TJX Companies, Inc. — Q2 FY2017 Form 10-Q
Business context and period. Off-price apparel and home fashions retailer operating more than 3,600 stores across Marmaxx, HomeGoods, TJX Canada and TJX International; Sierra Trading Post results are included in Marmaxx. The filing covers the 13 weeks and 26 weeks ended July 30, 2016, compared with the corresponding 2015 periods. Fiscal 2017 ends January 28, 2017. Results are unaudited; management notes retail seasonality, with sales and income generally higher in the second half.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $7.882B | $7.364B | $15.424B | $14.229B |
| Net income | $562.2M | $549.3M | $1.071B | $1.024B |
| Diluted EPS | $0.84 | $0.80 | $1.60 | $1.49 |
| Pre-tax margin | 11.6% | 12.0% | 11.3% | 11.6% |
| Cost of sales / net sales | 70.6% | 70.9% | 70.9% | 71.3% |
| SG&A / net sales | 17.7% | 16.9% | 17.7% | 17.0% |
Q2 sales rose 7%, net income about 2%, and diluted EPS 5% year over year. Six-month sales rose 8%, net income about 5%, and diluted EPS about 7%. Same-store sales increased 4% in Q2 and 6% year to date; growth was driven mainly by traffic, while higher units sold were largely offset by a lower average ticket. Stores in operation rose 6% and selling square footage 5% year over year at quarter-end.
Cost-of-sales ratios improved, supported by merchandise margins, buying and occupancy leverage, and favorable inventory-hedge mark-to-market effects. SG&A ratios worsened, mainly from wage increases, growth-related investment and credit-card chargeback costs. The effective tax rate increased to 38.5% from 38.0%, primarily reflecting income mix and higher valuation allowances on foreign net operating losses.
Cash flow, balance sheet and capital allocation
- Six-month operating cash flow was $1.159B, versus $929M; property additions were $508M versus $405M. Cash and equivalents were $1.804B at July 30, down from $2.095B at fiscal year-end; short-term investments were $421M.
- Current assets were $6.811B and current liabilities $4.314B. Long-term debt was $1.616B; no amounts were outstanding under the $1.0B revolving credit facilities, and the company reported covenant compliance. Cash plus short-term investments exceeded long-term debt by approximately $609M.
- Financing cash outflow was $928M, including $756M cash spent on share repurchases and $312M in dividends. The company repurchased 5.2M shares for $400M in Q2; diluted share-count reduction from buybacks benefited EPS growth by approximately 3%.
- Management expected fiscal 2017 capital spending of approximately $1.1B and planned fiscal-year repurchases of approximately $1.5B–$2.0B. It said cash, internally generated funds and credit facilities were more than adequate for operating needs over the next fiscal year.
Material changes, outlook and risks
- Segment mix: Q2 segment sales increased across all divisions. HomeGoods margin improved to 13.0% from 12.5%; Marmaxx declined to 14.6% from 14.9%; TJX Canada declined to 16.1% from 17.1%; and TJX International declined to 4.1% from 5.3%. International margin pressure included Trade Secret integration, expansion investment and higher payroll. Management said the Brexit vote may have temporarily reduced UK traffic and comparable sales.
- Acquisition: Trade Secret, acquired in October 2015 for AUD$83.3M (US$59.4M), operates 35 Australian stores and is included in TJX International. Its acquisition did not have a material effect on reported sales, net income or EPS, according to the filing.
- Pension and other unusual items: TJX offered eligible terminated vested pension participants a lump-sum payout option after quarter-end; participation could produce a pre-tax, non-cash settlement charge estimated at $35M–$45M, potentially higher or lower. Termination of the postretirement medical plan in Q1 generated a $5.5M pre-tax benefit.
- Exposure and contingencies: Foreign exchange and fuel costs affect results; outstanding diesel hedges covered about 54% of estimated remaining FY2017 requirements and 48% of the first half of FY2018 requirements. The company disclosed wage-and-hour and customer compare-at-pricing class-action litigation, without specified damages. Estimated undiscounted contingent obligations on certain assigned or sublet properties were approximately $43M; management expects most or all not to revert to TJX.
- Tax and reporting: Net unrecognized tax benefits were $36.2M. Possible developments over the next 12 months could reduce tax expense by up to $11M. Management identified no material change in principal market-risk exposures or risk factors and concluded disclosure controls were effective.
The filing provides capital-spending and repurchase plans but no specific earnings or sales guidance. Management cautioned that forward-looking results depend on factors including consumer trends, inventory execution, labor costs, currency, economic conditions, technology and data security, international expansion, legal matters and seasonality.
Investor verification priorities
- Check whether sales and same-store sales momentum continued, and whether lower average ticket or currency effects changed the trend.
- Track SG&A and distribution-cost growth against merchandise-margin improvement, particularly in Marmaxx and TJX International.
- Monitor International segment profitability and Trade Secret integration, as well as the reported UK post-Brexit traffic impact.
- Compare actual capital spending and repurchases with management’s FY2017 plans, and assess cash generation after those uses.
- Follow the pension lump-sum election and final settlement charge, and developments in the disclosed lawsuits and tax examinations.