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

The TJX Companies, Inc. (NYSE:TJX) Q3 2023 Earnings Call Transcript November 16, 2022

The TJX Companies, Inc. beats earnings expectations. Reported EPS is $0.86, expectations were $0.8.

Operator: Ladies and gentlemen, thank you for standing by. Welcome to The TJX Companies Third Quarter Fiscal 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. As a reminder, this conference call is being recorded, November 16, 2022. 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: Thank you, Fran. Before we begin, Jeff has some opening comments.

Jeff Botte: 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 30, 2022. 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 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 the non-GAAP measures we discuss today to GAAP measures are posted on our website, tjx.com, in the Investors section. Thank you. And now, I’ll turn it back over to Ernie.

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Ernie Herrman: Thanks, Jeff. Good morning. Joining me and Jeff on the call is Scott Goldenberg. As we announced today, John Klinger is being promoted to Chief Financial Officer at the beginning of our new fiscal year in late January. I wanted to take this opportunity to congratulate John on his broader role, and I look forward to working more closely with him as we move forward. Scott is remaining with the Company as Senior Executive Vice President, Finance. I would like to recognize his long and extremely successful tenure as CFO for which we are enormously grateful. I cannot emphasize enough how beneficial Scott has been to me personally. He has truly been a great partner. We are very pleased that TJX will continue to benefit from both, John and Scott’s expertise and leadership.

I’ll start today by thanking all of our global associates for their hard work and commitment to TJX. We truly appreciate their collective efforts to deliver great merchandise and values to our shoppers every day. Now to our results. I am very pleased with our third quarter performance. Once again, we delivered strong profitability and a terrific merchandise margin. On the top line, our better-than-expected U.S. comp sales were driven by the excellent performance at Marmaxx, particularly its apparel business, where sales were strong. Our third quarter results once again highlight the outstanding execution of our flexible business model by our very talented associates. While our business is not immune to macro factors, I am convinced that the flexibility of our off-price retail model and the depth of our expertise and experience, especially within our merchant organization, will remain an important advantage for us.

As we enter the fourth quarter, we’re in a terrific position to take advantage of the tremendous buying environment and to flow fresh exciting assortments to our stores and online this holiday season. We have many initiatives planned to drive sales and our value proposition remains very strong. Further, we are convinced that our great values will continue to resonate with consumers whose wallets remain stretched. Medium and longer term, we remain extremely confident that TJX is well-positioned to gain market share and become an even more profitable company. I’ll talk more about our holiday plans and our opportunities beyond 2022 in a moment. Before I continue, though, I’ll turn the call over to Scott to cover our third quarter financial results in more detail.

Scott?

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Scott Goldenberg: Thanks, Ernie, and good morning, everyone. I’ll start with some additional details on the third quarter. Third quarter consolidated pretax margin of 11.2% was up 20 basis points versus last year. Third quarter pretax margin exceeded the high end of our guidance, largely due to the timing of some expenses. Our plans for the fourth quarter assume that most of this benefit will reverse out. Aside from the timing of expenses, the other components of our pretax margin were essentially in line with the high end of our plan. Merchandise margin was flat, despite 120 basis points of incremental freight pressure. Within merchandise margin, we saw a significant benefit from markon, mostly due to better buying. Incremental wage costs continued to be a headwind to pretax margin with a negative impact of 80 basis points this quarter.

Third quarter U.S. comp store sales decreased 2% and exceeded our expectations. As a reminder, we were anniversarying an outsized 16% U.S. open-only comp increase last year, which was versus fiscal ’20. When added together, our comp would represent a 14% increase on a 3-year stack basis. Further, U.S. comp sales improved each month of the quarter on that same 3-year stack basis. Excluding foreign exchange, third quarter total sales would have been at the high end of our guidance. For the third quarter, U.S. average basket was up. U.S. customer traffic was down, but strengthened as the quarter progressed and improved versus the second quarter. Lastly, adjusted earnings per share were $0.86. Again, this was above the high end of our guidance, largely due to a benefit from the timing of some expenses, and our plans for the fourth quarter assume that most of this benefit will reverse out.

