3 percent.
Cammarata and Meyrowitz, who note that the more aggressive buying strategy did improve the company gross profit margin, told analysts the company will address the lower average ticket price by tweaking the merchandise mix to include more higher-end brands.
As for its newer divisions, Cammarata told analysts the company made good progress in improving sales at HomeGoods and A.J. Wright, both with 3 percent same store sales. He said it is still struggling to find the "right message" in advertising A.J. Wright. Bob’s Stores, Cammarata said, saw same store sales increase 2 percent and will build its women’s casual sportswear component to expand its market
Meyrowitz indicated to analysts that home-related merchandise did well in Q1 and rejected contentions that it could have trouble distinguishing itself in that highly competitive area.
As TJX works to refine its newer retail divisions and maximize its maturing core business, analysts note that it is doing so in a much more competitive retail environment. But Lang says she hasn’t seen any major changes in TJX’s market, aside from the very recent consolidation of department stores. That trend, she says, is actually a positive thing for TJX. In the short term, she says, consolidation of department stores could disrupt their relationship with vendors, which could provide some off-price buying opportunities. In the long term, consolidation of department stores should make them less promotional.
Retail experts following TJX’s makeover generally express confidence that the off-price leader will succeed in regaining its winning focus.
Retail analyst Kurt Barnard of Monclair, NJ-based Barnard’s Retail Trend Report, says there’s no question TJX has made some mistakes in terms of pricing and merchandise assortment in recent years. "Generally, they became a bit confused as to what they were doing," he says. The lapse has showed in TJX stores, Barnard says, which had begun to be less customer-attractive, "cluttered and dowdy."
But Barnard says Cammarata is "an old hand" at the off-price business and is extremely competent. While it’s too early to judge whether the acting CEO has turned the ship around, Barnard says he has a "good feeling" about his efforts.
Micky Baca can be reached at mbaca@wbjournal.com
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