TJX Companies, Inc. — Q3 FY2015 Form 10-Q
Business context and period: TJX is an off-price apparel and home fashions retailer operating more than 3,300 stores across Marmaxx, HomeGoods, TJX Canada and TJX Europe; Sierra Trading Post is included in Marmaxx. This unaudited filing covers the 13 weeks ended November 1, 2014 and the 39 weeks ended that date, compared with the periods ended November 2, 2013. Fiscal 2015 ends January 31, 2015.
Amounts below are in U.S. dollars; financial statement amounts are shown in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q3 FY2015 | Q3 FY2014 | 39 weeks FY2015 | 39 weeks FY2014 |
|---|---|---|---|---|
| Net sales | $7,366 | $6,982 | $20,774 | $19,614 |
| Income before taxes | $959 | $879 | $2,520 | $2,384 |
| Net income | $595 | $623 | $1,567 | $1,555 |
| Diluted EPS | $0.85 | $0.86 | $2.22 | $2.14 |
| Pre-tax margin | 13.0% | 12.6% | 12.1% | 12.2% |
- Q3 sales increased 6%, comprising 4% growth from new stores and 2% comparable-store sales growth. Nine-month sales also rose 6%, on 4% new-store and 2% comparable-store growth.
- Q3 cost of sales was 70.6% of sales, improving 0.1 percentage point; SG&A was 16.2%, improving 0.4 point. Nine-month cost of sales rose to 71.3% (up 0.2 point), while SG&A improved to 16.3% (down 0.3 point).
- Net income fell 4% in Q3 despite higher pre-tax income, principally reflecting the prior-year quarter’s tax benefits. Nine-month net income increased slightly and diluted EPS rose 4%, helped in part by lower weighted-average shares.
- Operating cash flow for the 39 weeks was $1,812, up from $1,633. Property additions were $706, giving approximate operating cash flow less property additions of $1,106. Financing cash outflow was $1,091, including $1,214 of share repurchases and $346 of dividends.
- At November 1, cash and cash equivalents were $2,154 and short-term investments were $277. Current assets were $7,155 and current liabilities $4,390 (current ratio approximately 1.63). Long-term debt, excluding current installments, was $1,624; shareholders’ equity was $4,374.
- Net debt expense for the 39 weeks was $31, compared with $24 a year earlier. The company had no borrowings under its two $500 million revolving credit facilities and reported compliance with their covenants.
Material changes and segment trends
- Comparable-store sales growth slowed to 2% in Q3 from 5% a year earlier and to 2% year to date from 3%. Management attributed Q3 growth to more units sold and slightly higher traffic; home fashions outperformed apparel.
- HomeGoods was a standout: Q3 sales rose 15%, comparable sales increased 7%, and segment margin improved to 13.9% from 13.1%. Marmaxx sales increased 4%, but comparable sales rose only 1% and margin declined to 14.5% from 14.7%.
- TJX Canada Q3 sales increased 1% in reported dollars, while currency translation reduced growth by 6 percentage points; segment margin increased to 17.2%. Its nine-month margin declined to 13.1% from 13.9%, with currency-related merchandise cost and hedge mark-to-market effects cited.
- TJX Europe Q3 sales increased 8%, but comparable sales fell 1%; segment margin improved to 11.0% from 10.4%. Nine-month sales rose 17%, including a 6-point benefit from currency translation, and margin improved to 7.2% from 6.4%.
Outlook, commentary and risks
- No specific full-year sales or earnings guidance is provided in the filing. Management estimated fiscal 2015 capital spending of approximately $975 million and planned fiscal 2015 share repurchases of approximately $1.6–$1.7 billion, subject to change.
- Management said unseasonably warm weather late in the quarter in parts of the U.S. and Europe likely hurt sales, particularly apparel. It also cited currency effects on Canadian merchandise costs and volatility from inventory-related hedge mark-to-market adjustments.
- In June 2014, TJX issued $750 million of 2.75% notes due 2021 and used part of the proceeds to redeem $400 million of 4.20% notes. The redemption generated a $16.8 million pre-tax extinguishment loss; the new notes’ effective fixed rate, including rate-lock costs, is 2.91%.
- The effective tax rate was 38.0% for Q3 and 37.8% year to date, versus 29.2% and 34.8% in the comparable prior periods. Prior-year rates benefited from approximately $80 million of tax benefits, including state tax settlements and a foreign valuation-allowance reversal.
- Former-operations reserves were $17.2 million at period end; most are expected to be paid within two years, though actual lease-related costs may differ. TJX also disclosed possible contingent liability on certain former BJ’s and Bob’s Stores leases not included in the reserve because management considered future liability remote.
- Unrecognized tax benefits were $29.3 million. Management said they could decrease by $0–$11.7 million over the next 12 months as tax matters are resolved. The company identifies weather, consumer demand, inventory execution, competition, labor, data security, foreign exchange, commodities, legal and tax matters, and international expansion among risks. It reported no material changes to previously disclosed risk factors or market-risk exposures.
- Management stated that existing cash, internally generated funds and credit facilities are more than adequate for operating needs over the next fiscal year. About 58% of cash was held outside the U.S.; $351 million was in jurisdictions where undistributed earnings were intended to be indefinitely reinvested.
Important facts for investors to verify
- Whether comparable-store sales and traffic sustain or recover from the slower Q3 pace, especially in Marmaxx and Europe.
- How inventory levels, merchandise margins, occupancy costs and hedge mark-to-market swings affect upcoming margins and cash conversion.
- Whether the planned capital spending and share repurchases proceed as expected, and their effects on liquidity, debt and per-share results.
- Resolution and cash impact of former-operations lease obligations and uncertain tax positions, including any changes to the disclosed reserves.
- Currency translation and foreign merchandise-cost exposure, including the effect of cash held overseas and the stated reinvestment intentions.