TJX: Discount King or Retail Pawn?

This week, Cramer is in search of the “discount king”… a stock that deserves to be called the best of breed in the off-price retail space. Cramer is doing an exercise in comparative stock-picking, the kind of thing hedge funds do, and in the process he’s putting five stocks into competition with each other to see who comes out on top.

In the retail space, consumers are no longer under pressure to trade down and buy cheap items now that the economy has gotten better, something that’s led higher end retailers and department store stocks to come back with a vengeance, but Cramer sees money left in the discount space… if you can find the right one.

Cramer’s starting off the week with TJX Companies , a discount retailer with nearly 2,700 retail locations in the T.J. Maxx, Marshalls, Homegoods and A.J. Wright brand name space. The same store sales in these outlets have done well throughout the recession, up 4% this past quarter, while most other retailers have seen negative same store sales.

Cramer points out that at the company, inventories were down 4%, which he sees as another sign of good management and strong execution. If you have too much that means you have to throw sales and other profit-wrecking deals to move merchandise, explains Cramer.

The Mad Money host also points out that TJX has an attractive balance sheet, a $625 million stock buyback, improved customer traffic, and plans to open 25 more stores than it had originally intended this year. Cramer is also a fan of the company’s advertising plan.

Will we start off the week by featuring the discount-retail king? Not all is rosy in the TJX future, says Cramer.

He points out that the stock has been up 67% year-to-date, versus 27% in the S&P Retail index and a 10% increase in the general market. With this, Cramer thinks the stock’s upside has run its course, despite 15 out of 20 analysts marking the stock as a buy. Cramer also brings up the fact that TJX may run into a sourcing problem this year and the fact that some of its principle competitors for its Marshalls and Homegoods businesses collapsed last year, so both of those growth engines will putter out by the end of the year, he says.

With other retailers doing well, they have little inventory and a good amount of cash, and there’s no reason to supply TJX with goods at firesale prices, says Cramer, who also cites a “grim” conference call, where management took down earnings estimates severely, indicating tougher and more disappointing times ahead. Cramer thinks TJX management may be worried that it won’t have enough cheap merchandise to make the numbers.

What’s Cramer’s bottom line? TJX is not the discount king, but the discount pawn, with its best price rally behind it. “The future just isn’t as bright for TJX without other retailers firesaling their extra inventory,” Cramer says, “I think this one's peaked and headed to the off-price bin itself.”

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