TJX Companies Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 17, 2022

Key Takeaways

  • Second quarter outperformance: Pretax margin of 9.2% exceeded plan and EPS of $0.69 was at the high end of guidance, driven by stronger-than-expected merchandise margins and disciplined expense controls.
  • U.S. comparable sales decline: U.S. comp store sales fell 5% in Q2 (Marmaxx down 2%, HomeGoods down 13%) as high inflation weighed on consumer discretionary spending.
  • Raised full-year outlook: FY adjusted pretax margin guidance increased to 9.7%–9.9% and EPS to $3.05–$3.13, reflecting ongoing merchandise margin improvement and lower freight and wage headwinds.
  • Inventory and liquidity position: Inventory per store is up 35% year-over-year but turns are above pre-pandemic levels; the company ended Q2 with $3.5 billion cash and returned over $1 billion to shareholders.
  • Off-price model strength: High merchandise availability, flexible buying and “treasure hunt” shopping experience position TJX to capture market share and drive holiday-season growth and long-term profitability.
AI Generated. May Contain Errors.
Earnings Conference Call
TJX Companies Q2 2023
00:00 / 00:00

There are 6 speakers on the call.

Operator

And gentlemen, thank you for standing by. Welcome to The TJX Companies Second 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 August 17, 2022.

Operator

I would like to turn the conference call over to Mr. Ernie Herrmann, Chief Executive Officer and President of The TJX Companies Inc. Please go ahead, sir.

Speaker 1

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

Speaker 2

Thank you, Ernie, and good morning. The forward looking statements of the company's plans to vary materially. These risks are discussed in the company's SEC filings, including without limitation, the Form 10 ks filed March 30, 2022. Further, these comments and the Q and A that follows are copyrighted today by The TJX 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 via 3rd party, We take no responsibility for inaccuracies that may appear in that transcript.

Speaker 2

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, cjx.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.

Speaker 1

Good morning. Joining me and Deb on the call is Scott Guiltenberg. I'll start today by once again thanking each of our global associates for their hard work. I truly appreciate their commitment to bringing our customers excellent value every day. Now to our results.

Speaker 1

I am very pleased with our 2nd quarter pretax profit margin, which was above our plan and our earnings per share, which were at the high end of our plan. This is despite U. S. Comp sales coming in lighter than we expected as we believe historically high inflation impacted consumer discretionary spending. We achieved this strong profitability through better than expected merchandise margin and disciplined expense management.

Speaker 1

I can't emphasize enough how this quarter is a testament to how great our business model is. Across the company, our talented associates all played a part in delivering great value to our customers every day and helped our company drive strong profitability in the quarter. As we enter the second half of the year, We see the flexibility of our business and our value proposition as key advantages in the current retail landscape. While we're not immune to macro factors, over our 46 year history, the flexibility of our off price model and our commitment to value have served us very well in different kinds of macro environments. We attract a wide range of customers, which we believe is a key advantage in today's environment.

Speaker 1

Long term, we remain very confident and our plans to capture market share and improve the profitability profile of TJX. I'll talk more about our opportunities for the remainder of 2022 and beyond in a moment. But before I continue, I'll turn the call over to Scott to cover our Q2 financial results in more detail.

Speaker 3

Thanks, Ernie, and good morning, everyone. I'd like to echo Ernie's comments and thank all of our global associates for their continued dedication to TJX. I'll start with some additional details on the Q2. 2nd quarter consolidated pretax margin of 9.2% was above our plan. We are very pleased with our strong flow through despite our softer sales.

Speaker 3

Our pretax margin outperformance was primarily driven by merchandise margin and effective expense management, which were both better than we planned. Pre tax margin was down 150 basis points versus last year's adjusted 10.7%. Merchandise margin had a significant benefit from a combination of strong mark on and our pricing initiative, but was down due to 240 basis points of incremental freight pressure. Incremental wage costs were 80 basis points. 2nd quarter U.

Speaker 3

S. Comp store sales decreased 5% over an outsized 21% open only comp increase last year versus fiscal 2020, which when summed together would be a 16% comp increase on a 3 year stacked basis. Moving on, we are very pleased that our comp sales in our overall apparel business at Marmaxx were slightly positive every month of the quarter. U. S.

Speaker 3

Home comp sales were down low teens versus a 37% U. S. Home open only comp increase last year and were the primary driver of the U. S. Softer of the softer U.

Speaker 3

S. Sales trends we saw. For the Q2, U. S. Average basket was up, driven by higher average ticket and U.

Speaker 3

S. Customer traffic was down. Lastly, earnings per share of $0.69 were at the high end of our plan. Now to our divisional results. At Marmaxx, 2nd quarter segment profit was 12.9%.

Speaker 3

Comp store sales decreased 2% versus an 18% open only comp increase last year. Again, it was great to see their overall apparel comps slightly positive. While customer traffic was down, we saw an increase in Marmaxx's average basket driven by a higher average ticket. At HomeGoods, 2nd quarter segment profit of 2.7% was hurt by nearly 800 basis points of incremental freight costs. Comp store sales decreased 13% versus a 36% open only comp increase last year when we saw outsized spending in home related categories.

