TJX COMPANIES INC quarterly report, Q2 FY2013

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TJX Companies, Inc. — Form 10-Q Summary

Business context and reporting period

Quarterly report for the 13 and 26 weeks ended July 28, 2012, compared with the periods ended July 30, 2011. Results are unaudited. TJX operates more than 2,900 off-price apparel and home-fashions stores across Marmaxx, HomeGoods, TJX Canada and TJX Europe. Fiscal 2013 is a 53-week year. Retail sales and income are generally higher in the second half, so interim results are not necessarily indicative of full-year results.

Financial performance and liquidity

  • Second quarter: Net sales were $5.946 billion, up 9%; net income was $421.1 million, up 21%; diluted EPS was $0.56 versus $0.45, up 24%. Same-store sales rose 7%.
  • First six months: Net sales were $11.744 billion, up 10%; net income was $840.3 million, up 37%; diluted EPS was $1.11 versus $0.79, up 41%. Against prior-year adjusted EPS of $0.84, excluding A.J. Wright consolidation costs, EPS increased 32%. Same-store sales rose 8%.
  • Margins: Pre-tax margin was 11.5% for the quarter, up 1.3 percentage points, and 11.6% year to date, up 2.3 points versus reported prior-year results (1.7 points versus adjusted). Cost of sales was 71.9% of sales in both periods, improving 0.8 and 1.1 points, respectively. SG&A was 16.5% for the quarter and 16.4% year to date, down 0.4 and 1.2 points.
  • Cash flow: Operating cash flow was $1.308 billion for the first six months, versus $325.7 million a year earlier. Property additions were $438.9 million. Cash and cash equivalents ended at $1.620 billion; short-term investments were $176.3 million.
  • Debt and liquidity: Long-term debt carrying value was $774.5 million. TJX had no borrowings under its two $500 million revolving credit facilities; the filing says existing cash, operating cash generation and credit facilities are more than adequate for operating needs over the next fiscal year. Current liabilities were $3.225 billion.
  • Shareholder returns: Six-month cash dividends paid were $155.7 million; declared dividends were $0.23 per share, versus $0.19 a year earlier. TJX repurchased 13.6 million shares for approximately $550 million during the six months; reported cash payments were $597.0 million due to settlement timing.

Material changes and segment results

  • Management attributed improved results chiefly to stronger customer traffic, higher merchandise margins and expense leverage on above-plan sales. Stores and selling square footage were each up 4% year over year; average per-store inventory, including distribution-center inventory, was down 12% at quarter end.
  • Marmaxx sales rose 9% in the quarter and same-store sales rose 7%; segment margin improved to 14.6% from 13.1%. HomeGoods sales rose 16%, same-store sales rose 9%, and segment margin increased to 10.1% from 7.3%.
  • TJX Canada sales rose 4%, while same-store sales rose 5%; segment margin declined to 14.0% from 14.5%, with currency effects weighing on the comparison. TJX Europe sales rose 7%, same-store sales rose 10%, and segment margin increased to 3.5% from 1.1%.
  • Year-to-date TJX Europe segment profit was $36.5 million versus a $24.0 million loss. Prior-year results included A.J. Wright’s $49.3 million segment loss and related consolidation costs; TJX completed the consolidation in fiscal 2012. Management presents certain prior-year adjusted comparisons excluding these items; those measures are non-GAAP.
  • The share count was reduced by repurchases, and the company’s two-for-one stock split was reflected retroactively in per-share and share data.

Outlook, commentary, risks and unusual items

  • Management expected fiscal 2013 capital spending of approximately $1 billion, including the Framingham home-office purchase. It planned approximately $1.2–$1.3 billion of share repurchases for the year; timing and amount could change.
  • Management expected general corporate expense, elevated in the first six months due partly to systems and growth investments, to moderate year over year during the remainder of the fiscal year. The filing does not provide a full-year sales or EPS forecast.
  • Effective tax rates increased to 38.3% for the quarter and 38.4% year to date. TJX cited expiration of the U.S. Work Opportunity Tax Credit, earnings mix and a smaller U.K. tax-rate-reduction benefit.
  • Risks cited include inventory buying and management, competition, consumer spending, international operations and currency, technology and data security, seasonality and weather, commodity prices, legal and tax matters, and real-estate activities. The company reported no material changes to previously disclosed risk factors or market-risk exposures.
  • Former-operations reserves were $37.7 million; most were expected to be paid over three to five years, and actual lease-related costs may differ from estimates. Potential liability on certain former BJ’s and Bob’s leases was not included because management considered the likelihood of liability remote.
  • Net unrecognized tax benefits were $119.5 million. TJX said examinations or proceedings could reduce the amount by $1 million to $50 million over the next 12 months, reducing tax expense. There were no material legal proceedings reported.

Important facts for investors to verify

  • Whether strong traffic and same-store sales growth, particularly in the U.S. and Europe, continued after July 28, 2012.
  • Whether merchandise-margin gains and expense leverage persisted, and how currency and inventory-hedge mark-to-market effects affected subsequent results.
  • Actual fiscal 2013 capital spending and repurchases versus management’s approximate plans, and the effect of buybacks on EPS and liquidity.
  • Developments in the former-operations reserve, potential lease obligations, tax examinations and unrecognized tax benefits.
  • Comparability of reported year-over-year results with adjusted results that exclude A.J. Wright consolidation items.