TJX Companies Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 17, 2022

There are 10 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to The TJX Companies First Quarter Fiscal 20 23 Financial Results Conference Call. 20. As a reminder, this conference call is being recorded, May 18, 2022. I would now like to turn the conference call over to Mr.

Operator

Ernie Hermann, Chief Executive Officer and President of The TJX Companies Incorporated. Please go ahead, sir.

Speaker 1

Nineteen. Thanks, Missy. Before we begin, Deb has some opening comments.

Speaker 2

Thank you, Ernie, and good morning. Eighteen. 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 nineteen and the implementation of the company's plans to vary materially. These risks are discussed in the company's SEC 18, 2019, and we will now begin the Q4 of 2019. Nineteen.

Speaker 2

Submission, reproduction or other use of the same for profit or otherwise without prior consent of TJX

Speaker 1

eighteen. It's prohibited and a violation of United States copyright

Speaker 2

and other laws. Additionally, while we have approved the publishing of a transcript of this call by a third party, nineteen. Thank you. And now I'll turn it back over to Ernie.

Speaker 1

Nineteen. Good morning. Joining me and Jeff on the call is Scott Goldenberg. I'd like to begin the call by reiterating that nineteen. Together with people and businesses around the world, we are united in our condemnation of the war in Ukraine.

Speaker 1

Nineteen. We have many associates with ties to Ukraine, including those from Ukraine or with family and loved ones living there, and associates in the surrounding countries like Poland. Nineteen. We are steadfastly committed to supporting all of our associates impacted by this crisis. We have offered them our support, including financial, eighteen Legal and Mental Health Resources.

Speaker 1

Further, we have made significant charitable donations to help with the humanitarian relief efforts. In terms of our business ties to Russia, in early March, we committed to divest from our minority investment in Familia, nineteen, which operates off price stores in Russia. Q1 results. Moving to our business update, nineteen. I want to start by once again thanking each of our global associates for their continued commitment to TJX.

Speaker 1

Thanks to their collective efforts, nineteen. We continue to offer outstanding merchandise and values to our shoppers every day. Now to our results. Eighteen. I am very pleased with our Q1 performance.

Speaker 1

I am especially pleased that both Q1 adjusted pretax profit margin eighteen and adjusted earnings per share exceeded our expectations. We achieved these results even though comp sales came in a bit lighter than our plans. Nineteen. I also want to highlight the strong performance of our largest division Marmaxx, which delivered a comp increase of 18% over a 12% open only comp increase last year. We were especially pleased that Marmaxx' nineteen.

Speaker 1

This comp was driven by customer traffic increases, which speaks to the appeal of our values and merchandise. Our first quarter performance highlights the sharp execution and flexibility of the entire organization nineteen that once again navigated through an uncertain environment and global supply chain issues to bring an exciting mix of merchandise to our stores and online shoppers. 18. During the quarter, our teams flexed our product mix and categories to respond to consumer trends and preferences. We saw the benefits of our pricing initiative for another quarter, while continuing to deliver our customers' outstanding value, nineteen, which is our buyers' number one priority.

Speaker 1

With Peoples Wallet stretched even further in the current environment, nineteen. Our teams did an outstanding job of offering shoppers excellent values every day. Longer term, I am confident about our ability to capture market share and improve the margin profile of TJX. Our goal nineteen. We are convinced that our differentiated treasure hunt shopping experience and outstanding values will continue to resonate with consumers nineteen and drive the successful growth of our business in the U.

Speaker 1

S. And internationally for many years to come. Nineteen. Before I continue, I'll turn the call over to Scott to cover our Q1 financial results in more detail.

Speaker 3

Thanks, Ernie, and good morning, everyone. Nineteen. I'd like to echo Ernie's comments and thank all of our global associates for their continued hard work. Nineteen. I'll start with some additional details on the Q1.

Speaker 3

As Ernie mentioned, we are very pleased with our Q1 profit results. 18.5 percent, which excludes 190 basis point nineteen. Negative impact from a charge related to the write down of our minority investment in Familia was up 220 basis points versus last year. Eighteen. This was higher than our plan due to the timing of expenses as well as the combination of expense management and a bigger benefit eighteen.

Speaker 3

For the Q1, the pre tax margin increase includes the benefit of our pricing initiative. Similar to the 4th quarter, nineteen. We saw a very strong mark on. However, merchandise margin was down due to 220 basis points of incremental freight pressure. Incremental wage costs also negatively impacted pretax margins by 70 basis points.

Speaker 3

Nineteen. Our year over year margin increase also includes a benefit from a reduction in COVID related expenses and the annualization of temporary store closures internationally nineteen. Adjusted earnings per share of $0.68 were above our plan and exclude a 0.19 18% negative impact from the charge related to our Familia investment. Our U. S.

Speaker 3

Comp store sales growth rounded down to 18.5% over an outsized 17% open only comp increase last year, and we're a bit below our planned range. Eighteen. I want to highlight that we are incredibly close to rounding to a positive 1% U. S. Comp.

Speaker 3

1st quarter average basket was up, driven by a higher average ticket eighteen and U. S. Customer traffic was down slightly. As far as the monthly cadence, U. S.

Speaker 3

Comp sales on a 3 year stack basis eighteen. During the quarter, we saw very strong comp sales in our overall apparel business at Marmaxx, nineteen, which was up 6%. U. S. Home comp sales, including our home goods division and Marmaxx home categories eighteen.

Speaker 3

We're down 7%. I should note that last year, our U. S. Open only home comp sales increased over 40%. Eighteen.

Speaker 3

Importantly, we believe the comp sales decline in our U. S. Home businesses was a result of the difficult year over year comparison nineteen and not driven by our pricing initiative. Another point I want to highlight is that our store inventory turns for every division and overall markdowns nineteen were favorable to pre pandemic levels. Further, our research tells us that customers' perception of our value gap with other retailers eighteen.

