How TJX Avoided Wall Street's Wrath

CIO — By the end of 2007, The TJX Companies, which owns T.J. Maxx, HomeGoods and Marshalls stores, had reported that approximately 100 million credit and debit card owners' information had been compromised by hackers, possibly dating back to 2003. The size and scope of the breach, as well as the lack of adequate security controls to mitigate the criminal activity, were breathtaking.

And yet Wall Street analysts didn't seem to care. In January 2007, when TJX first announced the "unauthorized intrusions," its stock traded around $29.The price hit a low of $26 in the spring as the scope of the breach expanded, but the stock price rebounded to a high of $32 in the fall. (In early February 2008, it was still trading around $32.)

In fact, the lack of financial fury by the analyst community was entirely predictable. Research from Emory University's Marketing Institute in 2006 found that when a company announces a security breach its stock price drops between 0.6 percent and 2.1 percent, which is usually not a huge hit to the bottom line.

To retail analyst Paula Rosenblum, a managing partner with Retail Systems Research, the reason why TJX was able to escape unscathed is simple: TJX's customers didn't care, so why should Wall Street.

"Sales continued to rise—especially same-store sales," a retail metric whose value trumps all else, she notes. "The fines that have been leveled against TJX metaphorically amount to a parking ticket, and even the most draconian statements by analysts that 'final costs may be a billion dollars' still borders on immaterial over a long enough time."

Another factor that saved TJX's stock price was the economy, says Patricia Edwards, a portfolio manager and managing director at Wentworth, Hauser and Violich who focuses on retail. "As we started to see cracks in the economy this past summer, all the department stores were making noises about too much inventory," Edwards says.

For TJX, economic conditions don't get any better than that because its stores feed off the inventory gluts of the department stores. "And when the economy gets rough, shoppers still want name-brand merchandise but at discount prices," Edwards says. "TJX delivers that in spades."

Now, as the economy seems even more unsettled than last summer, TJX seems well-positioned for the future. "Most of the lawsuits have been settled, the customers didn't blink, comparable store sales are up, earnings are on track and a down economy is always good for companies like TJX," Rosenblum says. "Why would Wall Street pummel them?"