Now to our divisional results. At Marmaxx, third quarter segment profit margin was 13.5%. Comp store sales increased 3% versus an 11% open-only comp increase last year. Marmaxx’s comp sales were positive each month and improved throughout the quarter. Again, it was great to see a strong comp increase in Marmaxx’s apparel business. Once again, Marmaxx’s average basket increased as it has throughout the year. While customer traffic was down, Marmaxx saw improvement each month of the quarter and versus the second quarter. At HomeGoods, third quarter segment profit margin was 8.9%. The segment profit margin improvement versus the first half of this year was mostly due to a significant moderation of the year-over-year impact of incremental freight costs.

Comp store sales decreased 16% versus a 34% open-only comp increase last year when we saw an outsized — when we saw outsized spending in home-related categories. HomeGoods’ average basket increased slightly. At TJX Canada, we are pleased with the overall — with their overall performance, particularly their strong profitability. Third quarter segment profit margin was 15.8%, exceeding their fiscal ’20 margin. Overall sales on a constant currency basis were up 4% in the third quarter. Further, third quarter Canadian sales growth also improved each month of the quarter when compared to fiscal ’20. At TJX International, third quarter segment profit margin was 6.7%, despite some deleverage from lower sales. Pretax margin was essentially in line versus fiscal ’20 due to better buying and expense management, which mostly offset incremental freight wage and other expense pressures.

Overall sales on a constant currency basis were down 1% from the third quarter. Moving to inventory. Our balance sheet inventory was up 26% versus the third quarter last year. This is higher than we expected due to early receipts of merchandise as the supply chain continued to improve. On a per-store basis, inventory was up 31% on a constant currency basis. We are very comfortable with our balance sheet and store inventory levels when compared to fiscal ’20. Importantly, overall store inventory turns and markdowns are in line with our fiscal ’20 levels. We still have plenty of liquidity and are in excellent position to take advantage of the great buying environment, including packaway opportunities. I’ll finish with our liquidity and shareholder distributions.

During the third quarter, we generated $1.1 billion of operating cash flow and ended the quarter with $3.4 billion in cash. In the third quarter, we returned $843 million to shareholders through our buyback and dividend programs. Now, I will turn it back to Ernie.

Ernie Herrman: Thanks, Scott. Now, I’d like to highlight the opportunities we see to drive traffic and sales in the fourth quarter. First, in this inflationary environment, we believe it is important as ever to deliver shoppers excellent value throughout the store and online every time they visit. This is our top priority, and I am confident that our banners will be a destination for consumers seeking great value this holiday season. Second, as I’ve been saying all year long, the marketplace is absolutely loaded with quality branded merchandise across good, better and best brands. Importantly, this has set us up very well to offer an excellent assortment of branded gifts this holiday season that we believe will excite and inspire our shoppers.

Third, I want to highlight that we plan to flow fresh product to our stores and online multiple times a week, which is a key differentiator of our business compared to many other retailers. With the rapidly changing merchandise mix, I am confident that shoppers are going to be very satisfied with the gift assortments they see every time they visit. Our store teams are excellent at managing this flow and creating fresh organized shopping presentations throughout our stores. Next, we feel great about our holiday marketing campaigns that just launched. We believe these campaigns can help drive traffic from both, new and existing shoppers across each of our banners. This year, each of our divisions will reinforce our value leadership and emphasize that shoppers can get more for their money when they visit.

We are also highlighting the fresh flow of merchandise throughout the holiday season with messaging such as Spend Less, Get More, All Season Long. In the U.S. and Canada, we are leveraging the strengths of our retail brand portfolio and multi-banner campaigns, helping to drive efficiencies and building awareness. Further, for all our retail banners, we have strong comprehensive marketing plans in place to help us stand out. Lastly, the flexibility of our business model has allowed us to successfully operate our business against some level of retail promotion every year for the past 46 years. I really want to emphasize that we are extremely confident that we can manage through any type of promotional environment that we may see from other retailers in the fourth quarter and beyond.

Looking beyond this year, we are convinced that we are set up very well to capitalize on the growth opportunities we see for our business in the medium and long term. On the top line, we believe we are well positioned to capture additional market share. We see many opportunities to drive sales and traffic as we attract a wide range of customers across many income demographics, which we believe is a key advantage of our business. Further, we have substantial store growth potential remaining in our current geographies around the world. In a retail environment where overall pricing has been reset higher, we believe our value proposition will be even more compelling and visible to consumers and that our treasure hunt shopping experience will hold tremendous appeal.

