TJX Companies, Inc. — Form 10-Q Summary
Business context and reporting period: TJX is a global off-price apparel and home fashions retailer operating nearly 4,200 stores, plus e-commerce businesses. This unaudited filing covers the 13 and 26 weeks ended August 4, 2018 (fiscal 2019 second quarter and first half), compared with the periods ended July 29, 2017.
Key financial results
| Metric | Q2 FY2019 | Q2 FY2018 | First half FY2019 | First half FY2018 |
|---|---|---|---|---|
| Net sales | $9.331 billion | $8.358 billion | $18.020 billion | $16.142 billion |
| Income before tax | $992.6 million | $891.7 million | $1.948 billion | $1.724 billion |
| Net income | $739.6 million | $553.0 million | $1.456 billion | $1.089 billion |
| Diluted EPS | $1.17 | $0.85 | $2.30 | $1.67 |
| Pre-tax margin | 10.6% | 10.7% | 10.8% | 10.7% |
- Second-quarter sales rose 12%, reflecting 6% comparable-store sales growth, 5% from new stores and 1% favorable currency translation. First-half sales also rose 12%, with 5% comp growth, 5% new-store contribution and 2% favorable currency.
- Customer traffic was the primary driver of comp growth. Apparel outperformed home categories. Stores in operation increased 7% and selling square footage increased 5% year over year.
- Second-quarter cost of sales improved to 71.1% of sales from 71.5%, while SG&A increased to 18.2% from 17.8%. Pre-tax margin declined 0.1 percentage point.
- The effective tax rate fell to 25.5% from 38.0% in Q2 and to 25.3% from 36.8% for the first half, primarily reflecting the U.S. tax-rate reduction under the 2017 Tax Act and income mix. TJX estimated the lower tax rate benefited diluted EPS by about $0.18 in Q2 and $0.34 for the first half.
- Operating cash flow was $1.561 billion for the first half, versus $1.103 billion a year earlier. Property additions were $573.9 million, compared with $506.9 million. Cash and cash equivalents were $2.873 billion at August 4; short-term investments were zero.
- Long-term debt was $2.232 billion, versus $2.231 billion at February 3, 2018. TJX had no amounts outstanding under its $1 billion revolving credit facilities and reported compliance with covenants.
- Cash used in financing was $1.286 billion, including $990 million of share repurchases and $441 million of dividends paid. TJX declared dividends of $0.78 per share for the first half, up from $0.625.
Segment performance and material changes
- Marmaxx: Q2 sales grew 11%; comps rose 7%. Segment margin increased to 14.2% from 14.1%, primarily from expense leverage.
- HomeGoods: Q2 sales grew 15%; comps rose 3%. Segment margin fell to 10.7% from 12.2%, primarily due to freight and supply-chain costs, wage increases and new-store expenses.
- TJX Canada: Q2 sales grew 13%; comps rose 6%. Segment margin increased to 14.8% from 10.0%, with a substantial favorable impact from inventory-derivative mark-to-market results.
- TJX International: Q2 sales grew 12%; comps rose 4%. Segment margin increased to 4.0% from 3.6%; derivative mark-to-market results and transactional foreign exchange contributed, partly offset by wage and distribution-center costs.
- Consolidated cost-of-sales improvement reflected favorable year-over-year inventory-derivative mark-to-market effects and occupancy leverage, partly offset by higher freight and supply-chain costs. SG&A pressure included global IT restructuring and wage increases.
- Prior-year results included a $99.3 million STP impairment charge recorded in fiscal 2018’s fourth quarter; it was not a charge in the reported quarter.
Liquidity, outlook, risks and unusual items
- Management said cash, internally generated funds and credit facilities were more than adequate for operating needs over the next fiscal year. Fiscal 2019 capital spending was expected to be approximately $1.4 billion, funded by internally generated funds.
- TJX planned to repurchase approximately $2.5–$3.0 billion of stock in fiscal 2019; $3.1 billion remained available under announced repurchase programs at quarter-end. The filing provides no specific full-year sales or earnings guidance.
- TJX repatriated approximately $1.4 billion of cash from its Canadian subsidiary during Q2. Approximately $0.8 billion of cash was held by foreign subsidiaries, including $0.3 billion in jurisdictions where TJX provisionally intended indefinite reinvestment. The company had accrued a $193 million transition tax under the 2017 Tax Act and paid approximately $15 million in the first half.
- Adoption of the revenue-recognition standard increased opening retained earnings by $59 million, primarily for estimated unredeemed credit-card rewards. TJX said adoption had no material impact on financial condition or results for the period.
- The forthcoming lease standard was expected to materially increase reported assets and liabilities because TJX leases nearly 4,200 locations. Adoption was planned for fiscal 2020; TJX did not expect a material income-statement effect.
- Risks identified include consumer and economic conditions, competition, inventory management, labor costs, technology and data security, sourcing and transportation costs, currency and commodity fluctuations, weather or other disruptions, litigation, tax matters and execution of international expansion. Management reported no material change in previously disclosed risk factors or market-risk exposures.
- Contingencies include wage-and-hour actions and a customer class action concerning “compare at” pricing; an immaterial amount was accrued. Estimated undiscounted contingent obligations for certain former-operation leases were approximately $42.5 million, which management believed were unlikely to revert to TJX in full.
Important facts for investors to verify
- Whether earnings growth remains strong after separating the estimated tax benefit and volatile foreign-exchange and inventory-derivative effects.
- Whether freight, supply-chain, wage and IT restructuring costs continue to pressure margins, particularly at HomeGoods.
- How inventory growth, up 5% per store on a reported basis, compares with sales and demand as the year progresses.
- The eventual balance-sheet effect of lease-standard adoption and any updates to the tax-law accounting and unrecognized tax benefits.
- Actual capital spending and repurchases versus stated plans, alongside cash generation, liquidity and debt levels.