The TJX Companies, Inc. (NYSE:TJX) Q3 2024 Earnings Call Transcript

The TJX Companies, Inc. (NYSE:TJX) Q3 2024 Earnings Call Transcript November 15, 2023

The TJX Companies, Inc. beats earnings expectations. Reported EPS is $1.03, expectations were $0.97.

Operator: Ladies and gentlemen, thank you for standing by. And welcome to The TJX Companies Third Quarter Fiscal 2024 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded as of today November 15, 2023. I would now like to turn the conference over to Mr. Ernie Herrman, Chief Executive Officer and President of The TJX Companies Incorporated. Please go ahead, sir.

Ernie Herrman: Thanks, Ivy. 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, the 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. I want to start by recognizing our global associates for their continued hard work and dedication to TJX. Again, I want to give special recognition to our store, distribution, and fulfillment center associates for the commitment to our company. Now, to our business update and third quarter results. I am extremely pleased with our third quarter performance as sales, profitability, and earnings per share all exceeded our expectations. Our 6% overall comp sales increase was entirely driven by customer traffic, which was up at all of our divisions. Marmaxx, our largest division, continued its strong momentum by once again delivering terrific increases in both comp sales and customer traffic.

In the third quarter, our apparel sales remained very strong and sales for overall home were outstanding, accelerating sequentially versus the second quarter, particularly at HomeGoods. We also saw comp sales and traffic increases at our Canadian and International divisions. Importantly, overall merchandise margin remains very healthy. Our excellent third quarter results are a testament to the strong execution of our teams across the Company and their continued focus on growing both, our top and bottom lines. With our above-plan results in the third quarter, we are raising our full year outlook for comp sales and earnings per share. John will talk to this in a moment. The fourth quarter is off to a strong start and we continue to see outstanding availability of merchandise across a wide range of brands in the marketplace.

This gives us great confidence that we can keep flowing a fresh assortment to our stores and online throughout the holiday season and beyond. Longer term, I am convinced that the flexibility of our business model, our wide demographic reach and our differentiated treasure hunt shopping experience will continue to serve us well and allow us to keep growing successfully in the United States and internationally. Okay. Before I continue, I’ll turn the call over to John to cover our third 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 third quarter. As Ernie mentioned, our overall comp store sales increased 6%, well above the high-end of our plan and were entirely driven by an increase in customer traffic. We saw continued momentum with our apparel comp sales, which includes accessories with a mid-single-digit increase. Overall, home comp sales accelerated and were up high single digits. TJX net sales grew to $13.3 billion, a 9% increase versus the third quarter of fiscal ‘23. The third quarter consolidated pre-tax margin of 12% was up 80 basis points versus last year.

Our pre-tax profit margin came in above our plan, primarily due to expense leverage on our stronger than expected sales and a benefit of approximately 40 basis points from the timing of expenses. As we stated in our press release this morning, we expect this benefit from the timing of expenses will reverse out in the fourth quarter. Third quarter pre-tax profit margin was negatively impacted by approximately 30 basis points of cost from the closing of our HomeGoods online business which was not contemplated in our previous guidance. All the costs associated with the closing of our HomeGoods’ e-commerce business are reflected in our Q3 results, and there are no further write-downs expected going forward. Third quarter gross margin was up 200 basis points versus last year.

This increase was driven by a higher merchandise margin due to the significant benefit from lower freight costs. Gross margin also benefited from expense leverage on the 6% comp sales increase. Supply chain investments and our year-over-year shrink accrual were headwinds to gross margin in the third quarter. Third quarter SG&A increased 140 basis points, primarily due to incremental store wage and payroll costs, higher incentive accruals due to above-plan results and approximately 30 basis points of cost related to the closing of our HomeGoods online business. Net interest income benefited pre-tax profit margin by 30 basis points versus last year. Lastly, we were very pleased that diluted earnings per share of $1.03 were also above our expectations and up 20% versus last year’s adjusted $0.86.

