TJX Companies, Inc. — Q1 Fiscal 2019 Form 10-Q
Business context and period: The filing covers the 13 weeks ended May 5, 2018, compared with the 13 weeks ended April 29, 2017. TJX operates off-price apparel and home-fashions retailers across the U.S., Canada, Europe and Australia. Fiscal 2019 is a 52-week year ending February 2, 2019; the prior fiscal year had 53 weeks. Management notes that retail sales and income are generally higher in the second half.
Financial performance
| Metric | Q1 FY2019 | Prior-year quarter | Change / context |
|---|---|---|---|
| Net sales | $8.689 billion | $7.784 billion | +12% reported; driven by 6% new-store sales, 3% comp sales and 3% currency translation |
| Comparable sales | +3% | +1% | Traffic increased; average transaction value declined slightly |
| Income before tax | $955.6 million | $832.5 million | +15% |
| Net income | $716.4 million | $536.3 million | +34% |
| Diluted EPS | $1.13 | $0.82 | +38%; includes an estimated $0.17 benefit from the 2017 Tax Act |
| Pre-tax margin | 11.0% | 10.7% | +0.3 percentage points |
| Cost of sales, buying and occupancy | 71.1% of sales | 71.0% | Higher freight/supply-chain costs and lower merchandise margin, partly offset by derivative gains and occupancy leverage |
| SG&A | 17.8% of sales | 18.1% | Lower ratio primarily reflected expense savings and a Canadian lease-buyout gain |
| Effective tax rate | 25.0% | 35.6% | Lower U.S. federal corporate tax rate and income mix |
Segments
- Marmaxx: Sales $5.381 billion, +8%; comp sales +4%; segment margin 13.9%, versus 13.8%.
- HomeGoods: Sales $1.269 billion, +13%; comp sales +2%; margin 11.6%, versus 13.6%, reflecting markdowns, supply-chain costs and new-store expenses.
- TJX Canada: Sales $853.8 million, +16%; comp sales +3%; margin 14.7%, versus 13.9%. Results benefited from a one-time lease-buyout gain and merchandise margin improvement.
- TJX International: Sales $1.185 billion, +24%; comp sales +1%; margin 3.4%, versus 0.7%. Currency translation contributed 14% to sales growth.
Cash flow, liquidity and capital
- Operating cash flow was $724.9 million, up from $448.4 million. The increase primarily reflected higher operating earnings; inventory growth and changes in taxes payable and related working capital partly offset it.
- Investing cash outflow was $220.5 million, including $264.9 million of property additions. Management expected fiscal 2019 capital spending of approximately $1.4 billion, funded internally.
- Financing cash outflow was $526.0 million, including $395.4 million of cash share repurchases and $197.3 million of dividends paid. TJX reported returning approximately $597 million to shareholders through repurchases and dividends during the quarter.
- Cash and cash equivalents were $2.681 billion and short-term investments were $435.9 million at May 5, 2018. Current assets were $8.422 billion and current liabilities $4.977 billion.
- Long-term debt was $2.231 billion; no amounts were drawn on the $1.0 billion revolving credit facilities, and TJX reported compliance with their covenants. No short-term bank borrowings or commercial paper were outstanding.
- The board had authorized a further $3.0 billion repurchase program; $3.736 billion remained available under announced programs at quarter-end. Management planned approximately $2.5–$3.0 billion of fiscal 2019 repurchases.
- Management expected to repatriate more than $1 billion from its Canadian subsidiary during fiscal 2019. Approximately $1.5 billion of cash was held by foreign subsidiaries.
Material changes and notable items
- Sales growth accelerated from 3% in the prior-year quarter to 12%; comp sales improved from 1% to 3%. Stores in operation increased 7% year over year and selling square footage increased 5%.
- Net income and EPS growth were aided by the lower tax rate, currency effects, share repurchases and improved operating results. Management estimated currency had a positive $0.04 EPS impact, compared with $0.01 in the prior-year quarter; repurchases benefited EPS growth by approximately 4%.
- Foreign-currency translation reduced other comprehensive income by $122.5 million, contributing to a $113.7 million total other comprehensive loss for the quarter.
- TJX adopted ASC 606 on February 4, 2018. The modified-retrospective adoption increased opening retained earnings by $58.7 million, primarily for estimated unredeemed U.S. loyalty rewards. Management said adoption did not materially affect quarterly financial condition or operating results.
- Inventory increased to $4.370 billion from $4.187 billion at the prior fiscal year-end. Average per-store inventory, excluding inventory in transit and e-commerce, was up 7% reported and 6% at constant currency year over year.
Outlook, risks and contingencies
- The filing provides no specific full-year sales, earnings or comp-sales guidance. It does give the capital-spending and share-repurchase plans noted above. Management believes cash, operating cash generation and available credit are adequate for operating needs over the next fiscal year.
- Management cited risks including inventory execution, competition, consumer demand, labor costs, data security and technology, weather and catastrophic disruptions, sourcing and transport, commodity prices, foreign exchange, international expansion, litigation, tax matters and real-estate activity. It reported no material changes to the risk factors in the prior Form 10-K.
- The company expects the new lease-accounting standard, planned for adoption in fiscal 2020, to materially increase reported assets and liabilities because TJX has more than 4,100 leased locations; it does not expect a material income-statement impact.
- Legal matters include wage-and-hour putative class or collective actions and a customer putative class action concerning “compare at” pricing. TJX accrued an immaterial amount. Estimated undiscounted contingent obligations relating to certain former-operation leases and properties were $46.4 million; management believes most or all will not revert to TJX or will be resolved for substantially less.
- Net unrecognized tax benefits were $58.7 million. The company said tax examinations or proceedings could reduce the tax provision by up to $22 million over the next 12 months. Accounting for the 2017 Tax Act remained provisional within the permitted measurement period.
Key facts for investors to verify
- How much of EPS growth reflects recurring operating performance versus the estimated $0.17 tax benefit, foreign-currency effects, derivative mark-to-market gains and the one-time Canadian lease-buyout gain.
- Whether HomeGoods’ lower segment margin and the reported increase in inventory lead to further markdowns or margin pressure.
- Execution and funding of the planned $1.4 billion capital program and $2.5–$3.0 billion share-repurchase plan, alongside dividends and the intended Canadian cash repatriation.
- The eventual balance-sheet impact of lease-standard adoption and developments in tax positions, wage-and-hour litigation and the compare-at pricing case.