TJX Companies, Inc. — Form 10-Q Summary
Business context and reporting period
Quarter ended July 29, 2017, the second quarter of fiscal 2018; comparisons are with the quarter ended July 30, 2016. The six-month period also ended July 29, 2017. TJX operates more than 3,900 off-price apparel and home-fashions stores across Marmaxx, HomeGoods, TJX Canada and TJX International, plus e-commerce businesses. Fiscal 2018 is a 53-week year. Management notes retail seasonality, with higher sales and income generally in the second half.
Financial performance and liquidity
| Metric | Q2 FY2018 | Q2 FY2017 | Six months FY2018 | Six months FY2017 |
|---|---|---|---|---|
| Net sales | $8.36 billion | $7.88 billion | $16.14 billion | $15.42 billion |
| Net income | $553 million | $562 million | $1.09 billion | $1.07 billion |
| Diluted EPS | $0.85 | $0.84 | $1.67 | $1.60 |
| Pre-tax margin | 10.7% | 11.6% | 10.7% | 11.3% |
| Operating cash flow | Not separately reported for the quarter | $1.10 billion | $1.18 billion |
Q2 same-store sales rose 3%, driven primarily by customer traffic; average transaction value declined as more units sold were offset by a lower average ticket. For the first six months, same-store sales rose 2%. Q2 cost of sales, including buying and occupancy, increased to 71.5% of sales from 70.6%; SG&A rose to 17.8% from 17.7%. Management attributed margin pressure principally to unfavorable mark-to-market effects on inventory hedges, higher distribution costs and wage increases. The six-month cost-of-sales and SG&A ratios were 71.3% and 17.9%, respectively.
At July 29, cash and cash equivalents were $2.45 billion, short-term investments $503 million, current assets $7.57 billion and current liabilities $4.66 billion. Long-term debt was $2.23 billion; no borrowings were outstanding under the $1 billion revolving credit facilities, and TJX reported compliance with covenants. Operating cash flow declined year over year by $81 million, partly reflecting timing of incentive-compensation, sales-tax and income-tax payments. Capital spending was $507 million for the six months.
Material changes and segment trends
- Q2 sales increased 6%, reflecting 4% from new stores and 3% same-store growth, partly offset by a 1% adverse currency impact. Six-month sales increased 5%; prior-year comparable growth was 8%.
- Q2 net income declined despite higher sales, while diluted EPS increased modestly; share repurchases reduced diluted shares and management estimated they benefited EPS growth by about 3%.
- HomeGoods was the strongest sales performer: Q2 sales grew 17% and same-store sales 7%. Its segment margin fell to 12.2% from 13.0%, primarily due to lower merchandise margin and higher freight, payroll and distribution costs.
- Marmaxx Q2 sales rose 4%, but segment margin declined to 14.1% from 14.6%, reflecting wage and supply-chain costs and deleverage on modest same-store growth.
- TJX Canada sales rose 10%, but Q2 segment margin fell sharply to 10.0% from 16.1%, primarily due to a 7.9-percentage-point unfavorable inventory-derivative mark-to-market effect and distribution costs.
- TJX International sales grew 4%, but segment margin declined to 3.6% from 4.1%, amid currency effects, wage and distribution costs, and expense deleverage.
Outlook, commentary, risks and unusual items
Management expected fiscal 2018 capital spending of approximately $1.2 billion and planned approximately $1.5–$1.8 billion of share repurchases for the year; timing and amounts could change. Management said cash, internally generated funds and credit facilities were more than adequate for operating needs over the next fiscal year. No earnings or sales guidance is stated in the provided filing text.
Unusual and accounting items include unfavorable mark-to-market losses on inventory-related derivatives, which affect reported cost of sales and margins but are generally offset when hedged inventory is received and paid for. Share-based-compensation accounting adoption reduced income-tax expense by $3.3 million in Q2 and $27.9 million in the six months. The filing describes a forthcoming lease standard expected to add significant lease assets and liabilities for more than 3,900 leased locations; management did not expect material income-statement impact if lease terms remain unchanged.
Risks highlighted include execution of buying and inventory strategies, consumer demand, labor and wage costs, weather, supply-chain and transportation costs, foreign exchange, information systems and data security, international operations, litigation and tax matters. Pending matters include wage-and-hour class or collective actions and customer lawsuits concerning compare-at pricing; the company accrued an immaterial amount. Estimated undiscounted contingent obligations for specified former-operation leases and properties were $48.7 million, which TJX believed were unlikely to revert in full.
Important facts for investors to verify
- Whether sales growth and customer traffic continue, particularly as same-store growth slowed versus the prior-year comparisons.
- Whether inventory-hedge mark-to-market volatility, foreign exchange and distribution costs continue to pressure margins, especially in Canada and International.
- Whether operating cash flow recovers as the timing of accrued expenses and tax payments normalizes, and how planned capital spending and repurchases affect cash and debt.
- Execution and costs of store expansion, the new U.S. Homesense chain, and supply-chain investments.
- Developments in labor and compare-at-pricing litigation, tax examinations, and adoption of the lease and revenue-recognition standards.