This includes an approximately $0.03 negative impact due to the closing of our HomeGoods online business which was not contemplated in our previous guidance. This also includes approximately $0.03 of unplanned benefit from the timing of expenses that we expect will reverse out in the fourth quarter. Moving to our third quarter divisional performance. At Marmaxx third quarter comp store sales increased a very strong 7% entirely driven by customer traffic. Marmaxx’s apparel and home categories both saw significant comp sales increases. Further, comp sales increases were very consistent across low, mid, and high income demographic areas and was strong across all regions. Marmaxx’s third quarter segment profit margin was 14%, up 50 basis points versus last year.

This was driven by a benefit from lower freight costs as well as expense leverage on the strong sales, partially offset by incremental store wage and payroll costs and higher incentive accruals. We are convinced that T.J. Maxx and Marshalls will continue to be gift giving destinations this holiday season. Long-term, we remain confident in our ability to capture additional market share in the U.S. At HomeGoods, third quarter comp store sales accelerated to an outstanding 9% increase, entirely driven by customer traffic. Comp performance was very strong across each region in the U.S. and across stores in different income demographic areas. We were very pleased to see HomeGoods third quarter segment profit margin return to double-digits, increasing 140 basis points to 10.3%.

This increase was due to a benefit from lower freight costs and expense leverage on stronger sales, partially offset by costs related to closing our HomeGoods online business. With more than 900 stores today, we continue to see a significant opportunity to open up more HomeGoods and Homesense stores around the country. We’re excited about our market share opportunities and bringing our eclectic home assortment and great values to even more shoppers. At TJX Canada, comp store sales growth was 3% and was also driven by an increase in customer traffic. Segment profit margin on a constant currency basis was 17%, up 120 basis points. We have a very loyal shopper base in Canada and are convinced that we can capture additional market share through all three of our Canadian banners.

At TJX International, comp store sales were up 1% and customer traffic was up. Comp sales and traffic increased in both Europe and Australia. In Europe, we were pleased with our performance given the high inflation impacting customer discretionary spend in the unseasonably warm weather. Segment profit margin for TJX International on a constant currency basis was 5.3%, down 140 basis points. We are confident that we can keep growing our footprint across our existing European countries in Australia and improve the overall profitability of this division. As to e-commerce, overall, it’s a very small percentage of our business and remains complementary to our very successful brick-and-mortar business. As to homegoods.com online business, when we looked at our long-term projections, we did not see a path to profitability over the long term like we do for our other banners.

In terms of our other e-commerce sites, we were very pleased with their sales trends in the third quarter. Moving to inventory. Balance sheet inventory was essentially flat versus the third quarter of fiscal ‘23. We feel great about our inventory levels and the outstanding availability in the marketplace. We are very — we are well positioned to flow fresh assortments to our stores and online this holiday season. I’ll finish with our liquidity and shareholder distributions. For the third quarter, we generated $1.2 billion in operating cash flow and ended the quarter with $4.3 billion in cash. In the third quarter, we returned $1 billion to shareholders through our buyback and dividend programs. Now, I’ll turn it back to Ernie.

Ernie Herrman: All right. Thanks, John. Now, I’d like to highlight the key opportunities we see to keep driving sales and traffic in the fourth quarter. First, as always, offering outstanding value is our top priority for the holiday selling season, especially in an environment where consumers’ wallets are stretched. The marketplace continues to be loaded with quality merchandise and we are set up extremely well to offer a wide range of good, better and best brands to consumers. Second, we believe our strongly positioned — we are strongly positioned to be a top destination for gifts this holiday season. Our buyers have done a terrific job selecting the best merchandise available for our global vendor base to surprise — from our global vendor base, to surprise and excite our customers.

We are confident that shoppers will find an eclectic assortment of guests to choose from for everyone on their list. In addition, we will remain focused on being a gifting destination throughout the year. Next, we will be following fresh product to our stores and online multiple times a week throughout the holiday season, which we believe differentiates us from many other major retailers. With our ever-changing mix of merchandise, shoppers can see something new every time they visit. Further, we feel great about our plans to transition our stores post-holiday and offer consumers the categories and trends they want to start the year. Lastly, we feel great about our holiday marketing campaigns across all of our brands, which launched earlier this month.