I want to reiterate our continued confidence in product availability to support our long-term growth plans. Throughout our history, availability of quality-branded inventory has never been an issue for us. Our more than 1,200 buyers source from a universe of approximately 21,000 vendors and from over 100 countries. There has always been significantly more merchandise in the marketplace than we could buy, and we expect that to continue. As to our profitability outlook, we remain committed to returning to our fiscal 2020 pretax margin level. To be clear, that would be a 10.6% pretax margin by fiscal 2025. Over the next two years, our plans assume additional merchandise margin opportunities across all of our divisions. We also expect our overall expense headwinds to moderate and that freight will be a tailwind next year.

Lastly, this outlook assumes that our overall comp store sales will return to a low single-digit increase in each of the next two years. Turning to corporate responsibility. I am pleased to share with you that our 2022 global corporate responsibility report was published this past quarter and is available on tjx.com. This report summarizes our fiscal 2022 initiatives and progress within our four areas of focus, which are workplace, communities, environmental sustainability and responsible business. The report includes an appendix of ESG data and maps our work and disclosures to a variety of ESG standards and frameworks, including The Global Reporting Initiative, United Nations Sustainable Development Goals, and the Sustainability Accounting Standards Board.

We’re proud to continue to make progress in our programs and initiatives, and I’m grateful to our teams around the globe for the work they do to support our global priorities. As always, we invite you to visit tjx.com to read our full report, and we’ll continue to update the site over the next year. In closing, I want to again thank all of our associates around the world for their hard work that led to our strong results in the third quarter. Our teams have put us in an excellent position this holiday season. I am convinced that we have some of the best talent in all of retail and across all areas of the business. Further, I believe their depth of off-price knowledge and expertise is unmatched and has driven our strong execution. I truly believe our associates will continue to be a major advantage for TJX going forward.

I’m convinced that the flexibility of our off-price model and our commitment to value set us apart and have allowed us to successfully operate in many different economic, retail and promotional environments. While we are impacted by macro factors, we have historically outperformed in both, good and bad environments throughout our 45-plus-year history. We are confident that we can execute on our short- and long-term growth plans to build TJX into an increasingly profitable $60 billion plus revenue company. Now, I’ll turn the call back to Scott to cover our full year and fourth quarter guidance. And then, we’ll open it up for questions. Scott?

Scott Goldenberg: Thanks again, Ernie. I’ll start with the full year. We increased our outlook for full year U.S. comp sales and now expect them to be down 1% to down 2% versus our previous guidance of down 2% to down 3%. This guidance now reflects the flow-through of our above-plan third quarter U.S. comp sales and our increased expectations for the fourth quarter. For the full year, we’re now planning total TJX sales in the range of $49.3 billion to $49.5 billion. The change versus our previous guidance is due to our forecast that unfavorable foreign exchange rates will negatively impact our fourth quarter reported sales. For full year adjusted pretax margins, we’re anticipating a range of 9.8% to 9.9%, maintaining the high end of our full year margin guidance.

For full year adjusted earnings per share, we now expect a range of $3.07 to $3.11 million, which is up 8% to 9% over last year’s adjusted $2.85. The change to the high end versus our previous guidance is due to an incremental $0.02 negative impact from unfavorable foreign exchange rates. Excluding this foreign exchange incremental foreign exchange impact, the high end of our adjusted EPS guidance would be unchanged. For modeling purposes, for the full year, we’re currently anticipating approximately 130 basis points of incremental freight expense and 70 basis points of incremental wage costs. Also, we’re assuming an adjusted tax rate of 25.3%, net interest expense of approximately $10 million and a weighted average share count of approximately 1.18 billion.

We remain committed to returning cash to shareholders through our dividend and stock repurchase programs. In fiscal ’23, we continue to expect to buy back 2.25 to 2.50 of TJX stock. Now to the fourth quarter. For the fourth quarter, we are increasing our plan for U.S. comp store sales to be flat to up 1% over an outsized 13% U.S. open-only comp store sales increase last year. Next, we are planning total fourth quarter TJX sales in the range of $13.9 billion to $14.1 billion. In the fourth quarter, we’re now assuming — in the fourth quarter, we’re now planning pretax margin in the range of 9.5% to 9.8%. This outlook now assumes that most of our third — the third quarter timing of expenses — the expense benefit will reverse out in the fourth quarter.

