The TJX Companies, Inc. (NYSE:TJX) Q2 2024 Earnings Call Transcript

The TJX Companies, Inc. (NYSE:TJX) Q2 2024 Earnings Call Transcript August 16, 2023

Operator: Ladies and gentlemen, thank you for standing by. Welcome to The TJX Companies Second Quarter Fiscal 2024 Financial Results Conference Call. [Operator Instructions] Call is being recorded, August 16, 2023. I would like to turn the conference call over to Mr. Ernie Herrman, Chief Executive Officer and President of The TJX Companies, Inc. Please go ahead, sir.

Ernie Herrman : Thanks, Sheila. Before we begin, Deb has some opening comments.

Debra McConnell : Thank you, Ernie, and good morning. The forward-looking statements we make today about the company’s results and plans are subject to risks and uncertainties that could cause the actual results and the implementation of the company’s plans to vary materially. These risks are discussed in the company’s SEC filings, including, without limitation, Form 10-K filed March 29, 2023. Further, these comments and the Q&A that follows are copyrighted today by The TJX Companies, Inc. Any recording, retransmission, reproduction or other use of the same for profit or otherwise without prior consent of TJX is prohibited and a violation of United States copyright and other laws. Additionally, while we have approved the publishing of a transcript of this call by a third party, we take no responsibility for inaccuracies that may appear in that transcript.

We have detailed the impact of foreign exchange on our consolidated results and our international divisions in today’s press release and the Investors section of our website, tjx.com. Reconciliations of other non-GAAP measures we discuss today to GAAP measures are also posted on our website, tjx.com, in the Investors section. Thank you. And now I’ll turn it back over to Ernie.

Ernie Herrman : Good morning. Joining me and Deb on the call is John Klinger. I’d like to begin today by once again recognizing our global associates for their dedication to TJX. It is their hard work that brings our business to life every day for our customers. I want to extend a special thank you to our store, distribution and fulfillment center associates for their continued very hard work and commitment to our company. I want to comment on the wildfires in Maui. We are grateful that our associates in Maui and the rest of Hawaii are safe. And at the same time, are deeply saddened by the devastation and loss. To help with the relief efforts on the ground, we have made a donation to the Maui Food Bank and our local teams are donating essential supplies.

Now to our business update and second quarter results. I am extremely pleased with our second quarter performance as sales, profitability and earnings per share were all well above our plans. I want to highlight that customer traffic drove our 6% overall comp sales increase, and it increased at all of our divisions. As a reminder, for us, customer traffic represents the number of customer transactions. I am particularly pleased with the performance of our largest division, Marmaxx, which delivered high single-digit increases in both comp sales and customer traffic. Our overall apparel and accessories sales were very strong. And our overall home sales significantly improved and returned to positive comp sales growth. Clearly, our terrific mix of branded, fashionable merchandise and great values resonated with shoppers when they visited our stores.

In terms of profitability, both pre-tax profit margin and earnings per share increased significantly versus last year. Importantly, merchandise margin continues to be very healthy with our above-plan sales and profitability performance in the second quarter, we are raising our full year outlook for comp sales, pre-tax profit margin and earnings per share. John will talk to this in a moment. We are very pleased with the continued momentum of our business and the excellent execution of our teams across the company. They have been laser-focused on driving sales and traffic and improving profitability. The third quarter is off to a very strong start, and we feel great about our plans for the remainder of the year. The marketplace is loaded with outstanding buying opportunities and we are confident that we will continue to offer a terrific mix of brands and an outstanding assortment of gifts to our shoppers during the fall and holiday selling seasons.

We are convinced that our differentiated treasure hunt shopping experience and excellent values will continue to serve us well and allow us to capture additional market share across our geographies for many years to come. Before I continue, I’ll turn the call over to John to cover our second quarter financial results in more detail.

John Klinger : Thanks, Ernie, and good morning, everyone. I also want to add my gratitude to all of our global associates for their continued hard work. I’ll start with some additional details on the second quarter. As Ernie mentioned, our overall comp store sales well above the high end of our plan and were entirely driven by an increase in customer traffic. We were very pleased to see that both comp store sales growth and customer traffic improved sequentially each month of the quarter. As we expected, average ticket was down due to merchandise mix, the impact of the lower ticket on sales was largely offset by an increase in units with shoppers putting more items into their cart. This is in line with what we have seen in our business historically.

