FINANCIAL CASE ANALYSIS

GPS & TJX: Part 4

Written By: Ben Van Neste

Bellevue University
MBA 520 Professor Goldman
 Table of Contents

Investment Decision……………………………………………………………………………………………………………….2

Ratio Comparison Table………………………………………………………………………………………………………….2

Ratio Explanation……………………………………………………………………………………………………………………2

Ratio Trend Analysis……………………………………………………………………………………………………………….4

Stock Price Trend Analysis………………………………………………………………………………………………………6

SWOT Analysis………………………………………………………………………………………………………………………..7

Financial Journal Review…………………………………………………………………………………………………………8

Conclusion……………………………………………………………………………………………………………………………….9

Reflection on the Financial Analysis Case……………………………………………………………………………..10

References………………………………………………………………………………………………………………………….…11

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Investment Decision

GPS and TJX from a financial standpoint, are very comparable, but through several levels

of analysis, there is a clear answer that TJX is the better investment. This report considers five

main standout ratios, each company’s performance over the last five years, a thorough SWOT

analysis, and six convincing financial journals all to compile the best analysis of how TJX will

produce a greater investment. The statements in this report are all supported by trusted

reliable resources to compile a decision in the best interest of the investor.

Ratio Comparison Table

Ratios GPS TJX Industry

Net Profit Margin 2.98% 4.58% 4.95%

Total Debt/Equity 2.93 2.66 2.34

Return on Assets 3.29% 5.34% 5.69%

Return on Equity 16.90% 27.80% 27.00%

Asset Turnover 1.19 1.36 1.22

Date of Ratio (23-Jul-2021) (23-Jul-2021) (23-Jul-2021)

Ratio Explanation

As stated before, many of the financial ratios for both GPS and TJX are very similar yet

five main ratios point out to how TJX comes out on top over GPS. The first is the net profit

margin which helps to measure what is profited on the product after the difference of the cost

or purchase price. The higher this ratio is, the better, as a company with half the net profit

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margin of another company’s, would have to sell twice as many products to be equally as

profitable. With these ratios, if both GPS and TJX sold $100 million in products, GPS would

retain about $3 million in profits while TJX would retain about $4.6 million. GPS underperforms

by almost 2% in comparison to the industry standard while TJX is only .37% away.

The total debt/equity ratio is the only ratio where GPS has a higher measurement than

TJX though in this instance that makes them the less ideal company. This ratio is simply a

comparison of debt to equity which in turn signifies how much leverage is being used and how

the company could withstand its debts with the shareholder’s equity. GPS and TJX have a

higher total debt/equity ratio which makes them both have a higher risk to investors over other

companies in the industry. However, GPS is almost two times higher than TJK is from the

industry-standard which clearly and simply makes them the riskier investment.

The third ratio is return on assets which uses net income and average total assets to

measure an expected return basically from the overall operations of the company without

including debt. This is similar to net profit margin except it considers all assets rather than just

the company’s expenses. This is important to get an idea of how well the company is utilizing

their assets or if they might be wasting resources. This ratio shows that TJX is utilizing their

assets much more effectively than GPS. Though they both underperform in relation to the

industry standard of 5.69%, TJX is at least very close to that measurement meanwhile GPS could

certainly use some improvement.

With some similarity to return on assets and in this instance, of even more importance,

return on equity really helps to clear up this investment decision. This ratio is a key takeaway of

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the company’s profitability in relation to the investors’ equity. The usefulness of this ratio is

highly dependent on the industry-standard which in this case is 27%. TJX outperforms this

standard while GPS is more than 10% under this mark. This distinctly reveals that GPS was

greatly less profitable than TJX. So far, if the goal is to select the more profitable and less risky

investment then the winner is surely TJX.

There is one more ratio for added peace of mind in this investment decision and that is

the asset turnover. This ratio is very similar to return on assets except it considers the average

of assets rather than the total. Unlike with return on assets, this ratio shows how TJX is

performing reasonably better than the rest of the industry while GPS yet again underperforms

in this area. TJX is doing a better job with using their assets to generate profit than the majority

of the industry which is a great indicator of their performance and profitability.

