Thursday, February 27, 2020

TJX Shares Could Be Primed for Profit Taking

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What’s happening: Shares of TJX Companies hit another record high on Wednesday, after the company reported strong fourth-quarter results, topping estimates for both revenue and earnings.

What happened: Shares of the off-price apparel and accessories retailer spiked more than 7% in regular hours on Wednesday, after the company reported upbeat quarterly results driven by strong holiday demand.

Investors were elated by news of a dividend hike and share repurchase authorisation, overlooking the fact that the company’s forecast for the fiscal first quarter earnings had missed expectations.

  • TJX posted a fourth-quarter profit of 81 cents per share, exceeding the consensus estimate of 77 cents per share.
  • The company’s quarterly sales grew about 10% to $12.2 billion, beating expectations of $11.8 billion.
  • Same-store sales rose 6%, topping expectations of 3.1% growth.

The retailer, which runs TJ Maxx, Marshalls, Marmaxx and HomeGoods stores, said it will raise the quarterly dividend by 13% to 26 cents a share. The pay-out is to be declared in March and paid in June. This marks the 24th consecutive year in which TJX has raised its dividend.

Management said the board had approved a plan to repurchase shares worth $1.75-$2.25 billion during fiscal 2021 ending January 30. The board has also authorised management to buy additional stock periodically up to $1.5 billion.

The Framingham, Massachusetts-based company projected earnings of 59 to 60 cents per share for the fiscal first quarter, missing the consensus estimate of 61 to 62 cents a share.

Why it matters: TJX reported same-store sales growth across all its brands, resulting in the 24th straight quarter of comp growth. The company’s Marmaxx segment posted the strongest growth, at 6%, followed by HomeGoods, which posted a 5% rise.

TJX witnessed strong customer traffic during the holiday season, and the momentum continued long after that, driven by new formats at its stores and a higher marketing spend. TJX is also making investments in its online business and announced the launch of Marshalls Online Store.

Investors were taking comfort from the fact that TJX has no outlets in China or any other coronavirus-affected countries. The off-price department store company seemed to be at an advantage versus rivals, which have had to partially or fully close their stores in coronavirus affected areas. However, during its earnings call, CEO Ernie Herrman said that a large volume of the company’s merchandise is developed in China. The CEO refrained from mentioning the extent of the impact on its business.

Stock performance so far: Following the earnings release, shares of TJX climbed 7.2% to settle at $63.99, hitting a new record high. The stock has outperformed the overall market over the past year, gaining 20.1% versus the 12% posted by the S&P 500 index. The company’s stock is up around 15% year to date. Although investor sentiment is significantly positive, there could be some profit taking in view of the elevated share price.

What to watch: Although the company has no stores in China, its business is not as insulated from the coronavirus impact as investors had hoped. The market will look out for details of the supply-chain disruption and its impact on business.

The Markets Today

     

Investors will be watching US stocks today, with the Dow and S&P 500 index posting declines for the fifth consecutive day on Wednesday.​

Context: US stocks closed mostly lower again on Wednesday, even after posting gains at the beginning of the session. Markets started losing the initial momentum on Wednesday afternoon after there were reports of the coronavirus spreading to the Americas and Europe.

Details: After losing around 2,000 points over the first two days of the week, the Dow suffered a loss of over 100 points on Wednesday. Investors scurried out of certain stocks on concerns of the coronavirus impacting the supply chains and financials of those companies.

The Dow declined 0.5% to close at 26,957.50, representing the biggest five-day loss in terms of points for the index. The S&P 500 fell 0.4%, while the Nasdaq 100 snapped its four-day drop by gaining 0.2% to settle at 8,980.77. The Dow and S&P 500 have erased all the gains they had recorded year to date. The five-day decline in the S&P 500 index also marks its largest percentage decline since February 8, 2018. Energy and healthcare were the worst performing sectors in the S&P 500 index.

US markets had rallied during the morning session, driven by hopes of central banks preparing for more stimulus initiatives to counter the coronavirus impact. However, the rise in confirmed cases and deaths outside the Chinese borders weakened the rally and moved the indices back into the red.

There has been a rapid increase in new virus cases from South Korea and Italy. South Korea’s total number of infections surged to 1,595 on Wednesday. China reported 29 new deaths and 433 new confirmed cases. On the other hand, many US companies have warned of a profit hit due to the virus. Microsoft was the latest to issue a warning, saying that it would not be able to meet its third-quarter forecast.

On the economic data front, US home sales climbed 7.9% to an annual rate of 764,000 in January, surging to its highest level in 12 years. The gains were driven by increased mortgage application volumes.

Why it matters: The losses posted by US markets are likely to deepen today, with US futures pointing towards a lower open this morning. After the weak performance of US stocks in the previous sessions, all eyes are on the economic data scheduled for release today.

What to watch: The markets will focus on the major indices, with US stock futures pointing towards a lower start again. The US economy is expected to grow 2.1% in the fourth quarter, unchanged from the previous quarter’s pace. Durable goods orders, which increased 2.4% in December, are likely to decline 1.5% in January. Analysts are projecting initial jobless claims to rise to 212,000 in the latest week. Preliminary estimates call for a 2.2% rise in the pending home sales index for January, compared to a 4.9% drop in the previous month. Analysts expect the Kansas City Fed's manufacturing production index to drop to -5 in February, versus January’s reading of -4.

Other Markets: European indices closed mostly higher on Wednesday, with the UK 100 and French 40 up 0.35% and 0.09%, respectively, and the German 30 closing down 0.12%.

Support & Resistances
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market snapshot

     

Futures at 0400 (GMT)

News shaping
the markets today

     

What else to watch today

     

Spain’s industry confidence indicator, Mexico’s unemployment rate, Canada's current account and US EIA’s report on natural gas.