TJX Companies, Inc. — Q3 Fiscal 2013 Form 10-Q
Reporting period: Thirteen and thirty-nine weeks ended October 27, 2012, compared with the periods ended October 29, 2011. Fiscal 2013 is a 53-week year ending February 2, 2013. TJX operates more than 3,000 off-price apparel and home-fashions stores across the U.S., Canada, and Europe. Interim results are unaudited and subject to retail seasonality.
Financial performance
| Metric | Q3 2013 | Q3 2012 | First 39 weeks 2013 | First 39 weeks 2012 |
|---|---|---|---|---|
| Net sales | $6.411 billion | $5.793 billion | $18.155 billion | $16.482 billion |
| Income before taxes | $748.5 million | $663.8 million | $2.113 billion | $1.653 billion |
| Net income | $461.6 million | $406.5 million | $1.302 billion | $1.021 billion |
| Diluted EPS | $0.62 | $0.53 | $1.73 | $1.31 |
| Pre-tax margin | 11.7% | 11.5% | 11.6% | 10.0% reported; 10.5% adjusted |
- Management reported same-store sales growth of 7% in Q3 and 8% year to date, driven mainly by customer traffic. Consolidated sales rose 11% in Q3 and 10% year to date; store count was up 5% and selling square footage up 4% year over year.
- Q3 cost of sales was 71.2% of sales, improving 0.7 percentage points year over year, primarily on stronger merchandise margins. SG&A was 17.0% of sales, up 0.5 points, reflecting unusual charges, higher incentive compensation, and growth investments. Year-to-date cost of sales was 71.6% and SG&A 16.6% of sales.
- Operating cash flow for the first 39 weeks was $2.080 billion, versus $830.8 million. Property additions were $775.6 million, compared with $661.4 million. Cash and cash equivalents were $1.642 billion and short-term investments $201.0 million at quarter end.
- Long-term debt carrying value was $774.5 million, comprising $375 million of 6.95% notes due 2019 and $400 million of 4.20% notes due 2015. There were no borrowings under the two $500 million revolving credit facilities. Management said available cash, internally generated funds, and credit facilities were more than adequate for operating needs over the next fiscal year.
- For the first 39 weeks, TJX repurchased 22.5 million shares for approximately $950 million and paid $240.3 million in dividends. Cash dividends declared were $0.115 per share in Q3. Shares outstanding at October 27 were 729.3 million.
Material changes and segment results
- All four operating segments reported same-store sales increases and higher segment profit in Q3 and year to date. Marmaxx remained the largest segment: Q3 sales were $4.161 billion and segment margin 13.9%, up from 13.2%. HomeGoods sales were $637.5 million and margin 12.0%, up from 11.5%.
- TJX Canada Q3 sales were $769.0 million; margin fell to 16.5% from 17.9%, with currency effects and less favorable inventory-hedge mark-to-market gains affecting the comparison. TJX Europe sales were $843.0 million; margin rose to 9.1% from 5.7%, supported by merchandise margin and expense leverage. Europe’s same-store sales increased 11% in Q3.
- Year-to-date diluted EPS rose 32% reported, or 26% versus the prior-year adjusted EPS of $1.37. Prior-year adjusted results exclude the A.J. Wright consolidation; those non-GAAP comparisons are not the reported GAAP figures.
- Merchandise inventories were $3.297 billion at quarter end, down from $3.706 billion a year earlier. Management said average per-store inventories, including distribution-center inventory, were down 14% year over year. Lower inventory investment and related payables changes contributed to improved operating cash flow.
Outlook, commentary, and risks
- Management expected fiscal 2013 capital spending of approximately $1 billion, including the purchase of TJX’s Framingham home office. It expected total fiscal-year share repurchases of approximately $1.2 billion to $1.3 billion; the timing and amount could change.
- The filing provides no specific full-year sales or earnings guidance. Management cited strong traffic and above-plan results, while noting investments in talent, systems, infrastructure, and store growth.
- Q3 and year-to-date EPS each included a $0.03-per-share effect from two charges unrelated to current-period operations: a $22.3 million pre-tax correction of prior-year pension accruals and a $16 million increase to the reserve for former operations. The pension correction related to a computational error dating to fiscal 2008; management said it did not materially affect current- or prior-year financial statements as reported.
- The former-operations reserve stood at $50.8 million. Management estimated most would be paid over the next three to five years; actual lease-related costs and payment timing may differ. TJX also disclosed possible contingent liability on certain former-business leases that it considered remote.
- Risks highlighted include inventory buying and management, customer demand, competition, economic conditions, expansion, technology and data security, weather and other disruptions, international operations, commodities and foreign exchange, litigation, taxes, and real estate. The filing reported no material change in market-risk exposures or risk factors from the prior annual report.
- Currency movements and non-hedge-accounted inventory derivatives can cause period-to-period earnings volatility. Q3 pre-tax margin was also affected by a 0.2 percentage-point year-over-year change in inventory-hedge mark-to-market adjustments.
Important facts for investors to verify
- Reconcile the $0.03-per-share unusual-charge impact, including the pension accrual correction and former-operations reserve increase, when assessing underlying earnings.
- Distinguish GAAP year-to-date comparisons from management’s non-GAAP adjusted fiscal 2012 comparisons, which exclude A.J. Wright-related items.
- Monitor whether strong traffic, merchandise margins, and lower inventory levels persist, and whether inventory availability or seasonal buying changes.
- Track foreign-exchange translation and inventory-hedge mark-to-market effects, particularly in Canada and Europe.
- Assess execution of the approximately $1 billion capital-spending plan and $1.2–$1.3 billion fiscal-year repurchase expectation against cash generation and operating needs.
- Review the assumptions and eventual cash payments behind the former-operations reserve and monitor the disclosed contingent lease exposures.