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TJX > SEC Filings for TJX > Form 10-K on 2-Apr-2013All Recent SEC Filings

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Form 10-K for TJX COMPANIES INC /DE/


2-Apr-2013

Annual Report


ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The discussion that follows relates to our 53-week fiscal year ended February 2, 2013 (fiscal 2013) and our 52-week fiscal years ended January 28, 2012 (fiscal 2012) and January 29, 2011 (fiscal 2011).

OVERVIEW

The TJX Companies, Inc. is the largest off-price retailer of apparel and home fashions in the U.S. and worldwide. Our over 3,000 stores offer a rapidly changing assortment of quality, fashionable, brand-name and designer apparel, home fashions and other merchandise at prices generally 20% to 60% below department and specialty store regular prices, every day. We operate our business in four divisions: Marmaxx (which operates T.J. Maxx and Marshalls) and HomeGoods, both in the United States; TJX Canada (which operates Winners, HomeSense and Marshalls in Canada); and TJX Europe (which operates T.K. Maxx and HomeSense in Europe).

Fiscal 2013 was another record year for us. Highlights of our financial performance for fiscal 2013 include the following:

- In fiscal 2013, we posted strong gains in same store sales, net sales and earnings per share on top of significant increases in the last two fiscal years.

Net sales increased to $25.9 billion for fiscal 2013, up 12% over fiscal 2012. The 53rd week in fiscal 2013 increased net sales by 2%.

Same store sales, on a 52-week basis, increased 7% in fiscal 2013 over increases of 4% in each of the previous two years. The fiscal 2013 increase was driven by an increase in customer traffic as we continued to grow our customer base.

Earnings per share for fiscal 2013 were $2.55 per diluted share, up 32% compared to $1.93 per diluted share in fiscal 2012, or up 28% compared to fiscal 2012 adjusted* diluted earnings per share of $1.99. The 53rd week added approximately $0.08 per share to fiscal 2013 earnings.

All of our divisions exceeded our expectations in fiscal 2013, posting strong same store sales increases and increases in segment profits.

* Adjusted measures exclude certain items affecting comparability. See "Adjusted Financial Measures" below.

- In fiscal 2013, we continued to drive the growth of our divisions.

At February 2, 2013, the number of stores in operation was up 5% and selling square footage was up 4% over the end of fiscal 2012. We expect to end fiscal 2014 with 3,200 stores, which would represent a 5% increase in our consolidated store base and a 4% increase in our selling square footage.

All of our divisions posted strong same store sales increases, driven by increases in customer traffic. New T.J. Maxx and Marshalls stores performed well as we expanded into more rural markets as well as major cities. The Marshalls chain in Canada also has performed well and TJX Europe regained its momentum with a very strong 10% same store sales increase.

We invested in e-commerce. In December, 2012, we purchased Sierra Trading Post, an off-price internet retailer. We expect to launch our T.J. Maxx website in a small, controlled mode in the second half of fiscal 2014.

- We continued our focus on operating with lean inventories, driving rapid merchandise turns and controlling expenses.

Our fiscal 2013 pre-tax margin (the ratio of pre-tax income to net sales) was 11.9%, a 1.5 percentage point increase compared to fiscal 2012, and a 1.2 percentage point increase from an adjusted 10.7% for fiscal 2012. The 53rdweek benefited the fiscal 2013 pre-tax margin by approximately 0.2 percentage points.



Our cost of sales ratio for fiscal 2013 improved 1.1 percentage points to 71.6% compared to fiscal 2012 and improved 1.0 percentage points compared to an adjusted basis for fiscal 2012. The improvements over last year were primarily due to improved merchandise margins and buying and occupancy expense leverage.

Our selling, general and administrative expense ratio for fiscal 2013 decreased 0.4 percentage points from 16.8% in fiscal 2012 to 16.4%. On an adjusted basis, this ratio decreased 0.1 percentage points from an adjusted16.5% in fiscal 2012.

Our consolidated average per store inventories, including inventory on hand at our distribution centers, but excluding our internet based business Sierra Trading Post, were down 6% at the end of fiscal 2013.

- We continued to use cash to return value to our shareholders.

During fiscal 2013, we repurchased 30.6 million shares of our common stock for $1.3 billion. Earnings per share reflect the benefit of the stock repurchase program. In February 2013, our Board of Directors authorized our 14th stock repurchase program for an additional $1.5 billion. We expect to repurchase approximately $1.3 to $1.4 billion of our stock in fiscal 2014.

