One of our best-performing stocks lately reports earnings this week. Here's what to expect

Published Mon, Nov 14 20221:05 PM ESTUpdated Mon, Nov 14 20221:14 PM EST

Kevin Stankiewicz @in/kevin-stankiewicz-b5593466 @kevin_stank

Off-price retailer TJX Companies (TJX), one of our best performing stocks since late summer, is set to report earnings this week Big picture We started our position in the parent of TJ Maxx and Marshalls on Aug. 24, which has proved to be a well-timed buy. From the close on Aug. 23 through Friday, TJX shares have rose 15.7% compared with a roughly 3% decline for the S & P 500 . During this stretch, TJX has been the fourth-best performing stock in the Jim Cramer's Charitable Trust, the portfolio we use for the Club — trailed by troubled Bausch Health (BHC), which rose 41.8%; Wynn Resorts (WYNN), which has advanced 26.8%; and Halliburton (HAL), which has climbed 24.1%. TJX's upside move has come alongside some favorable coverage from Wall Street analysts who believe conditions such as inventory gluts and a slowing economy are ripe for off-price retailers to thrive. A few weeks ago, JPMorgan's closely followed retail analyst Matt Boss added to TJX to his "focus list," meaning it's one of his favorite ideas in the sector. On Nov. 7, Morgan Stanley said off-price retailers continue to have the "most compelling" set up in the fourth quarter and next year. Overall, 77% of the 26 analysts who cover TJX rate the stock the equivalent of a buy, according to FactSet. The remaining 23% have the equivalent of a hold rating. FactSet lists no sell ratings on the stock. Two big earnings themes When TJX releases fiscal 2023 third-quarter results after Wednesday's closing bell, it'll mark the first time the company will report earnings as a CNBC Investing Club name. We think there are two primary themes to be aware of heading into the print: (1) the inventory environment and (2) pretax margins. The inventory component is foundational to our thesis, so we're curious whether management still sees "extraordinary off-price buying opportunities," in the words of TJX CEO Ernie Herrman on the company's second-quarter earnings call, in August. As noted earlier, the retail industry is awash in excess inventory after supply chains that were clogged up during the Covid pandemic started to ease around the time consumers started to spend more on services. Those dynamics combined to leave retailers with too much stuff — or, in some cases, out-of-season stuff — relative to demand. While that's bad for the likes of Target (TGT) and Macy's (M), it plays directly into the hands of TJX and its competitors, like Burlington Stores (BURL) and Ross Stores (ROST). One man's trash is another man's treasure. In general, there's always some excess inventory laying around that the TJXs of the world can buy and put on their shelves, creating a "treasure-hunting" experience its loyal customers love. But depending on the broader retail environment, it can vary in quality and the price at which the company acquires it. What has made this particular moment sweet for TJX is that a lot of retailers have goods they want to offload, allowing TJX to acquire it at very favorable prices, which helps merchandise margins. That's why we want to know how off-price buying market has evolved in recent weeks, and whether it is still extraordinarily favorable for TJX. Another layer to the inventory story is that some analysts believe calendar year 2023 is when the effects of persistently high inflation and a slowing economy will more noticeably show up in the shopping habits of middle- to upper-middle income consumers. If that proves true, then it'd be especially welcome news to hear TJX management continue to tout the favorability of the buying environment. Pretax margins is the other key topic to watch with TJX, both for these upcoming third-quarter results and going forward. The Club and other investors care about this because boosting margins helps earnings grow. TJX saw its pretax margin collapse to 0.3% during its pandemic-marred fiscal 2021, down from 10.6% in its prior fiscal year. While it rebounded somewhat to 9.1% in fiscal 2022, management has committed to returning to that pre-Covid level "within three years," CEO Herrman said on the August earnings call, which happened a few days before our initiation. Also along with fiscal Q2 results in August, TJX forecasts its full-year pretax profit margin to be between 9.3% to 9.5% for fiscal 2023, which concludes this coming January. For Q3, in particular, management is calling for 10.1% to 10.4%. While merchandise margin is just one component to TJX's profitability, other variables include expenses such as freight rates, which initially soared during the pandemic but have since started to moderate. Some analysts including JPMorgan's Boss believe freight rates are the biggest "wildcard" around TJX's pretax margin recovering to pre-Covid levels. For that reason, investors will be paying close attention to management's comments on the severity of freight headwinds and whether it expects further cooling. Bottom line We're pleased with how well TJX shares have performed since we added them to our portfolio nearly three months ago — a sign that others in the marketplace also believed the off-price retailer is the right kind of company for this economic situation. While our thesis is still intact, it's important to recognize the stock's big run-up into earnings could lead to some profit taking even if the quarter is solid. Of course, it's impossible to predict exactly how the market will react, but given the recent outperformance, it's a potential outcome on our radar. As mentioned, we're hoping to hear that the buying environment continues to play into the strengths of TJX. Any indications of easing cost headwinds — especially on the freight side — should help support earnings growth into next year. The consensus estimates on TJX, according to Refinitiv, call for fiscal Q3 earnings-per-share of 80 cents on revenue of $12.3 billion. (Jim Cramer's Charitable Trust is long TJX . See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. 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A Marshalls store in New York

Scott Mlyn | CNBC

Off-price retailer TJX Companies (TJX), one of our best performing stocks since late summer, is set to report earnings this week