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TJX > SEC Filings for TJX > Form 10-Q on 30-Aug-2013All Recent SEC Filings

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Form 10-Q for TJX COMPANIES INC /DE/


30-Aug-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The Thirteen Weeks (second quarter) and Twenty-Six Weeks (six months) Ended August 3, 2013

Compared to

The Thirteen Weeks (second quarter) and Twenty-Six Weeks (six months) Ended July 28, 2012

Overview

We are the largest off-price retailer of apparel and home fashions in the U.S. and worldwide. We sell a rapidly changing assortment of apparel, home fashions and other merchandise at prices generally 20% to 60% below department and specialty store regular prices, every day. We operate over 3,000 stores through our four segments: in the U.S., Marmaxx (which operates T.J. Maxx and Marshalls) and HomeGoods; TJX Canada (which operates Winners, HomeSense and Marshalls in Canada); and TJX Europe (which operates T.K. Maxx and HomeSense in Europe).

Results of Operations

We reported strong same store sales gains and strong earnings per share growth for the second quarter and first six months of fiscal 2014. These results were obtained over a very strong second quarter last year, which continues several quarters of strong year-over-year second quarter comparisons. We achieved these results in a generally challenging retail environment, focusing on execution and capitalizing on the flexibility of our business model. During the quarter, we also continued to invest in our systems, talent and e-commerce businesses and returned cash to our shareholders. Highlights of our financial performance for the second quarter and six months ended August 3, 2013 include the following:

Same store sales increased 4% in the second quarter of fiscal 2014 over an increase of 7% in the fiscal 2013 second quarter. Same store sales increased 3% in the six-month period ending August 3, 2013 over last year's 8% increase in the six months ended July 28, 2012. The fiscal 2014 increases were driven by an increase in the value of the average ticket (average unit retail) along with an increase in customer traffic.

Net sales increased 8% to $6.4 billion for the fiscal 2014 second quarter and increased 8% to $12.6 billion for the six-month period over last year's comparable periods. At August 3, 2013, stores in operation increased 5% and selling square footage was up 4% compared to the same period in fiscal 2013. We performed well in both apparel and home fashion categories.

Diluted earnings per share for the second quarter of fiscal 2014 were $0.66, up 18% compared to $0.56 in fiscal 2013. Diluted earnings per share for the six-month period ended August 3, 2013 were $1.28, up 15% compared to $1.11 in the same period in fiscal 2013.

Our pre-tax margin (the ratio of pre-tax income to net sales) for the second quarter of fiscal 2014 was 12.0%, a 0.5 percentage point increase from 11.5% for the same period last year. For the six months ended August 3, 2013, our pre-tax margin was 11.9%, a 0.3 percentage point increase from 11.6% for the same period last year.

Our cost of sales ratio for the second quarter of fiscal 2014 was 71.2%, a 0.7 percentage point improvement over the second quarter last year. Our cost of sales ratio for the six-month period ended August 3, 2013 was 71.4%, a 0.5 percentage point improvement over the same period last year. The improvements over last year were primarily due to increased merchandise margins and buying and occupancy expense leverage on same store sales growth.

Our selling, general and administrative expense ratio for the second quarter of fiscal 2014 increased 0.2 percentage points to 16.7%. For the six months ended August 3, 2013, the selling, general and administrative expense ratio increased 0.2 percentage points to 16.6%. The increases over last year were primarily driven by increased marketing spend and the impact of our e-commerce businesses.



Our consolidated average per store inventories, including inventory on hand at our distribution centers, but excluding our e-commerce businesses, were down 5% at the end of the second quarter of fiscal 2014 as compared to the prior year.

During the second quarter of fiscal 2014, we repurchased 6.4 million shares of our common stock at a cost of $325 million. For the six months ended August 3, 2013 we repurchased 12.9 million shares of our common stock at a cost of $625 million. Earnings per share reflect the benefit of our stock repurchase programs. We expect to repurchase a total of approximately $1.3 to $1.4 billion of our common stock under these programs in fiscal 2014.

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 the second quarter ended August 3, 2013 totaled $6.4 billion, an 8% increase over consolidated net sales of $5.9 billion in the fiscal 2013 second quarter. The increase reflected a 5% increase in new store sales and a 4% increase in same store sales, offset by a 1% decrease from the negative impact of foreign currency exchange rates. This increase compares to sales growth of 9% in last year's second quarter, which reflected a 7% increase in same store sales and a 3% increase in new store sales, offset by a 1% decrease from the negative impact of foreign currency exchange rates.