We paid quarterly dividends of $0.115 per share for fiscal 2013. We expect to pay quarterly dividends for fiscal 2014 of $0.145 per share, or an annual dividend of $0.58 per share, which would represent a 26% increase over the prior year, subject to the declaration and approval of our Board of Directors.

The following is a discussion of our consolidated operating results, followed by a discussion of our segment operating results.

Net sales: Consolidated net sales for fiscal 2013 totaled $25.9 billion, a 12% increase over $23.2 billion in fiscal 2012. The increase reflected a 7% increase from same store sales, a 3% increase from new stores and a 2% increase from the impact of the 53rd week in the fiscal 2013 calendar. Foreign currency exchange rates had an immaterial impact on fiscal 2013 net sales. Consolidated net sales for fiscal 2012 totaled $23.2 billion, a 6% increase over $21.9 billion in fiscal 2011. The increase reflected a 5% increase from new stores, a 4% increase from same store sales and a 1% increase from foreign currency exchange rates, offset in part by a 4% decrease due to the elimination of sales from stores operating under the A.J. Wright banner. (The fiscal 2012 sales from the converted A.J. Wright stores are included in new store sales.)

Same store sales increases in the U.S. for fiscal 2013 were driven by an increase in customer traffic, and to a lesser extent an increase in the value of the average transaction. Sales of both apparel and home fashions were equally strong. Geographically, same store sales increases in the U.S. were strong throughout most regions with Florida and the Southwest performing above the consolidated average and virtually all other regions close to the consolidated average. Our foreign segments both posted same store sales increases, with TJX Europe above the consolidated average and TJX Canada below the consolidated average.

Same store sales increases in the U.S. for fiscal 2012 reflected an increase in both the value of the average transaction and an increase in customer traffic. Same store sales of our home, dresses, men's, shoes and accessories categories were particularly strong. Geographically, same store sales increases in the U.S. were strong throughout most regions, with Florida and the Southwest performing above the consolidated average and the Midwest trailing the consolidated average. For the full fiscal year 2012, the same store sales increase for TJX Europe was well below the consolidated average, and same store sales at TJX Canada decreased from the prior year, but both Europe and Canada posted strong same store sales gains in the fourth quarter of fiscal 2012.

We define same store sales to be sales of those stores that have been in operation for all or a portion of two consecutive fiscal years, or in other words, stores that are starting their third fiscal year of operation. We classify a store as a new store until it meets the same store sales criteria. We determine which stores are included in the same store sales calculation at the beginning of a fiscal year and the classification remains constant throughout that year, unless a store is closed. We calculate same store sales results by comparing the current and prior year weekly periods that are most closely aligned. Relocated stores and stores that have increased in size are generally classified in the same way as the original store, and we believe that the impact of these stores on the consolidated same store percentage is immaterial. Same store sales of our foreign segments are calculated on a


constant currency basis, meaning we translate the current year's same store sales of our foreign segments at the same exchange rates used in the prior year. This removes the effect of changes in currency exchange rates, which we believe is a more accurate measure of segment operating performance. We define customer traffic to be the number of transactions in stores included in the same store sales calculation.

The following table sets forth our consolidated operating results from continuing operations as a percentage of net sales on an as reported and as adjusted basis:

                                   Percentage of Net Sales                    Percentage of Net Sales                           Percentage of Net Sales
                                         Fiscal Year                                Fiscal Year                                       Fiscal Year
                                            2013                                       2012                                              2011
                                         As reported                   As reported               As adjusted*            As reported               As adjusted*
Net sales                                             100.0 %                100.0 %                    100.0 %                100.0 %                    100.0 %
Cost of sales, including
buying and occupancy costs                             71.6                   72.7                       72.6                   73.1                       72.9
Selling, general and
administrative expenses                                16.4                   16.8                       16.5                   16.9                       16.3
Provision (credit) for
Computer Intrusion related
expenses                                                  -                      -                          -                   (0.1 )                        -
Interest expense, net                                   0.1                    0.2                        0.2                    0.2                        0.2
Income from continuing
operations before
provision for income
taxes**                                                11.9 %                 10.4 %                     10.7 %                  9.9 %                     10.6 %
Diluted earnings per
share-continuing

operations $ 2.55 $ 1.93 $ 1.99 $ 1.65 $ 1.75

* See "Adjusted Financial Measures" below.

