TJX Companies, Inc. — FY2018 Form 10-K Summary
Business context and reporting period
TJX operates more than 4,000 off-price apparel and home-fashions stores across the U.S., Canada, Europe and Australia, alongside e-commerce businesses. Its brands include T.J. Maxx, Marshalls, HomeGoods, Winners and T.K. Maxx. The fiscal year ended February 3, 2018 and included 53 weeks; fiscal 2017 included 52 weeks. The fourth quarter therefore included 14 weeks.
Key financial metrics
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $35.865 billion | $33.184 billion |
| Net income | $2.608 billion | $2.298 billion |
| Diluted EPS | $4.04 | $3.46 |
| Pre-tax margin | 10.8% | 11.2% |
| Cost of sales, buying and occupancy | 71.1% of sales | 71.0% |
| SG&A | 17.8% of sales | 17.4% |
| Operating cash flow | $3.026 billion | $3.627 billion |
| Capital expenditures | $1.058 billion | $1.025 billion |
| Cash and cash equivalents | $2.758 billion | $2.930 billion |
| Long-term debt | $2.231 billion | $2.228 billion |
Working capital was $3.360 billion. TJX had no short-term bank borrowings or commercial paper outstanding at year-end and reported $506 million of short-term investments. Cash, cash equivalents and short-term investments together totaled approximately $3.265 billion. Total debt was 30.2% of total capitalization, versus 33.1% in FY2017.
Material changes versus prior periods
- Annual sales rose 8%; comparable sales grew 2%, compared with 5% growth in each of the two prior years. The 53rd week contributed 2 percentage points to annual sales growth.
- Net income increased about 13% and diluted EPS rose from $3.46 to $4.04. FY2018 EPS included an estimated $0.17 net benefit from tax reform and related investments, about $0.11 from the extra week, and a $0.10 reduction from the Sierra Trading Post (STP) impairment.
- Pre-tax margin declined 0.4 percentage points. Higher supply-chain and payroll costs, tax-reform-related investments and the STP impairment weighed on profitability. Merchandise margin was flat year over year.
- Operating cash flow fell $601 million, mainly reflecting working-capital movements, including inventory, receivables and accrued liabilities.
- Store count grew from 3,812 to 4,070. Home fashions increased to 33% of sales from 31%, while clothing including footwear declined to 52% from 54%.
Quarterly results and unusual items
Fourth-quarter net sales were $10.961 billion, versus $9.468 billion in the prior-year quarter; net income was $877 million versus $678 million, and diluted EPS was $1.37 versus $1.03. The comparison is affected by the extra week in FY2018’s fourth quarter.
- The $99.3 million STP impairment was primarily goodwill-related and followed lower projected revenue growth. Management said STP’s top line improved in the second half as it transitioned toward the off-price model.
- The 2017 Tax Act produced a provisional $88 million tax benefit, including a $193 million transition-tax expense and a $281 million benefit from remeasuring deferred taxes and reversing certain deferred U.S. tax liabilities. The final accounting remained subject to review.
- TJX made $100 million of tax-reform-related investments, including associate bonuses, retirement-plan contributions and charitable contributions.
- FY2017 included a $51.8 million pre-tax debt-extinguishment loss and a $31.2 million non-cash pension settlement charge.
Guidance, outlook, risks and contingencies
- For FY2019, TJX planned approximately 238 net store additions: 65 Marmaxx, 100 HomeGoods/Homesense, 30 Canada and 35 International. The filing estimated about 4,308 total stores by year-end, including Sierra Trading Post.
- Planned FY2019 capital expenditures were approximately $1.4 billion. Management expected to fund these from internally generated funds.
- TJX planned $2.5–$3.0 billion of FY2019 share repurchases and expected quarterly dividends of $0.39 per share, subject to board approval.
- Management expected to repatriate more than $1 billion from Canada during FY2019. It said existing cash, internally generated funds and credit facilities were more than adequate for operating needs over the next fiscal year.
- Key risks include execution of opportunistic buying and inventory allocation, competition and online retail trends, wage and supply-chain cost inflation, foreign exchange and international sourcing exposure, cyber and information-system disruptions, weather and other disruptions, and legal, tax and regulatory matters.
- Operating lease commitments totaled $9.495 billion in undiscounted minimum payments. TJX noted that the forthcoming lease-accounting standard was expected to add significant lease assets and liabilities to the balance sheet.
- Putative wage-and-hour class or collective actions and customer claims concerning “compare at” pricing were pending; only an immaterial amount had been accrued. Management reported effective disclosure controls and internal control over financial reporting, while noting implementation of a new European merchandise accounting system.
Important facts for investors to verify
- How much of FY2018 sales and EPS growth came from the extra week, new stores, comparable sales, tax effects and share repurchases.
- Whether margin pressure from freight, distribution and wage costs persists, and whether the planned store expansion earns adequate returns.
- STP’s revenue trajectory and the assumptions underlying its valuation after the impairment.
- The final tax-reform accounting, transition-tax payments and the timing and tax impact of planned foreign-cash repatriation.
- Cash conversion and working-capital trends, alongside the scale of planned capital spending, dividends and buybacks.
- Potential effects of lease accounting, litigation outcomes, foreign-exchange changes and supply-chain disruptions.