Consolidated net sales for the six months ended August 3, 2013 totaled $12.6 billion, an 8% increase over $11.7 billion in last year's comparable period. The increase reflected a 5% increase in new store sales and a 3% increase in same store sales. Foreign currency exchange had a neutral impact on the fiscal 2014 sales. This compares to sales growth of 10% in the six-month period of fiscal 2013, which reflected an 8% increase in same store sales and a 3% increase in new store sales, offset by a 1% decrease from the negative impact of foreign currency exchange rates.

As of August 3, 2013, our consolidated store count increased 5% and selling square footage increased 4% as compared to the end of the second quarter last year.

The same store sales increases for both the second quarter and six months ended August 3, 2013 were driven by an increase in the value of the average ticket along with an increase in customer traffic. In the U.S., same store sales in most regions were near the consolidated average, with Florida and the West Coast particularly strong. In Europe, same store sales were above the consolidated average and in Canada same store sales were below the consolidated average.

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 and use average ticket to mean the average retail price of the units sold.


The following table sets forth certain information about our consolidated operating results from continued operations as a percentage of net sales:

                                        Percentage of Net Sales                 Percentage of Net Sales
                                         Thirteen Weeks Ended                    Thirteen Weeks Ended
                                            August 3, 2013                           July 28, 2012
Net sales                                                  100.0 %                                 100.0 %

Cost of sales, including
buying and occupancy costs                                  71.2                                    71.9
Selling, general and
administrative expenses                                     16.7                                    16.5
Interest expense, net                                        0.1                                     0.2

Income before provision for
income taxes*                                               12.0 %                                  11.5 %


                                        Percentage of Net Sales                 Percentage of Net Sales
                                        Twenty-Six Weeks Ended                  Twenty-Six Weeks Ended
                                            August 3, 2013                           July 28, 2012
Net sales                                                  100.0 %                                 100.0 %

Cost of sales, including
buying and occupancy costs                                  71.4                                    71.9
Selling, general and
administrative expenses                                     16.6                                    16.4
Interest expense, net                                        0.1                                     0.2

Income before provision for
income taxes*                                               11.9 %                                  11.6 %

* 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 income statement impact of changes in foreign currency exchange rates on merchandise purchases denominated in currencies other than the local currencies of our divisions, principally TJX Europe and TJX Canada. As we have not elected "hedge accounting" for these instruments as defined by U.S. generally accepted accounting principles (GAAP), we record a mark-to-market gain or loss on the derivative 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 paid for. 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 derivatives 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 improved 0.7 percentage points to 71.2% for the second quarter of fiscal 2014 as compared to the same period last year. Cost of sales, including buying and occupancy costs, as a percentage of net sales improved 0.5 percentage points to 71.4% for the six months ended August 3, 2013 as compared to the same period last year. The improvements in this ratio for both fiscal 2014 periods were primarily driven by increased merchandise margins and buying and occupancy expense leverage on same store sales growth. We believe our strong merchandise margins continued in part due to our lean, fast-turning inventory and flow of fresh merchandise.


Selling, general and administrative expenses: Selling, general and administrative expenses, as a percentage of net sales, were 16.7% in the second quarter of fiscal 2014, a 0.2 percentage point increase over last year's ratio. Selling, general and administrative expenses, as a percentage of net sales, increased 0.2 percentage points to 16.6% for the six months ended August 3, 2013 as compared to the same period last year. The increase in our selling, general and administrative expense ratio for both periods was primarily due to increased investments in marketing and the impact of our e-commerce businesses. Additionally, in the second quarter of fiscal 2014 this expense ratio also reflects our contribution to The TJX Foundation.

Interest expense, net: The components of interest expense, net are summarized below:

                               Thirteen Weeks Ended            Twenty-Six Weeks Ended
                             August 3,       July 28,        August 3,         July 28,
    Dollars in thousands       2013            2012            2013              2012
    Interest expense        $    15,111      $  13,062      $    26,905        $  25,397
    Capitalized interest         (3,272 )         (988 )         (6,717 )         (1,731 )
    Interest (income)            (2,920 )       (2,892 )         (5,987 )         (5,657 )

    Interest expense, net   $     8,919      $   9,182      $    14,201        $  18,009

Interest expense for both the second quarter and first six months reflects the interest cost on the $500 million of 2.5% ten year notes. The reduction in net interest expense for the six months ended August 3, 2013 was primarily due to capitalized interest costs on major capital projects not yet placed in service.

