TJX COMPANIES INC annual report, FY2010

TJX Companies, Inc. — FY2010 Form 10-K

Business context and reporting 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. This annual filing covers the 52-week fiscal year ended January 30, 2010. The prior year ended January 31, 2009 and included 53 weeks, which affects comparisons.

Financial performance

MetricFY2010FY2009
Net sales$20.29 billion$19.00 billion
Income from continuing operations$1.214 billion$915 million
Diluted EPS from continuing operations$2.84$2.08
Pre-tax margin9.6%7.6%
Net cash from operating activities$2.272 billion$1.155 billion
Capital expenditures$429 million$583 million
  • Comparable-store sales rose 6%; store count and selling square footage each increased 3%. Reported sales growth of 7% reflected same-store and new-store growth, partly offset by currency translation and the prior-year extra week.
  • Cost of sales, including buying and occupancy, declined to 73.8% of sales from 75.9%, chiefly on stronger merchandise margins, fewer markdowns and expense leverage. SG&A declined slightly to 16.4% from 16.5% of sales; higher performance-based compensation partly offset cost savings.
  • Cash and cash equivalents were $1.615 billion, with $131 million of short-term investments; working capital was $1.909 billion. Long-term debt was $774 million, and debt was 21.5% of total capitalization, versus 26.7% a year earlier. No short-term borrowings were outstanding at year-end.
  • TJX generated $2.272 billion of operating cash, repurchased $950 million of stock and paid $198 million in dividends. Inventory on hand was lower year over year, and the inventory change provided cash.

Material changes and unusual items

  • Income from continuing operations increased 33%. The prior-year comparison included a 53rd week, a $30.5 million reduction in the Computer Intrusion provision and a tax benefit; together these items lifted FY2009 diluted EPS by about $0.16.
  • Fiscal 2010 included $774 million of net proceeds from two debt offerings: $375 million of 6.95% notes due 2019 and $400 million of 4.20% notes due 2015. Proceeds helped fund share repurchases and refinancing; the convertible notes were called, with most converting into shares that TJX subsequently repurchased.
  • Bob’s Stores was sold in FY2009 and is reported as discontinued operations. FY2010 included no discontinued-operations loss.

Outlook, commentary and risks

  • Management said its conservative sales planning, lean inventories, buying close to need and cost controls helped results exceed expectations. It expected continued sales and earnings growth in FY2011.
  • For FY2011, TJX planned approximately 130 net new stores, including 54 in Europe; capital expenditures of about $750 million; and stock repurchases of approximately $900 million to $1 billion. It planned a quarterly dividend of $0.15 per share, subject to Board approval, and forecast an effective tax rate of 38.0%–38.5%.
  • Management considered existing cash generation and credit facilities adequate for operating, debt and capital needs for at least 12 months. Two $500 million revolving facilities served as commercial-paper backstops; one was scheduled to mature in May 2010.
  • Key risks include weak consumer spending, currency movements, merchandise buying and inventory execution, competition, store-expansion execution, seasonal and weather effects, labor and lease obligations, import and supply disruption, and legal, tax and regulatory matters.
  • TJX disclosed a customer-data intrusion discovered in FY2007. The remaining reserve was $23.5 million at year-end and actual costs could differ materially. A related financial-institutions case was settled for $525,000, with no admission of wrongdoing. The company also estimated $94 million of undiscounted contingent lease obligations if certain tenants or subtenants fail to perform.
  • Management and the independent auditor concluded internal control over financial reporting was effective at year-end. TJX implemented a new domestic payroll system effective January 1, 2010, materially changing related processes and procedures.

Important facts for investors to verify

  1. Separate underlying FY2010 growth from the prior year’s 53rd week, currency effects and prior-year provision and tax benefits.
  2. Assess whether stronger merchandise margins and leaner inventories are sustainable, and whether planned store growth and $750 million of capital spending earn expected returns.
  3. Review debt maturities, credit-facility renewal and the cash commitments from repurchases, dividends, leases and pension funding.
  4. Track developments in the Computer Intrusion reserve, contingent lease exposures, tax positions and any future data-security incidents.
  5. Compare FY2011 guidance with subsequent reported results; the outlook is management’s plan, not a guarantee.