TJX Companies, Inc. — Q3 FY2018 Form 10-Q
Reporting period: Thirteen and thirty-nine weeks ended October 28, 2017; comparative periods ended October 29, 2016. Fiscal 2018 is a 53-week year ending February 3, 2018. Unaudited interim results are seasonal and not necessarily indicative of full-year results.
Business context and financial performance
TJX operates more than 4,000 off-price apparel and home-fashions stores across Marmaxx, HomeGoods, TJX Canada and TJX International; Sierra Trading Post is included in Marmaxx. Unless otherwise noted, figures below are in millions of dollars.
| Metric | Q3 FY2018 | Q3 FY2017 | 39 weeks FY2018 | 39 weeks FY2017 |
|---|---|---|---|---|
| Net sales | $8,762 | $8,292 | $24,904 | $23,716 |
| Income before taxes | $1,020 | $890 | $2,744 | $2,629 |
| Net income | $641 | $550 | $1,731 | $1,620 |
| Diluted EPS | $1.00 | $0.83 | $2.67 | $2.43 |
| Pre-tax margin | 11.6% | 10.7% | 11.0% | 11.1% |
- Quarterly sales rose about 6%, net income 17%, and diluted EPS 20%. Nine-month sales rose 5%, net income 7%, and diluted EPS 10%.
- Q3 cost of sales, including buying and occupancy, was 70.2% of sales, down 0.3 percentage points; SG&A was 18.1%, up 0.5 points. For the nine months, these ratios were 70.9% and 18.0%, respectively.
- Same-store sales were flat in Q3, versus 5% growth a year earlier; nine-month same-store sales rose 1%, versus 5% growth. Traffic increased, but lower average transaction value offset traffic in Q3. Home fashions outperformed apparel.
- Segment results were mixed: Q3 sales/profit margin were Marmaxx $5,298 million/12.6%, HomeGoods $1,229 million/13.3%, TJX Canada $983 million/21.0%, and TJX International $1,252 million/7.0%. Marmaxx and International margins declined year over year; Canada’s margin improved substantially, including favorable currency effects.
Cash flow, liquidity and capital
- Nine-month operating cash flow was $1,929 million, down from $2,112 million. Capital expenditures were $828 million; investing cash flow was negative $799 million. Financing cash flow was negative $1,736 million, including $1,239 million of stock repurchases and $567 million of dividends paid.
- Cash and cash equivalents were $2,364 million and short-term investments $512 million at October 28, 2017. Long-term debt was $2,230 million; no amounts were drawn on the two $500 million revolving facilities, and TJX reported compliance with their covenants. Current assets were $8,390 million versus current liabilities of $5,468 million.
- Inventory was $4,726 million, up from $4,384 million at October 29, 2016. Management attributed cash-flow pressure partly to bringing in fresh merchandise for the holiday season. Accounts payable increased $733 million during the nine-month period.
- TJX repurchased 16.9 million shares for approximately $1.25 billion on a trade-date basis during the first nine months. Management planned approximately $1.5–$1.8 billion of repurchases for FY2018. Cash dividends declared were $0.3125 per share in Q3 and $0.9375 for the nine months.
Changes, outlook, risks and unusual items
- Q3 sales growth came from new stores and a 1% favorable currency impact; same-store sales were flat. Stores in operation increased 7% and selling square footage 5% year over year. Hurricanes and unseasonably warm U.S. weather were cited as drags; management estimated hurricanes reduced Q3 EPS by $0.03.
- Q3 EPS benefited by $0.04 from foreign currency. Share-based compensation tax-accounting changes reduced the tax provision by $12.6 million in Q3 and $40.5 million over nine months, increasing EPS by approximately $0.02 and $0.06, respectively. Repurchases benefited EPS growth by approximately 3% in both periods.
- Prior-year comparisons included $51.8 million of debt-extinguishment expense and a $31.2 million noncash pension settlement charge; together they reduced prior-year Q3 EPS by approximately $0.08. These charges did not recur in FY2018.
- Management expected FY2018 capital spending of approximately $1.1 billion and stated existing cash, operating funds and credit facilities were adequate for operating needs over the next fiscal year. No full-year earnings or sales guidance is provided in the filing text.
- Risks include consumer demand and fashion trends, competition, weather and catastrophic disruptions, labor costs, supply-chain and logistics costs, foreign exchange, information security and systems, international operations, and legal, regulatory and tax matters. TJX hedges portions of currency and diesel exposure; derivative mark-to-market changes can affect reported results.
- Contingencies include employment-related putative class actions and customer compare-at-pricing lawsuits; the filing reports an immaterial accrual and unspecified damages sought. Estimated undiscounted contingent obligations on certain assigned or former-operation leases were $46.8 million; management considers most or all unlikely to revert to TJX.
- TJX expects the lease-accounting standard to materially increase reported assets and liabilities because it has more than 4,000 leased locations; it did not expect a material income-statement effect if lease terms remain unchanged. Revenue-standard adoption was planned for FY2020, with no material financial impact expected beyond disclosures and specified presentation/timing changes.
Investor verification priorities
- Check the trajectory of comparable sales, average ticket and traffic, particularly Marmaxx and apparel, and the persistence of weather-related effects.
- Assess whether inventory growth, distribution costs, wage increases and supply-chain investments pressure margins or working capital.
- Separate recurring earnings from currency and derivative effects and the benefit from share-based compensation tax accounting.
- Verify planned FY2018 capital expenditure and repurchase levels against actual cash generation, dividends and liquidity.
- Review developments in the disclosed employment and pricing litigation, assigned-lease exposures, and the balance-sheet impact of lease-standard adoption.