TJX Companies, Inc. — Fiscal 2014 Second-Quarter Form 10-Q
Business context and reporting period: The filing covers the 13 weeks ended August 3, 2013, and the 26 weeks ended August 3, 2013. TJX operates more than 3,000 off-price apparel and home-furnishings stores across Marmaxx, HomeGoods, TJX Canada and TJX Europe; Sierra Trading Post is included in Marmaxx. Comparisons are with the periods ended July 28, 2012.
Financial performance and position
| Metric | Quarter | Six months |
|---|---|---|
| Net sales | $6.442 billion, up 8% | $12.632 billion, up 8% |
| Net income | $479.6 million, up 14% | $932.4 million, up 11% |
| Diluted EPS | $0.66, up 18% | $1.28, up 15% |
| Pre-tax margin | 12.0%, versus 11.5% | 11.9%, versus 11.6% |
| Same-store sales | Up 4%, versus 7% | Up 3%, versus 8% |
Quarterly cost of sales, including buying and occupancy, was 71.2% of sales, improving 0.7 percentage points year over year; SG&A was 16.7%, up 0.2 points. The six-month cost-of-sales ratio improved 0.5 points to 71.4%, while SG&A rose 0.2 points to 16.6%. Management attributed improved cost of sales to merchandise margins and buying and occupancy leverage; higher SG&A reflected marketing and e-commerce investment.
Six-month operating cash flow was $811 million, down from $1.308 billion. Capital expenditures were $497 million, versus $439 million. Cash and cash equivalents were $1.859 billion at August 3, 2013, with $231 million in short-term investments. Long-term debt was $1.274 billion, up from $775 million at February 2, 2013, following issuance of $500 million of 2.50% ten-year notes in May. No amounts were drawn on the two $500 million revolving credit facilities. Current assets were $5.950 billion and current liabilities $3.443 billion.
For the quarter, Marmaxx sales rose 8% and segment margin increased to 15.1%; HomeGoods sales rose 15% and margin increased to 11.8%; TJX Canada sales rose 3% while margin fell to 13.4%; TJX Europe sales rose 9% and margin increased to 5.2%. Foreign currency translation reduced quarterly consolidated sales growth by about 1 percentage point. The effective tax rate was 37.9% for the quarter and 38.0% year to date.
Changes, outlook and risks
- Repurchases reduced shares outstanding: TJX bought back 12.9 million shares for $625 million in the first half. Management expected approximately $1.3–$1.4 billion of repurchases for fiscal 2014.
- Management forecast fiscal 2014 capital spending of approximately $925–$950 million and expected second-half general corporate expense to be below the prior-year period. No full-year earnings or sales guidance is stated in the provided filing text.
- Management said cash, internally generated funds and credit facilities were more than adequate for operating needs over the next fiscal year. Approximately 45% of cash was held outside the U.S.; $237 million was in countries where TJX intended indefinite reinvestment of undistributed earnings.
- Operating cash flow fell year over year, primarily due to inventory timing and changes in prepaid expenses, accrued expenses and taxes payable. Inventory growth used cash, while management reported average per-store inventories down 5% year over year at quarter-end.
- Risks include inventory execution, consumer demand and competition, economic conditions, foreign exchange and commodity prices, data security and technology, weather and disruptions, international expansion, legal and tax matters, and seasonal fluctuations. The filing reported no material changes to previously disclosed risk factors or market-risk exposures.
- Former-operations reserves were $37.6 million; estimated lease obligations and possible claims may differ from estimates. TJX also disclosed contingent exposure on certain former-business leases, which it considered remote. Unrecognized tax benefits were $127.8 million; possible reductions over the next 12 months were estimated at $1–$50 million.
Key facts for investors to verify
- Whether same-store sales, merchandise margins and segment trends persist, particularly the weaker Canadian margin and slower comparable-sales growth versus 2012.
- Whether the planned $925–$950 million capital spending and $1.3–$1.4 billion repurchase plans are achieved, and their effects on liquidity, debt and per-share results.
- How operating cash flow develops as inventory and the timing of rent, incentive compensation and tax payments normalize.
- The terms and carrying value of the new notes, as well as the company’s substantial cash held outside the U.S. and related reinvestment intentions.
- Developments in former-operation lease contingencies, tax examinations and unrecognized tax benefits.