TJX Companies, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2016, the 13 weeks ended May 2, 2015; comparable period ended May 3, 2014. Fiscal 2016 ends January 30, 2016. Amounts are in U.S. dollars unless stated otherwise. TJX operates more than 3,400 off-price apparel and home-fashions stores across the U.S., Canada and Europe, plus e-commerce businesses.
Financial results
| Metric | Q1 FY2016 | Q1 FY2015 | Change / context |
|---|---|---|---|
| Net sales | $6.866 billion | $6.491 billion | Up 6%; same-store sales up 5% versus 1% |
| Income before taxes | $765.1 million | $730.5 million | Up about 5% |
| Net income | $474.6 million | $454.3 million | Up about 4% |
| Diluted EPS | $0.69 | $0.64 | Up 8%; foreign currency reduced current-quarter EPS by $0.04 |
| Cost of sales, buying and occupancy | 71.7% of sales | 72.1% | Improved 0.4 percentage points |
| SG&A | 17.0% of sales | 16.5% | Higher payroll, investments and pension costs |
| Pre-tax margin | 11.1% | 11.3% | Down 0.2 percentage points |
| Operating cash flow | $447.5 million | $483.0 million | Down $35.4 million |
| Cash and cash equivalents | $2.260 billion | $2.059 billion | At May 2, 2015 and May 3, 2014, respectively |
| Long-term debt | $1.624 billion | $1.274 billion | At period-end; increased year over year |
Business performance and material changes
- Same-store sales growth was driven mainly by increased customer traffic and units sold, partly offset by a lower average ticket. Home fashions outperformed apparel overall. Stores in operation rose 6% and selling square footage rose 5% year over year.
- Marmaxx sales rose 6%; same-store sales increased 3% and segment margin eased to 14.5% from 14.7% as distribution, payroll and pension costs increased.
- HomeGoods sales rose 16%; same-store sales increased 9% and segment margin improved to 13.8% from 13.0%, helped by merchandise margin and expense leverage.
- TJX Canada sales rose 2% as reported, while currency translation reduced sales growth by 13 percentage points. Constant-currency same-store sales increased 11%; segment margin was 7.3% versus 7.2%.
- TJX Europe sales declined 2% as reported, entirely due to currency translation, which reduced growth by 13 percentage points. Same-store sales rose 3%, versus 8% a year earlier; segment margin fell to 3.0% from 4.3%, reflecting investment initiatives and transactional foreign-exchange losses.
- Foreign currency reduced consolidated sales growth by 3 percentage points. Unhedged-accounting mark-to-market losses on merchandise-purchase derivatives affected cost of sales; the filing reports a $13.7 million loss on these contracts in the quarter.
Cash, liquidity, capital allocation and debt
- Operating cash flow was $447.5 million; property additions used $201.2 million, and investing activities used $242.5 million net. Cash declined $233.8 million from fiscal year-end to $2.260 billion.
- Management attributed the lower operating cash flow primarily to a $163 million cash use from inventory, net of related accounts payable, versus $51 million in the prior-year quarter. Higher packaway inventory and timing of merchandise purchases contributed.
- Financing activities used $474.6 million net, including $419.9 million of cash repurchases and $120.4 million of dividends paid. The declared dividend was $0.21 per share, versus $0.175.
- TJX repurchased 6.1 million shares on a trade-date basis for $415 million. It planned approximately $1.8–$1.9 billion of repurchases in fiscal 2016; $2.899 billion remained available under announced programs at May 2, 2015.
- Fiscal 2016 capital spending was expected to be approximately $975 million. Management said cash, internally generated funds and credit facilities were more than adequate for operating needs over the next fiscal year.
- TJX had $1.624 billion of long-term debt and no amounts outstanding under its two $500 million revolving credit facilities. It reported compliance with facility covenants. Cash and cash equivalents plus short-term investments totaled about $2.589 billion at May 2, 2015.
- Nearly 49% of cash was held by foreign subsidiaries. Of that, $327 million was in countries where TJX intended to reinvest undistributed earnings indefinitely; management reported no current plans to repatriate those balances.
Outlook, risks and unusual items
- The filing provides capital-spending and share-repurchase plans but no specific sales or EPS guidance. Management cautioned that quarterly results are seasonal and not necessarily indicative of full-year results; retailers generally realize higher sales and income in the second half.
- Key stated risks include execution of buying and inventory strategies, consumer demand and preferences, competition, labor costs, expansion, foreign exchange, commodity prices, weather and seasonality, data security and systems, legal and tax matters, and disruptions or catastrophic events. TJX said there were no material changes to previously disclosed risk factors or market-risk exposures.
- Former-operations reserves were $13.6 million at quarter-end, primarily for legacy lease obligations; most was expected to be paid within two years. TJX also described potential contingent liability on certain former BJ’s Wholesale Club and Bob’s Stores leases that it assessed as remote and excluded from the reserve.
- Net unrecognized tax benefits were $33.7 million. The company said they could decrease by zero to $15 million over the next 12 months, potentially reducing tax expense. The effective tax rate increased to 38.0% from 37.8%, primarily due to the jurisdictional mix of income.
- New revenue-recognition guidance was under evaluation and, as described in the filing, was expected to apply to TJX beginning in fiscal 2018. Management reported disclosure controls were effective at a reasonable-assurance level and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether inventory growth and packaway levels convert into sales without markdown or working-capital pressure.
- Whether currency movements and derivative mark-to-market effects continue to weigh on reported margins and EPS, particularly in Canada and Europe.
- Whether Europe’s lower segment margin improves as investment initiatives mature, and whether planned expansion meets expected returns.
- Whether planned buybacks and capital spending remain consistent with cash generation, liquidity and the company’s seasonal needs.
- Developments in tax examinations and legacy lease obligations, including contingencies not included in the recorded reserve.