** Figures may not foot due to rounding.

Impact of foreign currency exchange rates: Our operating results are affected by foreign currency exchange rates as a result of changes in the value of the U.S. dollar in relation to other currencies. Two ways in which foreign currency exchange rates affect our reported results are as follows:

- Translation of foreign operating results into U.S. dollars: In our financial statements we translate the operations of TJX Canada and TJX Europe from local currencies into U.S. dollars using currency rates in effect at different points in time. Significant changes in foreign exchange rates between comparable prior periods can result in meaningful variations in consolidated net sales, net income and earnings per share growth as well as the net sales and operating results of these segments. Currency translation generally does not affect operating margins, or affects them only slightly, as sales and expenses of the foreign operations are translated at essentially the same rates within a given period.

- Inventory hedges: We routinely enter into inventory-related hedging instruments to mitigate the impact of foreign currency exchange rates on merchandise margins when our divisions, principally in Europe and Canada, purchase goods in currencies other than their local currencies. As we have not elected "hedge accounting" for these instruments as defined by generally accepted accounting principles (GAAP), we record a mark-to-market gain or loss on the hedging instruments in our results of operations at the end of each reporting period. In subsequent periods, the income statement impact of the mark-to-market adjustment is effectively offset when the inventory being hedged is sold. While these effects occur every reporting period, they are of much greater magnitude when there are sudden and significant changes in currency exchange rates during a short period of time. The mark-to-market adjustment on these hedges does not affect net sales, but it does affect the cost of sales, operating margins and earnings we report.

Cost of sales, including buying and occupancy costs: Cost of sales, including buying and occupancy costs, as a percentage of net sales was 71.6% in fiscal 2013, 72.7% in fiscal 2012 and 73.1% in fiscal 2011. The 1.1 percentage point improvement in this ratio for fiscal 2013 was primarily due to improved merchandise margins, driven by lower markdowns, as well as expense leverage on the strong same store sales increase. In addition, the 53rd week in fiscal 2013 benefitted this expense ratio by approximately 0.2 percentage points.


The improvement in this ratio for fiscal 2012 was due to expense leverage on buying and occupancy costs (particularly at Marmaxx and HomeGoods), partially offset by a decrease in merchandise margins at TJX Europe and TJX Canada.

Selling, general and administrative expenses: Selling, general and administrative expenses as a percentage of net sales were 16.4% in fiscal 2013, 16.8% in fiscal 2012 and 16.9% in fiscal 2011. On an adjusted basis, this ratio was 16.5% in fiscal 2012 and 16.3% in fiscal 2011. The improvement in this ratio for fiscal 2013 was primarily due to expense leverage on strong same store sales, partially offset by contributions to the TJX Foundation and by expenses related to two third quarter items: a non-cash charge for the cumulative impact of a correction to our pension accrual for prior years and a non-operating charge due to the adjustment in our reserve for former operations relating to closed stores.

The increase in the adjusted selling, general and administrative expense ratio in fiscal 2012 compared to fiscal 2011 was driven by increased general corporate expenses, primarily investment in new systems, talent and e-commerce, costs associated with a voluntary retirement program and fourth quarter charges and write-offs at TJX Canada and TJX Europe (see segment discussions below), offset in part by expense leverage on strong same store sales, particularly at HomeGoods.

Interest expense, net: The components of interest expense, net for the last three fiscal years are summarized below:

                                                Fiscal Year Ended
                                 February 2,        January 28,        January 29,
       Dollars in thousands             2013               2012               2011
       Interest expense        $      48,582      $      49,276      $      49,014
       Capitalized interest           (7,750 )           (2,593 )                -
       Interest (income)             (11,657 )          (11,035 )           (9,877 )
       Interest expense, net   $      29,175      $      35,648      $      39,137

Gross interest expense has remained fairly constant over the last three fiscal years. The reduction in our net interest expense position in both fiscal 2013 and in fiscal 2012 was due to capitalized interest on major capital projects that have not yet been placed in service.

Income taxes: Our effective annual income tax rate was 38.0% in fiscal 2013, 38.0% in fiscal 2012 and 38.1% in fiscal 2011. TJX's effective rate remained constant for fiscal 2013 as compared to fiscal 2012. The fiscal 2013 effective tax rate benefitted from an increase in foreign earnings, which are taxed at lower rates, but this benefit was offset by the absence of the benefit in fiscal 2012 due to a net reduction in federal and state tax reserves. The decrease in the effective income tax rate for fiscal 2012 as compared to fiscal 2011 is primarily attributable to a reduction in the fiscal 2012 tax reserves related to the favorable resolution of U.S. Federal tax audits, partially offset by an increase in state and U.S. Federal tax reserves, for a net decrease in the provision.

