TJX Companies, Inc. — Q3 FY2011 Form 10-Q
Business context and period. TJX is an off-price apparel and home fashions retailer operating more than 2,800 stores across the U.S., Canada and Europe. This filing reports the 13 weeks ended October 30, 2010 (third quarter) and the 39 weeks ended October 30, 2010, compared with the corresponding 2009 periods. Amounts below are U.S. dollars unless noted.
Financial performance
| Metric | Q3 2010 | Q3 2009 | 39 weeks 2010 | 39 weeks 2009 |
|---|---|---|---|---|
| Net sales | $5,526 million | $5,245 million | $15,610 million | $14,347 million |
| Net income | $372 million | $348 million | $1,009 million | $819 million |
| Diluted EPS | $0.92 | $0.81 | $2.46 | $1.91 |
| Pre-tax margin | 10.8% | 10.8% | 10.4% | 9.2% |
| Cost of sales, buying and occupancy, as % of sales | 72.5% | 72.5% | 72.9% | 74.0% |
| SG&A as % of sales | 16.5% | 16.5% | 16.6% | 16.7% |
- Quarterly sales rose 5%; same-store sales increased 1%, versus 7% growth a year earlier. Nine-month sales rose 9%; same-store sales increased 4%.
- Quarterly net income increased about 7% and diluted EPS about 14%. Nine-month net income increased about 23% and diluted EPS about 29%.
- Operating cash flow for the first nine months was $1,099 million, down from $1,289 million. Property additions were $540 million, compared with $319 million; operating cash flow less property additions was approximately $559 million.
- At October 30, cash and cash equivalents were $1,339 million and short-term investments were $130 million. Current assets were $5,297 million versus current liabilities of $3,230 million (working capital approximately $2,067 million; current ratio approximately 1.64).
- Long-term debt was $774 million carrying value; no amounts were outstanding under the $1 billion revolving credit facilities. Total inventory was $3,273 million, nearly unchanged from $3,268 million a year earlier; consolidated per-store inventory was down 6% year over year.
- Cash returned to shareholders included $846 million of stock repurchases and $170 million of dividends paid in the first nine months. Dividends declared were $0.45 per share, versus $0.36 a year earlier.
Material changes and segment trends
- Nine-month pre-tax margin improved 1.2 percentage points, primarily from stronger merchandise margins, faster inventory turns, expense leverage and cost reductions. Quarterly pre-tax margin was unchanged. The quarterly cost ratio was flat, partly because of mark-to-market effects on inventory hedges.
- Marmaxx and HomeGoods delivered higher sales and segment profit. A.J. Wright posted a $1.2 million quarterly segment loss, with warm weather and markdowns cited as factors.
- Canada sales and same-store sales increased, but quarterly segment margin declined to 17.1% from 18.5%, including adverse inventory-hedge mark-to-market effects. Europe’s same-store sales fell 3% for the quarter and segment profit declined to $41 million from $49 million; management cited execution issues, markdowns, economic uncertainty and expansion costs.
- Share repurchases reduced weighted-average diluted shares to 403 million for the quarter from 428 million a year earlier, contributing to EPS growth.
Outlook, commentary and risks
- Management reported no specific full-year earnings or sales guidance in the provided filing text. It anticipated approximately $750 million of fiscal 2011 capital spending and $1.0–$1.2 billion of fiscal 2011 share repurchases.
- Management noted a challenging fourth-quarter same-store-sales comparison against 12% growth in the prior-year quarter and allocated a larger-than-normal portion of the remaining fiscal-year advertising budget. It planned to accelerate Marmaxx square-footage growth in fiscal 2012, introduce Marshalls in Canada with six stores planned for fiscal 2012, and slow TJX Europe square-footage growth the following year.
- Management said cash, internally generated funds and committed revolving facilities were more than adequate for operating needs. Pension-plan funding was not expected to be required in fiscal 2011; anticipated cash payments for the unfunded plan were $3.8 million.
- The Computer Intrusion reserve was $18.8 million at quarter-end after an $11.6 million nine-month credit, primarily reflecting insurance proceeds and reserve adjustments. Management cautioned that actual costs, including litigation and claims, could differ materially from estimates.
- Other exposures include possible changes in unrecognized tax benefits (a potential reduction in tax expense of up to $44 million over the next 12 months), discontinued-operation lease obligations, foreign-exchange and fuel-price volatility, weather, consumer spending, inventory execution, and European operating performance. A hypothetical 10% adverse currency move could have reduced nine-month pre-tax income by approximately $30 million; management said the modeled interest-rate impact was not material.
- The filing states that there were no material changes to previously disclosed risk factors and no material impact expected from newly issued accounting standards. Disclosure controls were concluded effective, with no material change in internal control over financial reporting reported for the quarter.
Investor verification points
- Check the sustainability of merchandise-margin gains and inventory discipline, especially as seasonal inventory and sales comparisons change.
- Track Europe’s same-store sales, markdowns, execution and expansion costs, and whether newer operations achieve management’s expected profitability.
- Assess the effect of buybacks on EPS, cash balances and capital allocation alongside planned capital spending and dividends.
- Monitor operating cash conversion, inventory and payables movements, and the impact of increased property additions.
- Follow developments in Computer Intrusion claims and insurance recovery, tax examinations, and contingent former-business lease obligations.