Ratio Trend Analysis

Legend:
- Lower Performer
- Higher Performer

GPS 30-Jan-2021 01-Feb-2020 02-Feb-2019 03-Feb-2018 28-Jan-2017

Net Profit Margin -4.82% 2.14% 6.05% 5.35% 4.36%

Total 2.93 2.32 0.35 0.40 0.45

Debt/Equity

Return on Assets -4.85% 3.23% 12.51% 10.87% 8.96%

Return on Equity -22.43% 10.22% 29.95% 28.04% 24.81%

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 Asset Turnover 1.01 1.51 2.07 2.03 2.06

TJX 30-Jan-2021 01-Feb-2020 02-Feb-2019 03-Feb-2018 28-Jan-2017

Net Profit Margin 0.28% 7.84% 7.85% 7.27% 6.93%

Total 2.66 1.93 0.49 0.48 0.53

Debt/Equity

Return on Assets 0.33% 17.01% 21.56% 19.36% 18.86%

Return on Equity 1.54% 59.51% 60.01% 54.00% 52.13%

Asset Turnover 1.17 2.17 2.75 2.66 2.72

The legend is included for these two ratio trend tables to outline very clearly which

company is the better investment. In terms of the trends from these five years, what stands out

the most is how poorly GPS has done in the last two years. Granted, they improved in all

aspects from 2017 to 2019 but those last two years don’t exactly signal a prosperous outcome

for this following year. TJX also had a slight downfall but mainly only for the last year. What is

great about TJX is that they managed to stay positive in many of these ratios during a year

where countless company’s endured heavy losses. Based on these trends, the company with

the most promising forecast would have to be TJX.

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Stock Price Trend Analysis

GPS 29-Jan-2021 31-Jan-2020 31-Jan-2019 31-Jan-2018 31-Jan-2017

Stock Price $20.19 $17.68 $25.76 $34.06 $22.44

% Change 14.2% -31.4% -24.4% 51.8% -

TJX 29-Jan-2021 31-Jan-2020 31-Jan-2019 31-Jan-2018 31-Jan-2017

Stock Price $68.29 $61.06 $44.74 $38.23 $37.57

% Change 11.8% 36.5% 17.0% 1.8% -

With only a quick look, these tables don’t quite as clearly show which company looks

better but with a more detailed view, the answer is clear yet again. In regards to the trends,

there is one thing that stands out above anything else and that is the volatility. GPS had an

incredible year in 2017 with a 51.8% gain in their stock price yet then they managed to lose all

of that and then some in the next two years. The incredible thing about TJX is their consistency

in pushing out a stock profit every year. If day-trading, high stakes, and gambling is desired then

GPS could actually be a great option. But for an investment that has much less risk, long-term

growth, and consistent profitability then TJX takes the crown. With trends like this, you could

see an investment in GPS grow an incredible 50% in a year just to lose it all over another year or

two and possibly not even break even. Whereas, with TJX you can have confidence that there

will be some level of profitability regardless of what the year looks like.

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SWOT Analysis

After reviewing the 5 important financial ratios, the 5-year performance, and the trends

in stock prices, the next analysis to be considered is the SWOT. In terms of strengths, GPS and

TJX are very similar though what TJX doesn’t have is a global presence which does limit their

opportunity for growth. In comparison to GPS, this does not affect them that much since 84.4%

of GPS’s last year’s total revenues was in the US alone which shows that they don’t have much

of an advantage in these other markets. What shows TJX’s greater strength is their exceptional

inventory turnover at 4.7. TJX boasts a reasonably higher inventory turnover than two of their

main competitors, Kohl’s, and Macy’s. GPS holds a 3.95 which is a lower inventory turnover

than their main competitors, Nordstrom and Ross.

The main weakness that should be considered in this analysis is how dependent GPS is

on their merchandise vendors. The large quantity of vendors they have in numerous countries

complicates so many aspects of the business and is likely what contributes to their lower net

profit margin ratio. Obviously, they cannot depend on just a small handful of vendors but they

could definitely streamline this more.

Both GPS and TJX have great opportunities to grow in the online retail market as it

keeps evolving into a massive sector. Also, the apparel retail market continues to grow which of

course only benefits the two companies in this industry. TJX holds yet another upper hand over

GPS in opportunities as they are in the multi-million dollar furniture and floor coverings market.

GPS and TJX are familiar names in the apparel industry but GPS is limited to only that while TJX

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can grow not only in that market but also in the home furnishings market. This is desirable as an

investor because it promotes market diversity.

The last aspect of SWOT to analyze is the threats. There is no question that GPS and TJX

are in an industry with intense competition. This makes it difficult to grow and acquire market

share but this competition does also speak to TJX’s commendable performance as many of their

financial ratios are above the industry standard while GPS does not have a single ratio that is

better. This intense competition means that TJX is beating out many of the industry

competitors which is an obvious positive sign for an investor. Consumer preferences continue

to change and labor costs continue to rise but both companies are well equipped to adapt and

defend themselves against these threats.

Financial Journal Review

The collection of outside sources and recommendations from studied analysts will even

further support and give evidence to the statements made in this analysis. This report isn’t only

what should induce fear for investing in GPS as there is a literal technical analysis indicator that

can measure this called Relative Strength Index or RSI. It can tell when a stock is in oversold

territory which is where it was just a month ago according to Nasdaq (BNK Invest, 2021). This is

certainly not good news for GPS. Certain analysts publicly offered their 12-month price targets

for GPS putting an average price target of $36.25 on the stock which is quite a low gain from its

current price (Benzinga Insights, 2021). In this report, it was consistently pointed out how GPS

underperforms in comparison to its industry and their competitors while in this article from

Forbes they declined 12% in the month of July, and yet the S&P500 held a 3% growth in the

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same length of time (Trefis Team, 2021). It’s always unfortunate to have an investment in a

company that is not performing even to the standard of other companies.