Each of our brands are emphasizing our value leadership and our great assortment of quality gifts for the whole family. We believe we are set up very well to be top of mind for consumers and drive shoppers to our stores this holiday season. Additionally, we feel great about our in-store shopping experience as our customer satisfaction scores remain very strong. Moving on, I’d like to spend a moment and list off the key characteristics of TJX that give us confidence that we can continue our successful growth around the world for many years to come. First, we are the largest brick-and-mortar off-price retailer in the world. We leverage our global infrastructure and share best practices across all of our divisions so that we can deliver the best merchandise values and shopping experience to our customers.

Second, we have one of the most flexible business models in retail. This allows us to buy close to need and quickly adjust our store assortment to meet changing consumer preferences and offer the hottest trends. Third, we successfully operate stores across a very wide demographic and we curate our store mix to appeal to shoppers across all income demographics. Importantly, we continue to attract an outsized number of Gen Z and millennial shoppers to our stores, which we believe bodes well for the future. Next, we source from an ever-changing universe of approximately 21,000 vendors in more than 100 countries. As a growing retailer with almost 5,000 stores, we believe many vendors want to work with TJX because we offer them a very attractive way to grow their business.

All of this gives us great confidence that there will be plenty of quality branded merchandise available for us. Fifth, we believe our best-in-class buying organization is a tremendous advantage. Many of our more than 1,300 buyers have multiple decades of off-price buying experience, which we believe has allowed us to establish some of the best mutually beneficial vendor relationships and all of retail. Next, we continue to have a significant opportunity to grow our global store base. Long term, we see the potential to open an additional 1,300-plus stores with just our current banners in just our current countries. Lastly, but most important is our talent. Throughout TJX, our management teams have deep decades-long off-price expertise in the U.S. and internationally, which we believe is unmatched.

Additionally, we are laser-focused on teaching and training to develop the next generation of leaders for our company. Finally, I am so proud of our culture, which I believe is a major differentiator and another key component of our success. We believe that the combination of all these characteristics is why we have such a long history of successful growth in many types of economic and retail environments. We are convinced that these aspects of our business are a tremendous advantage and will allow us to continue offering shoppers inspiring merchandise, outstanding value, and an exciting treasure hunt shopping experience every day. Turning to corporate responsibility. I am pleased to share with you that we recently published our 2023 Global Corporate Responsibility Report.

The report summarizes our fiscal 2023 initiatives and progress within the four areas we focus on: workplace, communities, environmental sustainability, and responsible business. We are proud to continue to make progress in our programs and initiatives, and we aim to provide our stakeholders with relevant information through our report and website. I’m grateful to our teams around the globe for the work that they do to support our global priorities. As always, we invite you to visit tjx.com to read our full report and our updates throughout the year. Summing up, we were very pleased to deliver another quarter of strong sales and profitability. The fourth quarter is off to a strong start, and we are excited about the initiatives we have planned to drive sales and traffic this holiday season.

Going forward, I want to assure you that we are laser-focused on further improving the profitability of TJX over the long term. Further, I am convinced that the key characteristics of our business have set us up extremely well to take advantage of the market share opportunities we see ahead in the United States and internationally. Now, I’ll turn the call back to John to cover our fourth quarter and full year guidance, and then we’ll go on to open it up for questions.

John Klinger: Thanks again, Ernie. Before I start, I want to remind you that our fiscal ‘24 calendar includes an extra week in the fourth quarter. Now, starting with our fourth quarter guidance. We will continue to expect overall comp store sales growth to be up 3% to 4%. As a reminder, our comp guidance for the fourth quarter excludes our expected sales from the extra week in the quarter. For the fourth quarter, we expect consolidated sales to be in the range of $15.9 billion to $16.1 billion, which includes approximately $800 million of revenue expected from the extra week. We now expect fourth quarter pretax profit margin to be in the range of 10.4% to 10.6%. Excluding an expected benefit of approximately 40 basis points from the extra week, we expect adjusted pretax profit margin to be in the range of 10.0% to 10.2%.

