Should I Buy TJX Stock? 3 Pros, 3 Cons

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Many retailers are looking dicey heading into the 2013 holiday shopping season, but discounter TJX Companies (TJX) has been upbeat. Investors have taken notice, bidding up TJX stock by roughly 7% in the past month to contribute to a sizzling 50% year-to-date return.

Analysts have taken notice, too, and have upped their estimates on TJX stock. For instance, Sterne Agee’s Ike Boruchow increased his 2013 earnings forecast to by 4 cents to $2.88 and also raised his 2014 forecast by 10 cents to $3.32.

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However, there might be a little reason for caution — TJX did not raise its outlook during its latest earnings report.

So, should you buy TJX stock regardless, or has the red light just come on? To see, we look at the pros and cons of TJX:

TJX Pros

Global Platform: TJX is a leading off-price apparel and home fashions retailer that sports more than 3,000 locations across four major divisions:

Marmaxx: These include T.J. Maxx and Marshalls chains in the U.S. Each has different merchandise mixes, such as in terms of jewelry, accessories and footwear. Homegoods: Launched over 20 years ago, this is a chain that sells home basics, furniture, lamps, rugs and wall décor. TJX Canada: This includes Marshalls, HomeSense and Winners brands across Canada. TJX Europe: TJX operates T.K. Maxx and HomeSense in the U.K., Ireland, Germany and Poland.

Together, these divisions generally aim to offer discounts between 20% and 60% — a huge draw for increasingly squeezed consumers.

Business Model: For more than three decades, TJX has built a solid infrastructure that includes a buying organization of 900-plus people operating out of 13 offices in 10 countries. Since 2008, TJX has increased the network of global vendors from 10,000 to 16,000, and as a result, TJX is able to quickly react to consumer tastes, trends and even macro changes and weather events. Of course, TJX also has focused on getting more efficiencies, introducing lean approaches to its supply chain and strategies to reduce inventory turns. TJX now operates 20 distribution centers in five countries.

Growth: In the latest quarter, consolidated comparable store sales increased 5% year-over-year, on top of 2012′s 7% increase. The drivers included a combination of increased ticket and traffic volume. Also, growth has been strong across all segments and countries — even Europe has been robust, and enjoyed 5% comps growth in Q3. Finally, TJX has gotten into the online game, launching its e-commerce site in September.

TJX Cons

Competition: While TJX attempts to undercut more traditional retailers, it has plenty of competition in the deep-discount game, Ross Stores (ROST), Kohl’s (KSS) and Burlington Stores (BURL). TJX also must contend with big-box operators like Target (TGT). So far, TJX has been able to dig itself a niche and remain fairly differentiated, but it’s fair to point out the danger in slipping — in retail, customers always have plenty of alternatives.

Consumer Tastes: Again, TJX has done a pretty good job with merchandising, but a retailer can easily go into a slump. In some cases, the results can be devastating, as seen with JCPenney (JCP). For TJX, it also has the challenge of making sure it gets the right merchandise for a global operation, which means it’s vulnerable to misfires.

Valuation: TJX isn’t necessarily overvalued. But then again, investors certainly are not getting a discount. TJX stock currently trades at 21 times earnings, and you’re not even getting much of a dividend to lean on, either, at a yield of less than 1%. On a relative basis, there definitely are better values out there, such as Target, which is trading at 15 times earnings and yields 2.6%.

Verdict

TJX has been able to thrive regardless of the macroeconomic environment. Then again, who doesn't want big discounts on branded goods?

Over the years, TJX has built a powerful infrastructure spanning various strong brands. More importantly, if TJX is to believed, there’s plenty of growth potential — TJX thinks it can reach more than $40 billion in revenues, which would be a big leap from 2012′s roughly $26 billion.

So should you buy TJX stock? Yes — this retailer has a winning formula that will be tough to beat.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.