Our overall apparel business, including accessories, continued its momentum with high single-digit comp increase. Overall, home comp sales were up mid-single digits. TJX net sales grew to $12.8 billion, an 8% increase versus the second quarter of fiscal ’23. Second quarter consolidated pre-tax margin of 10.4% was up 120 basis points versus last year. This was well above our plan due to a bigger benefit than we expected from lower freight costs as well as expense leverage on our above-plan sales. Gross margin was up 260 basis points. This increase was driven by a higher merchandise margin due to the significant benefit from lower freight costs. This year-over-year freight benefit was primarily driven by lower rates as well as a benefit from our freight initiatives and the remainder of our year — in the remainder of our year-end accrual adjustment.

Gross margin also benefited from our inventory and fuel hedges, and expense leverage on a 6% comp increase. Our year-over-year shrink accrual and supply chain investments were headwinds to gross margin in the second quarter. Second quarter SG&A increased 170 basis points due to a combination of factors. These include higher incentive accruals and due to above planned results, a reserve related to a German government COVID program receivable, incremental store wage and payroll costs and a contribution to The TJX Foundation. Net interest income benefited pre-tax profit margin by 40 basis points versus last year. Lastly, we were very pleased that earnings per share of $0.85 were up 23% versus last year and also well above our expectations. Now moving to our second quarter divisional performance.

At Marmaxx, second quarter comp store sales increased an outstanding 8%, entirely driven by customer traffic. Marmaxx’s apparel and home categories both saw high single-digit comp increases. Further, it was great to see comp sales and traffic increases accelerate every month throughout the quarter. Comp sales were very strong across each of Marmaxx’s region. We also saw consistent performance across low, mid- and high-income store demographics. Marmaxx’s second quarter segment profit margin was 13.7%, up 80 basis points versus last year, primarily driven by a benefit from lower freight costs as well as expense leverage on the strong sales and strong mark on. We continue to be pleased with the momentum at Marmaxx and are excited about the initiatives we have planned to help us drive sales and traffic for the remainder of the year and beyond.

At HomeGoods, we were very pleased to see second quarter comp store sales increased 4% and a significant increase in our end customer traffic. HomeGoods comp sales and traffic increases also accelerated every month throughout the quarter. I also want to note that our full year plans assume that HomeGoods will continue to comp positively for the second half of the year. HomeGoods second quarter segment profit margin was 8.7%, up 600 basis points and entirely due to benefit — a benefit from lower freight costs. We remain confident in the long-term opportunities we see to grow both our HomeGoods and HomeSense banners and capture additional share of the U.S. home market. At Canada, comp store sales were up 1% and customer traffic increased. Segment profit margin was 15%.

As the only major brick-and-mortar off-price retailer in Canada, we have a very loyal shopper base in many value-conscious shop customers. We are confident that we are set up well to continue growing our footprint across Canada and attract more customers to our banners. At TJX International, comp store sales increased 3% and customer traffic was also up. It was great to see comp sales and traffic increases at both our European and Australian businesses. During the quarter, we also launched online shopping in Germany and Austria. Segment profit margin for TJX International on a constant currency basis was 2.1%, which was negatively impacted by over 300 basis points due to the reserve related to the German receivable I spoke to earlier. We are very happy with our overall performance in this division and are confident we can continue to grow our banners in our existing countries and improve profitability.

As to e-commerce, overall, it remains a very small percentage of our business. We continue to add new merchandise to our sites so that shoppers can see something new every time they visit. Moving to inventory. Balance sheet inventory was down 7% versus the second quarter of fiscal ’23. Similar to the first quarter, the year-over-year decline was primarily due to the elevated levels we saw last year from the early arrival of merchandise and a larger in-transit balance as a result of supply chain delays at that time. We feel great about inventory levels in the outstanding buying environment. As Ernie said, the marketplace is loaded with merchandise, and we are well positioned to flow fresh assortments to our stores and online this fall and holiday season.

I’ll finish with our liquidity and shareholder distributions. For the second quarter, we generated $1.3 billion in operating cash flow and ended the quarter with $4.6 billion in cash. In the second quarter, we paid down $500 million of maturing debt and returned $932 million to shareholders through our buyback and dividend programs. Now I’ll turn it back to Ernie.

