TJX Companies, Inc. — Form 10-Q Summary
Business context and reporting period
For the 13 weeks ended November 3, 2018 (third quarter fiscal 2019) and the 39 weeks ended that date, TJX reported results for its off-price retail businesses: Marmaxx, HomeGoods, TJX Canada, and TJX International. Comparisons are with the periods ended October 28, 2017. Fiscal 2019 is a 52-week year; the prior fiscal year was 53 weeks. Results are unaudited, and the company cautions that interim results are not necessarily indicative of the full year.
Financial performance and liquidity
- Third-quarter revenue and earnings: Net sales were $9.83 billion, up 12%; comparable sales rose 7%, primarily on higher customer traffic. Net income was $762 million, up from $641 million, and diluted EPS was $0.61 versus $0.50.
- Nine-month results: Net sales were $27.85 billion, up 12%; comparable sales increased 6%. Net income was $2.22 billion versus $1.73 billion, and diluted EPS was $1.75 versus $1.33.
- Margins: Third-quarter pre-tax margin fell to 10.7% from 11.6%; cost of sales rose to 71.1% of sales from 70.2%, while SG&A improved to 17.9% from 18.1%. Nine-month pre-tax margin was 10.8% versus 11.0%. Higher freight and supply-chain costs and inventory-hedge comparisons pressured cost of sales.
- Cash flow: Operating cash flow for the first nine months was $2.48 billion, up from $1.93 billion. Capital spending was $873 million. Investing activities used $369 million and financing activities used $2.06 billion. Cash declined $47 million from the fiscal-year start to $2.71 billion.
- Balance sheet and debt: At November 3, cash was $2.71 billion, current assets were $9.32 billion, and current liabilities were $6.01 billion. Long-term debt was $2.23 billion; no amounts were outstanding under the $1 billion revolving credit facilities, and TJX reported compliance with their covenants. Cash exceeded long-term debt by approximately $479 million.
- Shareholder returns: TJX paid $682 million in dividends and spent $1.59 billion on share repurchases during the nine months. It returned $841 million through repurchases and dividends in the third quarter. The February 2018 repurchase authorization had approximately $2.5 billion remaining.
Material changes and segment performance
- Sales growth reflected comparable-sales gains, store expansion, and currency effects. Store count was up 6% and selling square footage up 4% year over year. Apparel outperformed home categories; U.S. comparable sales were strong, while Canada and International were below the consolidated average.
- Marmaxx third-quarter comparable sales rose 9%, and segment margin improved to 12.8% from 12.6%. HomeGoods comparable sales rose 7%, but margin declined to 11.3% from 13.3%, primarily due to freight-related merchandise-margin pressure and higher supply-chain costs.
- TJX Canada comparable sales rose 5%; third-quarter segment margin fell to 17.6% from 21.0%, mainly due to inventory-derivative mark-to-market effects and higher store payroll costs. TJX International comparable sales rose 3%, and margin improved to 7.6% from 7.0%, supported by cost efficiencies and merchandise margin, partly offset by derivative effects.
- The effective tax rate declined to 27.2% for the quarter and 25.9% for the nine months, compared with 37.1% and 36.9%, respectively, largely reflecting the U.S. federal tax-rate reduction under the 2017 Tax Act and jurisdictional income mix. Management estimated the lower tax rate benefited diluted EPS by approximately $0.09 for the quarter and $0.26 for the nine months.
Outlook, commentary, risks, and unusual items
- Management said existing cash, internally generated funds, and credit facilities should be adequate for operating needs over the next fiscal year. Fiscal 2019 capital spending was expected to be approximately $1.3 billion, funded internally. TJX planned approximately $2.5 billion of fiscal 2019 stock repurchases; timing and amounts may change.
- A pension annuity transaction transferred $207.4 million of plan assets and reduced pension obligations. It had no cash impact but caused a $36.1 million non-cash pre-tax settlement charge, reducing quarterly EPS by about $0.02.
- Average per-store inventories, excluding e-commerce and goods in transit, were up 9% reported and 10% at constant currency year over year. Management cited higher freight, supply-chain costs, wage increases, foreign-currency movements, and inventory-hedge volatility as factors affecting results.
- TJX expects the lease accounting standard, planned for adoption in fiscal 2020, to materially increase reported balance-sheet assets and liabilities for its nearly 4,300 leased locations; it does not expect a material income-statement impact.
- Risks identified include inventory management and buying execution, competition and consumer trends, labor costs, economic conditions, weather or other disruptions, data security and technology, sourcing and transportation costs, currency fluctuations, litigation, and tax matters. The filing reported wage-and-hour and compare-at-pricing class-action lawsuits; an immaterial amount was accrued. Estimated contingent obligations on certain former-operation leases and sublet properties were approximately $40.1 million, though management believes most or all will not revert to TJX.
Important facts for investors to verify
- Whether strong comparable-sales growth persists and supports earnings after tax-rate benefits diminish.
- Whether freight, supply-chain, wage, and inventory-hedge pressures continue to weigh on merchandise and operating margins.
- Inventory levels and sell-through, given the reported increase in average per-store inventories.
- Execution of planned capital spending and repurchases, alongside cash generation and liquidity needs.
- Final accounting and balance-sheet effects of the 2017 Tax Act and the upcoming lease standard, plus developments in disclosed litigation and lease contingencies.