Speaker 3

HomeGoods average basket increased significantly driven by a higher average ticket and customer traffic decreased. We were very pleased with the improvement in profitability we saw at our international divisions. At TJX Canada, 2nd quarter segment profit margin of 15.8% exceeded their pre COVID Q2 fiscal 2020 level. Overall sales increased 22% and benefited from having stores open all quarter this year. On a constant currency basis, TJX Canada sales were up 28% in the 2nd quarter.

Speaker 3

At TJX International, 2nd quarter segment margin of 7% was significantly higher than the Q1 and also exceeded the pre COVID Q2 fiscal 2020 level. Overall sales decreased 7%. This sales decline is entirely due to the impact of foreign exchange. On a constant currency basis, TJX International sales were up 6% in the 2nd quarter. As to e commerce, It remains a very small percentage of our overall sales.

Speaker 3

We continue to add new brands and categories to our sites, so shoppers can see something every Something new every time they visit. Moving to inventory. Balance sheet inventory was up 39% versus the Q2 last year. On a per store basis, inventory is up 35% on a constant currency basis. We are very comfortable with our balance sheet and store inventory levels.

Speaker 3

Importantly, overall store inventory turns are better than our pre pandemic levels. I'll finish with our liquidity and shareholder distributions. During the Q2, we generated $641,000,000 of operating cash flow and ended the quarter with $3,500,000,000 in cash. In the Q2, we returned over $1,000,000,000 to shareholders through our buyback and dividend programs. Now I will turn it back to Ernie.

Speaker 1

Thanks, Scott. I'd like to start by sharing the key traffic, sales and profitability opportunities we for the remainder of the year. Starting with the top line. First, we are excited about our merchandising plans for the fall and holiday Again this year, we will be flowing eclectic assortments to our stores and online multiple times a week. This is a strategy that has worked well for many years and sets us apart from other retailers during the busy holiday season as shoppers Can see something new every time they visit us.

Speaker 1

We are confident that we can execute on our merchandising initiatives and manage our supply chain to keep our shelves fully stocked. 2nd, availability of merchandise across good, Better and Best Brands is exceptional. We have plenty of open to buy and I have great confidence that our buying team of more than 1200 buyers We'll bring the right brands, fashions and values to our consumers throughout the years. Next, we are laser focused On driving traffic and sales with our marketing initiatives, this year we have sharpened our messaging to reinforce our value leadership position. Each of our banners are communicating that we offer shoppers more for their money and at the same time deliver great brands and quality.

Speaker 1

In an environment where consumer wallets are stretched, we believe it is as important as ever to amplify our value messaging across television, digital and social media platforms. I also want to highlight that our customer satisfaction Scores remain very strong. Further, we continue to attract a significant number of millennial and Gen Z shoppers, which we believe bodes well for the future. Moving to profitability, We are extremely pleased that we are able to increase our full year pre tax margin guidance in this environment, Giving us confidence are the merchandise margin opportunities we see. The buying environment is very attractive And we believe we can continue to benefit from buying better.

Speaker 1

Further, our pricing initiative is working very well. Our teams have done an outstanding job implementing this initiative over the past year and we are very pleased that our value perception scores remain very strong. Again, we are seeing extraordinary off price buying opportunities in the marketplace and have no issues with overall availability. We are in a terrific inventory position and we have plenty of open to buy to take advantage of the current environment. This allows us to offer even more exciting merchandise and value to our shoppers, which is our top priority every day.

Speaker 1

Lastly, we remain focused on managing expenses and continue to look at ways to operate our business more efficiently. Now, I'd like to remind you of the characteristics of our business that we believe strongly position us to continue our successful growth around the world over the medium and long term. 1st and foremost is the strong appeal of our great values, Outstanding merchandise and differentiated treasure hunt shopping experience. Further, we believe the ability to touch and feel merchandise and take it home the same day is very important to consumers. 2nd, we see an excellent opportunity to grow our global store base by at least another 1500 stores in our current geographies.

Speaker 1

We are extremely confident That there will be more than enough real estate locations and merchandise available to support our store growth plans. Again, being one of the most flexible retailers in the world is a tremendous advantage. The flexibility of our opportunistic buying, Supply chain and store formats enable us to change up our floor space to expand the hot categories and trends that shoppers are looking for. As to profitability beyond this year, we remain committed to returning to our pre COVID pretax margin level of 10.6% within 3 years. We expect that across all of our divisions, Our merchandise margin opportunities, the moderation of expense headwinds, particularly freight and our focus on expense management will contribute to our improved profitability.

Speaker 1

As always, we believe driving outsized sales It's our best opportunity to improve pre tax margin over the long term. Turning to corporate responsibility, I'd like to update you on our commitment to building a more inclusive and diverse workplace. Last year, we completed our Global for the company increase the representation of diverse associates throughout all levels of our talent pipeline Equip leaders with the tools to support difference with awareness, fairness, sensitivity and transparency and our role and responsibility and inclusion. We have a number of initiatives underway to help support these priorities. For example, we have introduced a new leadership competency and cultural factor focused on inclusion.