Ernie Herrman : Thanks, John. I will start by highlighting the key strengths that have allowed TJX to grow successfully through many kinds of retail and economic cycles for nearly five decades. I’m convinced that these core strengths set us apart from many other retailers and will continue to be a tremendous advantage going forward. First is our value leadership. Our goal has always been to offer great value on every item, every day to every customer. At TJX, value is more than just offering consumers a great price. For us, value also means delivering desirable brands, fashionable merchandise and great quality to our shoppers. We believe our value proposition is one of the best in all of retail, and will continue to attract consumers to our retail banners all around the world.

Second, we have developed one of the most flexible brick-and-mortar retail models in the world. The flexibility of our close to need opportunistic buying allows our merchants to quickly react to the hottest trends in the marketplace and adapt to changing consumer preferences. The flexibility of our supply chain and store formats allows us to ship to our stores multiple times a week, merchandise stores individually and flex our floor space to support our ever-changing assortment. Third, we successfully operate stores across a wide customer demographic. We want to sell to everyone, and we aim to appeal to all value-conscious shoppers and inspire and excite them every time they visit us. The flexibility of our business allows us to curate an assortment of good, better and best merchandise across our stores, and to appeal to shoppers across all income demographic areas.

Next, we have built an expansive vendor universe over many decades and believe we have some of the best relationships in all of retail. This vast network of changing vendors, which numbered approximately 21,000 over the last year, is the reason why we are so confident that there will always be more than enough inventory in the marketplace for us to buy. Our best-in-class buying organization of 1,200-plus merchants does a terrific job selecting the right mix of categories and brands for the right stores to create our fun treasure hunt shopping experience. We also see the globalness of our business as a tremendous strength. We have built a highly integrated global infrastructure, supply chain and buying organization that we believe would be difficult to replicate.

This allows us to leverage our global presence to create a differentiated treasure hunt shopping experience in each country we operate in. Last, but certainly not least, is our talent. Teaching and talent development have always been priorities at TJX. Through our organization and management teams, we have deep decades-long off-price experience in the U.S. and internationally. I believe that our global talent base will continue to be a tremendous advantage as we continue our growth around the world. I truly believe that the combination of these key strengths and the execution of them, is why we are one of the strongest companies in all of retail and have a very long history of successful performance. Now I’ll briefly highlight the opportunities we see to keep driving sales and traffic in the second half of the year.

First, as I said earlier, we are seeing phenomenal product availability across all categories and a wide range of brands. This gives us great confidence that we can bring consumers the right assortment at the right values throughout the fall and holiday season. Second, we feel great about our store merchandising initiatives that we have planned. We are particularly excited about our gifting initiatives as we continue to focus on being a destination for gifts throughout the year. With our rapidly changing assortment, we believe shoppers will be inspired to visit us frequently to see what’s new. And third, we have very strong marketing campaigns planned. Each of our brands will continue to reinforce our value leadership position through a combination of channels, including digital, television and social media.

We believe our compelling campaigns will capture the attention of new consumers while keeping us top of mind with our existing customers. Moving to profitability. We are extremely pleased that the high end of our adjusted pre-tax profit margin plan for fiscal 2024 now exceeds our previously announced target of 10.6% for fiscal 2025. This is a testament to the hard work and commitment of the entire organization. I want to assure you that we did not be — that we will not be complacent and we’ll strive to continue improving our profitability over the long term. Before I close, I’d also like to reinforce our deep commitment to acting as a responsible corporate citizen, and I am proud of the work our teams across the globe continue to do. We expect to publish our annual global corporate responsibility report this fall.

And I hope you’ll take some time to look at our website to learn more about what we are doing. Summing up, we are very pleased with the momentum we are seeing across the business and the very strong start to the third quarter. We’ve had excellent performance in the first half of the year, and our teams have put us in a great position for continued success for the remainder of the year. I’m convinced that the characteristics of our flexible off-price business model and the operating expertise within our organization are unmatched. I am so proud of our culture, which I believe is a major differentiator and a key component of our success. I am extremely confident about the future of TJX and I’m excited about the opportunities we see to capture additional market share and improve profitability in the long term.

Now I’ll turn the call back to John to cover our full year and third quarter guidance, and then we’ll open it up for questions.

