TJX Companies, Inc. — Form 10-Q Summary
Business context and reporting period. This unaudited filing covers the 13 weeks and 39 weeks ended October 31, 2015, in fiscal 2016; comparisons are to the periods ended November 1, 2014. TJX operates off-price apparel and home-fashions stores and e-commerce businesses in the U.S., Canada and Europe. In October it acquired Australian retailer Trade Secret, which operates 35 stores, for approximately $57 million; its post-acquisition results were not included in this quarter.
Financial performance
| Metric | Quarter | 39 weeks |
|---|---|---|
| Net sales | $7.753 billion, +5% | $21.983 billion, +6% |
| Net income | $587.3 million, versus $595.0 million | $1.611 billion, versus $1.567 billion |
| Diluted EPS | $0.86, versus $0.85 | $2.35, versus $2.22 |
| Pre-tax margin | 12.1%, versus 13.0% | 11.8%, versus 12.1% |
| Operating cash flow | Not presented separately | $1.657 billion, versus $1.826 billion |
Quarterly same-store sales rose 5%, entirely from increased customer traffic; higher units sold were offset by a lower average ticket. Nine-month same-store sales also rose 5%. Home fashions outperformed apparel, with both categories recording same-store growth.
For the quarter, cost of sales was 71.0% of sales, up 0.4 percentage points; SG&A was 16.7%, up 0.5 points. For the 39 weeks, cost of sales improved 0.1 point to 71.2%, while SG&A rose 0.6 points to 16.9%. Higher payroll costs, increased units handled, supply-chain costs, transactional foreign exchange and inventory-hedge mark-to-market effects pressured expenses and margins. Strong sales provided buying and occupancy leverage. Quarterly diluted EPS increased despite lower net income, supported by share repurchases, which management estimated benefited EPS growth by about 4% in both reported periods.
Balance sheet, liquidity and capital allocation
- At October 31, cash and cash equivalents were $1.723 billion and short-term investments were $400 million. Merchandise inventory was $4.442 billion.
- Long-term debt was $1.624 billion. TJX had no borrowings under its two $500 million revolving credit facilities and was in compliance with their covenants. Management said available cash, internally generated funds and credit facilities were sufficient for operating needs over the next fiscal year.
- Operating cash flow for the 39 weeks declined $169 million year over year. Inventory, net of related accounts payable changes, used $521 million of cash, versus $220 million in the prior-year period, reflecting higher stock to meet demand and earlier receipt of fourth-quarter merchandise.
- Capital expenditures were $651 million for the 39 weeks; management anticipated fiscal 2016 capital spending of approximately $975 million. TJX spent $1.296 billion on repurchases and paid $404 million in dividends during the period. Management planned approximately $1.8–$1.9 billion of fiscal 2016 repurchases.
- About 62% of cash was held by foreign subsidiaries. Management reported no current plans to repatriate indefinitely reinvested foreign earnings.
Material changes, outlook and risks
- Sales growth reflected 5% same-store growth and new-store contribution, partly offset by a 3% foreign-currency impact in both the quarter and nine-month period. Currency translation and transactional FX also weighed on international results and margins.
- Segment performance was mixed. HomeGoods sales grew 13% in the quarter and its margin rose to 14.0%. Marmaxx sales grew 5%, but margin fell to 13.8%. TJX Canada same-store sales rose 10%, while reported sales fell 5% from currency translation and quarterly margin declined to 15.0%. TJX Europe sales rose 6%, but margin decreased to 10.4% amid FX effects and investment spending.
- Trade Secret’s preliminary purchase-price allocation included $34.2 million of goodwill; valuation was incomplete and could be adjusted. Its results were expected to enter the following quarter’s results and be combined with TJX Europe.
- Management cited ongoing investments in wages, distribution, technology and European infrastructure. It did not provide a specific earnings or sales forecast in the supplied filing text. The stated capital-spending and repurchase plans are subject to change.
- Key disclosed risks include inventory execution, customer demand and preferences, labor costs and retention, competition, data security and systems, weather and seasonality, international expansion, currency and commodity fluctuations, acquisitions, legal and tax matters, and disruptions or catastrophic events. The filing reported no material changes to previously disclosed risk factors or market-risk exposures.
- Contingencies include a $12.6 million reserve for former operations, mainly lease obligations; TJX estimated most would be paid within two years and noted possible contingent exposure on up to 10 additional former-business leases, whose liability it considered remote. Net unrecognized tax benefits were $31.4 million; possible reductions over the next 12 months could range from zero to $11.4 million.
Most important facts for investors to verify
- Whether sales and traffic momentum persists and whether lower average tickets affect future growth or merchandise mix.
- Whether cost pressures, wage initiatives, distribution expenses and international FX effects continue to compress margins.
- Whether inventory growth converts to sales without further weakening operating cash flow or requiring markdowns.
- Trade Secret’s final purchase-price allocation, integration, and contribution to subsequent results and the Europe segment.
- Execution and funding of planned capital spending and repurchases, alongside dividends and liquidity needs.
- Developments in tax examinations, former-operations lease obligations, and other disclosed contingencies.