Speaker 1

In addition, associate resource groups similar to those we have in the U. S. Have launched and are now active in both Canada and Europe. Also, Teams throughout the organization have set up committees to better incorporate inclusion and diversity into our everyday work. In our communities, we continue to support a number of organizations that work with black communities and other communities of color.

Speaker 1

In addition, we have deepened relationships with some non profit partners in the U. S. To expand our reach to diverse students for recruitment efforts. We appreciate that this is a work in progress And we remain committed to our global priorities and helping associates feel welcome, valued and engaged. In closing, I want to emphasize my confidence in the future of TJX.

Speaker 1

We have a long track record of successfully operating through many different types of economic and retail environments. We believe value is as important as ever to consumers And delivering great value has been our mission for over 45 years. We are very confident in the power of our off price buying and pricing initiative, while maintaining our value gap with other retailers as always. We continue to invest in our stores and shopping experience, which we believe positions us strongly and we remain committed to returning cash to shareholders. Further, we have a management team with decades of off price expertise at TJX and a very deep bench of talent who have successfully navigated through the unprecedented COVID environment.

Speaker 1

I am convinced That we are set up well to grow our top and bottom lines over the medium and long term and I'm confident in our plans to grow TJX and to an increasingly profitable $60,000,000,000 plus revenue company. Now I'll turn the call back to Scott for some additional comments, and then we'll open it up for questions. Scott?

Speaker 3

Thanks again, Ernie. I'll start with the full year. We now expect full year U. S. Comp sales to be down 2 percent to 3% versus an outsized 17% U.

Speaker 3

S. Open only comp increase last year. This guidance now reflects the flow through of our Q2 U. S. Comp sales and our expectations for the second half of the year, which assumes our 3 year stacked U.

Speaker 3

S. Comp continues at levels similar to recent trends. For the full year, we are now planning total TJX sales in the range of 49.6 to $49,900,000,000 The lower sales guidance includes our lower than planned second quarter sales and our updated sales expectation for the second half of the year. Despite the reduction in our sales plan, we are pleased to be raising our guidance for the full year adjusted pretax margin to 9.7% to 9.9%. This is 10 basis points higher than our previous guidance due to our assumption for even stronger flow through for the back half of the year.

Speaker 3

Our improved profitability outlook versus our prior guidelines is due to stronger merchandise margin, Better expense management and less incremental freight and wage pressure expected in the second half of the year. For modeling purposes, we are now assuming 140 basis points of incremental freight expense and 70 basis points of incremental wage costs. For full year adjusted earnings per share, we are now planning a range of $3.05 to $3.13 which is up 7% to 10% over last year's adjusted $2.85 This guidance now includes a $0.03 negative impact from FX that was not contemplated in our original full year plan. Excluding this impact, the high end of our earnings per share guidance would be the same as our original plan. For modeling purposes, for the full year, we're currently anticipating an adjusted tax rate of 25.5 percent, Net interest expense of approximately $20,000,000 and a weighted average share count of approximately 1,170,000,000 We remain committed to returning cash to our shareholders through our dividend and stock repurchase programs.

Speaker 3

In fiscal 2023, we continue to expect to buy back $2,250,000,000 to $2,500,000,000 of TJX stock. Now to our Q3 guidance. For the Q3, we're planning pretax margin in the range of 10.1% to 10.4%. This guidance assumes approximately 100 basis points of incremental freight expense and about 80 basis points of incremental wage costs. In the Q3, we are planning U.

Speaker 3

S. Comp store sales to be down 3% to 5% over an outsized 16% U. S. Open only comp store increase last year. Next, we are planning 3rd quarter TJX sales in the range of 12.1 to $12,300,000,000 For modeling purposes, in the Q3, we're currently anticipating a tax rate of 25 0.8 percent net interest expense of approximately $2,000,000 and a weighted average share count of 1,170,000,000 As a result of these assumptions, we're planning 3rd quarter EPS of $0.77 to $0.81 per share.

Speaker 3

Our Q3 and full year guidance implies that for the Q4, pre tax margin will be in the range of 10.1% to 10.4%. U. S. Comp stores will be in the range of flat to down 1% and earnings per share will

Speaker 1

be in the range of $0.92 to $0.96

Speaker 3

In closing, I want to reiterate that we are confident with our medium and long term growth and profitability plans. Further, we have a strong balance sheet and are in excellent financial position to navigate the current environment, while simultaneously investing in the growth of our business and returning significant cash to our shareholders. Now we are happy to take your questions. And as we do every quarter, we are going to ask that you Thanks. And now we will open it up to questions.

Operator

Thank you. We will now begin the question and answer session. Our first question will come from Lorraine Hutchinson. Your line is open.

Speaker 4

Thank you. Good morning. Can you just talk a little bit about your view of the U. S. Consumer and how that changed over the course of the quarter?

Speaker 4

Are you seeing any pushback to the price increases you've taken? And are you seeing that trade down customer shop your store a little bit more? Thank you.

Speaker 1

Thanks, Lorraine. First of all, U. S. Customer trend in the quarter, it's moved around a bit. I think What happened in this quarter is when a little bit of that fuel spike, if you remember back in the middle of the quarter, that's when we had a big ramp up On that, in addition to really food, those are the 2 inflationary categories that really we feel can impact Our consumer the most, but the fuel has obviously come down more recently.

