Monday, July 24, 2006

Calls of Note Part 6

- Prudential is very positive on The TJX Companies (NYSE:TJX) after an opportunity to walk a store and have a few hours with Carol Meyrowitz, President of TJX, Jeff Naylor, CFO, and Sherry Lang, IR.

Firm believes the story is clicking and the upside is really positioned to flow going forward. Basically what TJX is doing is going through each business to make sure they have the right fashion/content, the right/hot brands, and they are doing more of the buying off price rather than up front so they are building the margin.

At the same time, TJX is maniacally focused on cost reduction opportunities, and basically no stone is being left un-turned. The women's sportswear comp is already accelerating, the home business has improved, and the better brands won't even begin hitting until August. Firm thought Bob's looked markedly improved and it sounds like Carol Meyrowitz thinks AJ Wright can be an 8% margin business.

Prudential continues to think the TJX story offers excellent upside potential in 2006 and 2007. Averaging the trough (7.6% in 2004) and peak (9.8% in 1999) operating margin since 1999 yields an operating margin of 8.7%. If one applies that operating margin to our 2007 sales, the earnings would be $2.07 versus published estimate of $1.80. Even if TJX can just attain their operating margin goals by 2007 - which boil down to a total company operating margin of 8.0% versus published 7.6% estimate - they still see $0.10 upside, or $1.90 in earnings power. Applying the average high multiple of the last 3 years of 16.8x yields a $32 stock price.

Reits Overweight and $32 tgt.

Notablecalls: Not actionable but good to know category.

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