TJX Companies, Inc. — Q1 Fiscal 2012 Form 10-Q
Business context and period: The filing covers the 13 weeks ended April 30, 2011, compared with the 13 weeks ended May 1, 2010. TJX operates off-price apparel and home-fashions stores in the U.S., Canada and Europe. Results are seasonal; management cautions that interim results are not necessarily indicative of the full fiscal year.
Financial performance
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Net sales | $5.220 billion | $5.017 billion | +4% |
| Same-store sales | +2% | +9% | Slower growth |
| Income before taxes | $429.6 million | $536.3 million | -20% |
| Net income | $266.0 million | $331.4 million | -20% |
| Diluted EPS | $0.67 | $0.80 | -16% |
| Pre-tax margin | 8.2% | 10.7% | -2.5 percentage points |
| Cost of sales as % of sales | 73.3% | 72.7% | +0.6 percentage points |
| SG&A as % of sales | 18.3% | 16.4% | +1.9 percentage points |
| Operating cash flow | $143.1 million | $527.4 million | Down $384.3 million |
Cash and cash equivalents were $1.377 billion at April 30, 2011, down from $1.742 billion at January 29, 2011. Short-term investments were $85.3 million. Long-term debt was $774.4 million; TJX reported no borrowings under its revolving credit facilities and $1 billion of availability. Current assets were $5.008 billion and current liabilities were $3.102 billion.
Property additions were $226.1 million, versus $149.1 million a year earlier. Operating cash flow less property additions was negative $82.9 million. Inventory was $3.015 billion, up from $2.765 billion at fiscal year-end; management said consolidated per-store inventory was up 12% year over year, primarily reflecting increased packaway purchases. Dividends declared were $0.19 per share, versus $0.15.
Material changes and business drivers
- Sales growth included 2% same-store sales growth, 4% growth from new stores and a 1% currency benefit, partly offset by a 3% reduction from A.J. Wright sales elimination. Store count and selling square footage were each up 2% year over year.
- Q1 included a $49 million A.J. Wright segment loss and $20 million in store conversion costs. Management attributed $0.11 of diluted EPS impact to the consolidation: $0.08 from closures and $0.03 from conversions and grand reopenings.
- Foreign currency effects reduced Q1 FY2012 EPS by $0.03, compared with a $0.01 reduction a year earlier. Management said the mark-to-market effects on inventory hedges were expected to reverse later, primarily in Q2.
- TJX Europe moved from a $5.8 million segment profit to a $31.3 million loss, with same-store sales down 5%. Management cited aggressive markdowns to clear inventory and reset the merchandise mix.
- TJX Canada same-store sales fell 3%, versus 6% growth a year earlier; management cited unusually cold weather, lower merchandise margins and hedge mark-to-market effects. Marmaxx and HomeGoods sales rose 8% and 10%, respectively.
Outlook, risks and contingencies
- Management expected A.J. Wright consolidation to improve overall profitability beginning in Q2 as it focused resources on larger businesses. It described Europe as a significant long-term growth opportunity, while acknowledging execution and value-assortment issues.
- Fiscal 2012 capital spending was expected to be approximately $800 million to $825 million, including new stores and renovations. No full-year earnings or sales guidance is provided in the supplied filing text.
- Management said cash, internally generated funds and revolving credit facilities were more than adequate for operating needs. A $500 million revolving facility maturing in May 2011 was replaced with a new five-year facility; combined revolver availability was $1 billion.
- Risks cited include currency and commodity movements, inventory and buying execution, weather, consumer spending, international operations, competition, data security, technology, litigation, tax matters and other factors. TJX reported no material change in previously disclosed risk factors or market-risk exposures.
- The reserve for the 2007 computer intrusion was $17.2 million; management said possible estimate variation was not expected to be material. The reserve for former operations was $73.8 million, including A.J. Wright costs; most was expected to be paid over three to five years. TJX also disclosed possible contingent exposure on certain former-business leases, which it considered remote.
- Net unrecognized tax benefits were $124.1 million. Tax examinations or proceedings could reduce the tax provision by up to $42.0 million over the next 12 months. Management reported effective disclosure controls; a new TJX Europe financial reporting system implemented January 30, 2011 materially changed related processes and procedures.
Important facts for investors to verify
- Whether Europe’s markdowns and merchandise-mix reset restore same-store sales, segment profitability and margins.
- Whether the expected Q2 reversal of inventory-hedge mark-to-market effects occurs, and how currency movements affect reported earnings.
- Whether packaway inventory converts into sales without further pressure on cash flow, markdowns or margins.
- Actual remaining A.J. Wright closure and conversion costs, and whether anticipated post-consolidation profitability improvements materialize.
- Capital spending, repurchases and dividends relative to operating cash generation; $1.2 billion remained available under repurchase programs at quarter-end.
- Developments in tax examinations and the computer-intrusion and former-operations reserves and contingencies.