Speaker 1

So I'm thinking there we might have a bit of a lag in terms of the benefit of that having coming down and That could work out better for us as this quarter moves on. There was no let me be clear on your question about pushback on the pricing. We have 0. Not only do we do qualitative studies on it, we are actually able to measure Well, down to the SKU level, turns how we're selling an item where the retail has been adjusted, But even entire categories, departments and the store, in fact, we're measuring our turns and all of these things relative Pre COVID fiscal 2020 calendar 2019 and in most cases We are actually turning our inventories faster than them. And that as you know was a very good year for us And a real actually model of business that we're very happy with from an inventory turn in sales perspective.

Speaker 1

So we have zero concern overall. We've had a couple of items here that we find and we react quickly if it hasn't worked. But I would say, Marin, our batting record is in the probably 95% zone. So great question by the way, because of course, We monitor that every week. So that has been a non issue.

Speaker 1

Again, we felt Lorraine was prudent to When we went to this more conservative sales for the back half, I would tell you we did that Knowing that we want to be conservative, it's been a little ball, it's moved around a bit. We tend to look at the 3 year stacks, how do our Sales compared to FY 2020 and that's kind of where we looked at the recent trend at the end of the second quarter And that's where we just kind of applied that going forward. Our intention is always, as you know, to beat that. The management team in every division is On a mode to beat that, I have to tell you that I think and it's too far out for us to Change the numbers right now from we have Q4 is where we feel like there's a lot of opportunity for us. And I would say if you look at and I know you're aware of this, we kind of ran out of some steam there in some categories and businesses last year.

Speaker 1

And I'm sure I'll get into it more and other questions during the call, but we have a I feel like a great opportunity to drive some more incremental sales in Q4 specifically. Thanks for the question.

Operator

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

Speaker 5

Great. Thanks. So it's kind of a perfect setup for my question Ernie. So on the overall product availability, are there any inventory constraints by category You still see remaining or on the very attractive buying environment and maybe some of the category opportunity you left on the table last year That you cited. Do you see this translating now to an optimal fall and holiday assortment across apparel and home?

Speaker 5

And Maybe just last, could you elaborate on the excitement you cited in the release for some of the back half initiatives to drive traffic?

Speaker 1

Sure. Great question, Matt. And it does piggyback on what we started to talk about with Lorraine. Well, constraints, I would tell you there were no the only constraints that would apply in this discussion is the And us having to hold back all the merchants from buying too much too soon. So we have this has self inflicted constraints we're putting on Because the teams right now and I know my senior team right now, one of their prime responsibilities has been to This really gets at the meat of what's been going on has been to get at holding the merchants back from buying too much too soon.

Speaker 1

As you know, we mentioned in the release and I think even ahead of this many of you were aware of the amount of Goods in the market, I hesitate to use the word unprecedented, but it is at a different level, I would say, than we've seen and it's across all good, better and best Zones. And so I'm going to give you an example that speaks to a place where we've been challenged, but I would Tell you gives us a level of optimism, as you would say, to getting to that optimal mix and an excitement level for the back half. So we've been struggling in our home area as other retailers has and you can see with the home goods sales. However, they have done as has Marmaxx specifically, both have gone in and kept their Tory is very clean and taken aggressive markdowns to ensure that we go into the back half with no liabilities and mix so that we can deliver as much Fresh excitement based on what's working and chase the hotter trends and vendors. So HomeGoods specifically, again, where we've been A little softer on the 3 year stack than we would have liked, is in a terrific inventory position now.

Speaker 1

They put in a lot of work to get there. But what they've done is created significant open to buy to the point of and normally we don't give Numbers like I'm about to give you, but I would tell you at this point in time that we are going to buy 4,000,000 units in home goods over the next few weeks, All to be what we call ladder planned and shipped into September for selling in September. And because Of the market situation with the availability there, we're able to go after the categories that are happening, the healthy ones in home and buy them even better. So we've been buying goods really better than ever in home goods recently. And I think, A, it's going to help us drive sales because we are going to be so fresh.

Speaker 1

We're going to Taking some of the best goods, we're going to be able to pick and choose out of the market because there's so much availability. And that's again 4,000,000 units that will be bought in the next couple of weeks And ship to the stores and to sell buy, ship and sell in the next month of September. So Marmaxx on a larger scale, Great inventory position. I think what's happening in the brands and this might Preeti on some of the other questions, but for the excitement for Q4 to get to the optimal mix, when we get to 4th quarter, Brands mean so much for gift giving. And so what I'm very happy about what I'm starting to see on the On order, again, Significant open to buy, significant availability across better and best and good out there as I think we're going to have a That has even more brands and some new vendors that we didn't even have last year in some of our hottest categories.

Speaker 1

I actually get an update on key vendor buys every week and the last 2 weeks have yielded some vendors in some meaningful quantities that I know we did not have last year. So it's all tough to measure and put into the sales forecast right now, which is it just gets me excited that I think we have some upside there. So sorry for the long winded answer, but you're touching on some of the most exciting part of the model and the part of the secret sauce that really I think It's going to set us apart from everyone else. So thanks.

Speaker 5

Great color. Thanks, Ernie. Welcome.