For modeling purposes, in the fourth quarter, we’re currently expecting a headwind from incremental wage costs and for freight to be flat. We’re also anticipating a tax rate of 24.9%, net interest income of approximately $19 million, and a weighted average share count of approximately 1.17 billion. As a result of all of these assumptions, we’re planning fourth quarter EPS of $0.85 to $0.89 per share. This outlook now assumes that most of the third quarter timing of benefit — of expense benefits will reverse out in the fourth quarter and also reflects an expected unfavorable impact due to foreign exchange rates. In closing, I want to highlight that we are in great position operationally and financially to grow our business. We have a very strong balance sheet and continue to generate outstanding cash flow.

Further, we are set up extremely well to continue making important investments to support the growth of our business while simultaneously returning significant cash to our shareholders. Now, we’re happy to take your questions. And 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 commence our questions from as many analysts as we can. Thanks. And now, we will open it up for questions.

Q&A Session

Operator: Our first question is from Omar Saad.

Omar Saad: Thanks for taking my question. Great job in the quarter. Ernie, if you take a look at the consumer, a macro lens for your business, maybe you could talk a little bit about whether you’re still seeing any resistance to the pricing that you put for your business and to the products? And also any trade-down effects showing up whether inside your business or you’re pulling consumers in some other more premium channels? Thanks.

Ernie Herrman: Thanks, Omar. Well, on the macro lens, with regard to the pricing, we are seeing very, very little resistance. And I would say our hit rate is in the 90-plus-percent in terms of success on measuring it. In fact, at one point, I think, Scott and his script talked about how our turns are essentially where they were in FY20, which is always a barometer. So, we look at pre-COVID, and we get all the way down to a SKU level. So, we look at categories, we look at apartments and then we go to SKU level. And obviously, we zero-in on where we’ve adjusted the retail. And because of what’s happened around us where the retails have gone up so much significantly, we have really been so effective at it and hit extremely low resistance.

So, a lot more, I guess, opportunity as we move forward to keep doing because we’ve spot it, as you can imagine, we’re also spotting places where we’ve gone up for retail and we can go up again. So you have that dynamic, which is a little unusual because sometimes we do an intermediate price point raise, and the goods, whether it’s apparel or hard lines, have gone up a couple of price points because remember, some of the inflationary hits have been more than just 2% or 3%. So, there are some items that have gone up 10% or 20%, and we’ve only gone up the first price point. So, all in all, Omar, definitely more opportunity there, if anything, in terms of pricing stance. Scott?

Scott Goldenberg: Yes. Hi Omar. Scott. The other thing, and we said this last quarter, I’ll use Marmaxx as the example, in terms of our sales, and obviously, we had some outperformance at Marmaxx. It’s the consistency. So asking on the trade down, not necessarily saw that we saw any. But it was just a consistency across regions, across age of stores, across locations, urban, suburban, rural, across volume. Almost any way you look at it, we saw that same level of consistency. Most of our departments improved versus the second quarter, as you would expect, as the overall numbers went up. And I think it goes back to what Ernie has been saying just the strong execution of our buying and planning and our allocation teams.

Ernie Herrman: The interesting thing, Omar, that we’re — we try — I tried to emphasize in the script is the nature of one of our biggest, biggest strengths. We’ve talked about this before, we probably don’t emphasize it enough is the fact that we trade so broadly between the good, better and best in the brands, and it makes it a little — by the way, to what Scott said, it makes it a little tougher to read if there a trade down or not because we’re not going after a certain demographic. I mean, we’re trying to trade as broadly as we can. We’re going after demos, all different income levels, age levels. And we do not go after one sector of good, better or best goods. And so I think it’s actually tough to see are you taking from one trade down area when, in fact, I think in some cases because we’ve had some great buys I see a list every week at the good level, which means in some cases, we could — we’re taking good sideways, not necessarily trade-down from other retailers, if that makes sense.

So again, I think we’re in the advantage of having a good, better, best wide offering is going to continue to serve TJX well on taking market share.

Operator: Our next question is from Lorraine Hutchinson.

Lorraine Hutchinson: I wanted to dig in on inventory a little bit further. Are there any pockets of excess inventory, particularly in home? And then what does your packaway capacity look like? If you were to purchase a large volume of spring product, does that preclude you from taking advantage of some of the great deals you’re seeing during holiday?

Scott Goldenberg: I’ll actually prompt Ernie to actually talk first about the markdowns and overall how that’s been.