TJX Companies, Inc. — FY2017 Form 10-K Summary
Reporting period: Fiscal year ended January 28, 2017 (52 weeks), with fiscal 2016 ended January 30, 2016 as the comparable period. The filing also reports fourth-quarter results. Amounts are U.S. dollars unless stated otherwise.
Business context and reporting period
TJX operates more than 3,800 off-price apparel and home-fashions stores across the U.S., Canada, Europe and Australia, alongside e-commerce businesses. Its banners include T.J. Maxx, Marshalls, HomeGoods, Winners, HomeSense, T.K. Maxx, Trade Secret and Sierra Trading Post. The model emphasizes opportunistic buying, lean inventory and merchandise generally priced 20%–60% below comparable department- and specialty-store regular prices.
Key financial metrics
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net sales | $33.184 billion | $30.945 billion |
| Net income | $2.298 billion | $2.278 billion |
| Diluted EPS | $3.46 | $3.33 |
| Pre-tax margin | 11.2% | 11.8% |
| Cost of sales, including buying and occupancy | 71.0% of sales | 71.2% |
| SG&A | 17.4% of sales | 16.8% |
| Operating cash flow | $3.602 billion | $2.937 billion |
| Capital expenditures | $1.025 billion | $889 million |
| Cash and cash equivalents at year-end | $2.930 billion | $2.095 billion |
| Working capital at year-end | $2.993 billion | $2.370 billion |
| Long-term debt at year-end | $2.228 billion | $1.615 billion |
Same-store sales rose 5%, matching FY2016’s increase. Net sales grew about 7%, reflecting 5% same-store growth and 4% new-store contribution, partly offset by a 2% adverse currency effect. Average per-store inventories, including distribution-center inventory but excluding in-transit inventory and e-commerce businesses, were down 5% year over year. Operating cash flow less capital expenditures was approximately $2.577 billion.
Fourth-quarter FY2017 net sales were $9.468 billion versus $8.962 billion in Q4 FY2016; net income was $678 million versus $666 million; diluted EPS was $1.03 versus $0.99.
Material changes and segment performance
- FY2017 sales rose about 7%, while net income increased about 1% and diluted EPS increased about 4%. Share repurchases reduced weighted-average diluted shares and contributed to EPS growth.
- Cost of sales improved by 0.2 percentage points, reflecting higher merchandise margin and occupancy-cost leverage. SG&A rose by 0.6 points, primarily due to wage increases, growth investments and supply-chain costs; pre-tax margin fell by 0.6 points.
- FY2017 EPS included a $0.07 per-share reduction from a $51.8 million pre-tax loss on early debt extinguishment and a $31.2 million non-cash pension settlement charge. Together, the charges reduced net income by $50 million.
- Marmaxx sales rose 7% and same-store sales rose 5%; segment margin eased to 14.1% from 14.3%. HomeGoods sales increased 12%, same-store sales rose 6%, and margin was 13.9% versus 14.0%.
- TJX Canada sales increased 11% and same-store sales rose 8%; segment margin was 13.0% versus 13.1%. TJX International sales rose 3%, but same-store sales growth was 2% and segment margin fell to 5.4% from 7.5%, reflecting currency, derivative mark-to-market effects, payroll costs, weaker sales leverage and the full-year inclusion of Trade Secret.
- Cash from operations increased $665 million year over year, including a $350 million favorable comparison from inventory and accounts payable movements and higher accrued liabilities.
Outlook, risks and contingencies
- For FY2018, management planned approximately 65 new Marmaxx stores, 81 HomeGoods stores, 35 Canadian stores and 49 International stores; it also planned the first few stores of a new U.S. home concept. TJX expected capital expenditures of about $1.2 billion, funded from internally generated funds.
- Management planned FY2018 share repurchases of approximately $1.3–$1.8 billion and expected an annual dividend of $1.25 per share, subject to Board approval. These are plans, not guarantees.
- TJX reported sufficient cash, internally generated funds and credit facilities for operating needs over the next fiscal year. It had no borrowings under its $1 billion revolving credit facilities at year-end. Cash and short-term investments totaled about $3.473 billion; long-term debt was $2.228 billion.
- Contractual obligations included $8.521 billion of minimum operating-lease payments and $3.441 billion of purchase obligations. The lease total excludes certain additional occupancy costs.
- Principal risks include buying and inventory execution, competition and changing customer preferences, labor and wage costs, foreign exchange and sourcing exposure, supply-chain disruptions, cyber and systems risks, economic and weather conditions, international expansion, regulatory compliance, and litigation. Currency sensitivity analysis indicated a hypothetical 10% adverse currency move could reduce annual pre-tax income by about $65 million.
- Pending matters include U.S. wage-and-hour class or collective actions and customer putative class litigation concerning “compare at” pricing. The filing describes claims as seeking unspecified damages and states that an immaterial amount was accrued for ongoing litigation.
- Management identified Sierra Trading Post as having a relatively narrow goodwill valuation cushion: estimated fair value exceeded carrying value by approximately 10%; continued underperformance could lead to impairment of some or all of its $97 million goodwill.
- The company expected new lease accounting requirements to materially increase reported assets and liabilities because of its more than 3,800 leased locations; the income-statement effect was not yet determined. Management reported effective disclosure controls and internal control over financial reporting; the auditor also gave an unqualified opinion on the financial statements and internal controls.
Important facts for investors to verify
- Whether FY2018 store-growth, capital-expenditure, buyback and dividend plans were achieved, and the returns generated by expansion.
- Whether margins stabilize as wage, distribution and supply-chain costs rise, particularly in TJX International.
- How currency movements and inventory-derivative mark-to-market effects affect reported earnings and segment profitability.
- Progress and impairment assumptions for Sierra Trading Post, and performance of the new U.S. home concept and Trade Secret rebranding.
- Cash-flow sustainability after capital investment, dividends and share repurchases, alongside lease commitments and debt maturities.
- Developments in wage-and-hour and compare-at-pricing litigation, tax positions, and implementation of lease-accounting changes.