Income taxes: The effective income tax rate was 37.9% for the second quarter this year, compared to 38.3% for last year's second quarter. The effective income tax rate for the six months ended August 3, 2013 was 38.0% as compared to 38.4% for last year's comparable period. The decrease in the effective income tax rate for both periods was primarily due to an increase in foreign earnings, which are taxed at lower rates, and the extension of legislation allowing for the U.S. Work Opportunity Tax Credit. The Work Opportunity Tax Credit had expired as of the beginning of last year and was not extended until the fourth quarter of fiscal 2013.

Net income and net income per share: Net income for the second quarter of fiscal 2014 was $479.6 million, or $0.66 per diluted share, versus $421.1 million, or $0.56 per diluted share, in last year's second quarter. Foreign currency had a neutral impact on earnings per share in the second quarter of fiscal 2014 as well as in the second quarter of fiscal 2013. Net income for the six months ended August 3, 2013 was $932.4 million, or $1.28 per diluted share, versus $840.3 million, or $1.11 per diluted share, in the same period last year. The impact of foreign currency exchange rates reduced diluted earnings per share by $0.01 per diluted share in fiscal 2014, compared to a neutral impact in the same period last year.

Our weighted average diluted shares outstanding affect the comparability of earnings per share. Our stock repurchases benefit our earnings per share. During the second quarter of fiscal 2014, we repurchased 6.4 million shares of our common stock at a cost of $325 million. For the first six months of fiscal 2014, we repurchased 12.9 million shares of our common stock at a cost of $625 million.

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). Late in fiscal 2013 we acquired Sierra Trading Post (STP), an off-price internet retailer. The results of STP 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



                                             Thirteen Weeks Ended               Twenty-Six Weeks Ended
                                          August 3,         July 28,          August 3,          July 28,
Dollars in millions                          2013             2012               2013              2012
Net sales                                 $  4,295.3        $ 3,976.1        $    8,431.1        $ 7,865.1
Segment profit                            $    648.0        $   581.4        $    1,282.3        $ 1,186.0
Segment profit as a percentage of net
sales                                           15.1 %           14.6 %              15.2 %           15.1 %
Percent increase in same store sales               4 %              7 %                 2 %              7 %
Stores in operation at end of period
T.J. Maxx                                                                           1,052            1,005
Marshalls                                                                             914              891
Sierra Trading Post                                                                     4               -

Total                                                                               1,970            1,896

Selling square footage at end of
period (in thousands)
T.J. Maxx                                                                          24,187           23,311
Marshalls                                                                          22,561           22,091
Sierra Trading Post                                                                    83               -

Total                                                                              46,831           45,402

Net sales for Marmaxx increased 8% for the second quarter of fiscal 2014 and increased 7% for the six-month period as compared to the same periods last year. Same store sales for Marmaxx were up 4% in the second quarter of fiscal 2014 and up 2% for the first six months of fiscal 2014, on top of a 7% increase for both comparable periods last year.

Same store sales growth at Marmaxx for both the second quarter and six-months ended August 3, 2013 were driven by increases in the value of the average ticket. Geographically, same store sales were generally strong across the U.S., with Florida and the West Coast outperforming the chain average. Our apparel and home fashion categories both performed well.

Segment profit margin increased to 15.1% for the second quarter of fiscal 2014 compared to 14.6% for the same period last year. This improvement reflects an increase in merchandise margin of 0.5 percentage points as well as expense leverage on the strong same store sales growth, particularly in occupancy costs, partially offset by the impact of our e-commerce businesses. Segment margin increased to 15.2% for the six months ended August 3, 2013 compared to 15.1% for the same period last year. The six-month segment margin improvement was due to increased merchandise margins of 0.4 percentage points, partially offset by the impact of our e-commerce businesses.


