TJX Companies, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2017, the 13 weeks ended April 30, 2016; comparative quarter ended May 2, 2015. TJX operates off-price apparel and home-fashion retailers in the U.S., Canada, Europe and Australia. Results are unaudited.
Financial performance
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Net sales | $7.542 billion | $6.866 billion | +10% |
| Income before tax | $825.0 million | $765.1 million | +8% |
| Net income | $508.3 million | $474.6 million | +7% |
| Diluted EPS | $0.76 | $0.69 | +10% |
| Operating cash flow | $420.3 million | $447.5 million | Down $27.3 million |
- Same-store sales rose 7%, following 5% growth in the prior-year quarter. Growth was driven by customer traffic; increased units sold were largely offset by lower average ticket.
- Cost of sales was 71.2% of sales, improving 0.5 percentage points. SG&A was 17.7%, up 0.7 points, principally from wage increases, growth investments, and higher legal and credit-card chargeback costs. Pre-tax margin declined 0.2 points to 10.9%.
- Effective tax rate increased to 38.4% from 38.0%, primarily due to income mix by jurisdiction and a higher valuation allowance on foreign net operating losses. Foreign currency reduced EPS by $0.05, versus $0.03 in the prior-year quarter. Repurchases benefited EPS growth by approximately 3%.
Liquidity, debt and cash flow
- At April 30, 2016, cash and cash equivalents were $1.944 billion and short-term investments were $403.7 million. Current assets were $6.878 billion and current liabilities $4.297 billion.
- Long-term debt was $1.615 billion; no amounts were outstanding on the revolving credit facilities. TJX had two $500 million revolvers maturing in March 2020 and March 2021 and reported compliance with their covenants. Cash and short-term investments exceeded reported long-term debt by approximately $732 million.
- Operating cash flow was $420 million; property additions used $266 million. Cash used in financing was $379 million, including $341 million of share repurchases and $140 million of dividends paid. Cash declined $151 million to $1.944 billion, partly offset by $97 million from exchange-rate changes.
- Management said existing cash, internally generated funds and credit facilities were more than adequate for operating needs over the next fiscal year. Approximately 63% of cash was held by foreign subsidiaries; $296 million was in countries where undistributed earnings were intended to remain indefinitely invested.
Material changes and segment results
- Sales growth comprised 7% same-store growth and 4% new-store growth, partly offset by a 1% negative foreign-currency translation impact. Stores in operation increased 6% and selling square footage 5% year over year.
- Marmaxx sales increased 8%; same-store sales rose 6% and segment margin edged up to 14.6% from 14.5%.
- HomeGoods sales increased 15%; same-store sales rose 9%, while segment margin eased to 13.7% from 13.8%.
- TJX Canada sales increased 11%, including 14% same-store growth on a constant-currency basis; currency translation reduced reported growth by 7 points. Segment margin increased to 8.4% from 7.3%.
- TJX International sales increased 13%, including 4% same-store growth; currency translation reduced growth by 4 points. Segment margin fell to 1.5% from 3.0%, reflecting currency effects and integration of Trade Secret, acquired in October 2015.
- International merchandise-purchase hedge losses were a significant earnings factor: derivative losses recognized in income were $43.9 million in the quarter, compared with $9.4 million a year earlier. Management noted that mark-to-market effects are generally offset when hedged inventory is received and paid for.
Outlook, risks and unusual items
- Management forecast fiscal 2017 capital spending of approximately $1.1 billion and planned approximately $1.5–$2.0 billion of stock repurchases for the year. The filing provides no specific full-year sales, earnings or EPS guidance.
- Inventory excluding in-transit goods and e-commerce was up 7% per store year over year. Management attributed increased inventory and packaway levels to higher demand; inventory, buying execution and demand remain relevant risks.
- Fiscal 2017 first-quarter results included a $5.5 million pre-tax benefit from terminating the unfunded postretirement medical plan. The quarter also reflected higher wages, investments in growth and supply-chain capacity, and higher legal and chargeback costs.
- Risks identified include consumer spending and economic conditions, competition, labor costs and staffing, inventory management, foreign exchange, international expansion, data security and systems, merchandise quality and availability, weather and disruptions, litigation, tax matters, and regulatory changes. Management reported no material change to previously disclosed risk factors or market-risk exposures.
- Putative wage-and-hour class or collective actions and customer lawsuits concerning “compare at” pricing were pending; an immaterial amount was accrued. Estimated undiscounted contingent obligations on certain former-operation leases were approximately $43 million; management expected most or all would not revert to TJX or would be resolved for substantially less.
- Management concluded disclosure controls were effective at a reasonable-assurance level and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether same-store sales momentum and customer traffic persist, and whether average-ticket weakness changes.
- Whether higher wages, growth and distribution investments, and legal or chargeback costs continue to pressure SG&A and margins.
- Whether International segment profitability recovers after Trade Secret integration and currency impacts.
- How inventory growth and packaway levels convert into sales and operating cash flow; operating cash flow declined year over year despite higher net income.
- Execution and funding of the $1.1 billion capital-spending outlook and $1.5–$2.0 billion repurchase plan, alongside dividends and liquidity needs.
- Potential volatility from foreign-exchange and inventory-hedge accounting, tax examinations, and the disclosed litigation and lease contingencies.