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As September quarter earnings reports continue to roll out for the retail sector, a key takeaway that's emerging is that many consumers became even more value conscious, scrutinizing their spending habits and trading down to lower price points. In this tough environment, off-price retailer TJX (TJX) has been thriving, likely taking market share from department stores and big box retailers like Nordstrom (JWN), Kohl's (KSS), and Target (TGT), which reported weak Q3 results this morning, while also guiding Q4 EPS well below expectations.

• Meanwhile, TJX continues to deliver strong results as Q3 EPS and revenue edged past estimates, driven by solid consolidated comparable sales growth of 3% and higher merchandise margins. Taking some of the luster off the better-than-expected Q3 results was the company's Q4 EPS guidance of $1.12-$1.14, which is slightly below expectations. However, it's worth noting that TJX does have a tendency of issuing conservative guidance and then surpassing that guidance when it reports earnings. In fact, this has been the case in each of the past three quarters.
• Like last quarter, TJX's comp growth was entirely driven by an increase in customer transactions, indicating that its product assortment and value proposition are resonating well with consumers. By brand, HomeGoods was the standout again with comps of +3%, which is quite impressive given that it lapped growth of +9% in the year-earlier period. Meanwhile, Marmaxx, which combines TJ Maxx and Marshalls and is the company's largest segment, performed well with a comp of +2% on top of last year's comp of +7%.
• Bolstered by lower freight costs, higher net interest income, and stronger merchandise margins, TJX's pretax margin came in well ahead of the company's plan, expanding to 12.3% from 10.9% last quarter. For Q4, TJX is forecasting pretax profit margin to slip to 10.8-10.9%, but again, the company oftentimes exceeds its own guidance.

In the earnings press release, CEO Ernie Herrman commented that Q4 is off to a strong start and that the company is excited for the holiday shopping season. Indeed, we believe that TJX will again emerge as a winner in the retail space this holiday season as consumers continue to hunt for bargains. With shares hovering around all-time highs, TJX was facing lofty expectations ahead of the Q3 earnings report. The company's conservative downside Q4 EPS guidance provided the catalyst for this morning's profit-taking pullback, but the overall story for TJX remains bright in our view.