TJX Companies, Inc. — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2011, ended July 31, 2010; comparable periods ended August 1, 2009. The filing is unaudited. TJX operates nearly 2,800 off-price apparel and home-fashions stores across the U.S., Canada and Europe.
Financial performance
| Metric | Quarter | Six months |
|---|---|---|
| Net sales | $5.07 billion, up 7% | $10.08 billion, up 11% |
| Same-store sales | Up 3% | Up 6% |
| Income before taxes | $496.3 million, up 20% | $1.03 billion, up 37% |
| Net income | $305.0 million, up 17% | $636.4 million, up 35% |
| Diluted EPS | $0.74 vs. $0.61 | $1.54 vs. $1.09 |
| Pre-tax margin | 9.8% vs. 8.7% | 10.2% vs. 8.3% |
Improved merchandise margins were the principal driver of margin expansion: cost of sales, buying and occupancy costs declined to 73.4% of sales for the quarter and 73.1% for the half, from 74.4% and 74.8%, respectively. Merchandise margins improved 0.8 percentage points for the quarter and 1.3 points year to date. SG&A was 16.8% of sales for the quarter, up 0.1 points, and 16.6% for the half, down 0.2 points. The quarter and half-year results included an $11.6 million credit for computer-intrusion costs, adding $0.01 to diluted EPS in each period.
Cash flow and liquidity: Six-month operating cash flow was $666.0 million, down from $704.7 million. Capital additions were $326.9 million. Cash and cash equivalents were $1.38 billion at July 31; short-term investments were $139.2 million. Current assets were $4.95 billion and current liabilities $2.97 billion. Cash declined $234.4 million from fiscal year-end, chiefly alongside $574.7 million of cash-settled share repurchases, $110.1 million of dividends and capital spending.
Debt and capital: Long-term debt was $774.4 million, with no current debt installments reported; capital-lease obligations totaled $17.0 million. TJX had $1.0 billion of revolving credit facilities available and no borrowings under them. The carrying value of long-term debt was below its disclosed estimated fair value of $911.4 million. Shares repurchased in the first six months totaled 13.7 million at a stated cost of $589.6 million; cash-flow repurchase payments were $574.7 million, reflecting settlement timing. Dividends declared were $0.15 per share for the quarter and $0.30 for the half.
Material changes and segment trends
- Sales growth reflected 3% same-store growth and 4% growth from new stores in the quarter. In the first half, growth reflected 6% same-store growth, 4% from new stores and a 1% favorable currency effect. Stores and selling square footage were each up 4% year over year.
- U.S. segments generally improved. For the quarter, Marmaxx sales rose 5% and segment profit rose 16%; HomeGoods sales rose 10% and profit rose to $35.2 million; A.J. Wright sales rose 6%, while same-store sales were flat.
- Canada sales rose 17% in the quarter, including an approximately 9-point favorable currency translation effect; segment profit increased to $81.7 million. Europe sales rose 3%, but same-store sales fell 4% and segment profit fell to $2.1 million from $24.7 million.
- Consolidated per-store inventories, including distribution-center inventory, were down 13% year over year at quarter-end. Management attributed stronger merchandise margins to leaner inventories, faster turns, buying closer to need and fewer markdowns.
Outlook, commentary and risks
- Management said second-half same-store sales comparisons would be more challenging after double-digit growth in the prior-year second half, and planned a larger-than-normal share of fiscal 2011 advertising for the second half.
- Fiscal 2011 capital spending was expected to be approximately $750 million. TJX anticipated repurchasing approximately $900 million to $1 billion of stock in fiscal 2011; timing and amounts could change with cash flow, liquidity, market conditions and business prospects.
- TJX planned to begin opening Marshalls stores in Canada in spring fiscal 2012 and believed the market could ultimately support 90 to 100 stores.
- Management stated that cash, operating cash generation and revolving facilities were more than adequate for operating needs. No full-year earnings or sales guidance is provided in the filing text.
- Key exposures include consumer spending and economic conditions, currency movements, inventory execution, competition, seasonality and weather, data security, litigation, tax matters, international expansion and pension-asset markets. TJX noted execution issues in the U.K. and Ireland, economic uncertainty and unseasonable weather as factors affecting European sales; newer European operations and infrastructure investment also weighed on segment margins.
- The computer-intrusion reserve was $19.6 million at quarter-end and remains an estimate subject to potentially material changes from claims, litigation, expenses and insurance recoveries. TJX also disclosed a $32.2 million reserve for discontinued operations and possible contingent exposure on certain former-business leases not included in that reserve because liability was not considered probable.
- Unrecognized tax benefits were $127.4 million. Management said they could decrease by $3 million to $74 million over the next 12 months, potentially reducing tax expense. Effective tax rates rose to 38.6% for the quarter and 38.4% for the half, largely because a favorable prior-year tax treatment did not recur.
- A hypothetical 10% adverse currency movement was estimated to potentially reduce six-month pre-tax income by approximately $14 million; the filing said the corresponding financial-position impact would not be material. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether sales, traffic and merchandise-margin gains persist as prior-year comparisons become more difficult.
- Whether Europe’s negative same-store sales and sharply lower segment profit improve, and how expansion costs affect future margins.
- Actual full-year capital spending and share repurchases, including the effects on cash, liquidity and per-share results.
- Any material change in computer-intrusion claims, insurance recoveries, discontinued-operation lease exposure or tax examinations.
- Currency, inventory and consumer-spending developments, and any subsequent management guidance not included in this filing.