TJX Companies, Inc. — Form 10-Q Summary
Business context and reporting period. TJX is an off-price apparel and home fashions retailer operating more than 4,400 stores through Marmaxx, HomeGoods, TJX Canada and TJX International; Sierra is included in Marmaxx. This filing covers the 13 and 26 weeks ended August 3, 2019, the second quarter and first half of fiscal 2020. Fiscal 2020 ends February 1, 2020. Interim results are not necessarily indicative of full-year results, and sales and income are generally higher in the second half.
Key financial results
| Metric | Q2 FY2020 | First half FY2020 | Comparison |
|---|---|---|---|
| Net sales | $9.782 billion | $19.059 billion | Up 5% and 6%, respectively |
| Net income | $759 million | $1.459 billion | Up 3% and approximately flat, respectively |
| Diluted EPS | $0.62 | $1.19 | Versus $0.58 and $1.15 |
| Pre-tax margin | 10.4% | 10.3% | Down 0.2 and 0.5 percentage points |
| Cost of sales, buying and occupancy | 71.8% of sales | 71.7% of sales | Up 0.7 and 0.6 percentage points |
| SG&A | 17.7% of sales | 18.0% of sales | Down 0.5 points and flat |
| Operating cash flow | Not separately presented | $899 million | Versus $1.561 billion |
| Property additions | Not separately presented | $578 million | Versus $574 million |
First-half operating cash flow less property additions was approximately $321 million, compared with approximately $987 million in the prior-year period; this is a simple cash-flow measure, not a company-reported free-cash-flow metric. Net cash used in financing was $1.138 billion, primarily reflecting $700 million of share repurchases and $517 million of dividends.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $2.186 billion at August 3, 2019, down from $3.030 billion at fiscal year-end. Merchandise inventories were $5.087 billion, up from $4.579 billion at fiscal year-end.
- Long-term debt was $2.235 billion. No amounts were outstanding under the two $500 million revolving credit facilities; TJX reported compliance with their covenants. No short-term borrowings or commercial paper were outstanding.
- Operating lease liabilities totaled $9.097 billion, including $1.354 billion current and $7.743 billion long term. These lease obligations are distinct from reported debt.
- TJX said cash, internally generated funds and credit facilities were more than adequate for operating needs over the next fiscal year. Approximately $0.7 billion of cash was held by foreign subsidiaries.
Material changes and operating performance
- Comparable sales rose 2% in Q2, versus 6% growth a year earlier; first-half comparable sales increased 4%, versus 5%. Customer traffic increased across all four major segments. Q2 total sales growth also reflected store expansion and a 1% negative currency impact.
- Sales growth was broad, but segment results were mixed. Q2 segment profit margins were 14.0% for Marmaxx (14.2% prior year), 9.0% for HomeGoods (10.7%), 12.2% for TJX Canada (14.8%) and 3.9% for TJX International (4.0%).
- Management attributed margin pressure principally to lower merchandise margins, higher freight and supply-chain costs, and, in some segments, markdowns and expense deleverage. Canada and International were also affected by transactional foreign exchange and inventory-derivative mark-to-market changes. SG&A benefited from prior-year IT restructuring and charitable contributions and from insurance claim settlements; wage and technology costs partly offset those benefits.
- Share repurchases reduced weighted-average diluted shares and management estimated they contributed about 3% to EPS growth in both Q2 and the first half. The company repurchased $700 million of stock on a cash-settlement basis in the first half, versus $990 million in the prior-year period.
Outlook, commentary and risks
- Management anticipated approximately $1.5 billion of fiscal 2020 capital spending, funded through internally generated funds, and planned approximately $1.75 billion of fiscal 2020 share repurchases. Repurchase timing and amounts may change with cash flow, liquidity, market and business conditions.
- The filing provides no numerical sales, earnings or comparable-sales guidance in the supplied text.
- TJX adopted the new lease accounting standard on February 3, 2019, recording approximately $9 billion of right-of-use assets and lease liabilities. Comparative periods remain under the prior lease standard, limiting balance-sheet comparability; the adoption also affects expense and interest comparisons.
- Brexit remained unsettled, with a potential U.K. exit date of October 31, 2019. TJX warned a hard Brexit could disrupt merchandise flows, increase regulatory requirements and affect staffing, consumer behavior and financial results, particularly in the short term. It had adjusted its European supply chain and was monitoring developments.
- Other material exposures include foreign-exchange and fuel-price movements, freight and supply-chain costs, consumer demand, labor and technology costs, and execution of expansion and inventory management. The filing reported putative wage-and-hour class and collective actions with an immaterial accrual, and estimated approximately $32 million of certain contingent lease obligations; management did not expect these matters to have a material adverse impact.
- Net unrecognized tax benefits were $241.6 million. The company said these could decrease by up to $32 million over the next 12 months depending on examinations or proceedings. Disclosure controls were assessed as effective; a new financial reporting system was implemented at TJX Canada in June 2019, resulting in material process and procedure changes affecting internal controls.
Most important facts for investors to verify
- Whether comparable-sales momentum and customer traffic persist, particularly at HomeGoods and TJX Canada, where Q2 comps were flat and up 1%, respectively.
- Whether higher freight, supply-chain costs, markdowns and currency effects continue to pressure merchandise and segment margins.
- Inventory growth and working-capital conversion, given first-half operating cash flow declined to $899 million and inventories increased.
- Progress against fiscal 2020 capital-spending and share-repurchase plans, alongside the effect of dividends and repurchases on liquidity.
- Lease obligations and the new accounting standard’s effects on reported assets, liabilities, expenses and period-to-period comparisons.
- Developments in Brexit, foreign exchange, tax examinations and the disclosed wage-and-hour litigation.