On a 13-week basis, this would represent an increase of 80 to 100 basis points versus last year’s pretax profit margin of 9.2%. The decrease in the fourth quarter pretax profit margin guidance is due to the expected reversal of the approximately 40 basis-point benefit we saw in the third quarter from the timing of expenses. Next, we expect fourth quarter gross margin on a 13-week basis to be in the range of 28.2% to 28.4%, up 210 to 230 basis points versus last year. We’re planning a significant benefit from lower freight costs as well as a benefit from our year-over-year shrink accrual, partially offset by headwinds from our ongoing supply chain investments. On a 13-week basis, we’re planning fourth quarter SG&A to be approximately 18.5%, up 150 basis points 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 fourth quarter tax rate of 26%, net interest income on a 13-week basis of about $49 million, and a weighted average share count of approximately 1.15 billion shares. As a result of these assumptions, we now expect fourth quarter earnings per share to be in the range of $1.07 to $1.10. Excluding an expected benefit of approximately $0.10 from the extra week, we expect fourth quarter adjusted earnings per share to be in the range of $0.97 to $1. On a 13-week basis, this will represent an increase of 9% to 12% versus last year’s earnings per share of $0.89. I want to be clear that our assumptions for comp sales, pretax profit margin and earnings per share for the fourth quarter are unchanged versus our previous guidance.

The decrease in the fourth quarter pretax profit margin and earnings per share guidance is due to the expected reversal of the approximately 40 basis points and $0.03 benefit from the timing of expenses that we saw in the third quarter. Now, to the full year. We are now expecting overall comp store sales increase of 4% to 5%. 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 $53.7 million to $53.9 billion, which includes approximately $800 million of revenue expected from the 53rd week. We expect full year pretax profit margin to be approximately 10.8%. Excluding an expected benefit of approximately 10 basis points from the 53rd week, we expect adjusted pretax profit margin to be approximately 10.7%.

On a 52-week basis, this would represent an increase of 100 basis points versus fiscal ‘23 pretax profit margin of 9.7%. Regarding shrink, our indicators are still leading us to believe that we can continue to plan shrink flat for 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 in January. Moving to full year adjusted gross margin on a 52-week basis, we now expect it to be approximately 29.6%, a 200 basis-point increase versus last year. We expect virtually all of this increase to be driven by a benefit from lower freight costs. This guidance also assumes a continuation of headwinds from our supply chain investments. We are very pleased with the level of freight recapture we’ve seen so far this year and remain focused on looking for ways to reduce our freight costs going forward.

For the full year, adjusted SG&A on a 52-week basis, we are now expecting it to be approximately 19.2%, a 130 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 25.7%, net interest income on a 52-week basis of about $165 million, and a weighted average share count of approximately 1.16 billion shares. As a result of our above planned third quarter earnings performance, we are increasing our full year earnings per share guidance to a range of $3.71 to $3.74. Excluding an expected benefit of approximately $0.10 from the 53rd week, we expect adjusted earnings per share to be in the range of $3.61 to $3.64.

On a 52-week basis, this would represent an increase of 16% to 17% versus fiscal ‘23’s adjusted earnings per share of $3.11. It’s important to understand that we did not flow through the entire third quarter earnings per share beat to the fourth quarter because of the $0.03 of costs related to closing of the e-commerce business. In closing, I want to reiterate that we are very pleased with the execution of our teams across the company in the third quarter and are confident in our plans for the fourth quarter. Long term, I want to reiterate that we will not be complacent when it comes to looking at ways to improve our profitability. We have a very strong balance sheet and are in an excellent financial position to invest in the growth of our business and simultaneously return significant cash to our shareholders.

Now, we are happy to take your questions. As we do every quarter, we’re 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 comes from the line of Lorraine from Bank of America. Please go ahead.

Lorraine Hutchinson: Your gross margins are now trending nicely above pre-COVID levels. You just said you won’t be complacent about finding opportunities for margin expansion. So, can you talk about the two or three factors that you’re most excited about to expand your gross margin in the coming years?

John Klinger: Yes. I mean, the top thing is continuing to drive our top line sales is important. And where we see opportunities as other retailers increase their average retails, we can hold our 20% to 60% value gap and raise ours as well.

