TJX Companies: Can Global Expansion Offset U.S. Margin Strains?

TJX Companies (NYSE: TJX) reported its Q1 FY2026 results on June 19, 2025, delivering a mixed performance that underscores the challenges of sustaining profitability in an era of rising costs while capitalizing on international growth. The off-price retail giant's pretax margin dipped 0.8 percentage points year-over-year, driven by inventory hedge losses and wage inflation, yet its international divisions—particularly in Europe and Canada—showed resilience. Investors now face a critical question: Can TJX's global scale and operational adaptability overcome near-term margin pressures, or is the stock overvalued at a forward P/E of 26.5x?

Margin Headwinds: A Perfect Storm of Costs

The 10.3% pretax margin in Q1 FY2026, while above internal expectations, reflects mounting pressures. The 0.5 percentage point drop in gross profit margin to 29.5% stemmed from negative mark-to-market adjustments on inventory hedges, a recurring issue as the company bets on volatile commodity prices. Meanwhile, SG&A costs rose to 19.4% of sales due to higher store wages and the absence of prior-year reserve benefits.

Mitigation Strategies:
- Expense Controls: Management emphasized stricter cost management, including store-level payroll optimization.
- Sourcing Flexibility: The off-price model's agility in securing discounted inventory remains a key advantage, though tariffs and currency headwinds (notably in Europe) could limit gains.
- Debt Management: A robust balance sheet ($3.4B cash, 0.9 net debt/EBITDA) provides flexibility to navigate volatility.

However, the company's $7.1B inventory pile—up 14% year-over-year—raises a red flag. Overstocking risks could pressure margins if demand softens, especially in the U.S., where comparable sales grew a modest 2% versus 4% in Europe.

International Momentum: A Bright Spot in a Dull U.S. Market

While TJX's U.S. business faces margin strain, its global operations are outperforming:

• Canada: Constant-currency sales rose 7%, with comparable sales up 5%, fueled by strong execution in a competitive market.
• Europe & Australia: TK Maxx and Homesense stores delivered 7% constant-currency sales growth, with comparable sales jumping 5% (vs. 2% in FY2025). The availability of fresh merchandise and strategic store expansions (e.g., new locations in Germany) are key drivers.

These regions now account for ~25% of TJX's total sales, up from 20% in 2020, and their faster growth rates are critical to offsetting U.S. margin pressures. Management's focus on “value-driven assortments” and localized inventory strategies—such as tailoring apparel to regional tastes—appear to be paying off.

Valuation & Guidance: Is 26.5x P/E Justified?

The stock trades at a forward P/E of 26.5x, above its five-year average of 21x and higher than peers like Ross Stores (19x). To justify this premium, TJX must deliver on its FY2026 EPS guidance of $4.34–$4.43 (+2% to +4% growth). However, management warned that tariffs and currency headwinds could reduce EPS growth by ~3%, implying a potential miss without upside surprises.

Critics argue that the valuation assumes sustained international growth and margin stability. Bulls counter that TJX's off-price model—combining deep discounts with a “treasure hunt” experience—remains unmatched in its ability to attract price-sensitive shoppers. The company's 4.2% dividend yield and $2.5B annual buybacks also offer downside protection.

Investment Thesis: Hold for the Long Game, but Watch Margins

TJX's Q1 results highlight a bifurcated story: U.S. margin pressures vs. global growth optimism. The stock's valuation hinges on whether the latter can offset the former. Key considerations:

1. Margin Recovery: Can gross margins rebound once inventory hedges stabilize? A return to mid- to high-30% gross margins would ease pressure on pretax margins.
2. International Payoff: Europe and Canada are critical to top-line growth, but scalability depends on store expansions and inventory management.
3. Valuation Reality Check: At 26.5x, the stock requires consistent EPS growth. If tariffs and inflation persist, the multiple may compress.

Verdict: Hold for now. The off-price model's durability and global expansion justify long-term faith, but investors should demand clearer margin stabilization by late 2025. Short-term traders may want to wait for a pullback.

In short, TJX's global moat remains intact, but the path to sustaining its premium valuation requires execution on both growth and cost control—a tall order in today's choppy retail landscape.