Speaker 3

Now to our division results. At Marmaxx, 1st quarter comp store sales increased 3% nineteen. Over a very strong 12% open only comp increase last year and segment profit increased to 13.2%. 18. Again, we are particularly pleased to see an increase in customer traffic at Marmaxx, which is up low single digits.

Speaker 3

Eighteen. I'll also reiterate that the comp increase was driven by Marmaxx's overall apparel business, which was up 6%. Eighteen. In the Q1, we saw an increase in Marmaxx's average basket, driven by a higher average ticket, nineteen, primarily due to our pricing initiative as well as apparel sales being a higher percentage of the mix. At HomeGoods, 1st quarter comp store sales decreased 7% versus a remarkable 40% open only comp increase last year.

Speaker 3

Segment profit margin nineteen was hurt by nearly 700 basis points of incremental freight costs. I want to highlight that HomeGoods' 3 year comp stack for the Q1 nineteen was up 33%. HomeGoods average basket increased driven by a higher ticket eighteen and customer traffic decreased in the Q1. Looking ahead, we see HomeGoods as strongly positioned in the retail environment eighteen and we will be emphasizing our value messaging in our marketing. At TJX Canada, overall sales increased 41% twenty and segment profit margin exceeded their pre COVID Q1 fiscal 'twenty level.

Speaker 3

Year over year sales benefited from having

Speaker 1

nineteen. Stores opened all quarter

Speaker 3

this year versus significant temporary closures in the Q1 of last year. 18. At TJX International, overall sales increased 163% due to the benefit of having stores open all quarter this year even while there were nineteen. Segment profit margin was negatively impacted by freight costs. We are very pleased that all of our eighteen.

Speaker 3

Moving to inventory, our balance sheet inventory was up 37% eighteen. I want to emphasize that in store inventories are where we want them to be nineteen as we look at more normalized comparisons to pre pandemic levels. We still have plenty to open by for the Q2 and second half of the year. Nineteen. We remain well positioned to take advantage of excellent deals we are seeing in the marketplace and flow fresh merchandise to our stores eighteen and online throughout the year.

Speaker 3

I'll finish with our liquidity and shareholder distributions. During the Q1, we used 634,000,000 eighteen and operating cash flow, primarily due to the timing of inventory purchases and related accounts payables. We ended the quarter with $4,300,000,000 in cash. 18. In the Q1, we returned over $900,000,000 to shareholders through our buyback and dividend programs.

Speaker 3

Now I will turn it back to Ernie.

Speaker 1

Nineteen. Thanks, Scott. Now I'd like to highlight the opportunities that we see that give us confidence that we can continue to capture nineteen. Starting with the top line. 2.

Speaker 1

First, we are confident that the combination of our value proposition, our treasure hunt shopping experience and flexibility will continue to be a winning retail formula. We are convinced that the consumers' desire for exciting brands and fashions at great values is not going away. Additionally, nineteen. In today's highly inflationary environment, we believe our value proposition is as appealing as ever. Nineteen.

Speaker 1

We serve a wide customer demographic and offer a range of merchandise categories and brands across good, better and best, nineteen, which we see as a major advantage. This year, we have exciting marketing initiatives eighteen. We are also pleased to announce our exceptional value and differentiated shopping experience. First, we are sharpening our marketing messages across eighteen. Our outlets to emphasize our value leadership to consumers.

Speaker 1

2nd, we are strategically targeting pockets of opportunity within certain geographies nineteen. Lastly, we are pleased to see that across all our divisions, customer nineteen. Faxon scores are strong, and we are attracting new shoppers of all ages, including a large number of Gen Z and millennial shoppers, nineteen, which we believe bodes well for the future. 2nd, we continue to see significant nineteen. Our next question comes from the line of John nineteen.

Speaker 1

We see our flexible buying, supply chain and store formats as tremendous advantages, nineteen, which allow us to open stores across a wide customer demographic. All of this gives us confidence in our long term plan nineteen of opening more than 1500 additional stores in our current markets with our current banners. Eighteen. Lastly, and I can't emphasize this enough, we are extremely confident that we'll continue to have 20 of quality branded merchandise available across good, better and best brands to support our growth plans. Our global buying team of more than 1200 buyers sources goods from a universe of approximately 21,000 vendors nineteen in more than 100 countries.

Speaker 1

In a landscape where we are planning to grow our sales and open new stores, while many other retailers are closing stores, nineteen. To be clear, overall product 16. Availability has never been an issue for TJX. We believe that each of these characteristics of our business nineteen. Set us up as well to deliver sales and market share gains in the U.

Speaker 1

S, Canada, Europe and Australia over the long term. Now importantly to profitability. I am very pleased that for the full year, nineteen. We now expect an adjusted pre tax margin on an adjusted basis to reach 9.6% to 9.8%, nineteen. Higher than our original plan and adjusted earnings per share in the range of $3.13 to $3.20 nineteen, which at the end is also higher than our original plan.

Speaker 1

Scott will provide more details, but the key drivers nineteen. Our pricing initiative and expense management. We continue to believe that delivering nineteen. Strong sales is the best way to offset the cost pressures that we're facing. We also remain laser focused on looking at other ways to improve profitability nineteen.

Speaker 1

As I've mentioned on our last few calls, our initiative to selectively raise retails nineteen. Has been working very well and we continue to believe it will be a multiyear opportunity for us. We are also optimistic nineteen. The expense headwinds we've been facing for the last 3 years will begin to moderate going forward. Further, looking ahead to the next few years, nineteen.

Speaker 1

We see opportunities to improve divisional margins and deliver continued increases in overall profit margins. I want to reiterate that our goal is to return to our fiscal 2020 pretax margin level of 18.6 percent within 3 years. Turning to corporate responsibility and ESG. Eighteen. Last quarter, I shared with you that our environmental sustainability teams were developing plants for more aggressive initiatives eighteen.

Speaker 1

Across several of our priority areas, I am pleased to share that last month, we announced 4 new global environmental sustainability goals. 1st, we have set a goal to achieve net 0 greenhouse gas emissions in our operations by 2,040. 2nd, we intend to source 100% renewable energy in our operations by 2,030. 3rd, nineteen. We are working to divert 85 percent of our operational waste from landfill by 2027.