Operator

Our next question will come from Kimberly Greenberger. Your line is open.

Speaker 4

Great. Thanks so much for taking the question. Arne and Scott, you guys have been talking about getting back to this sort of 10% plus pretax margin in the back half. And I mean in a year when so many retailers are struggling with margin visibility, you guys look to be sort of solidly on track to hit those targets. I wanted to know if you could sort of step back and talk about margin, not Specific targets necessarily for 2023 or 2024, but just what are the puts and takes As we head into next year and the following, what are the puts and takes on margin?

Speaker 4

And do you see opportunity to sort of claw back even more of the margin here over the next couple of years

Speaker 1

that we

Speaker 4

saw under some pressure through COVID? Thanks.

Speaker 1

Yes. Kimberly, I'll let Scott jump in on Some of the big pieces of this, but what I'd like to highlight one thing I mentioned in the script is, well, first of all, I'm thrilled with we and we called this out back really at the beginning of the year that we thought we could approach Getting approach of 10%. We're getting there as we're talking I think at 9.7% to 9.9% this year. But even over the 3 years, Scott, I think we'll talk to this, We're feeling good about getting back to that pre COVID 10.6% for TJX, which is right, I think what you're getting at. And he's going to give you some of the puts and takes.

Speaker 1

But let me give you another piece on that, that I think is really One thing is a moderation obviously of some of the other expenses around us, freight for example. We realize where wage is going. That's been something we haven't talked on this call about, but we kind of have a good feel for where that's The big game changer right now in this environment, in addition to what Scott's going to talk about is our merchandise Margin, not that I'm leaving them a lot to talk about, is the merchandise margin Opportunities we see really from 2 things. We've been talking more in the last two calls about retailing, Kimberly, right? Retailing Selectively better and the way we're changing retail, but the buying better is one of the things right now we're seeing is we're able to Really, because of the availability out there, lower our costs on light goods.

Speaker 1

And so we're kind of Over the next couple of years, what I'm envisioning is we're going to win on both sides of it, on the retail and on the cost of the goods, Because our buyers are doing a terrific job in the market. And again, the market right now across all the different categories And vendors is really yielding some amazing opportunity and this will not be short Based on what's happening in the industry as far as store closures and market shift and online shifting patterns Where we think we get market share, but we get margin opportunity on that. Scott, I don't know if you

Speaker 3

I needed to put some my mouth got a little dry the last few minutes, but the few things. The first, I'd say that we're starting, as Ernie said, I mean, when we started the year, we thought we were going to be similar to last year in that 9.5%, 9.6% range. So The fact that we have dropped effectively ex FX almost $2,000,000,000 in sales Our original guidance and our margins are going up. I think just speaks as Ernie I think said several different times to the model and our ability to In a sluggish environment, we've never said we're immune from sales. We've been able to take advantage of those other aspects of the business under the gross margin And the and expense management that we do when we flex down.

Speaker 3

Again, Ernie, I think Touched on it, but we've managed our markdowns quite well, maybe a little more due to some of the home sales, but our markdowns Have been slightly higher, but in line with what we would have expected. And as we move through as the freight starts to moderate, a lot of this has to do with the freight. We did say if the environment Such that the freight would moderate, we would be able to improve our margins. That certainly is what happening In the back half and we still would expect our freight rates to be better next year. Some of that has to do a lot with what our teams are doing, the logistics folks and others in terms of a lot of the mitigation strategies, getting longer For ocean freight, we are taking advantage of where we're moving our goods and to what ports.

Speaker 3

And I think a lot and a lot of other And we think some of the demurrage costs and other things we believe are going to be going down next year. So some of that's reflected in our back half and some of that we think Continue into next year. By starting at a higher base next year, I mean, we would hope that we're in a sluggish environment Worldwide from an economic point of view, homes in home, obviously, although we've changed the mix that apparel is at 5% more than It used to be still more than what it was in home than compared to what it was in 2020. And I think we're maintaining these margins as we go into next year and Get back to the level of comps we would see pre COVID, I think that with some slight increases in retail, not that to the level we'd see this year, We should be able to, as we've spoken over the last several quarters, increase our profitability, assuming, as Ernie said, there's no major changes to the headwinds. So also this hasn't been a Other retailers have talked to it.

Speaker 3

The flow of both the merchandise into our distribution centers worldwide It has certainly not been optimal from an expense efficiency point of view and like what we call our output per hour. So I think those are things that next year We would hope to get better once we flow a little better. And I think get back to having less lead times in buying, so we're buying Closer to need. So I think again it's all setting us up well for a continued improvement on A more normalized sales increase.

Speaker 2

Great. Very clear. Thank you.

Operator

Thank you. Our next question comes from Paul Lejuez. Your line is open.

Speaker 1

Hey, thanks guys. Curious if you can talk a little bit about what you saw Throughout the quarter on a monthly basis, maybe changes in traffic patterns and any detail you might be able to provide by concept. And Ernie, usually you say something about the quarter to date period. So curious, if you're seeing comp trends in line with that 3rd quarter comp guidance. Earlier, I think you made a comment about maybe there being a lag effect on the gas price reduction.