Income from continuing operations and diluted earnings per share from continuing operations: Income from continuing operations was $1.9 billion in fiscal 2013, a 27% increase over $1.5 billion in fiscal 2012, which in turn was a 12% increase over $1.3 billion in fiscal 2011. Diluted earnings per share were $2.55 in fiscal 2013, $1.93 in fiscal 2012 and $1.65 in fiscal 2011.

Fiscal 2013 diluted earnings per share included an approximate $0.08 per share benefit due to the impact of the 53rd week in the fiscal 2013 calendar. Adjusted diluted earnings per share were $1.99 for fiscal 2012 and $1.75 for fiscal 2011 (see Adjusted Financial Measures).

Foreign currency exchange rates also affected the comparability of our results. Foreign currency exchange rates had an immaterial impact on earnings per share in fiscal 2013 compared to fiscal 2012 but benefitted fiscal 2012 earnings per share by $0.01 per share compared with a $0.01 per share negative impact in fiscal 2011.

In addition, our weighted average diluted shares outstanding affect the comparability of earnings per share. Our stock repurchases benefit our earnings per share. We repurchased 30.6 million shares of our stock at a cost of $1.3 billion in fiscal 2013, 49.7 million shares of our stock at a cost of $1.4 billion in fiscal 2012, and 55.1 million shares at a cost of $1.2 billion in fiscal 2011.


Discontinued operations and net income: In fiscal 2011, we had a net gain from discontinued operations reflecting an after-tax benefit of $3.6 million (which did not impact diluted earnings per share) as a result of a $6 million pre-tax reduction of the estimated cost of settling lease-related obligations of former businesses. Net income, which includes the impact of these discontinued operations, was $1.9 billion, or $2.55 per share, for fiscal 2013, $1.5 billion, or $1.93 per share, for fiscal 2012, and $1.3 billion, or $1.65 per share, for fiscal 2011.

Adjusted Financial Measures: In addition to presenting financial results in conformity with GAAP, we are also presenting certain measures on an "adjusted" basis. We adjusted them to exclude:

from the fiscal 2012 results, costs related to the A.J. Wright consolidation incurred in fiscal 2012, including closing costs, additional operating losses related to the A.J. Wright stores closed in fiscal 2012 and the costs incurred by the Marmaxx and HomeGoods segments to convert former A.J. Wright stores to their banners and hold grand re-opening events for these stores, and

from the fiscal 2011 results, costs related to the A.J. Wright consolidation incurred in fiscal 2011 (which included a majority of the costs related to closing the A.J. Wright business and the operating loss of the A.J. Wright segment for the fourth quarter of fiscal 2011), and the benefit of a reduction to the provision for the Computer Intrusion which occurred over four years ago.

These adjusted financial results are non-GAAP financial measures. We believe that the presentation of adjusted financial results provides additional information on comparisons between periods including underlying trends of our business by excluding these items that affect overall comparability. We use these adjusted measures in making financial, operating and planning decisions and in evaluating our performance, and our Board of Directors uses them in assessing our business and making compensation decisions. Non-GAAP financial measures should be considered in addition to, and not as an alternative for, our reported results prepared in accordance with GAAP.

Reconciliations of each of the adjusted financial measures to the financial measures in accordance with GAAP for fiscal 2012 and fiscal 2011 are provided below.

                                            Fiscal year 2012                                     Fiscal year 2012
                                                 As reported                                          As adjusted
Dollars in millions, except per                     % of Net                                             % of Net
share data                              U.S.$          Sales         Adjustments            U.S.$*          Sales
Net sales                            $ 23,191                        $        (9 )(1)     $ 23,182
Cost of sales, including buying
and occupancy costs                    16,854           72.7 %               (16 )(2)       16,838           72.6 %
Gross profit margin                         -           27.3 %                                   -           27.4 %
Selling, general and
administrative expenses                 3,890           16.8 %               (63 )(3)        3,828           16.5 %
Income from continuing operations
before provision for income taxes    $  2,411           10.4 %       $        69          $  2,481           10.7 %
Diluted earnings per
share-continuing operations          $   1.93                         $     0.06 (4)      $   1.99




