TJX Companies, Inc. — Form 10-Q Summary
Business context and period. TJX operates off-price apparel and home-fashions retailers in the U.S., Canada, and Europe, including T.J. Maxx, Marshalls, HomeGoods, Winners, and T.K. Maxx. The unaudited first quarter of fiscal 2015 covered the 13 weeks ended May 3, 2014; comparisons are with the 13 weeks ended May 4, 2013. Amounts below are U.S. dollars.
Financial results and liquidity
| Metric | Quarter ended May 3, 2014 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $6.491 billion | $6.190 billion | +5% |
| Net income | $454.3 million | $452.9 million | +0.3% |
| Diluted EPS | $0.64 | $0.62 | +3% |
| Same-store sales | +1% | +2% | Growth slowed |
| Pre-tax margin | 11.3% | 11.8% | Down 0.5 percentage points |
| Cost of sales, including buying and occupancy | 72.1% of sales | 71.6% | Up 0.5 percentage points |
| SG&A | 16.5% of sales | 16.5% | Flat |
| Net interest expense | $9.6 million | $5.3 million | Increased |
| Operating cash flow | $473.7 million | $280.7 million | Increased $193.0 million |
| Property additions | $193.4 million | $238.5 million | Decreased |
| Cash and cash equivalents | $2.059 billion | $1.990 billion | At May 3, 2014 and May 4, 2013 |
At May 3, 2014, short-term investments were $259.9 million; current assets were $6.236 billion and current liabilities were $3.705 billion. Long-term debt, excluding current installments, was $1.274 billion. TJX had two $500 million revolving credit facilities with no borrowings outstanding and was in compliance with their covenants. Shareholders’ equity was $4.283 billion.
Material changes and operating trends
- Sales growth reflected 4% growth from new stores and 1% same-store sales growth. Stores in operation were up 5% and selling square footage up 4% year over year. Management attributed same-store growth to higher average tickets, partly offset by lower customer traffic; unseasonable weather in parts of the U.S. and Canada was considered unfavorable.
- Gross margin pressure reflected lower merchandise margins and buying and occupancy cost deleverage on modest comparable-sales growth. The company also cited mark-to-market effects on inventory-related hedges.
- Results varied by segment: Marmaxx sales rose 2%, but same-store sales were flat and segment margin fell to 14.7% from 15.3%. HomeGoods sales rose 10%, same-store sales rose 3%, and margin edged up to 13.0%. TJX Canada sales fell 6% (including an approximately $52 million adverse currency translation effect); same-store sales fell 1% and margin declined to 7.2% from 11.5%. TJX Europe sales rose 24% (including approximately 9 percentage points of favorable currency translation); same-store sales rose 8% and margin improved to 4.3% from 2.3%.
- Net income was nearly unchanged, while EPS increased partly because weighted average diluted shares declined to 712.9 million from 732.6 million, supported by share repurchases.
- Operating cash flow improved year over year, in part because inventory net of accounts payable and accrued-liability movements used less cash; management attributed the accrued-liability comparison largely to the timing of tax payments.
Outlook, risks, and notable items
- Management forecast fiscal 2015 capital spending of approximately $975 million and planned share repurchases of approximately $1.6–$1.7 billion. It stated that cash, internally generated funds, and credit facilities were more than adequate for operating needs over the next fiscal year. The filing does not provide a clear earnings or sales guidance target.
- Cash and cash equivalents held outside the U.S. totaled $991.8 million, about 48% of cash; $281.9 million was in countries where TJX intended indefinite reinvestment of undistributed earnings.
- Inventory-purchase and diesel hedges expose results to currency and fuel-price movements. The quarter included a net $11.2 million derivative loss recognized in income, compared with a $4.3 million gain in the prior-year quarter; management noted that realized hedge effects are generally offset by the underlying hedged items.
- TJX’s former-operations reserve was $28.2 million at quarter-end, mainly for lease-related obligations. The company estimated most of the reserve would be paid over the next two to three years; actual costs and timing may differ. It also disclosed contingent exposure on certain former-business leases that it considered remote.
- The effective tax rate was 37.8%, versus 38.1%. TJX said the rate reflected jurisdictional income mix and the expiration of the U.S. Work Opportunity Tax Credit. It disclosed $27.0 million of net unrecognized tax benefits and said potential resolution over the next 12 months could reduce the tax provision by $0–$11 million.
- Management reported no material changes in market-risk exposures or previously disclosed risk factors, and no material changes to internal control over financial reporting. Forward-looking risks include consumer demand, weather, inventory execution, competition, labor, currency, data security, technology, legal and tax matters, and international expansion.
Important facts for investors to verify
- Whether subsequent quarters sustain comparable-sales growth and recover the gross-margin and pre-tax-margin declines.
- Whether Canada’s margin and sales improve, and whether European growth and margin gains persist after currency effects.
- Execution of the approximately $975 million capital-spending plan and $1.6–$1.7 billion repurchase plan, including effects on liquidity and per-share results.
- Cash-flow quality, seasonal inventory needs, and the level and timing of former-operations and tax-related cash outflows.
- Currency and diesel-hedge performance, including the timing of recognized mark-to-market effects and offsets from underlying transactions.