John Klinger : Thanks, again, Ernie. Before I start, I want to remind you that fiscal ’24 calendar includes a 53rd week. Also, as we stated in our press release this morning, we have offered eligible former TJX associates who have not yet commenced their pension benefit, an opportunity to receive a lump sum payout of their vested pension benefit. We anticipate that the impact of this pension payout offer, primarily a noncash settlement charge, could negatively impact fiscal ’24 EPS by approximately $0.01 to $0.02, but could be higher or lower depending on participation rates and other factors. To be clear, any of the guidance we are providing today does not include the potential impact of this pension payout offer. We expect to exclude the impact of this potential settlement charge from our adjusted pre-tax profit margin and EPS results in the third quarter.

Now to our full year guidance. We are now planning an overall comp store sales increase of 3% to 4%. As a reminder, our comp guidance excludes our expected sales from the 53rd week. For the full year, we now expect consolidated sales to be in the range of $53.5 billion to $53.8 billion. This guidance includes approximately $800 million of additional revenue expected from the 53rd week. As Ernie said, we’re increasing our full year profitability guidance. We’re now planning full year pre-tax profit margin to be in the range of 10.7% to 10.8%, excluding an expected benefit of approximately 10 basis points from the 53rd week, we now expect adjusted pre-tax profit margin to be in the range of 10.6% to 10.7%. On a 52-week basis, this would represent an increase of 90 basis points to 100 basis points versus fiscal ’23’s adjusted pre-tax profit margin of 9.7%.

Regarding shrink, we continue to be laser-focused on our in-store initiatives while making sure we maintain an enjoyable shopping experience for our customers. At this time, our shrink indicators are leading us to believe that we can continue to plan shrink flat in fiscal ’24. As a reminder, we will not know the full effect of our shrink initiatives or the accuracy of our indicators until we do a full annual inventory count at the end of the year. Moving on, we’re planning full year adjusted gross margin on a 52-week basis in the range of 29.4% to 29.5%, a 180 basis points to 190 basis point increase versus last year. We expect virtually all of this increase to be driven by a benefit from lower freight costs. We are also planning a benefit from merchandise margin.

This guidance also assumes a continuation of headwinds from our supply chain investments and incremental distribution center wages. We are very pleased with the level of freight recapture we are seeing given the significant pressure we saw over the prior three years. Our expected freight benefit this year includes a pull forward of most of the benefit we were expecting in fiscal ’25. We remain laser-focused and looking at ways to reduce our freight costs. Moving on, we’re expecting full year SG&A on a 52-week basis to be approximately 19.1%, a 120 basis point increase versus last year. This expected increase is primarily driven by incremental store wage and payroll costs and higher incentive accruals. For modeling purposes, we’re currently assuming a full year tax rate of 26%, net interest income on a 52-week basis of about $157 million, and a weighted average share count of approximately 1.16 billion shares.

As a result of these assumptions, we’re increasing our full year earnings per share guidance to a range of $3.66 to $3.72. Excluding an expected benefit of approximately $0.10 from the 53rd week, we expect adjusted earnings per share to be in the range of $3.56 to $3.62. On a 52-week basis, this would represent an increase of 10 — excuse me, 14% to 16% versus fiscal ’23’s adjusted earnings per share of $3.11. Lastly, we now expect to open about 125 net new stores in fiscal 2024, an increase of approximately 3%. This reflects a shift of some of our planned fall openings into next year. Moving to the third quarter. We’re planning overall comp store sales growth to be up 3% to 4%. Similar to the second quarter, we expect the comp increase to be driven by customer traffic.

We’re planning for average ticket to be down less than it was in the second quarter, again, due to merchandise mix. We’re also expecting an increase in units sold. We expect third quarter consolidated sales to be in the range of $12.9 billion to $13.1 billion, a 6% to 7% increase over the prior year. We’re planning third quarter pre-tax profit margin to be in the range of 11.3% to 11.5%. We’re expecting third quarter gross margin in the range of 30.3% to 30.5%, up 120 basis points to 140 basis points versus last year. We’re planning a significant benefit from lower freight costs partially offset by headwinds from supply chain investments, inventory cap and our year-over-year shrink accrual. We’re planning third quarter SG&A of approximately 19.3%, up 130 basis points versus last year.

