TJX Companies, Inc. — Q1 Fiscal 2018 Form 10-Q
Reporting period: Thirteen weeks ended April 29, 2017. TJX operates off-price apparel and home-fashions retail businesses in the U.S., Canada, Europe and Australia. The quarter’s results are unaudited; the company cautions that retail seasonality makes interim results not necessarily indicative of the full year.
Financial performance
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Net sales | $7.784 billion | $7.542 billion |
| Net income | $536.3 million | $508.3 million |
| Diluted EPS | $0.82 | $0.76 |
| Pre-tax margin | 10.7% | 10.9% |
| Cost of sales, including buying and occupancy | 71.0% of sales | 71.2% of sales |
| SG&A | 18.1% of sales | 17.7% of sales |
| Operating cash flow | $448.4 million | $445.2 million |
| Property additions | $258.5 million | $266.2 million |
- Sales rose 3%; same-store sales increased 1%, versus 7% growth a year earlier. New-store sales contributed 4%, while foreign currency reduced reported sales growth by 2%.
- Customer traffic increased, but lower average ticket offset higher units sold. Home fashions outperformed apparel; management cited unfavorable weather in parts of the U.S. and Canada.
- Cost-of-sales improvement reflected favorable inventory-hedge mark-to-market effects and higher merchandise margin, partly offset by distribution costs and expense deleverage. Higher payroll costs contributed to SG&A growth.
- Cash and cash equivalents were $2.669 billion and short-term investments $457.1 million at April 29. Long-term debt was $2.228 billion. The company had two $500 million revolving credit facilities with no borrowings and reported covenant compliance.
- Cash dividends declared were $0.3125 per share, compared with $0.26. TJX repurchased 4.5 million shares for $350 million. Operating cash flow less property additions was approximately $189.9 million.
Segments and material comparisons
- Marmaxx: Sales rose 2%; same-store sales were flat. Segment profit declined to $687.2 million from $708.9 million, and margin fell to 13.8% from 14.6%, reflecting wages, supply-chain costs and deleverage.
- HomeGoods: Sales rose 11%, including 3% same-store growth. Segment profit increased to $152.1 million; margin was 13.6% versus 13.7%.
- TJX Canada: Sales rose 8%, including 3% same-store growth. Segment profit increased to $102.9 million from $57.5 million and margin to 13.9% from 8.4%, primarily reflecting a favorable 6.9-percentage-point inventory-derivative mark-to-market comparison.
- TJX International: Sales fell 2%, driven by a 10% adverse currency-translation effect; same-store sales were flat. Segment profit declined to $6.9 million from $14.3 million and margin to 0.7% from 1.5%, with supply-chain and systems investments, payroll costs and deleverage weighing on results.
Outlook, commentary and risks
- No sales or EPS guidance is stated in the provided filing text. Management expected fiscal 2018 capital spending of approximately $1.2 billion and planned stock repurchases of approximately $1.3 billion to $1.8 billion. It said cash, internally generated funds and credit facilities were adequate for operating needs over the next fiscal year.
- Diluted EPS included an approximately $0.03 benefit from newly adopted share-based-payment tax accounting; the change reduced the quarter’s income-tax provision by $24.6 million. The effective tax rate was 35.6%, versus 38.4% a year earlier. Foreign currency contributed approximately $0.01 to EPS, compared with an approximately $0.05 adverse effect in the prior-year quarter.
- Comparability also reflects a $5.5 million pre-tax benefit from settlement of a postretirement medical plan in the prior-year quarter. Currency and fuel hedges can create period-to-period earnings volatility; the company does not use derivatives for speculation.
- Key disclosed risks include consumer demand and trends, weather, competition, wage and logistics costs, inventory execution, currency movements, international expansion, information systems and data security, and litigation. Putative wage-and-hour and compare-at-pricing class actions seek unspecified damages; an immaterial amount was accrued. Estimated contingent obligations on certain former-operation leases and properties were $53.6 million, though TJX believes most or all will not revert to it.
- The forthcoming lease-accounting standard is expected to materially increase reported assets and liabilities because TJX has more than 3,800 leased locations; the company could not yet assess the income-statement effect.
Important facts for investors to verify
- Whether same-store sales and the average ticket improve, and whether growth continues to depend on new stores.
- How much segment profit—particularly Canada’s improvement—reflects hedge mark-to-market timing rather than underlying operating trends.
- Whether wage, distribution and technology costs continue to pressure margins, especially in Marmaxx and International.
- Execution and funding of planned capital spending and share repurchases, alongside cash balances held overseas and the timing of any repatriation.
- Developments in tax examinations and litigation, and implementation effects of the lease-accounting standard.