From all of the ratios and trends, it was evident that TJX withstood the difficult 2020

pandemic year much better than GPS did. They now show tremendous recovery from that year

as well as they are “expected to post quarterly earnings of $0.56 per share in its upcoming

report, which represents a year-over-year change of +411.1%” (Newstex, 2021). One thing that

hasn’t been mentioned much in this report, though it has been a wonderful change of pace, is

the COVID-19 pandemic. With the new variant and it seems that there still will be troubles from

this virus but on the bright side TJX is that company that withstands well in the face of these

events which is why they are rated third in the 7 Virus-Resistant Retail Stock to Own Now

(Market Beat, 2021). Similarly to how it was noted that GPS typically underperformed when

comparing to the industry and competitors, TJX many times stood out as beating the

competition and they do even more in this detailed analyst report from J.P.Morgan as they

intricately look at TJX’s first-quarter open-only store comp of +16% which “materially outpaced

negative ~8% average mid-tier Dept. Store comps pointing to an accelerating market share

shift” (Boss & Douglas, 2021). This is outstanding news for any investor involved with TJX.

Conclusion

Putting all of these detailed analyses together provides strong evidence and confidence

that TJX is the better investment decision. To highlight the main points of this decision would

include TJX’s much better return on equity (ROE) in relation to the industry as well as its

performance over the last five years, the greater consistency in its stock price, the diversity in

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markets that TJX holds, and the staying ahead of competition that they maintain. If the reader

decides to invest in GPS that is of course completely acceptable however this report proves that

a decision as such would very much lack the evidence and support to take that action. For the

most evidence-based decision, TJX is the best investment option.

Reflection on the Financial Analysis Case

I am very thankful to have been given and to have completed all four parts of this

financial case. This will certainly aid me in my pursuit of business analytic roles, though I do

hope to keep as much distance as I can from financial analytics. Nevertheless, I’m sure I will be

using some level of it at work. I also am eager to use what I have learned and apply the skills to

my own investment portfolio. I can now have a much greater understanding of the companies I

invest in rather than just basing my decisions on personal feelings. It’s also so beneficial to have

learned what many of these ratios mean and how they affect the company and stock price.

Many small investors that I know would have no idea what constitutes good/bad performing

ratios, so I hope to that I might be able to aid anyone that might ask for it.

Lastly, beyond purely the financial knowledge and skills that are gained through the four

parts of this case, I have surely improved my ability to really dive deep into research and

analysis. It’s very simple to base opinions or decisions on just a few sources that have come

across, but what this financial case helped me to do, is to consider all aspects of the desired

knowledge. The financial journal review could be minimally accepted for many projects but

instead, it was just a minuscule aspect for this analysis which is great because there is always so

much more to consider and learn.

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 References

Benzinga Insights. (2021, July 26). Where Gap Stands With Analysts.

Markets.Businessinsider.Com. https://markets.businessinsider.com/news/stocks/where-

gap-stands-with-analysts-1030646364

BNK Invest. (2021, July 19). The Gap is Now Oversold (GPS). Nasdaq.

https://www.nasdaq.com/articles/the-gap-is-now-oversold-gps-2021-07-19

Boss, M., & Douglas, A. (2021, May). TJX Companies: 1Q Beat w/ Forward Market Share vs.

Margin Debate; Remain OW. J.P.Morgan. https://app-avention-

com.ezproxy.bellevue.edu/API/Report/ApplinkPDF/API/Custom/FetchAnalystsReport.as

px?DocID=92468525

Newstex. (2021). TJX (TJX) Reports Next Week: Wall Street Expects Earnings Growth. Zacks

Investment Research [BLOG]; Chicago. Published.

http://ezproxy.bellevue.edu/login?url=https://www-proquest-

com.ezproxy.bellevue.edu/wire-feeds/tjx-reports-next-week-wall-street-

expects/docview/2560102216/se-2?accountid=28125

Market Beat. (2020, May 29). 7 Virus-Resistant Retail Stocks to Own Now. MarketBeat.Com.

https://www.marketbeat.com/slideshows/7-virus-resistant-retail-stocks-to-own-

now/3.aspx

Trefis Team. (2021, August 2). Can Gap Stock Rebound After A 12% Decline In A Month?

Forbes. https://www.forbes.com/sites/greatspeculations/2021/07/30/can-gap-stock-

rebound-after-a-12-decline-in-a-month/?sh=4d7a01a33e82

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