Speaker 1

Does that mean that you have not Seeing any sort of a pickup as gas prices have come down, anything you could say on 3Q quarter to date? Thanks. Yes. I'll let Scott jump in, but I'll talk about the quarter to date. Basically, the guidance we gave is based on how we're trending.

Speaker 1

So that's We're right in line with what we just gave for guidance. To your point, could I'm hoping we get a little benefit as that fuel factor wears off a little. And The other dynamic that we're not sure of that was in the quarter, we haven't talked about it, is we had some Weather noise, I guess, a little during the quarter where the weather was for apparel was a little It was just extremely hot in certain areas of the country. So I don't know if that hit us by a little. So this is where we say we wanted to be prudent on our go forward Comp estimates and stay conservative.

Speaker 1

My goal and the team's goal It's to beat those. And I think we I just think we have upside. If you look at some of those other issues as well as We going into this quarter so far, I would tell you our flow was a little less Then probably we would have liked and that is getting into the stores as we Speak and I think that could give us a little bump up at the end of August going into September, Because we did run a little lighter than we would have liked at the end of July. So that hit Q2 and it's really hit us a little. Having said that, again, we're trending right now where we're giving you the guidance.

Speaker 1

So hopefully that gives a little color there.

Speaker 3

Yes. Just to add What Ernie said, I think we've been we've done the sales, I'll call it forecasting or what we put in our guidance Exactly the same way at the end of from we started the year to the Q1 to now and that we've taken whether it whatever we think the It's generally been 4 to 6 weeks of the most recent trend and use that for the rest of the year regardless of trying to Yes. As Ernie said, we think we might be able to do better in the Q4, but we've just held that trend because that's what we're seeing. Because last year was such a volatile On the upside, those comps, as we've said many times, we're 21% in the 2nd quarter, 16% in the 3rd quarter, moderating in the Q4 of last year, but still higher than in typical year. So We've just felt that was the more prudent way from a sales perspective.

Speaker 3

Within the sales And in the adjustment, it's more home goods adjustment than Marmaxx adjustment as our home sales have Yes. The home goods sales dropped a bit more than the Marmaxx sales from the prior trend and that's reflected And our go forward trends. Other than that, addressing maybe the first question that was asked on the call, Where Ernie alluded to, whether it's inflation or gas prices, in the Q1, For the first time in 5, 6, 7 years, we saw that our lower where our stores are in lower income Areas were dropped below the higher income areas. That is still true through the Q2, although the Change from the Q1 to the second was equal, but The higher demographic stores are still doing better than the lower. And again, that's pretty much of a big change versus the last 5 to 7 year trend.

Speaker 3

Everything, I think it just seemed to, at least for our spend, stay similar type of impact across the different demographic levels. And again, not much change also from a geographic perspective within the United States as well, pretty equal the change from the Q1 to the second.

Speaker 1

Yes. Thanks for the color, Scott. Ernie, what drove that slower flow relative to what you would have liked at the end of the quarter there? Well, when we so what we do is we look at the way sales are trending. And so when we were having that little bump down In July, we slowed the shipping a little bit and that's what we do.

Speaker 1

It's a big ship. And so we probably ended up with a little bit less shipping than we would have liked. However, we reacted a week or 2 later And we know it will be in good shape at the end here. We have an advantage, Paul, in the way we stage goods in our warehouse, right, because We've always talked about it. We can use it to manage.

Speaker 1

So if we see this happens quite a bit by the way. If we see sales slowing, we're able to slow our shipping out of our DCs. But sometimes you get caught off guard and this was one of those where we shift to the sales, but then the sales started nudging up a little and we realized, we I could have shipped a little bit more. And so it's just that's our own execution. Yes, I would tell you there was nothing Impact of that other than us.

Speaker 1

But the teams are great and they reacted quickly. And so we ended up with this a couple of weeks of blip, where we're probably giving up a little business, but then we'll be back on track really in about 2 weeks from now. So, yes, good question. It's That is part of the if it was easy, anyone would do it, right? But It's a big ship when you have that many stores.

Speaker 1

And I give the teams a lot of credit because they caught it, they catch it quickly. And by the way, I'm giving you the time, We don't talk about the times when 9 out of 10 times if we slow the shipping or increase the shipping based on the trend, it happens The right amount, which isn't always easy. This just happened to be one of the times we're a little on the wrong side of it. Got it. Thanks a lot.

Speaker 1

Good luck. Thank you.

Operator

Thank you. Our next question comes from Jay Sole. Your line is open.

Speaker 3

Great. Thank you so much. Just curious about what's baked into the guidance in terms of What you see from competition from the other off price retailers, meaning whether it's a Nordstrom Rack or Burlington or Ross, like given that obviously inventory availability Seems really strong for your company, but maybe it's not so great out there for everybody at large. Do you expect them to get more competitive? And what impact you think that would have on the business?

Speaker 3

Thank you.

Speaker 1

Yes, Jay, so we're pretty simple with the teams here. Again, our buyers are excellent and Our planning and allocation team and we the good news is we kind of keep them focused and I tell them not to worry too much about what the competitors are doing because Let's face it, we're in a bit of a fortunate position. This isn't anything we're doing, but we're so big and we have A lot of strong relationships with certain some of the strongest relationships with certain vendors, and some of the vendors don't overlap as much With those competitors you're talking about and some do, from what we've seen and what we Here, there's plenty of goods honestly to go to everybody in the off price world right now. And there typically is by the way. But right now, we don't foresee that as being any issue.

