TJX Companies, Inc. — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2010, ended August 1, 2009; comparisons are to the corresponding periods ended July 26, 2008. Results are unaudited. TJX operates off-price apparel and home-fashion stores in the U.S., Canada and Europe.
Financial performance
| Metric | Second quarter | Six months |
|---|---|---|
| Net sales | $4.748 billion, up 4% | $9.102 billion, up 3% |
| Same-store sales | Up 4% | Up 3% |
| Income from continuing operations | $261.6 million vs. $212.1 million | $470.8 million vs. $410.1 million |
| Diluted EPS from continuing operations | $0.61 vs. $0.48 | $1.09 vs. $0.92 |
| Pre-tax margin | 8.7% vs. 7.4% | 8.3% vs. 7.2% |
| Operating cash flow | Not separately reported | $704.7 million vs. $468.4 million |
Cost of sales, including buying and occupancy, declined to 74.4% of sales in the quarter and 74.8% for the half, from 75.7% and 75.9%, respectively. SG&A was 16.7% and 16.8% of sales, each down 0.1 percentage point. Management attributed margin improvement primarily to stronger merchandise margins, effective buying and faster inventory turns. Net interest expense rose to $9.2 million for the quarter and $15.9 million for the half, largely reflecting lower interest income and new debt.
Liquidity, debt and capital allocation
At August 1, 2009, cash and cash equivalents were $1.427 billion, with $134.6 million of short-term investments. Current assets were $5.212 billion and current liabilities $3.230 billion. Total debt was approximately $1.193 billion, including $418.9 million current and $774.3 million long-term. TJX had $1 billion available under revolving credit facilities and no borrowings under those facilities. Operating cash flow benefited from deferred tax effects, inventory and accounts-payable movements, and the timing of tax payments; it also included a $50 million pension contribution.
During the half, TJX issued $375 million of 6.95% ten-year notes and $400 million of 4.20% six-year notes. Most zero-coupon convertible notes were converted into 15.1 million shares. TJX repurchased 8.0 million shares for $236.7 million and paid $96.6 million in dividends. A C$235 million term facility was repaid on August 10, after quarter-end; TJX also planned to use funds to repay $200 million of 7.45% notes due December 2009. Capital expenditures were $163.6 million for the half.
Changes and segment performance
- U.S. businesses led performance. Marmaxx sales rose 6% and segment profit rose 20% in both the quarter and half. HomeGoods quarter same-store sales increased 9%, with segment profit of $24.5 million versus $2.2 million. A.J. Wright returned to segment profitability.
- International reported sales fell as currency translation weighed on results: Canada sales declined 8% in the quarter and 10% for the half; Europe declined 7% and 11%. In local-currency terms, same-store sales rose 1% in Canada and 6% in Europe for both periods. European segment profit improved; Canadian profit and margins declined, partly because of currency-related merchandise costs and hedge mark-to-market effects.
- Foreign exchange translation reduced reported sales growth and diluted EPS by approximately $0.02 in the quarter and $0.04 for the half. Inventory-hedge mark-to-market effects reduced EPS by $0.01 and $0.03, respectively. The prior-year half included a $0.02-per-share tax benefit.
- Prior-year results include Bob’s Stores as discontinued operations, including after-tax operating losses of $11.9 million for the quarter and $16.0 million for the half. No discontinued-operations loss was reported in fiscal 2010 periods.
Outlook, risks and unusual items
Management said results were significantly above expectations, citing increased customer traffic, merchandise-margin gains, lean inventories and expense control. The filing gives no specific full-year sales or earnings guidance. Management expected approximately $150 million of fiscal 2010 savings from expense-reduction initiatives and estimated fiscal 2010 capital spending of $450–$475 million. Management cautioned that first-half results are not necessarily indicative of the full year because retail sales and income are seasonal and generally higher in the second half.
Key risks include the recession and consumer spending, execution of store growth and inventory strategies, foreign exchange, competition, and the ability to generate cash and obtain financing. TJX maintained a $27.2 million reserve for probable costs related to the previously disclosed computer intrusion; actual costs could vary materially. In June 2009, it settled investigations by 41 state Attorneys General, agreeing to fund $2.5 million for data security, pay $5.5 million plus $1.75 million of investigation expenses, and meet specified security requirements. TJX also disclosed contingent lease liabilities related to former businesses and $38.9 million reserved for discontinued-operation obligations. No material risk-factor changes were reported. A potential reduction in unrecognized tax benefits of $2–$70 million over the next 12 months was considered reasonably possible, not assured.
Investor verification priorities
- Assess how much of the earnings and cash-flow improvement is sustainable versus driven by tax timing, currency, hedge accounting effects and working-capital movements.
- Track Canadian margins and whether international results improve as currency translation and merchandise-cost pressures change.
- Verify actual fiscal 2010 expense savings and capital spending against management’s estimates.
- Monitor the computer-intrusion claims, reserve adequacy and compliance with the state settlement, as well as contingent lease exposures.
- Review debt maturities, interest costs, buybacks and liquidity after the August 10 facility repayment and December 2009 note maturity.