TJX Companies, Inc. — Q2 FY2012 Form 10-Q
Reporting period: The quarter and first half ended July 30, 2011 (13 and 26 weeks, respectively); comparisons are with periods ended July 31, 2010. TJX operates off-price apparel and home-fashions stores in the U.S., Canada and Europe. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Q2 FY2012 | Q2 FY2011 | First half FY2012 | First half FY2011 |
|---|---|---|---|---|
| Net sales | $5,468 | $5,068 | $10,689 | $10,085 |
| Net income | $348 | $305 | $614 | $636 |
| Diluted EPS | $0.90 | $0.74 | $1.57 | $1.54 |
| Pre-tax margin | 10.2% | 9.8% | 9.3% | 10.2% |
| Cost of sales, buying and occupancy / sales | 72.7% | 73.4% | 73.0% | 73.1% |
| SG&A / sales | 16.9% | 16.8% | 17.6% | 16.6% |
- Q2 sales rose 8%; same-store sales increased 4%. First-half sales rose 6%, with same-store sales up 3%. Store count and selling square footage were each 2% higher year over year at quarter-end.
- Q2 pre-tax income was $559 million versus $496 million; first-half pre-tax income was $989 million versus $1,033 million. Q2 margin improved, while first-half margin declined primarily amid A.J. Wright consolidation costs and higher SG&A.
- Management’s non-GAAP adjusted first-half diluted EPS was $1.68 versus $1.53, excluding $69 million of A.J. Wright-related costs in FY2012 and the $12 million Computer Intrusion reserve benefit in FY2011. Adjusted first-half pre-tax margin was 9.9% versus 10.1%. These are management-defined non-GAAP measures.
- Q2 gross-margin improvement reflected buying and occupancy leverage and year-over-year inventory-hedge mark-to-market effects. First-half SG&A pressure also reflected higher administrative and advertising costs and deleverage in Canada and Europe.
Cash flow, balance sheet and capital allocation
- First-half operating cash flow was $326 million, down from $666 million. The inventory increase, net of the related accounts-payable change, used $352 million of cash, versus $10 million in the prior-year period; management attributed the increase mainly to packaway inventory.
- Property additions were $439 million versus $327 million. Investing cash outflow was $441 million. Management expected FY2012 capital spending of approximately $800–$825 million.
- Cash and cash equivalents were $978 million at July 30, 2011, down from $1,742 million at January 29, 2011. Short-term investments were $82 million. Current assets totaled $5,029 million and current liabilities $3,191 million.
- Long-term debt was $774 million; the filing reports no separate current debt installment. TJX had $1 billion available under revolving credit facilities, serving as backup to its commercial paper program, and reported no borrowings on the disclosed Canadian operating and U.K. credit lines.
- Financing cash outflow was $671 million, including $671 million of cash repurchases and $132 million of dividends paid. TJX repurchased 13.1 million shares during the first half and had $922 million remaining under its newly authorized $1 billion repurchase program. Dividends declared were $0.38 per share for the first half, up from $0.30.
Material changes, outlook and risks
- A.J. Wright consolidation: TJX converted 90 stores to other banners and closed the remaining 72 stores, two distribution centers and the home office; the consolidation was completed in Q1. FY2012 first-half results included $49 million of A.J. Wright segment losses and $20 million of conversion costs. The closures reduced reported sales compared with the prior year; the company expected some sales to migrate to other TJX stores.
- Segment trends: Marmaxx delivered 5% same-store sales growth in both Q2 and the first half, with first-half segment profit of $970 million. HomeGoods same-store sales rose 3% in Q2 and 4% in the first half. Canada same-store sales fell 3% in both periods; management cited execution issues, particularly in women’s and children’s categories. Europe was flat in Q2 and down 2% for the first half; it recorded a $24 million first-half segment loss, including aggressive first-quarter markdowns. Management said it had slowed European expansion and was focusing on execution.
- Inventory: Consolidated per-store inventory, including distribution centers, was up 16% year over year, partly reflecting end-of-season goods packed away for expected store flow beginning in Q3. Store inventories were lower than a year earlier, and forward purchase commitments for the second half were significantly lower than at the comparable prior-year point.
- Outlook: The filing gives capital-spending expectations but no specific earnings or sales guidance. Management noted that retail sales and income are generally higher in the second half, and cautioned that interim results are not necessarily indicative of full-year results.
- Contingencies and exposures: The Computer Intrusion reserve was $16.8 million; management said estimate variations were not expected to be material. The former-operations reserve was $58.2 million, with most expected to be paid over the next three to five years; certain possible former-business lease liabilities were excluded because management considered future liability remote. Net unrecognized tax benefits were $126.3 million; these could decrease by up to $42 million over the next 12 months, reducing tax expense. TJX also identified currency, diesel-fuel, interest-rate, inventory, consumer-spending, seasonal, weather, data-security and other risks. It reported no material change in market-risk exposures, risk factors or internal controls; legal proceedings were listed as not applicable.
Important facts for investors to verify
- Whether sales and margin momentum continued after Q2, particularly in Canada and Europe, and whether Europe returned to profitability.
- Whether elevated packaway inventory flowed to stores as planned, and whether inventory levels and cash conversion improved.
- The realized costs and any remaining obligations from the A.J. Wright consolidation, including expected sales migration to other banners.
- How much of reported EPS growth reflects share repurchases, foreign-currency effects and hedge mark-to-market movements versus underlying operations.
- Updates to cash generation, capital spending, share repurchases, tax examinations, the former-operations reserve and the Computer Intrusion reserve.