TJX Companies, Inc. — Q1 FY2020 Form 10-Q
Reporting period: Thirteen weeks ended May 4, 2019, compared with the thirteen weeks ended May 5, 2018. TJX operates off-price apparel and home-fashions retail businesses through Marmaxx, HomeGoods, TJX Canada, and TJX International. Results are unaudited; the company notes its business is seasonal and first-quarter results are not necessarily indicative of the full year.
Financial performance
| Metric | Q1 FY2020 | Prior-year quarter | Change / context |
|---|---|---|---|
| Net sales | $9.278 billion | $8.689 billion | Up 7%; comparable sales rose 5%, non-comparable sales added 3%, and currency reduced sales 1%. |
| Net income | $700.2 million | $716.4 million | Down about 2%. |
| Diluted EPS | $0.57 | $0.56 | Up; share repurchases benefited EPS growth by approximately 3%. |
| Pre-tax margin | 10.1% | 11.0% | Down 0.9 percentage point. |
| Cost of sales, including buying and occupancy | 71.5% of sales | 71.1% | Higher supply-chain and freight costs; partly offset by sales leverage. |
| SG&A | 18.3% of sales | 17.8% | Higher store wages, technology costs, and an unfavorable comparison with a prior-year lease-buyout gain. |
| Operating cash flow | $149.2 million | $724.9 million | Down $575.6 million, principally reflecting inventory growth and a favorable prior-year prepaid-expense movement. |
| Capital expenditures | $316.9 million | $264.9 million | Property additions for stores, renovations, offices, distribution centers, and systems. |
Liquidity, debt, and capital allocation
- Cash and cash equivalents were $2.235 billion at May 4, 2019; there were no short-term investments, commercial paper, or borrowings under the revolving credit facilities.
- Long-term debt was $2.234 billion. Operating lease liabilities totaled $8.965 billion after adoption of the new lease standard; these are lease obligations, not reported long-term debt.
- Cash used in investing activities was $326.7 million and cash used in financing activities was $599.6 million. The latter included $397.3 million of share repurchases and $238.8 million of dividends paid.
- TJX returned approximately $589 million to shareholders through repurchases and dividends. Approximately $2.8 billion remained authorized for repurchases; management planned fiscal 2020 repurchases of approximately $1.75–$2.25 billion.
- Management expected fiscal 2020 capital spending of approximately $1.5 billion, funded by internally generated cash. It stated cash, internally generated funds, and credit facilities were more than adequate for operating needs over the next fiscal year.
- The company reported compliance with credit-facility covenants and no outstanding facility borrowings.
Material changes and segment trends
- Comparable sales increased 5%, versus 3% growth in the prior-year quarter; customer traffic was the primary driver and increased across all four major segments. Stores in operation rose 6% and selling square footage 4% year over year.
- Marmaxx sales rose 8% and comps increased 6%; segment margin eased to 13.7% from 13.9%, mainly due to freight and supply-chain costs.
- HomeGoods sales rose 10%, but comps increased only 1%; segment margin fell to 9.8% from 11.6%, reflecting higher supply-chain costs, store-growth investment, and expense deleverage.
- TJX Canada sales declined 1%, including a 5% negative currency impact; comps were flat. Segment margin fell to 11.4% from 14.7%, affected by currency-related merchandise costs, flat-sales deleverage, and a prior-year lease-buyout gain.
- TJX International sales increased 4% despite an 8% negative currency impact; comps increased 8%. Segment margin fell to 2.3% from 3.4%, largely due to an unfavorable year-over-year mark-to-market impact from inventory derivatives.
- Net income declined even as diluted EPS increased, with lower weighted-average shares from repurchases contributing to per-share growth. Net interest expense also fell, primarily due to higher interest income and the elimination of build-to-suit accounting effects.
Outlook, risks, and unusual items
- Guidance: The filing provides capital-spending and share-repurchase plans but no specific full-year revenue, earnings, or margin guidance.
- Lease accounting: TJX adopted ASC 842 on February 3, 2019, recording right-of-use assets and lease liabilities of approximately $9 billion at transition. The adoption materially increased reported assets and liabilities; prior comparative balance sheets were not restated. Q1 lease cost was $711.8 million.
- Brexit: Management cited potential disruption to merchandise flows, staffing, and compliance in Europe, particularly if the U.K. left the EU without a comprehensive withdrawal agreement and transition period. TJX said it had adjusted its European supply chain and established supporting resources and systems.
- Costs and currency: Freight and supply-chain costs pressured margins; currency movements affected reported international sales and merchandise costs. TJX uses foreign-exchange and fuel derivatives, which can create mark-to-market earnings volatility.
- Tax: The effective tax rate was 25.2%, versus 25.0%. Unrecognized tax benefits were $237.7 million; management said potential resolution of examinations or proceedings over the next 12 months could reduce the tax provision by zero to $31 million.
- Contingencies: TJX disclosed wage-and-hour and customer compare-at-pricing class actions, among other ordinary-course matters; an immaterial amount was accrued. Estimated undiscounted contingent obligations for certain former-operation leases and properties were $34.1 million, with management expecting most or all not to revert to TJX.
- Management reported no material changes to previously disclosed risk factors or market-risk exposures. It identified buying and inventory execution, consumer trends, competition, labor, technology and data security, economic conditions, sourcing and transport, currency, litigation, tax, and weather among factors that could affect results.
Important facts for investors to verify
- Whether sales and traffic momentum persists and whether margin pressure from freight, supply-chain, wages, and technology costs moderates.
- Inventory levels and operating cash conversion: inventory rose to $5.057 billion, while first-quarter operating cash flow fell substantially year over year.
- How the new lease accounting presentation affects comparisons of assets, liabilities, expenses, and cash commitments; distinguish lease liabilities from funded debt.
- Progress against the stated fiscal 2020 capital-spending and share-repurchase plans, and the effect of repurchases on EPS and liquidity.
- Developments in Brexit, foreign exchange and derivative effects, tax examinations, and the disclosed litigation and lease contingencies.