TJX Companies, Inc. — Fiscal 2017 Third-Quarter Form 10-Q
Business context and period. TJX is an off-price apparel and home fashions retailer operating more than 3,700 stores across Marmaxx, HomeGoods, TJX Canada, and TJX International, as well as online businesses. This unaudited quarterly report covers the 13 weeks and 39 weeks ended October 29, 2016; comparisons are with the periods ended October 31, 2015. Fiscal 2017 ends January 28, 2017.
Financial performance
| Metric | 13 weeks ended Oct. 29, 2016 | Change vs. prior year | 39 weeks ended Oct. 29, 2016 | Change vs. prior year |
|---|---|---|---|---|
| Net sales | $8.292 billion | +7% | $23.716 billion | +8% |
| Net income | $549.8 million | -$37.5 million | $1.620 billion | +$9.1 million |
| Diluted EPS | $0.83 | -$0.03 | $2.43 | +$0.08 |
| Pre-tax margin | 10.7% | 12.1% prior year | 11.1% | 11.8% prior year |
- Third-quarter same-store sales rose 5%, matching the prior-year increase; growth was primarily driven by customer traffic. Units sold increased, largely offset by a lower average ticket. Home fashions outperformed apparel.
- Third-quarter cost of sales was 70.5% of sales, down 0.5 percentage point, reflecting stronger merchandise margin, inventory-hedge currency gains, and occupancy leverage. SG&A was 17.6% of sales, up 0.9 point, mainly due to wage increases, higher unit handling, growth-related investments, and credit-card chargeback costs.
- For the first nine months, cost of sales was 70.7% of sales, down 0.5 point, while SG&A was 17.7%, up 0.8 point. The reported nine-month diluted EPS increase occurred despite currency headwinds and higher expenses.
- Operating cash flow for the first nine months was $2.087 billion, versus $1.657 billion in the prior-year period. Property additions were $767 million versus $651 million. Cash and cash equivalents were $2.376 billion at quarter-end; short-term investments were $451 million.
- Long-term debt was $2.227 billion, compared with $1.615 billion at January 30, 2016. Cash plus short-term investments exceeded long-term debt by about $599 million. The company had $1 billion of revolving credit facilities, with no amounts outstanding, and reported compliance with their covenants.
- Current assets were $7.942 billion and current liabilities $4.895 billion at quarter-end. The filing says existing cash, internally generated funds, and credit facilities are expected to be adequate for operating needs over the next fiscal year.
Material changes and unusual items
- Quarterly sales growth comprised 5% same-store growth and 4% growth from new stores, offset by a 2% negative foreign-currency effect. Store count rose 5% and selling square footage 4% year over year.
- Third-quarter diluted EPS included an $0.08-per-share reduction from a $51.8 million pre-tax loss on early debt extinguishment and a $31.2 million non-cash pre-tax pension settlement charge. Together, these items reduced pre-tax margin by 1.0 percentage point.
- TJX issued $1.0 billion of 2.25% notes due 2026 and used part of the proceeds to redeem $375 million of 6.95% notes early. The debt redemption generated a $50.6 million premium within the extinguishment loss.
- Eligible former employees received a pension lump-sum offer; the plan paid $103.2 million from plan assets, with no direct cash impact to TJX. The company also terminated an unfunded postretirement medical plan in the first quarter, recording a $5.5 million pre-tax benefit.
- Share repurchases totaled $1.175 billion for the first nine months, including 5.2 million shares for $400 million in the quarter. Management said buybacks benefited EPS growth by about 3% in both the quarter and year-to-date period.
- Segment results were mixed. TJX Canada quarterly sales rose 14% and segment margin increased to 16.7%, aided by inventory-hedge mark-to-market benefits. TJX International quarterly sales declined 1% and margin fell to 7.9%, reflecting currency translation, flat same-store sales, Trade Secret integration, and expansion costs.
Outlook, risks, and contingencies
- Management anticipated fiscal 2017 capital spending of approximately $1.1 billion and planned $1.5 billion to $2.0 billion of stock repurchases for the year. The filing text provided here does not state a full-year sales or earnings forecast.
- Management cited a challenging European retail environment and unseasonably warm fall weather affecting TJX International same-store sales. It also identified wage and labor costs, distribution capacity and costs, foreign-exchange movements, customer trends, competition, economic conditions, weather, technology and data security, and international expansion among factors that could affect results.
- Currency movements affect translated foreign results and the mark-to-market of inventory hedges; these effects can create period-to-period earnings volatility. The company hedged about 51% of estimated diesel needs for the remainder of fiscal 2017 and 50% for the first nine months of fiscal 2018.
- Contingencies include putative wage-and-hour class actions and customer lawsuits concerning “compare at” pricing; damages sought are unspecified, and only an immaterial amount was accrued. Estimated undiscounted obligations on certain assigned or sublet former-operation properties were approximately $43 million; management believes most or all will not revert to TJX or will be resolved for substantially less.
- The effective tax rate was 38.2% for the quarter and 38.4% year to date, up from 37.6% and 37.9%, respectively, primarily due to income mix and foreign net-operating-loss valuation allowances. Tax examinations could reduce unrecognized tax benefits and the tax provision by up to $12 million over the next 12 months.
Most important facts for investors to verify
- Whether same-store sales and traffic momentum continued, particularly in Europe, and whether lower average tickets persist.
- How much reported earnings were affected by nonrecurring debt and pension charges, currency hedges, and changing exchange rates.
- Whether higher payroll, distribution, technology, and expansion costs constrain margins as sales grow.
- Execution and returns on planned capital spending and the $1.5–$2.0 billion repurchase program, alongside the increased debt balance.
- Developments in wage-and-hour and pricing litigation, tax examinations, and contingent lease obligations.