Speaker 1

20. And finally, we are aiming to shift 100 percent of the packaging for products developed in house by our product design team to be reusable, recyclable nineteen. As I've shared in the past, nineteen. We've been committed to mitigating our impact on the environment for many years. I'm very excited about these new goals and the plans our teams are putting in place to support them.

Speaker 1

Nineteen. We look forward to sharing more about our progress as we go forward. As always, we have more information on corporate responsibility at tjx.com. Nineteen. In closing, I want to again thank each of our associates around the globe.

Speaker 1

Nineteen. We feel great about the health of our business and are confident that the appeal of our exciting merchandise mix and outstanding values nineteen. To our 45 year history and many kinds of retail, economic and 2,000 geopolitical environments. We continue to see the advantages and strength of our flexible off price model. Nineteen.

Speaker 1

We see many opportunities to capture additional market share and increase our profitability as we look to become a $60,000,000,000 plus revenue company. 18. Now I'll turn the call back to Scott for additional comments and then we'll open it up for questions. Scott?

Speaker 3

Nineteen. Thanks again, Ernie. I'll start with the full year. As Ernie mentioned, we are pleased to be raising our guidance nineteen. Full year adjusted pretax margin to a range of 9.6% to 9.8%.

Speaker 3

18. This is 10 to 30 basis points higher than our original plan. I'd like to highlight that this contemplates our expectation for better flow on lower plan sales, which speaks to the strength of our flexible off price model. I'll also note that we're planning approximately 150 basis points to 160 basis points of incremental freight expense. Eighteen.

Speaker 3

Again, for full year adjusted earnings per share, we are planning a range of $3.13 to $3.20 nineteen, which is up 10% to 12% over last year's adjusted $2.85 This is also $0.04 more on the high end eighteen. We expect full year U. S. Comp sales to increase 1% to 2% eighteen. Over an outsized 17% U.

Speaker 3

S. Open only comp increase last year. This guidance now reflects the flow through nineteen. Our implied back half guidance is for a 4% to 5% increase nineteen. Over a 14% increase in the second half last year.

Speaker 3

For the full year, we are now planning total TJX sales 18.5% in the range of $51,300,000,000 to $51,800,000,000 The lower sales guidance is primarily a result nineteen. Of a change in FX rates, which reduced our full year sales forecast by approximately $700,000,000 nineteen as well as our lower than planned Q1 sales. For modeling purposes, for the full year, we're currently anticipating an adjusted tax rate 18.7 percent, net interest expense of about $35,000,000 and a weighted average share count eighteen of approximately $1,180,000,000 In terms of our year end cash position, we expect it to be in line where we originally planned it. Nineteen. We remain committed to returning cash to shareholders.

Speaker 3

In March, our Board of Directors approved an increase eighteen and our quarterly dividend by 13% to $0.295 per share. This marks our 25th dividend increase over the last 26 years. 2023, we continue to expect to buyback $2,250,000,000 to 2,500,000,000 nineteen. Now to our 2nd quarter guidance. For the 2nd quarter, we are planning U.

Speaker 3

S. Comp sales to be down 1% to 3% 18% over an outsized 21% U. S. Open only comp store sales increase last year. We are pleased with the start of nineteen with momentum from the March April period continuing into May to date.

Speaker 3

I should note that our 2nd quarter comp plan reflects this Acceleration in comp trends we saw in the March April period and into May. Next, we are planning total second quarter TJX sales in the range of 12.0 $12,200,000,000 In the 2nd quarter, we're planning pretax margin in the range of 8.7% to 9.1%. Eighteen. This guidance assumes approximately 250 basis points of incremental freight expense and about 80 basis points of incremental wage costs. Nineteen.

Speaker 3

For modeling purposes, in the Q2, we're currently anticipating a tax rate of 26.3 percent, net interest expense 18.5000000 and a weighted average share count of approximately 1,180,000,000. As a result of these assumptions, we're planning eighteen. EPS of $0.65 to $0.69 per share. Again, our 2nd quarter and full year guidance eighteen. Implies in the back half of the year, U.

Speaker 3

S. Comp sales will be up 4% to 5%. Additionally, we expect pre tax nineteen. In closing, I want to reiterate that we are laser focused on driving sales and traffic eighteen and improving the profitability profile of TJX. We are in great position both operationally and financially eighteen to take advantage of the opportunities we see to grow our business.

Speaker 3

Our strong balance sheet and financial foundation continue to give us great confidence nineteen and today's macro environment. Further, we continue to make investments to support our growth initiatives while simultaneously returning significant cash nineteen. Now we are happy to take your questions. As we do every quarter, we are going to ask you that you please limit your questions to 1 per person nineteen. Thanks.

Speaker 3

And now we will open it up for questions.

Operator

Thank you. It is now time for the question and answer session of today's call. Our first question comes from Paul Lejuez. Your line is open, sir.

Speaker 1

Hey, thanks guys. Nineteen. Curious how you would characterize the buying environment in home categories specifically versus apparel and also love to hear how you would characterize nineteen. Competitive environment you're operating in, seems like some large retailers out there have some excess apparel. Curious if you're seeing any sort of a pickup in promotions that might be having nineteen.

Speaker 1

Yes. No, great questions, Paul. Nineteen. First of all, the buying environment in all, okay, right now the markets are extremely loaded across the board, good, better, best category, whether it's home, apparel, accessories, any of the other hard lines that we carry in the store that aren't just nineteen. Fall into those buckets.

Speaker 1

The markets are fairly loaded in terms of the buying environment. Nineteen. Home right now, as you can see, we have a decrease in the business in the Q1 of a 7, but that was against a 40. Nineteen. And so we are still doing a lot of home business very healthy.

Speaker 1

And so we will continue to buy at a steady pace, I would call it. We also buy in a number of different ways, whether it's in home or apparel in terms of not just what's in the building now. Eighteen. For shipping right now, we also do packaways and things along those lines where we hold the goods for longer and then we as we've talked before, we do a 18. Small percent of our business where we do good in advance.