HomeGoods



                                             Thirteen Weeks Ended                Twenty-Six Weeks Ended
                                         August 3,           July 28,          August 3,          July 28,
Dollars in millions                         2013               2012               2013              2012
Net sales                                $    690.1         $    597.7        $    1,379.7        $ 1,193.4
Segment profit                           $     81.2         $     60.5        $      170.2        $   130.0
Segment profit as a percentage of
net sales                                      11.8 %             10.1 %              12.3 %           10.9 %
Percent increase in same store sales              8 %                9 %                 7 %              9 %
Stores in operation at end of period                                                   430              393
Selling square footage at end of
period (in thousands)                                                                8,492            7,774

HomeGoods net sales increased 15% in the second quarter of fiscal 2014 compared to the same period last year, and 16% for the six months of fiscal 2014 over the same period last year. Same store sales increased 8% for the second quarter and increased 7% for the six months ended August 3, 2013, driven by increases in customer traffic and average ticket, and on top of same store sales increases of 9% in both comparable periods last year.

Segment profit margin increased to 11.8% for the second quarter of fiscal 2014 compared to 10.1% for the same period last year. Segment profit margin for the six months ended August 3, 2013 increased 1.4 percentage points to 12.3%, compared to 10.9% for the same period last year. The growth in segment margin for both the quarter and year-to-date periods was driven by expense leverage on strong same store sales, particularly occupancy and buying costs, along with a slight increase in merchandise margin.

International Segments:

TJX Canada



                                             Thirteen Weeks Ended                Twenty-Six Weeks Ended
                                         August 3,           July 28,          August 3,          July 28,
U.S. Dollars in millions                    2013               2012               2013              2012
Net sales                                $    679.4         $    660.7        $    1,324.9        $ 1,300.9
Segment profit                           $     90.8         $     92.7        $      165.1        $   163.7
Segment profit as a percentage of
net sales                                      13.4 %             14.0 %              12.5 %           12.6 %
Percent increase in same store sales              2 %                5 %                 0 %              6 %
Stores in operation at end of period
Winners                                                                                226              220
HomeSense                                                                               89               87
Marshalls                                                                               22               12

Total                                                                                  337              319

Selling square footage at end of
period (in thousands)
Winners                                                                              5,179            5,076
HomeSense                                                                            1,710            1,682
Marshalls                                                                              551              312

Total                                                                                7,440            7,070

Net sales for TJX Canada increased 3% for the second quarter and increased 2% for the six-month period ended August 3, 2013 compared to the respective periods last year. Currency exchange translation negatively impacted second quarter sales growth by approximately 1 percentage point and negatively impacted six-month sales growth by approximately 2 percentage points, as compared to the respective periods last year. Same store sales increased 2% for the second quarter of fiscal 2014 and were flat for the six months ended August 3, 2013.

Segment profit margin decreased to 13.4% for the second quarter ended August 3, 2013 compared to 14.0% last year and for the six months ended August 3, 2013 segment profit margin decreased slightly to 12.5% compared to 12.6% in the same period last year. The decrease in segment profit margin for the second quarter was driven by a reduction in


merchandise margin as the change in the U.S. currency exchange rate during the second quarter increased our cost of merchandise and put pressure on our mark-on. In addition, the decline in segment margin in both periods reflects expense deleverage on the low single-digit same store sales increase, particularly in investments in talent as TJX Canada grows the Marshalls chain. The mark-to-market adjustment on inventory hedges had a favorable impact on year-over-year comparison of segment margin of 0.2 percentage points in both the second quarter and first six months of fiscal 2014.

TJX Europe



                                             Thirteen Weeks Ended                Twenty-Six Weeks Ended
                                         August 3,           July 28,          August 3,          July 28,
U.S. Dollars in millions                    2013               2012               2013              2012
Net sales                                $    777.6         $    711.1        $    1,496.4        $ 1,384.2
Segment profit                           $     40.5         $     24.7        $       56.9        $    36.5
Segment profit as a percentage of
net sales                                       5.2 %              3.5 %               3.8 %            2.6 %
Percent increase in same store sales              6 %               10 %                 5 %             11 %
Stores in operation at end of period
T.K. Maxx                                                                              355              338
HomeSense                                                                               27               24

Total                                                                                  382              362

Selling square footage at end of
period (in thousands)
T.K. Maxx                                                                            8,090            7,741
HomeSense                                                                              447              402

Total                                                                                8,537            8,143

Net sales for TJX Europe increased 9% for the second quarter of fiscal 2014 and 8% for the six months ended August 3, 2013, compared to the same periods last year. Currency exchange translation negatively impacted second quarter sales growth by approximately 1 percentage point and negatively impacted six-month . . .

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