Ernie Herrman: Yes. Lorraine, it’s obviously top of mind for all of our merchant teams in terms of how we’re retailing the goods and managing our inventory flow. And like anything else, those teams have — just continuing to get better and better in terms of how we flow the merchandise. And one reason our merchandise has been a healthy margin year-to-date and last year is not only because of the way we bought it. It’s also the way our planning and allocation teams have flowed the goods, which has helped with our sales, of course, having the right goods in the right stores at the right time, but also in the way we float it. We have saved markdowns appropriately in categories. So we’re very bullish on that. I think, the — we mean more to the vendors today than ever before.

And I think that’s another facet of why we’re very bullish on where our merchandise margins can go. And I think John, when he’s mentioning that, you’re ultimately talking about market share with store closures, et cetera. But even if those fall off, we’re not anticipating stores close at the same rate. We still have a base now of customers and a value umbrella, which I think what John was talking about is, we are positioned with tremendous opportunities to still show our 20% to 60% off and still retail goods advantageously, I would say, and then still buy better with all of the availability that’s out there. So multiple factors going on. All going back to why I would say we are always happy to see a seasoned buying team like we have with such consistency and tenure over the years, this is what allows you to sleep at night and know you’re going to take advantage of those opportunities with the vendor community.

Operator: Next, we’ll go to the line of Paul from Citigroup. Please go ahead.

Paul Lejuez: Just a little bit more on gross margin. Curious on freight if you got back all of what you lost in 3Q last year, was it even more than that? And where is the upside coming from within the freight line? And I’m also curious, can you talk about the pure merch margin excluding freight, just considering your average unit cost and average unit retail? Thanks.

John Klinger: Yes. So on freight, so compared to FY20, we lost 300 basis points, and so we’ve gotten back about two-thirds of that. We’ve done it through — obviously, the rates that we’ve negotiated, have been favorable. And we had some benefit from our year-over-year accrual, but we’re also implementing a lot of initiatives to try to be as efficient as we can in our freight. So, some of those initiatives are how we move the merchandise from ports to our DCs, from the DCs to stores. So, that’s where we’ve seen a lot of benefit as well. Going forward, so there’s a bit of stickiness in the freight costs. As we’ve seen this year, there was a rail strike. So, wages went up on rail salaries, truck driver salaries have gone up.

So, there’s a bit of stickiness in the domestic freight, which is the lion’s share of our freight rate. So, we don’t believe at this point now that we’ll get back all of the freight, but we’ll continue to look at ways to be as efficient as we can on the freight rate going forward. And just to remind you, a lot of the freight benefit that we’re seeing this year has been a pull forward of what we expected to see in FY25. So, we’re seeing a lion’s share of that coming in FY24. And so, for FY25, again, it’s about looking for ways to be more efficient with initiatives internally.

Paul Lejuez: Thanks, John. And the pure merch margin and FX rate?

John Klinger: So the underlying merch margin, so Marmaxx was up. We did see a bit of headwind in FX rates for Canada and Europe. But we’re seeing a benefit in the Marmaxx division.

Ernie Herrman: Yes, Paul. And I’ll jump in there as well. I’ll tell you another place where I think we have an advantage on merchandise margin going forward is in our home business. So our home business, as you can tell from these results, which we are very bullish on, we feel is going to be very contrarian to the marketplace and much healthier than the marketplace. And with that, based on the momentum that we’ve seen — you could see it improving every quarter. John and I have talked about it every quarter. And then coming out of this quarter with a 9 comp and HomeGoods is just way above the market. But our Marmaxx home business is very healthy. And our other home business and the other divisions have improved as well.

That is an area where we think there’s specifically a margin opportunity because some of our margin is on the mix of departments within TJX. And as home now going forward over the next couple of years, we’re anticipating that to kind of grow in percent of total for us. I think that’s going to help our merchandise margin in total TJX. So, just that’s why that’s another bright spot in terms of merchandise margin directly.

Operator: Next, we’ll go to the line of Adrienne from Barclays. Please go ahead.