TJX Companies, Inc. — Q2 FY2016 Form 10-Q
Reporting period: Thirteen weeks ended August 1, 2015; six-month year-to-date period also reported. Comparative periods ended August 2, 2014. Amounts below are in U.S. dollars unless noted.
Business context and performance
TJX operates off-price apparel and home-fashions retailers through Marmaxx, HomeGoods, TJX Canada and TJX Europe; Sierra Trading Post results are included in Marmaxx. The company reported more than 3,400 stores. It said sales and income are generally higher in the second half of its fiscal year.
- Q2 net sales were $7.364 billion, up 6%; same-store sales rose 6%, driven primarily by customer traffic. New-store sales contributed 4 percentage points, while foreign exchange reduced reported growth by 4 points.
- Six-month net sales were $14.229 billion, up 6%; same-store sales increased 5%. New stores added 4 points and foreign exchange reduced growth by 3 points.
- Home fashions outperformed apparel overall. Store count increased 6% and selling square footage 4% year over year.
Financial results and liquidity
| Metric | Q2 FY2016 | Q2 FY2015 | Six months FY2016 | Six months FY2015 |
|---|---|---|---|---|
| Net sales | $7.364bn | $6.917bn | $14.229bn | $13.408bn |
| Income before tax | $886.2m | $830.6m | $1.651bn | $1.561bn |
| Net income | $549.3m | $517.6m | $1.024bn | $971.9m |
| Diluted EPS | $0.80 | $0.73 | $1.49 | $1.37 |
| Pre-tax margin | 12.0% | 12.0% | 11.6% | 11.6% |
- Cost of sales, including buying and occupancy, improved to 70.9% of sales in Q2 and 71.3% year to date, helped by expense leverage. SG&A rose to 16.9% and 17.0%, respectively, reflecting payroll, investment and pension costs, charitable contributions, and a prior-year casualty-reserve benefit.
- Operating cash flow for the six months was $928.6m, down from $1.088bn. Merchandise inventory growth, including earlier receipt of third-quarter goods, was a major use of cash.
- Property additions were $404.9m; net investing cash outflow was $470.8m. Financing cash outflow was $1.032bn, including $851.1m of share repurchases and $262.9m of dividends paid.
- Cash and cash equivalents were $1.911bn at August 1, down from $2.494bn at January 31; short-term investments were $327.5m. Current assets were $6.797bn and current liabilities $4.161bn.
- Long-term debt was $1.624bn, essentially unchanged. TJX had no borrowings under its two $500m revolving credit facilities and reported compliance with their covenants. The company stated available cash, operating funds and credit facilities were more than adequate for the next fiscal year.
Material changes and segment trends
- Net income increased about 6% in Q2 and 5% year to date; diluted EPS rose about 10% and 9%, respectively. Repurchases reduced weighted-average diluted shares and benefited EPS growth by approximately 3–4% in both periods.
- HomeGoods was a notable growth driver: Q2 sales rose 16%, same-store sales 9%, and segment margin increased to 12.5% from 12.2%.
- Marmaxx sales rose 7% and same-store sales 4% in Q2, but segment margin declined to 14.9% from 15.3%, reflecting higher distribution, payroll and pension costs and the prior-year insurance-reserve benefit.
- Canada’s Q2 same-store sales rose 12%; its segment margin increased to 17.1% from 13.7%, with foreign exchange favorably affecting the comparison. Europe’s Q2 same-store sales rose 5%, but segment margin fell to 5.3% from 5.8%, amid currency effects and investment spending.
- Prior-year Q2 included a $16.8m pre-tax loss on early extinguishment of debt; there was no such charge in the current period.
Outlook, risks and contingencies
- Management expected fiscal 2016 capital spending of approximately $975m and planned fiscal-year share repurchases of approximately $1.8bn–$1.9bn. The filing provides no clear full-year earnings or sales guidance.
- TJX signed an agreement to acquire Australian off-price retailer Trade Secret, which operates 35 stores, for AUD $80m; closing was expected by year-end 2015, subject to customary conditions.
- Management cited risks including consumer demand and economic conditions, inventory execution, competition, labor costs, weather and seasonality, data security and systems, international expansion, foreign exchange and commodity prices, acquisitions, litigation and tax matters. It reported no material changes to previously disclosed risk factors or market-risk exposures.
- Former-operations reserves were $13.0m; most were expected to be paid within two years. TJX could also be contingently liable on up to 12 former-business leases not included in the reserve, which it assessed as remote. Tax examinations could reduce unrecognized tax benefits and tax expense by up to $15.5m during the next 12 months.
- Approximately 58% of cash was held by foreign subsidiaries. TJX said it had no current plans to repatriate cash considered indefinitely reinvested.
Important facts for investors to verify
- Whether strong traffic-led comparable sales and HomeGoods growth persist, and whether Europe’s margin weakness improves.
- Whether inventory growth converts to sales without pressure on cash generation or markdowns.
- How foreign exchange affects reported sales, international margins and merchandise costs.
- Execution, closing conditions and financial contribution of the Trade Secret acquisition.
- Capital-spending and repurchase plans, cash held overseas, and the potential timing and effect of tax examinations.