Off price retailers enter new issue fray
admin | April 3, 2020
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
Two credits that rarely come to market deserve highlighting amid a frenzy of new issues. Off-price retailers, TJX Companies (TJX – A2 (n)/A (n)) and Ross Stores (ROST – A2/BBB+ (n)) both tapped the market in an effort to shore up liquidity. Despite the temporary shut- down of all stores by both businesses, each entered the pandemic with strong footing from a liquidity standpoint. Management teams at both companies are credited with a long history of maintaining very conservative balance sheets, underscored by net cash positions (excluding leases). However, TJX was able to price bonds well through those of ROST, providing for a good relative value opportunity.
TJX priced its $4 billion offering at +320 bp across four tranches and tightened considerably on the break. TJX’s new 10-year bond is currently trading around the +285 bp area, +140 bp tighter than where ROST priced its 10-year. That relationship should be closer to +100 bp and eventually tighten closer to +50 bp once normal business resumes. Prior to the pandemic TJX front end bonds only traded 10-15 bp tighter than ROST.
Exhibit 1: ROST vs TJX LTM Comparison (FYE 2/1/20)
Source: ROST and TJX 10-Ks, Amherst Pierpont Securities
A Strong #2 Position
While TJX is more than double the size of ROST from a sales perspective, we note that ROST has done a considerable job managing its cost structure, which has enabled them to grow margins relatively consistently on an annual basis ahead of the pandemic. At year end, ROST’s EBITDA margin was nearly 300 bp better than TJX’s. We note that not only does their EBITDA margin compare favorably to their closest peer, but IG retail peers in general. Furthermore, ROST has maintained minimal debt on the balance sheet ending fiscal year 2019 with $313 million of total debt. That said, debt/EBITDA is just over 0.1x. On a lease adjusted basis, leverage was 1.15x at year-end, comparing favorably to TJX which was closer to 1.7x.
The Agencies Chime In
Interestingly, Moody’s affirmed ROST’s A2 rating with a stable outlook while putting TJX’s A2 rating on negative outlook when the deals were announced. Moody’s noted that ROST maintains excellent liquidity which will enable the company to navigate the disruption caused by the pandemic, thereby underscoring its decision to affirm the stable outlook. Moody’s negative outlook on TJX was due to the fact that it was more than doubling its funded debt level which could mean sustained credit metric weakness. S&P decided to take a different approach and downgraded ROST one notch to BBB+ with a negative outlook. While S&P believes ROST’s operating results will be severely pressured as with all its retail peers, it did highlight that its lack of e-commerce presence could be a negative. Peers with an online presence, including TJX, could offset some of its lost sales from store closures via its online business. However, TJX did temporarily shut its e-commerce platform along with its stores and both continue to remain closed.
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