Speaker 1

I don't know how they that's up to them as far as How they're running their open to buys and what they're doing as far as how far they want to buy out or whatever. We right now, If anything, our strategy on the buying of goods is to get more liquid and it has been for the last month and to buy less Further out than we typically have because of we're not worried about other competitors buying the goods. We think there's going to be more goods An unusual amount more goods across all the branded areas, which by the way going back to what I mentioned before. I think for Q4 Gift giving, I think we're going to have some of the best branded content we've had in a while, again, regardless of what competitors are doing in terms of how much they are buying or not. But good now let me say good question.

Speaker 1

We do talk about our merchants talk about in a category with a vendor, Based on this amount of goods, do we think that could go to one of the other competitors? Is this important for us to have? Or what they weigh all of that out when they're making buys. And again, that's why I give them all the credit on handling it all really, really well in this environment. We I have to say, we like An environment like this where there's a lot of strangely enough a lot of volatility around that generally bodes well For us, because in the end, I usually think there's a market share opportunity for us to keep getting additional brick and mortar market share from other brick and mortar out there, Because the model is so flexible and it will allow us to chase the hotter category trends more nimbly than most retailers.

Speaker 1

Thanks for your question.

Speaker 3

Got it. Thank you so much.

Operator

Thank you. Our next question comes from Brooke Roach. Your line is open. Good morning and thank you so much for taking our question. Ernie, you've made some comments about the strong buying environment and the opportunity that that better buying can drive some of the margin improvement that is underpinning the improvement to 10.6 percent pretax margins.

Operator

Can you discuss your view on the longevity of this benefit and perhaps the opportunity for this buying environment to persist even when we've heard about some order book cuts into the second half of this year and also a more promotional retail environment overall? Thank you.

Speaker 1

Sure, Brook. Yes, these are just these topics Sure. Things we talk about internally quite frequently. First of all, we think we have multiple years of longevity to this strategy. From what we're seeing, there's even probably more opportunity in the retailing of the buying of goods as we continue as well as by the way, not just merchant Driven some of the costs that Scott mentioned could be a couple of few year trend because they Some of those freight costs went up so dramatically, so fast, it could be kind of a bit of a slow Correction, and we don't think it's going to happen fast.

Speaker 1

So between buying goods, retailing the way we're retailing, The fact that we mean more to the market than ever before and to key vendors And as well as well and you're talking about by the way the promotional environment. So we haven't seen the promotional environment. If anything Because of what's happened with inflation, again, we look at the promotional environment as less promotional and a lot of these costs are baked in even going Forward, I foresee the promotional environment not getting any worse for a few years. I think we're good for a couple of years there. And as I said back in the script, our mission still is our out the door retail that we provide to the consumer Have to maintain that gap between the out the door retailer that they have and what we sell it for, Our out the door retail, which is always our ticketed price.

Speaker 1

I do if you're onto a whole, we could spend a whole phone call on this. But if you look at the promotions that happened, there's still as you know a lot of retailers that are still doing the very high low game of a sale All the time. And it's I always look at that where consumers today are looking for authenticity. They're looking for an Citing treasure hunt entertaining shopping experience in stores and we continue along with that value We continue to provide those two things. In fact, one thing we haven't talked about today is we're very bullish on keeping our store Experian is right in line with the strong merchandise values and excitement that we're getting.

Speaker 1

So we're going back to our remodeling program aggressively. We have new prototype in our Marshalls business specifically that we're excited about, that we're starting to roll out because we want our We believe there's a market share gain not just on number 1, by our merchandise value, yes, But number 2, by the shopping experience. So that is a long that's a long term play as well just so you know. But I know you were talking about the buying and the retailing. No reason to think this won't go on for a number of years.

Speaker 1

It was a good question, Brook.

Operator

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

Speaker 1

Thank you. Good morning. Ernie, I was hoping maybe you could elaborate a little bit The comment you made earlier about the availability of brands and the excitement you have around especially with the Q4 around brands, are you talking about designer brands? Is this kind of across categories? Is this more specific Apparel or some of the fashion areas.

Speaker 1

And maybe also talk about for T. J. Maxx, obviously, TGS company is obviously known for its flexibility at Scale, maybe talk about broadly your ability to reassort away from home categories if they're going to be soft for a while as you deal with Consumers deal with inflation and you cycle those big gains from last year and towards some of those more reopening type categories. Does the organization as a whole have the ability to shifted to merchandising assortment. Thanks.

Speaker 1

No, Omar, 2 big things that we're approaching. I'll start with the ReAssort from home. We've been doing that consistently in Marmaxx And in the international divisions and in total TJX where we have moved funding out of HomeGoods and into Marmaxx And within Europe and in Canada, we do the same thing where we take open to buy. And sometimes by the way we move actual merchants out of those areas to the areas that are the more trending areas that we forecast over the next 12 to 18 months. So we have been doing that consistently since we were watching the home trend and it's really one of the strengths of the business model because we can do it so quickly.

