TJX COMPANIES INC quarterly report, Q2 FY2005

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Business Context and Reporting Period

Company: The TJX Companies, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: April 30, 2005 (First Quarter of Fiscal Year 2006)
Business Overview: TJX operates off-price retail chains including Marmaxx (T.J. Maxx and Marshalls), Winners and HomeSense (Canada), T.K. Maxx (UK), HomeGoods, A.J. Wright, and Bob's Stores. The company reported 8% growth in stores in operation and total selling square footage compared to the prior year.

Key Financial Metrics

Metric Q1 2005 Q1 2004
Net Sales $3,651.8 million $3,352.7 million
Net Income $149.3 million $168.1 million
Diluted EPS $0.30 $0.32
Pre-Tax Margin 6.6% 8.2%
Operating Cash Flow $187.1 million $193.3 million
Cash and Equivalents (End of Period) $177.8 million $241.5 million
Total Debt (Short-term + Long-term) $608.7 million $669.4 million

Note: Debt figures include current installments of long-term debt, short-term debt, and long-term debt exclusive of current installments.

Material Changes vs. Prior Period

  • Revenue Growth: Net sales increased 9% year-over-year, driven by a 6% contribution from new stores and a 3% increase in same-store sales. Same-store sales were negatively impacted by unseasonably cool weather in the U.S. and Canada during March and April.
  • Profitability Decline: Net income decreased 11% to $149.3 million. Pre-tax margin contracted from 8.2% to 6.6% due to reduced merchandise margins (higher markdowns at Marmaxx and Winners) and the de-leveraging effect of lower same-store sales growth in non-Marmaxx divisions.
  • Expense Ratios: Cost of sales increased to 76.2% of net sales (from 75.1%), and SG&A expenses rose to 17.0% (from 16.5%) due to higher store payroll, health care costs, and occupancy costs.
  • Segment Performance:
    • Marmaxx: Same-store sales up 3%; segment profit margin declined to 10.4% from 11.2%.
    • Winners and HomeSense: Same-store sales (local currency) down 1%; segment profit dropped 50% to $12.3 million due to aggressive markdowns from cold weather.
    • T.K. Maxx: Same-store sales (local currency) down 1%; reported a segment loss of $0.3 million compared to a profit of $1.9 million prior year.
    • HomeGoods: Same-store sales flat; segment profit margin decreased to 0.2% from 2.3%.

Guidance, Outlook, and Management Commentary

  • Capital Allocation: The company repurchased 11.0 million shares of common stock at a cost of $262.9 million during the quarter. Cumulative repurchases under the $1 billion program announced in May 2004 totaled 28.7 million shares ($669.4 million) as of April 30, 2005.
  • Liquidity and Credit: In May 2005, TJX entered into new $500 million four-year and $500 million five-year revolving credit facilities, replacing prior arrangements. Combined availability under prior facilities was $665 million at period end. The company maintains $35 million in commercial paper outstanding.
  • Inventory Management: Consolidated average per-store inventories were 5% higher than the prior year. Marmaxx inventories were up 14%, largely due to timing of receipts at distribution centers, though management noted the inventory position is more liquid than the prior year.
  • Risks and Contingencies:
    • Weather: Unseasonably cold weather negatively impacted spring apparel sales.
    • Discontinued Operations: A reserve of $12.6 million exists for potential future obligations related to real estate leases of former businesses. A $2.2 million creditor recovery was received in the quarter, offset by an addition to the reserve.
    • Market Risk: The company hedges foreign currency exposure for Canadian and European operations. Sensitivity analysis indicated a hypothetical 10% adverse currency movement would not have a material effect on financial position.

Investor Verification Checklist

  • Margin Sustainability: Verify if the decline in merchandise margins (driven by markdowns) is a temporary weather-related issue or a structural shift in pricing power.
  • Inventory Liquidity: Confirm the "liquid" nature of the 14% inventory increase at Marmaxx and ensure it does not lead to future markdown pressure.
  • Foreign Segment Performance: Monitor T.K. Maxx and Winners/HomeSense closely, as both reported declines in local currency same-store sales and profitability.
  • Share Repurchase Impact: Assess the remaining capacity of the $1 billion repurchase program and its effect on future EPS growth.
  • Debt Covenants: Review the new credit facility covenants (debt-to-earnings ratio) to ensure compliance given the current margin compression.