                                            Fiscal year 2011                                            Fiscal year 2011
                                                 As reported                                                 As adjusted
Dollars in millions, except                         % of Net                                                    % of Net
per share data                        U.S.$            Sales           Adjustments               U.S.$*            Sales
Net sales                          $ 21,942                            $      (279 )(5)      $   21,663
Cost of sales, including
buying and occupancy costs           16,040             73.1 %                (242 )(6)          15,798             72.9 %
Gross profit margin                       -             26.9 %                                        -             27.1 %
Selling, general and
administrative expenses               3,710             16.9 %                (177 )(7)           3,533             16.3 %
Provision (credit) for
Computer Intrusion related
costs                                   (12 )           (0.1 )%                 12 (8)                -
Income from continuing
operations before provision
for income taxes                   $  2,164              9.9 %         $       129           $    2,293             10.6 %
Diluted earnings per
share-continuing operations        $   1.65                             $     0.10 (9)       $     1.75

* Figures may not cross-foot due to rounding.

(1) Sales of A.J. Wright stores prior to closing ($9 million).

(2) Cost of sales, including buying and occupancy costs of A.J. Wright prior to closing ($15 million) and applicable conversion costs of A.J. Wright stores converted to Marmaxx and HomeGoods banners ($1 million).



(3) Operating costs of A.J. Wright prior to closing and costs to close A.J. Wright stores not converted to other banners ($44 million) and applicable conversion and grand re-opening costs for A.J. Wright stores converted to Marmaxx and HomeGoods banners ($19 million).

(4) Impact on earnings per share of operating loss and closing costs of A.J. Wright stores ($0.04 per share) and conversion and grand re-opening costs at Marmaxx and HomeGoods ($0.02 per share). 2012 effective tax rate used in computation.

(5) Sales associated with A.J. Wright prior to closing ($279 million).

(6) Cost of sales, including and buying and occupancy costs associated with closing A.J. Wright stores, distribution centers and home office ($242 million).

(7) Operating costs of A.J. Wright prior to closing and costs to close A.J. Wright stores not being converted to other banners ($177 million).

(8) Reduction of the provision for Computer Intrusion related costs, primarily as a result of insurance proceeds and adjustments to our remaining reserve ($12 million).

(9) Impact on earnings per share of operating losses and closing costs of A.J. Wright stores ($0.11 per share) and impact on earnings per share of the reduction to the provision for Computer Intrusion related costs ($0.01 per share). 2011 effective tax rate used in computation.

The costs to convert A.J. Wright stores to other banners and to hold grand re-openings affected our Marmaxx and HomeGoods segments in fiscal 2012. A reconciliation of adjusted segment margin, a non-GAAP financial measure, to segment margin as reported in accordance with GAAP for each of these segments is as follows:

                                                Fiscal 2012                                            Fiscal 2012                      Fiscal 2011
                                                As reported                                            As adjusted                      As reported
                                   U.S.$ in        % of Net                                U.S.$ in       % of Net         U.S.$ in        % of Net
                                   Millions           Sales         Adjustments           Millions*          Sales         Millions           Sales
Marmaxx segment profit           $    2,073            13.5 %     $          17 (1)     $     2,090           13.6 %     $    1,876            13.3 %
HomeGoods segment profit         $      234            10.4 %     $           3 (2)     $       238           10.6 %     $      187             9.5 %

* Figures may not cross-foot due to rounding.

(1) Conversion costs and grand re-opening costs for A.J. Wright stores converted to a T.J. Maxx or Marshalls store.

(2) Conversion costs and grand re-opening costs for A.J. Wright stores converted to a HomeGoods store.

Segment information: We operate four main business segments. Marmaxx (T.J. Maxx and Marshalls) and HomeGoods both operate stores in the United States. Our TJX Canada segment operates our stores in Canada (Winners, HomeSense and Marshalls), and our TJX Europe segment operates our stores in Europe (T.K. Maxx and HomeSense). (A.J. Wright ceased to be a segment following its consolidation.) Late in fiscal 2013 we acquired Sierra Trading Post (STP), an off-price internet retailer. The results of STP are not material and have been included with our Marmaxx segment. We evaluate the performance of our segments based on "segment profit or loss," which we define as pre-tax income or loss before general corporate expense and interest expense. "Segment profit or loss," as we define the term, may not be comparable to similarly titled measures used by other entities. The terms "segment margin" or "segment profit margin" are used to describe segment profit or loss as a percentage of net sales. These measures of performance should not be considered an alternative to net income or cash flows from operating activities as an indicator of our performance or as a measure of liquidity.


Presented below is selected financial information related to our business segments:

U.S. Segments:

Marmaxx



                                                                  Fiscal Year Ended
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