This expected increase is driven by incremental store wage and payroll costs and higher incentive accruals. For modeling purposes, we’re currently assuming a third quarter tax rate of 25.3% and net interest income of about $40 million and a weighted average share count of approximately 1.15 billion shares. We expect third quarter earnings per share to be in the range of $0.95 to $0.98, up 10% to 14% versus last year’s adjusted $0.86. For the fourth quarter, on a 13-week basis, we’re planning comp store sales to be up 3% to 4%, adjusted pre-tax margin in the range of 10.3% to 10.5% and adjusted earnings per share in the range of $1 to $1.03. We will provide more detailed guidance for the fourth quarter on our third quarter earnings call. Before I close, I want to echo Ernie’s comments that we continue to see opportunities to further improve profitability over the long term.

As always, the best way for us to drive profitability is with outsized sales. We continue to see opportunities to grow sales and traffic and capture additional market share. Further, we remain laser-focused on being even better on buying and retailing the goods and driving merchandise margin. At the same time, we expect to continue to face headwinds from incremental wage costs and supply chain investments. As usual, we’ll give you a detailed annual guidance beyond this year on our February — on our call in February. In closing, I want to reiterate that we are very pleased with our — with the execution of our teams across the company and are confident in our sales and profitability plans. Further, we have a strong balance sheet and are in an excellent financial position to simultaneously invest in the growth of our business and return significant cash to our shareholders.

Now we are happy to take your questions. As we do every quarter, we are going to ask that you please limit your questions to one per person, so we can keep the call on schedule and answer as many questions as we can. Thanks, and now we’ll open it up for questions.

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Q&A Session

Operator: [Operator Instructions] Our first question will come from Matthew Boss.

Matthew Boss : Congrats on a really nice quarter. So Ernie, you cited the third quarter off to a very strong start and tremendous off-price buying opportunities. Could you just elaborate on how traffic and demand progressed over the course of the second quarter, maybe what you’ve seen in August, across both apparel and home? And then, John, could you just elaborate on the improved bottom line full year outlook as we think about AUR and freight relative to shrink and wages?

Ernie Herrman : Sure. Matt, good question. Obviously, looking at as the indicator I gave when I said very strong for the Q3 start, which is coming out of Q2 where each month got a little stronger. So we were sequentially stronger throughout Q2 as the quarter went on. And that momentum has now continued into Q3. And I think you were asking about any differentiator between apparel or home, I would tell you when it well. When you have comps like this and you have Marmaxx running such a high comp as they did, as you can imagine, we are we are experiencing health across just about every category in the store. And in fact, the parallel across the board has been very healthy as has the home area. And I’m talking within Marmaxx because you’ve seen that HomeGoods from — remember, Q1 in HomeGoods, we were down 7%, and now we were up 4% in HomeGoods for Q2, which is really a terrific.

We had signaled to all of you that we thought there’d be incremental improvement. Clearly, it was even exceeded our expectations. And we are feeling very good about that business also as we go into Q3. So I hope that answered your question.

John Klinger : And Matt, just to answer the question you had for me. I mean, as far as the back half and full year guidance. We continue to see freight opportunity in our initiatives, obviously, increasing our — the confidence we have to increase our top line sales gives us the confidence to increase our back half guidance. As far as AUR Look, as far as pricing and merchandise margin, they were in line with our expectations. In the buying environment, it’s fantastic. As Ernie said, we continue to see opportunities to take price in certain areas and merchandise margin improvement. We’re really pleased at how our strategies this quarter drove our top line and again, gave us the confidence to increase our full year comp.

Ernie Herrman : John, as I was touching on it in your question, as we talked — remember, there was a little bit confusion on the last call, and we talked about how our ticket might be down slightly and pretty much it was on our expectations, right in line. And as a result, we drove our top line as we had explained to you in some of our meetings about you can’t judge the average ticket and its sales relationship because some of the categories that we were growing in the mix of departments create multiple purchases. And so we’re pleased to see it all really went along the lines of what we had discussed back at the end of Q1.

Operator: Our next question comes from Lorraine Hutchinson.

Lorraine Hutchinson : I just wanted to confirm what I think you just said, which was the like-for-like price increases are working and the ticket decline was just mix. And then my question is if you think you’re seeing any signs of a trade-down customer coming into any of your banners?