TJX Companies, Inc. — Form 10-Q Summary
Business context and reporting period
Reports the unaudited 13 weeks ended May 1, 2010, compared with the 13 weeks ended May 2, 2009. TJX operates off-price apparel and home-fashion stores in the United States, Canada and Europe. Management notes that retail results are seasonal and the first quarter is not necessarily indicative of full-year results.
Financial performance and liquidity
| Metric | Quarter ended May 1, 2010 | Prior-year quarter |
|---|---|---|
| Net sales | $5.017 billion | $4.354 billion |
| Income before tax | $536.3 million | $339.2 million |
| Net income | $331.4 million | $209.2 million |
| Diluted EPS | $0.80 | $0.49 |
| Operating cash flow | $527.4 million | $361.0 million |
| Capital expenditures | $149.1 million | $66.4 million |
- Sales rose 15%; same-store sales increased 9%. Management attributed sales growth to same-store gains, new stores and a favorable 3-percentage-point currency translation effect.
- Pre-tax margin increased to 10.7% from 7.8%. Cost of sales fell to 72.7% of sales from 75.2%, while SG&A fell to 16.4% from 16.9%. The effective tax rate was 38.2%, versus 38.3%.
- Cash and cash equivalents were $1.833 billion at May 1, 2010; short-term investments were $126.1 million. Current assets were $5.105 billion and current liabilities $3.015 billion.
- Long-term debt was $774.3 million, with no current debt installments reported. TJX had no borrowings under its revolving credit facilities and reported $1 billion of available capacity. The filing estimates long-term debt fair value at $868.1 million, versus its $774.3 million carrying value.
- Cash dividends declared were $0.15 per share, up from $0.12. TJX repurchased 5.5 million shares for approximately $234 million during the quarter.
Material changes and segment results
- Management cited leaner inventories, buying closer to need, improved merchandise margins, expense leverage and cost-reduction programs as drivers of improved margins. Consolidated per-store inventories were down 12% year over year.
- Marmaxx same-store sales rose 10% and segment margin increased to 14.3% from 11.3%. HomeGoods same-store sales rose 15%, with margin at 8.9% versus 4.0%. A.J. Wright same-store sales rose 7%, with margin at 4.6% versus 2.5%.
- Canada same-store sales rose 6%; segment margin increased to 9.8% from 4.7%, partly reflecting currency translation and a less adverse mark-to-market impact from inventory hedges.
- Europe same-store sales rose 1%, down from 6% growth a year earlier; segment profit fell to $5.8 million from $9.3 million, and margin declined to 1.1% from 2.2%. Management cited unseasonable weather, execution issues in the U.K. and Ireland, investment in newer markets and infrastructure expansion.
- Interest expense, net increased to $10.2 million from $6.6 million, principally reflecting debt issuance and refinancing changes.
Outlook, risks and unusual items
- No specific full-year revenue or earnings guidance is stated in the filing. Management anticipated fiscal 2011 capital spending of approximately $750 million, including new stores and renovations, and said cash, operating funds and credit facilities were adequate for operating needs.
- Management planned to renovate stores, with approximately 700 Marmaxx locations expected to be in the new prototype by fall 2010; it said renovated stores had shown sales improvement to date.
- The $22.5 million reserve for probable costs related to the previously disclosed computer intrusion is an estimate; actual costs could vary materially, including with litigation, claims and insurance developments.
- TJX disclosed possible contingent liability on certain former-business leases, but said liability was not considered probable and was not included in the discontinued-operations reserve. That reserve was $33.2 million.
- Unrecognized tax benefits were $125.0 million. Resolutions of tax examinations or proceedings could reduce the tax provision by $1 million to $49 million over the next 12 months.
- Market risks include currency, interest rates and pension-asset volatility. A hypothetical adverse 10% currency movement could have reduced quarterly pre-tax income by approximately $6 million; the stated interest-rate sensitivity was not material. The filing identifies risks including consumer spending, inventory execution, weather, competition, data security, foreign exchange, oil prices, litigation and international operations.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing states there were no material changes to the prior annual report’s risk factors.
Investor verification priorities
- Check subsequent results against the strong 9% same-store sales growth and margin gains, including whether lean inventory levels and merchandise margins were sustained.
- Assess the durability of international performance, particularly Europe’s weak segment margin and the stated U.K. and Ireland execution issues.
- Review the impact of currency movements and inventory-hedge mark-to-market changes on reported sales, margins and earnings.
- Monitor the $22.5 million computer-intrusion reserve, related litigation and claims, and the contingent former-business lease exposures.
- Track the planned $750 million capital spending, share repurchases and dividends against cash generation, debt and liquidity.
- Follow tax examinations and the potential $1 million to $49 million tax benefit, as well as the renewal of the $500 million revolving facility.