TJX Companies, Inc. — Form 10-Q Summary
Business context and reporting period
Off-price apparel and home fashions retailer operating more than 2,900 stores in the U.S., Canada and Europe. This filing covers the 13 weeks and 39 weeks ended October 29, 2011, compared with the periods ended October 30, 2010. Fiscal 2012 is a 52-week year; retail results are seasonal, with higher sales and income generally in the second half.
Financial performance and liquidity
| Metric | Q3 FY2012 | 39 weeks FY2012 |
|---|---|---|
| Net sales | $5.793 billion, up 5% | $16.482 billion, up 6% |
| Same-store sales | Up 3% | Up 3% |
| Net income | $406.5 million, up from $372.3 million | $1.021 billion, versus $1.009 billion |
| Diluted EPS | $1.06, versus $0.92 | $2.63, versus $2.46 |
| Pre-tax margin | 11.5%, versus 10.8% | 10.0%, versus 10.4%; adjusted 10.5%, versus 10.4% |
| Cash from operations | Not separately presented for the quarter | $830.8 million, versus $1.099 billion |
Q3 cost of sales was 71.9% of sales, down 0.6 percentage points year over year; SG&A was 16.5%, unchanged. For the nine months, cost of sales was 72.6%, down 0.3 points, while SG&A was 17.2%, up 0.6 points (16.8% adjusted). Net interest expense was $8.6 million for Q3 and $26.6 million year to date.
At October 29, cash and cash equivalents were $956.9 million and short-term investments were $71.7 million. Current assets totaled $5.418 billion and current liabilities $3.380 billion. Long-term debt was $774.5 million; TJX also had $1 billion of revolving credit availability and no borrowings on the disclosed foreign operating credit lines. Total debt and capital lease obligations are disclosed separately in the balance sheet.
Year-to-date operating cash flow decreased $268 million, principally as inventory growth, net of the related accounts-payable change, used $573 million versus $265 million in the prior-year period. Capital expenditures were $661 million. Cash and equivalents fell $784.8 million from fiscal year-end. Share repurchases used $974.8 million of cash and dividends paid were $203.5 million.
Material changes versus the prior comparable period
- Q3 sales growth included 3% same-store growth, 3% from new stores and 1% from foreign currency, partly offset by 2% from A.J. Wright closures. Q3 traffic was essentially flat; higher average transaction value drove same-store growth.
- Q3 pre-tax margin improved mainly on gross-margin improvement and favorable year-over-year mark-to-market effects on inventory hedges. Year-to-date reported pre-tax margin declined, but adjusted margin increased slightly.
- Net income was nearly unchanged year to date, while diluted EPS rose, aided by a lower weighted-average share count following repurchases. TJX repurchased 18.6 million shares for $967.7 million during the nine months.
- A.J. Wright consolidation was completed in Q1: 90 stores converted to other TJX banners and 72 stores, two distribution centers and the home office closed. Nine-month results included $69 million of related costs; adjusted diluted EPS was $2.74 versus $2.45.
- Marmaxx and HomeGoods delivered higher sales and segment profit. TJX Canada same-store sales fell 2% year to date; TJX Europe same-store sales fell 2%, and Europe segment profit declined to $18.4 million from $49.2 million, reflecting first-quarter markdowns to clear inventory and reset merchandise mix.
Outlook, commentary, risks and unusual items
- Management expected fiscal 2012 capital spending of approximately $800–$825 million and stated that cash balances, internally generated funds and credit facilities were more than adequate for operating needs. No full-year earnings guidance is provided in the supplied filing text.
- Management reported 14% higher consolidated per-store inventory including distribution centers; in-store inventory was below the prior-year level, while distribution-center inventory rose primarily from pack-away purchases. Forward inventory commitments for the rest of fiscal 2012 were significantly lower than a year earlier.
- Management cited unseasonably warm weather as a factor affecting Q3 traffic, and execution issues in women’s and, to a lesser extent, children’s categories as factors in Canada’s same-store sales decline. It slowed European expansion and was working to improve execution.
- Management estimated HomeGoods could grow to approximately 750 U.S. stores over time. TJX had begun launching Marshalls in Canada, with six stores open at quarter-end.
- The fiscal 2012 effective tax rate was 38.8% for Q3 and 38.2% year to date. Management expected the full-year rate to be higher than previously anticipated because of a higher share of U.S. earnings. Net unrecognized tax benefits were $125.1 million; possible reductions over the next 12 months were estimated at $1–$42 million.
- The former-operations reserve was $52.3 million; most was expected to be paid over three to five years. TJX also disclosed potential contingent liability on certain former BJ’s Wholesale Club and Bob’s Stores leases, which it considered remote. The Computer Intrusion reserve was $16.4 million; actual costs could differ, though material variation was not expected.
- Market risks include diesel fuel, foreign exchange and interest rates. TJX hedged approximately 36% of expected fiscal 2012 diesel requirements and 25% of expected requirements for the first three quarters of fiscal 2013. Management reported no material changes in market-risk exposures, risk factors or internal controls; disclosure controls were deemed effective at a reasonable-assurance level.
Important facts for investors to verify
- Whether inventory growth and pack-away purchasing translate into sales without elevated markdowns, and how the lower forward commitments affect later periods.
- Whether Canada’s category execution issues and Europe’s margin and profit recovery improve, and how much reported results depend on hedge mark-to-market effects and currency movements.
- The sustainability of earnings growth relative to extensive share repurchases, and the cash-flow impact of inventory, capital spending, dividends and buybacks.
- The final costs and cash outflows from A.J. Wright closures and former-operation lease obligations, as well as developments in tax examinations and unrecognized tax benefits.
- Management’s full-year earnings outlook, which is not clearly provided in the supplied filing text.