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Potential Roadblocks to TJX Companies’ Growth

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Challenges ahead

TJX Companies (TJX) ended fiscal 2015 on a strong note with a 6.0% growth in net sales and a steady growth in earnings. Although the company has been performing well, there are certain potential challenges and roadblocks to TJX Companies’ Growth.

TJX Companies accounts for about 1.0% of the SPDR S&P Retail ETF (XRT).

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Currency headwinds

Over the past few months, the US dollar has been strengthening against most of the major currencies in the world. This has negatively impacted companies with international operations.

TJX Companies derived about 24.0% of its fiscal 2015 revenues from its international segments TJX Canada and TJX Europe.

TJX Canada’s net sales in fiscal 2015 remained essentially flat due to a 7.0% impact of currency translation. However, TJX Europe had a 2.0% favorable impact on its net sales from currency translation.

As we saw in the previous part of this series, currency headwinds are expected to have a 5% impact on diluted EPS (earnings per share) in fiscal 2016 ending January 31, 2016.

Higher costs

TJX Companies expects selling, general, and administrative expenses as a percentage of sales to increase to 16.6%, up from 16.1% in fiscal 2015. This is due to the announced hike in wages and incremental investments.

In February 2015, TJX Companies announced that its US store workers will earn at least $9 per hour beginning June 2015. The company expects wages for all hourly US store associates who have been employed for at least six months to increase to at least $10 per hour later in the year.

Overall higher wages, other incremental investments, and pension costs are expected to have a negative impact of ~4.0% on fiscal 2016 EPS growth.

Intense competition

The rapid growth of TJX Companies, Ross Stores (ROST), and Burlington Stores (BURL) has attracted department stores to this category. Nordstrom (JWN) is already reaping benefits of its off-price Rack stores chain. Macy’s (M) is planning to test its off-price model store.

Luxury department store Neiman Marcus is making its presence felt in the off-price space through Last Call Studio stores. Saks Fifth Avenue is closing its department stores but expanding its OFF 5th stores.

TJX Companies and Ross Stores are established players, but the emergence of too many off-price stores might impact their sales in the long term.

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