Speaker 1

So, what's great, again, I go to this business model nineteen. It just allows us to tailor that to the sales levels. Nineteen. Also our home business within the full family stores and Marmaxx, etcetera, same thing applies there in terms of availability nineteen. And how the merchants handle it.

Speaker 1

It's interesting you mentioned apparel, which from what we hear has been a little inconsistent out there. Our nineteen. The apparel business has been pretty strong actually here in the Q1. 12. And in fact, I spent an hour yesterday in our TJ Maxx store with one of our apparel general merchandise managers.

Speaker 1

Nineteen. Yes, and we were talking about all the different opportunities, the availability, the opportunities on different aspects of the business that she has been feeling good about, not to mention that our business in that arena has been pretty damn strong. So nineteen. Feeling good on that front. What was the last piece of your question?

Speaker 1

Was it about promotions, I believe, in terms of what's in the environment? Are we seeing retails Promoted further aggressively, and we are not, certainly not in the categories that we are in. So when I say that, I would not interpret that as a blanket statement for other retailers that are in other ends of the business. Some of your more commodity driven retailers that are in more nineteen. Home cleaning supplies or maintenance supplies around the business.

Speaker 1

I think that's a different I'll put product per se. Again, we are fashion driven. So when you look at our fashion and brand driven, nineteen. The retailers that carry the like product in categories, if anything, we continue to watch their prices go up and promotions be decreased, Which continues to favor our selective pricing retail strategy as we look out here, I think for a number of years. Nineteen.

Speaker 1

Good question. Great color, Ernie. Thanks. Thank you, Paul.

Operator

Thank you. Our next question comes from Matthew Boss. Your line is open.

Speaker 4

Nineteen. Great. Thanks and congrats on a nice quarter.

Speaker 1

Thank you.

Speaker 4

So Ernie, could you speak to drivers of the improvement that you cited in March April nineteen and then the momentum that you cited in May to start the Q2. Are there any notable categories that you're chasing into? And just on the positive traffic eighteen and Marmaxx. Are you seeing a new customer, increased trips from your existing customer, any signs of trade down that you think we're seeing Just across the board, the March April improvements and the momentum in May.

Speaker 1

Yes. No, great, Matt. Yes, nineteen. Kind of the big picture, right, Matt, in terms of what's giving us these sales. And of course, we are looking at our teams nineteen.

Speaker 1

We are always striving to exceed our sales plans. We have been enjoying these amazing comps at Marmaxx. We were up against the 12 comp right the year before. Nineteen. They see a 3 in their LNG.

Speaker 1

We wish we could do more, but in this environment right now, obviously, we are very pleased with that as well as the profitability approach. Nineteen. Many of the categories that were, I guess the way you'd look at this because we don't like to give too specific, but I can tell you this, nineteen. Like I just mentioned to Paul, our apparel business has been we've been pleased with our apparel business nineteen. Given in this environment, I think part of that is, a year ago, you were getting more traffic and more shopping at our home businesses nineteen and Less in Apparel.

Speaker 1

So, I think what's happening in Marmaxx is we are now getting back some of the businesses that weren't as strong a year ago, nineteen. Which is great. I go back to the flexibility of the business model. It allows us to chase the trends that shift from year to year and season to season. Nineteen.

Speaker 1

So that was a big part of our, I would say, the escalation in our Marpril business versus February, Not to mention the February, you can kind of have a bit of a weather issue there. When we look out, what's really neat, and Scott mentioned it, We have the vast bulk. You can't go by these inventory numbers, because by the way, you are looking at a spot in time. And twenty. If you look at those inventory numbers about what we used to carry 2 year FY 2020, they are comparable.

Speaker 1

We have the vast majority nineteen. Of our open to buy for this whole year still available to us. So, when you look at 100 of 1,000,000 of dollars here, remember, nineteen. We are buying to a $50 plus 1,000,000,000 sales plan. And so we have so much open to buy to still chase nineteen.

Speaker 1

The categories for Q3 that we think as we get closer in that we should be driving harder. Having said that, as you can nineteen. Tell by the way our business even coming into the second quarter, as you alluded to, we're happy with the way we're tracking. Nineteen. We have a lot of opportunity in some of those high categories to buy close in because there is such good availability.

Speaker 1

So I hope that answers your question. We don't give specific I can't give you specific categories, but hopefully that gives you the color. Scott, I think will jump in a little.

Speaker 3

Yes. I think nineteen. One of the things we saw a little different from the Q1 and into May that was different than frankly nineteen. Many, many years, probably have to go back half a decade where we have approximately more than 75% of our stores at HomeGoods and Marmaxx 18. Where they are in the, what we'll call, higher demos over 75,000 versus under 75,000.

Speaker 3

Those stores nineteen. Have done better than our lower demo stores. And I think, again, we're positioned well, and Ernie can jump in because of nineteen. The goods that we carry for a lot of those customers in the better and best goods and that again that's continued into the start of the quarter. Nineteen.

Speaker 3

So that's a bit of a change. But again, the majority of our stores are in those areas. So again, I think it bodes well for us. Nineteen. In a difficult environment, maybe we're not immune, but a little more resilient in terms of the customers that we nineteen.

Speaker 3

Who might have a little more money in their pocketbook than the lower demos.

Speaker 1

Yes, I'll just jump in, Matt, because nineteen. This has really triggered some of the discussions as we have we talked about this for years, I think. One of the benefits at TJX with TJ Maxx, Marshalls, HomeGoods, nineteen. Even with Sierra or online, as we trade very broadly and we've always consciously said, nineteen. We don't want to segment a moderate versus a better versus even a higher end.

Speaker 1

We want to sell goods to everybody. Nineteen. And so I think, the fact that we are across the board and particularly right now that we have higher demos, specifically in HomeGoods eighteen. And Max and Marshall's and some of the other retailers out there. I think that probably helps at all even off to Scott was talking to us some of these has trended.

