TJX Companies - 10-Q quarterly report FY

Table of Contents

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

/X/ Quarterly Report under Section 13 and 15(d)
Of the Securities Exchange Act of 1934
Or
/  / Transition Report Pursuant to Section 13 and 15(d)
Of the Securities Exchange Act of 1934

For Quarter Ended July 27, 2002
Commission file number 1-4908

The TJX Companies, Inc.
(Exact name of registrant as specified in its charter)

(508) 390-1000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x   No o

The number of shares of Registrant’s common stock outstanding as of August 24, 2002: 528,211,936

1

Table of Contents

PART I FINANCIAL INFORMATION
THE TJX COMPANIES, INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF INCOME
(UNAUDITED)
DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS

The accompanying notes are an integral part of the financial statements.

2

Table of Contents

PART I FINANCIAL INFORMATION
THE TJX COMPANIES, INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF INCOME
(UNAUDITED)
DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS

The accompanying notes are an integral part of the financial statements.

3

Table of Contents

THE TJX COMPANIES, INC. AND CONSOLIDATED SUBSIDIARIES
BALANCE SHEETS
(UNAUDITED)
IN THOUSANDS

The accompanying notes are an integral part of the financial statements.

4

Table of Contents

THE TJX COMPANIES, INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(UNAUDITED)
IN THOUSANDS

The accompanying notes are an integral part of the financial statements.

5

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6

Table of Contents

7

Table of Contents

8

Table of Contents

9

Table of Contents

         *   Includes the operating results of HomeSense stores which commenced operations in April 2001.

10

Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION

Twenty-Six Weeks Ended
July 27, 2002
Versus Twenty-Six Weeks Ended July 28, 2001

Historical earnings per share amounts have been restated to reflect a two-for-one stock split, distributed on May 8, 2002. All reference to earnings per share amounts are diluted earnings per share unless otherwise indicated.

Net sales for the second quarter of fiscal 2003 were $2,765.1 million, up 11% from $2,487.6 million in last year’s second quarter. Net sales for the first half of fiscal 2003 were $5,430.8 million, a 14% increase over the prior year. Consolidated same store sales increased 2% for the second quarter ended July 27, 2002 and increased 4% for the six-month period. Consolidated same store sales increased 2% for the second quarter ended July 2001, and increased 1% for the six-month period ended July 2001. For the thirteen weeks ended July 2002, approximately 80% of the increase in net sales was due to new stores, with the balance due to increased comparable store sales. For the twenty-six weeks ended July 2002, the increase in sales attributable to new stores amounted to approximately 70%, with the balance due to same store sales growth.

Net income for the second quarter of fiscal 2003 was $129.6 million, or $.24 per share, versus $111.9 million, or $.20 per share last year. For the twenty-six week period, net income was $276.7 million, or $.51 per share, versus $235.6 million, or $.42 per share.

The following table sets forth operating results expressed as a percentage of net sales:

Cost of sales including buying and occupancy costs, as a percentage of net sales, decreased for both periods ended July 2002, due to increases in merchandise margin from the prior year of 1.6% for the second quarter and .6% for the six month period. This margin improvement is primarily due to reduced markdowns reflecting our lower inventory levels and more liquid inventory position during the periods ended July 2002, as compared to the prior periods. This margin improvement was partially offset by an increase in occupancy costs as a percent of net sales of .4% in the second quarter and .2% for the six month period, reflecting new store occupancy costs and the less than planned growth in second quarter sales. On a year to date basis the lower than planned sales growth in the second quarter offset the favorable impact in the first quarter of that period’s strong sales performance.

Selling, general and administrative expenses, as a percentage of net sales, increased from the prior year in both periods. Contributing to the second quarter increase were higher store payroll costs as well as the effect of less than planned growth in sales.

11

Table of Contents

Impacting the ratio in both periods was an increase in retirement and medical costs as compared to the same periods last year.