Speaker 1

Again, we buy so much of the inventory so close and relative to traditional retailers. We don't get stuck with this big liability Home product like many retailers would. And you tend to read about some of the other retailers that are more bought in advance how they run into Really a profit hit because they're stuck with the liability. We are not to that degree. We took our markdowns as I said earlier And we were able to move more over.

Speaker 1

On your first part, Omar, which is interesting, the brands are across, Yes, not just actually not just designer and not just apparel. So we're getting some Brands, I can't give you what they are, but this applies to accessories, hard lines. If you walk in our store, even in Some of the hard lines either the Gundolis where home is or in our Q1 area, you're going to see some new vendors there, but you're also going to see that we've gone after some of those categories more aggressively than before Because we're getting new vendors at different levels of goods, so when we talk about good, better, fast, sometimes it can be assumed I'm talking about on the best end It's designer apparel and it isn't always that way. It's actually, I guess you would call it better or designer hard lines of Nice that we have some which by the way is as we go to Christmas on gift giving, which I think you mentioned, Some of those hard line better vendors, which are special, are great gifts. And it's not just the apparel because as you know, you probably personally are friends Today, we don't consumers don't just give apparel gifts.

Speaker 1

It's also Other hard line gifts, some of it in the tech area. We have that tech area out there in the queue line and that's often given those are great gifts, especially when we're able to buy some better brands than that. And so that's all the type that we're really excited about. And I think it's going to help us with that

Operator

The final question of the day comes from John Kernan. Your line is open.

Speaker 1

All right. Thanks for squeezing me in. Congrats on a nice quarter. Ernie, not a believer of the point, but just can you talk to the mark on opportunity you've talked about in prior calls? It seems like you're getting more conviction And the opportunity and the deals you're getting from vendors and then maybe just elaborate on what this means for merch margin and gross margin as we go forward?

Speaker 1

Thanks. Sure, John. Well, we spent more time, Scott and I both really on the prior two calls, we were Because I guess it was more new news was talking about the retailing of the goods in terms of how that would create some mark on and ability to offset costs. Start with that whole strategy. Again, that's a we're a byproduct of the fact that all the retailers around us for the most part have had to raise Retail is on certain categories or some as you know have done it more in a widespread raising of retail across the board.

Speaker 1

We didn't do that. We did it very Selective and surgically, but what's happened is for different reasons in this environment, Our teams and we see this every week are also getting mark on improvement from the costs. And that is the reason we're talking about that more. And I think it's almost as though the 2 pronged has evened off Because we were talking before about the retail was giving us. You can see from these results that we're delivering and the outlook for the back half of the year That we're very bullish in our merchandise margin and it's really because of both.

Speaker 3

Yes. Just to echo what Ernie just said, Given our call it whatever the better retailing strategy, all of our improvement versus our last guidance, not At least from a margin merchandise margin perspective is all in the buy. So our average retail is up whatever we had planned it to be up, But it's all better buying in the across all of our divisions and it's fairly significant improvement in our mark on In the back half of the year. So it's better buying. Costs are going up, but the retails are going up a bit more More than the cost.

Speaker 3

Yes, that's the other way. Right. And part of that no one asked, part of why the inventory is up is you have the Freight and cost impact that's buried in the overall inventory. But the retail costs are going up, but the retails are More than the cost, but we had that baked into both original and last guidance.

Speaker 1

John and the other thing, John, that goes hand in hand with this because that wouldn't That would all just be okay if we thought, oh, we're doing that, but we're hurting sales. The opposite is happening because Proportionally, our values you could on many of these things are even better value today than they were because retails have gone up even more than what we're going up. And which is why our I think it was in the these are the first question or close to that where I was talking about our turns are actually faster than they were in FY 2020, Which is an indication that when the customers in the store, the values are actually hitting Then as stronger than they've been for a few years. So it's Really nice to see. You need both, right?

Speaker 1

You can't just have the buy and then the retail move if you're not selling the goods at the right And the customer not seeing the fact that you're still providing. And I'm telling you, in many cases, we're providing because of what's happening around us more out the door value relative to the

Speaker 3

And with a slight moderate with the moderation in freight and with a better buying The back half of the year, our merchandise margin, including all the freight pressure, is actually going to be up Right, versus it was down in the first half of the year.

Speaker 1

It's kind of I have to belabor the point, but it's really what we just experienced in Q2 and the way we're guiding, yes, with more conservative sales, but healthy profit directionally is Really, it is a testament and a great example of textbook utilization of this business model. And you couldn't do that if you didn't have the right teams. And again, we have such great associates here that are executing this whether for merchandising or planning or marketing or In our distribution area, logistics, it's all working. And this is just a great, I think, evidence of how we're able to flex And take advantage of the market.

Speaker 3

Excellent. Thanks guys.

Speaker 1

Thank you, John. That was our last question. So thank you all for joining us today. And we will be updating you again on our Q3 earnings call in November. We look forward to it.

Speaker 1

Thank you everybody.

Operator

Ladies and gentlemen, that concludes your conference call for today. You may all disconnect. Thank you for participating.

Powered by Quartr