Speaker 1

And I go back to we always have consciously the merchants here, we have always gone after good, better and best. I think I mentioned in my script a couple of times. Nineteen. So it's kind of where we put our it's a combination of our merchandise, our locations, nineteen. The store atmosphere and our treasure hunt shopping experience certainly allows us to appeal to a broad, broad customer base.

Speaker 4

Eighteen. Great color. Best of

Speaker 1

luck. Thank you.

Operator

Thank you. Our next question comes from Kimberly Greenberger. Your line is open.

Speaker 5

Nineteen. So welcome to you on that.

Speaker 3

Thank you.

Speaker 5

I wanted to ask about the pricing initiatives. It's obviously nineteen. One of the drivers in this margin inflection story. Can you talk about where you have seen the most success nineteen. And are there any areas where you might be seeing some pushback on those pricing initiatives?

Speaker 5

Nineteen. And then I just wanted to follow-up on an earlier thread, if we could, and sort of ask the question a different way. Nineteen. It seems like this is an environment ripe for trade down. We're starting to hear eighteen.

Speaker 5

From some of the food retailers and I think others that they're starting to see signs of trade down. Nineteen. I don't know Ernie or Scott, if you've got data from years years years ago, maybe during periods of consumer stress nineteen. In the past, how many quarters has it typically taken for you to see a traffic benefit from trade down nineteen where shoppers might be trading down from higher cost retailers into the TJX banners. And are there any signs of that happening yet?

Speaker 5

Thanks.

Speaker 1

Nineteen. Yes. Great, Kimberly. I'll let Scott where you ended, I'll let Scott start with that, and then we'll come back around to your first question.

Speaker 3

Yes. And I'll just address the first part at 18. Very high level, let Ernie go into the detail. I think from a big picture point of view, as I said, I think we said in the scripted remarks is that nineteen. Our sales our turns are better at all divisions than they were pre COVID.

Speaker 3

Nineteen. So we feel at a hot macro level that the merchandise is moving through with our price initiative. Our markdown rates Similarly are lower than our pre March. So we are not seeing any of our big picture financial metrics. 2.

Speaker 3

In fact, they are all better. In terms of going back to your question on what happened, if you go back to the eighteen. Again, this is a long time ago, the recession in 2008 going into 2,000 calendar 2009, we had 2 soft quarters. That 3rd, if you remember, going back to Q3 and Q4 Fiscal 2009 for us. And then by the Q1 of that year, nineteen.

Speaker 3

We had a slight comp transaction increase and then it accelerated from there on in. Nineteen. Hard to say it's exactly comparable. So 2 quarters of softness, and then we started to rebound and get a lot I believe nineteen. We've got a lot of trade down.

Speaker 3

We were renovating a lot of stores, and I'll let Ernie address it on other things that we did.

Speaker 1

Yes, I think we I think you're spot on there, Kimberly, in terms of what dynamic takes place out there, where you get trade. We were getting Trade down or trade over, I don't know what you'd call it from some of the mass market guys, department stores. 2, because clearly what's been neat is our store visits. Visiting stores now has become a very appealing thing to a lot of customers as we have seen right from last year as COVID, yes, it's out there, but eighteen. Customers love shopping our stores, so you do get that treasure hunt entertainment quotient, especially in HomeGoods or nineteen.

Speaker 1

And Marmaxx, yes, TJ Maxx or Marshalls where you can have really an eclectic value trip there that really I think allows nineteen. There's a reason for people to kind of trade down, as you would say, obviously driven by the value equation, nineteen. Which leads me to the, I guess your first question. The pricing initiative, yes, across the board, we have had no 1st of all, we have not had any nineteen. We've had a few items here or there, but we have been 95% $90,000,000 over that, successful on the pricing initiative.

Speaker 1

And Really, we're still in the beginning stages. I believe we're well ahead of first of all, our model allows us to do this. Nineteen. We're well ahead of probably other retailers on this front, but we also have a business model that in the categories that we're in, which are fashion driven and brand driven, nineteen, which is allowing us to probably have the flexibility to do this more than other retailers could. So We're super excited about it.

Speaker 1

As you can tell, our results are really panning out. Nineteen. It's not just the way we can retail. We monitor the out the door retail that we're selling it versus the out the door Promotional retailer of the other retailers and we are still well, well below. Of course, part of that is because many retailers on the similar items have had to raise The retail that they're at, or promote it less.

Speaker 1

So we're really, I think, in a multiyear nineteen. Margin expansion opportunity driven by that, but it sounds like that is because of the markup. It's also because our ticket now nineteen. Is going up, which is helping us with our other cost efficiencies within the business in terms of processing less units. Nineteen.

Speaker 1

So we don't see that not continuing to happen for another few years anyway. Nineteen. So we are excited about it. It all seems to be connecting at once and you can see from our outlook well, you can see from the last quarter and our outlook for the year, nineteen. We're feeling really good.

Speaker 1

And where we think we can take the TJX margin over the next 3 years, we're feeling very confident about that as well. Nineteen.

Speaker 5

Great to hear. Thank you.

Speaker 1

Welcome.

Operator

Thank you. Our next question comes from Michael Binetti. Your line is open.

Speaker 6

Nineteen. Hey, guys. Congrats on a great quarter and thanks for all the detail here. I guess what I'm trying to figure out is you have the comps accelerating to 4% to 5% in the back half nineteen. And you have obviously a ton of great merchandise, but help us connect the dots on how having great supply nineteen.

Speaker 6

Is enough evidence for you that demand will remain strong or strengthen to the trends you saw. And then Ernie, you said you feel really good about the long term eighteen. Opportunity to take share here. Similar question. What do you see today for a business model that in a lot of ways works very close to need, Getting inventories in very close to turning around.

Speaker 6

What do you see today to know that this isn't just department stores or specialty retailers having over ordered at a moment in time During holiday or for spring, and with some time left for fall or holiday, they can start to trim their orders and we're back to a situation where there's not as much inventory More quickly than you thought. How do you know that we have duration here as you think about your comments on the long term?

