Get Caught Up in T.J. Maxx’s Web; There are reasons off-price stores, which buy excess inventory and off-season fashions from department stores and manufacturers, have been late e-commerce adopters

Get Caught Up in T.J. Maxx’s Web

MIRIAM GOTTFRIED

Dec. 1, 2013 3:32 p.m. ET

T.J. Maxx has left the building. In September, TJX Cos., the off-priced retailer’s parent company, launched an e-commerce platform for its flagship brand. For a retailer to offer online sales in the year 2013 is hardly cutting edge. But T.J. Maxx had reasons for waiting, and investors may be rewarded for their patience.TJX has yet to provide performance metrics for the site, so analysts haven’t built it into valuation models. But it is possible to roughly estimate the platform’s potential contribution to profit once it ramps up after, say, three or four years.

The average retailer with an e-commerce presence gets about 11% of sales online, according to Sterne Agee. And e-commerce operating margins are about seven percentage points higher on average than brick-and-mortar stores.

TJX’s operating margin was 12% in fiscal 2012, ended January. Say it got 10% of revenue from e-commerce, with an operating margin of 18%. That would add about 45 cents, or 13.6%, to fiscal 2014 earnings per share, Sterne Agee estimates. More conservatively, if e-commerce made up only 6% of sales and margins were 16% then it would add 24 cents.

Granted, TJX’s online store won’t reach significant scale by 2014, but it could by around 2017. Lululemon, which launched its e-commerce platform in April 2009, got only 4% of revenue from online sales that fiscal year, ended January. By fiscal 2012, that had risen to 14.4% of revenue.

Another concern: An online presence can cannibalize in-store sales. But the U.S. apparel market grows at roughly the pace of the overall economy, according to Richard Jaffe, analyst at Sitfel Nicolaus. Ignoring fast-growing e-commerce can mean losing market share to competitors.

There are reasons off-price stores, which buy excess inventory and off-season fashions from department stores and manufacturers, have been late e-commerce adopters. Their inventories often comprise one-time items and arrive from a vast network of suppliers.

They have also faced resistance from high-end brands not wanting to see deeply discounted goods online. And there is the risk it might alienate core customers who appreciate the “treasure hunt” for the best items.

T.J. Maxx is aware of the challenges. Its first attempt at e-commerce in 2004 saw lower-than-expected sales and was shuttered after a year.

Since then, flash sale sites such as Gilt Groupe have become popular among deal seekers online, making brands more accustomed to the idea.

And T.J. Maxx last year purchased off-price Internet retailer Sierra Trading Post to learn about selling online. Its new site aims to preserve the feel of its stores. You can’t just search “Diane Von Furstenberg;” you must comb through women’s dresses or shoes. The retailer is also experimenting with a flash sale of its own, Maxx Flash. Unlike other flash sites, it can accept returns at stores and resell items there.

Selling online could start to have a real impact on TJX’s bottom line. Using the consensus estimate for fiscal 2014 earnings per share of $3.26, Sterne Agee’s extra 45 cents would imply TJX’s stock trading at 17 times versus the current 19 times. For investors, accounting for e-commerce could make TJX look more like a bargain.