Speaker 1

Well, okay. So let's take eighteen. Your first question, which I think I'll let Scott actually talk, it's fairly clear as to why we're feeling those sales trends based on nineteen. The way we're trending now when you look at the stacks. Scott, do you want to talk about that?

Speaker 3

Yes. Just from again, I'll let Aaron answer while from long term, we keep it up. 2. When you look at the first half of this year, 18%. As I called out, we're going against a total U.

Speaker 3

S. Stack of 19% nineteen. And have reflected close to that between the two quarters, obviously, a 0 to slightly less comp, so a 2 year stack of 'nineteen. Nineteen. We haven't reflected any increase on that stack because we are going against a 3 year stack, because we are going against a second half that's 18.

Speaker 3

Five points lower in the back half. And again, I'll let Ernie speak to the opportunity.

Speaker 1

Well, nineteen. So Michael, so what that saying is we are assuming that we are just doing the same things we are doing now And we would trend at a 4% to 5% based on the current trend.

Speaker 3

The other thing again that nineteen. We said and maybe we could have been clearer on the script and in the press release is that when we started the year, we gave guidance nineteen. Before the invasion that happened in Ukraine, we did see a bit of a slowdown across the globe pretty much for about 3 to 4 weeks. Eighteen. And then even though with all the news of inflation and the gas price increases and everything else, nineteen.

Speaker 3

We got back on to what would have been our trend that we did guide to, but which is what we are similarly using for the rest of the year. So nineteen. It hasn't seemed to impact the customer coming into our store, but we haven't set an improvement to that trend, nineteen. But just that same trend as Ernie just indicated over the rest of the year. And I'll let Ernie speak to the inventory and eighteen.

Speaker 3

I think we always believe that we can flex into the categories for the back half of the year, take advantage of what we're currently seeing.

Speaker 1

Nineteen. Yes. So, Michael, so we're in a great position for OpenABuy for the back half. To your nineteen. Question, though, which I think I know what you are getting at is, what would make us think that this isn't just short term in terms of The duration, I think you are using that word in terms of duration of this trend and how could we keep it going.

Speaker 1

So what we are also nineteen. Strategically, we look at the, as Scott was, looking at the 3 year track, and then we look at we studied the market nineteen. Share opportunity based on store closures and what's going on with some of the other reports around us. But we've really gotten pretty good at nineteen. In this environment, projecting what our trend would be like.

Speaker 1

Again, pre COVID, we had a pretty good handle on our trend. Nineteen. So we're really going back to that trend which went on for multi years pre COVID, and then we're factoring in What we're seeing today, and of course availability is 18. Probably greater than it was ever pre COVID now, because there's so much stop and go. And I think it's hard for a lot of these vendors Because it's been more volatile than it was a few years ago to predict.

Speaker 1

So, if you factor that in and say, oh, overall, I am going to have a nineteen. Notch more exciting branded valued mix. If anything, we'd probably do better than where we typically Trended it out, but really we are using past trends over multi years. Where we are trending now on 3 stack, we analyze that, and then we look at, eighteen. Most importantly, what's out there in terms of brands and how we're retailing the goods.

Speaker 1

And by the way, our buying here's nineteen. One thing that's really happened during COVID, and I think I've talked about this, is we were able to learn a lot of things and for our merchants, nineteen. Which are very well connected during COVID. One advantage they've learned is how to communicate faster, whether virtually or nineteen with the technology. And so I think there's been some neat faster moving approach to certain categories that I think we've actually improved on Versus a few years ago.

Speaker 1

But that I think that really answers it.

Speaker 6

That's really helpful guys. Thanks so much.

Speaker 1

Nineteen. Thank you.

Operator

Thank you. Our next question comes from Omar Saad. Your line is open.

Speaker 1

Nineteen. Thanks for taking my question. Couple of little follow ups.

Speaker 7

Did I hear you guys say somewhere in

Speaker 1

the prepared remarks that you nineteen. I think the expense headwinds are moderating going forward. I just wanted to kind of clarify what you meant by that in a strong straight comment. And do you mean from here or do you mean at some point in

Speaker 7

the future? Nineteen. It sounds like Europe was probably kind of the biggest kind of demand drag in the Europe and the Ukraine war rather was the biggest demand drag in

Speaker 1

the quarter. The cold wet spring, was that also a factor in your business in the quarter?

Speaker 3

Nineteen. It's hard to talk on weather patterns. It certainly didn't help early in the quarter. So probably In the month of February, I think our trends were pretty much where they once we got a couple of weeks, as I said, past 18. Yes, the war that started, they were pretty much, they were closer to being in line with what we thought.

Speaker 3

And we also, nineteen. We did see an uptick though not just in the U. S, but an uptick in both Canada and in Europe as well, Both in Mainland Europe and in the UK. So I think it was pretty much similar across all geographies. Nineteen.

Speaker 3

The first thing I'd say is in terms of the freight costs, which are certainly the largest deleverage, eighteen. Our freight costs came in as planned for the Q1. So what we anticipated is what happened. 20. As we look forward, we have reflected at least what we are seeing nineteen.

Speaker 3

At this point in time, it's best we can determine for the rest of the year due to the freight cost. The primary difference at this point in time nineteen. Is the diesel, the oil costs going up, certainly there are additional costs to that, I'd say, in the $40,000,000 to $50,000,000 range, which have been reflected in our plan. Everything else that we see, we think we Adjusted for the higher spot in the ocean freight, have higher demerge costs and other things of which eighteen. It's not that we see them going down, it's just we were going against some larger compareants.

Speaker 3

So when you talk about HomeGoods, we do see a both 18. Decrease in our deleverage and a decrease in our actual overall rates in the back half of the year. Eighteen. And some of that is a lot of that is attributed to a lot of what our teams have done, starting to negotiate new contracts, nineteen. The mix of goods, they have done a nice job in, I'll call it, port utilization, eighteen.

Speaker 3

Moving to the ports where there is less of an issue or where we have better whether it's East Coast and get a better benefit. Nineteen. And I think some of that is more to what Ernie talked about going forward where we do see eighteen. The benefits of what we're going to be doing to reduce costs, some of that benefit we see going into 'twenty three and 'twenty four nineteen. As a reduction in those costs, which we think will benefit our margins.

Speaker 3

At the same time, what we're seeing nineteen. We think we've been doing things to reduce the volatility in the freight costs and at the same time improve nineteen. And also, Ernie didn't probably talk to, but going forward, nineteen. We've been dealing over the last 2 years with longer lead times that we typically have in our model. Nineteen.

Speaker 3

We still believe less than everyone else, but more than what we have, and we are starting to see some benefit in having reduced lead times both domestically and international. Eighteen. And again, I think that will bode well for us being even more flexible in reacting going forward to the current trend. So, nineteen. I think that's the biggest.

Speaker 3

The wage and the other costs are pretty much as planned. What we reflected nineteen. And the guidance is pretty much we have no change at this point. So we think what we put in is more than sufficient to cover Our future cost, at least for at the time being.

Speaker 1

So Omar, just to make sure you understand to your point, it's a great nineteen. Pricing strategy and some of the headwinds moderating that we could approach potentially an 8% profit margin in the next 3 years there, nineteen. Which I think, as all of you know, is not where we've been and I think that would be significant inroad to profitability there. Nineteen. So we have sat with that management team and looked at all these different aspects from pricing to the freight discussion Scott was just talking about where we think that's going, understanding the post Brexit headwinds on that, and we think we can get from the 6% change to approach 8% really in the next 3 years.

Speaker 1

And then in HomeGoods, which is obviously More directed by these freight issues in terms of a cost. I think that's where we are feeling, we can get a chunk of that Margin back, as Scott was saying, in the nearer term. So feeling good about that, eighteen.

Speaker 3

Yes. And in the back half of the year, I think we have one more. Our peak deleverage in freight costs is going to be the Q2 of this year nineteen. And that disproportionately impacts HomeGoods. But the back half of the year, as we talked to just with freight and obviously we do believe We're going against lesser sales, won't have the deleverage on the comps.

Speaker 3

Last year also, we had an abnormally low, given when we ran a forty 5. We had an abnormally low markdown rate at HomeGoods as well. And when we look at the back half, we're going to be nineteen. Significantly higher in our pretax margins at HomeGoods, not necessarily at double digit, but significantly higher in the back half. So nineteen.

Speaker 3

I think that's a big change.

Speaker 7

Got it. That's really helpful color. And for what it's worth, your ability to forecast and manage your inflationary expenses, including 18. Certainly, distinguishing yourself. Yes.

Speaker 1

The teams have worked really hard, Omar. I am glad you have noticed that. Eighteen. We are trying to, as you could tell quarter by quarter, we try to talk about that in advance and really give all of you an idea. And eighteen.

Speaker 1

As you can see, we've been pretty consistently close to being right on the button on where we thought they were going to be. The good news is nineteen. The good news on this call, we're telling you, we think we know where some of these costs are going. We're going to start leveraging and we're going to start getting these costs down, nineteen. As well as at the same time, continuing to expand on our pricing strategy.

Speaker 1

2. So both are positive.

Speaker 3

Yes. So again, it goes back to what Ernie was saying about the pricing strategy and the mark on. Nineteen. We see continued strong mark on both equal and better than planned for the back half of the year. 18.

Speaker 3

Correct. And that along with the pricing strategy The average ticket. The average ticket is what's allowing us nineteen. It's obviously not due to the sales because we are actually losing several pennies due to that, but we are more than offsetting it by those two components That along with some expense management. So those are why we are raising the full year.

Speaker 7

Thank you. Cheers.

Speaker 1

Nineteen. Thank you.

Operator

Thank you. Our next question comes from Ike Boruchow. Your line is open.

Speaker 8

Nineteen. Hey, guys. So I guess my question is kind of Scott to what you were just saying, U. S. Comps coming down, the margins going up, Clearly more of an issue of HomeGoods.

Speaker 8

I guess my question is bigger picture. Internally, how do you guys identify that the pricing initiatives that you're taking Are not somewhat responsible for the negative comp reaction that you're seeing in the U. S. And specifically at HomeGoods. I'm just trying to understand how you kind of balance the pricing you're taking against potentially some of the lost revenue you might get.

Speaker 8

Just trying to understand how you guys think about that internally?

Speaker 3

I can go ahead. Yes. I'll then

Speaker 1

Mike, I'll jump in. Yes.

Speaker 3

I mean, again, we do not see any differential nineteen. Between the products that have had price increases or changes in prices versus the prices that didn't have it. So nineteen. And we haven't seen any change in our markdown rates, our turns and all that.

Speaker 1

Yes, we can see it by SKU. So we can see the actual 2, that where the price was adjusted versus a non price adjusted SKU and we'll see no difference in turn. The rate the goods are selling at, in addition to our turns we had it in Our trends are as good, if not better than they were pre COVID, when none of this was going on. So that's really a great nineteen. Ultimately, that's a true measure of it.

Speaker 1

And then we have the qualitative studies that we're doing. And nineteen. When we do take these raising up retails, it's not in a vacuum or most often looking at what the other retailer has done in terms of nineteen. So remember, you might think, oh, we just raised the well, no, we raised the retail because that item or category has been raised around us. Nineteen.

Speaker 1

So we are following, we are not leading. It's where we obviously might have been too low to begin with or whatever based on nineteen. Other people have already gone up or promoted less. It's a great by the way, great question. As you can imagine, we've been watching this all along.

Speaker 1

And then if you look at HomeGoods, I mean, they were just up against a 40. It's as simple as they were up against a 40 comp. So when they dropped 2. A 7. They were still on a 33 stack.

Speaker 1

They are still on the 33 stack of growth.

Speaker 3

Yes. And the thing is that They were remarkably similar last year at the home in Marmaxx and the home increase nineteen. In HomeGoods, and they're remarkably similar this year, our home within Marmaxx. So it's similar result Happening in both places, so.

Speaker 8

I guess, sorry, just one quick follow-up. I guess what I'm just trying to understand is if it's not If the U. S. Comp lowered outlook is not due to the pricing initiatives, then what are you attributing the weakness nineteen. Relative to kind of 3 months ago when you initially gave that guide.

Speaker 8

I guess that's probably my question.

Speaker 1

So really, well, first of all, part of that is nineteen. Remember, we did that before the war happened, before fuel spiked even more. And so that was all after the initial. And nineteen. When we and we talked about this, we were taking our best guess off a year where we had a huge growth.

Speaker 1

So we're kind of off like a Point or 2, but given we never knew. We were taking our best guess early as to where we would be. And then you had other dynamics happened around us that are impacted. The good news is, by the way, which is why the other question earlier We are still looking at a 4% to 5% in the back half, which is a healthy sales increase At plan, which is a healthy sales increase driven by a little more normalized we're up against the what in the back half, Scott?

Speaker 3

Twenty. Yes, we're going down from a U. S. Comp of 19% in the first half to 20 14%. At least at the high end of 20 14, It's closer to the similar high end where we were running pre COVID for 2 out of 3.

Speaker 1

Yes, yes.

Speaker 3

So 18. It feels You

Speaker 1

know what happens, Ike, as part of this is if we didn't have that plan out there and we just went out with a lower plan to begin with and got even more we try to take our eighteen. Yes. That's a conservative plan. So in this case, we're coming in higher on the profit and the sales. So it's kind of nineteen.

Speaker 1

It's really good news overall.

Speaker 3

It's kind of like what we said last year for multiple, multiple quarters when asked how are you going to do against the comps. Right. 2. Yes. We didn't have a crystal ball on exactly how we were going to do against the 40 comp, whether it's in the home at Marmaxx.

Speaker 3

So I mean it's hard to get upset at a 33 18. Yes, 3 year stack. And so we feel we've managed through it. And again, we would have

Speaker 1

been By the way, others took a more pessimistic 18. Right, and forecast lower comps. And so yes, we might be missing by a shade, but we're still actually higher than some of the other comps.

Speaker 3

2nd. We didn't get a true run rate. That's very helpful.

Speaker 1

We

Speaker 3

didn't get a true run rate or at least a run rate that's now about 2 months in the making eighteen. And all we are doing, it's not a crystal ball here, we are just holding at the high end That 3 year stack.

Speaker 8

Yes, very helpful. Thank you so much.

Speaker 1

You're welcome. Thank you. Nineteen.

Operator

Thank you. And our final question of the day comes from Adrienne Yih. Your line is open.

Speaker 9

Good morning. Very nicely done in such a tough environment. Nineteen. Ernie, my question for you is Yes. You're welcome.

Speaker 9

You deserve it. At Marmaxx, eighteen. Do you perceive that with positive traffic that the comp was capped by a lack of inventory? And then can you help us within HomeGoods, nineteen. What categories within that are uptrending and downtrending?

Speaker 9

And how quickly can you shift the mix, A, within HomeGoods,

Speaker 1

nineteen. Yes, great question. Nineteen. So first of all, no, it isn't lack of inventory in Marmaxx actually. I think what's happened there is it's being driven that's nineteen.

Speaker 1

J. Rice:] It's nineteen. Traffic would have been higher, I think, if we didn't have maybe the fuel environment case and costs going up around us. So that There was really just about we were thrilled with the 3% comp at Marmaxx against a I think it was a 12% last year. Eighteen.

Speaker 1

So, Barmax is trending very strong like the way they are starting in the 2nd quarter. To your question, I will go to your last question, they are already eighteen. Flexing their home business. They have already flexed it actually. So to your point, how fast they have already been doing it.

Speaker 1

Nineteen. So they flex the businesses back and forth almost weekly, Adrianne. But in terms of affecting the buying to those flexes, eighteen. Yes. That takes about a month, I would say, between the buying and the planning and shifting the inventories.

Speaker 1

Why can we do it faster? We turned that business so fast nineteen. That they are able to physically flex the store faster and our shipping out of our DCs is well controlled and reactive. Eighteen. We have a terrific planning analysis.

Speaker 1

So we have an entire team where their job is to Massage the shipping by category, by department into the stores. When stock gives you that inventory level, The bulk of that increased inventory is actually in our DCs. It's not in the stores. So our planning and allocation teams are able to Strategically decide how much of that do I ship when. And so you can imagine, if home slows up a little relative to expectations, we just ship less.

Speaker 1

Nineteen. And we shipped more in apparel. And Marmaxx has been doing a great job actually on that. And in HomeGoods, the categories, I think your other question was, nineteen. We don't give which categories are high categories.

Speaker 1

The only thing I can tell you is to add some color to it, this will probably tell you something, nineteen. Our HomeSense business, which has a lot of bigger ticket items, has been super healthy. Nineteen. So we're very happy with that business. We continue to look for opening more of those down the road.

Speaker 1

Again, when you walk into a HomeSense, half the store nineteen. As furniture and lighting and rugs and categories that, I think traditionally have been nineteen. A lot have been bought online. What's great about our home business is customer gets to buy it and take it that day, nineteen. Which has been, I think, and a reason we will continue in HomeSense and at HomeGoods continue to gain market share.

Speaker 1

We have such an advantage over eighteen. The online home players. And so those categories have been very good and I think they will continue to be very good. Nineteen. That's a high level, that's what I'd like to mention there.

Speaker 9

That's super, super helpful. It's nice to see the environment moving towards your model, so and you guys are continuing so well. 18. Good luck.

Speaker 1

Thank you, Adrianne. And that was our last call. 18. So thank you all for joining us today. We have enjoyed the discussion.

Speaker 1

We will be updating you again on our Q2 earnings call in August.

Operator

Thank you for participating.

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TJX Companies Q1 2023
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