Interest expense, net includes interest income of $3.1 million in the second quarter of the current fiscal year versus $4.3 million of interest income in the second quarter last year. The twenty-six weeks ended this year includes interest income of $6.1 million versus $9.7 million of interest income last year. The reduction in interest income is due to lower interest rates. The decrease in gross interest expense, over the comparable periods last year, is due to the amortization of the debt expenses relating to the zero coupon convertible notes, included in the last year’s reporting periods.

Our effective income tax rate was 38.5% and 38.3% for the three and six months ended July 27, 2002, respectively, versus 38.1% for the comparable periods last year. The increase in the effective income tax rate as compared to last year is due to the impact of foreign operations.

We evaluate the performance of our segments based on “operating income” which is defined as pre-tax income before general corporate expense, goodwill amortization and interest. The following is a summary of key operating statistics of our business segments (US dollars in millions):

12

Table of Contents

Marmaxx same store sales were slightly below our expectations for the second quarter. Operating income exceeded our expectations for the quarter and was 10% ahead of last year for the second quarter and 15% ahead of last year for the twenty-six week period. Marmaxx continued to manage inventory levels well, maintaining liquidity and the ability to take advantage of good buying opportunities in the marketplace and reducing the levels of markdowns. Marmaxx’s growth in operating income and operating margin reflects the strong merchandise margins.

Winners sales were above our expectations and operating margins and income were well ahead of last year in both periods. Winners managed its inventories well, also maintaining liquidity and the ability to take advantage of good buying opportunities. The HomeSense operating results are included with Winners, but are not material.

T.K. Maxx same store sales were below plan for the quarter but operating income was above plan and significantly above last year. T.K. Maxx maintained very clean inventories throughout the quarter and was able to achieve very strong merchandise margins through reduced markdowns.

HomeGoods same store sales were slightly below plan for the quarter but operating income was well above expectations and the prior year in both periods. Solid execution of its merchandising and inventory strategies resulted in increases in merchandise margins that drove the results.

A.J. Wright’s operating income for the second quarter of fiscal 2003 was on plan and same store sales were up 10% over the last year. For the twenty-six weeks ended July 2002, same store sales were up 16% and operating income and margins also improved compared to last year.

Financial Condition

Cash flows from operating activities for the six months ended July 27, 2002 and July 28, 2001 reflected the increase in net income and increases in inventories and accounts payable that are largely due to normal seasonal requirements and new stores. The net change in inventory and accounts payable for the six months ended July 27, 2002 is more favorable to operating cash flows than in the same period last year. This improvement reflects the benefit of operating with a lower average store inventory as compared to last year’s comparable period as well as an increase in inventory turnover due to higher

13

Table of Contents

same store sales growth in this year’s six month period as compared to last year. This favorable cash flow impact was offset in part by an increase in prepaid expenses of $34 million associated with our advance funding of annual employee benefit costs in the period ended July 2002 as compared to last year’s comparable period.

Cash flows from operating activities were reduced by $9 million for payments against our reserve for discontinued operations. We have a reserve for future obligations relating primarily to real estate leases of House2Home, Inc. and Zayre Stores, both of which were previously owned by TJX, for which TJX or a subsidiary is a lessee or guarantor. Both of these operations have filed for relief under Chapter 11 of the Federal Bankruptcy Code and are in liquidation. The reserves were established at various times subsequent to the disposition, when the operation suffered significant financial distress. These reserves reflect the estimated cost to TJX of these potential lease obligations. The reserves reflect the fact that the number and cost of the lease obligations for which we may have liability will be reduced by various mitigating factors including assignments to third parties, lease terminations, expirations, subletting, buyouts, modifications and other actions, legal defenses, use by TJX for our own store opening program, and indemnification by BJ’s Wholesale Club, Inc. in the case of House2Home leases.

House2Home (formerly known as Waban, Inc., HomeClub, Inc. and HomeBase, Inc.) was spun-off by TJX in 1989, along with BJ’s Wholesale Club. In 1997, House2Home spun-off BJ’s Wholesale Club, Inc., and BJ’s Wholesale Club agreed to indemnify TJX for all liabilities relating to the House2Home leases with respect to the period through January 31, 2003, and 50% of such liabilities thereafter. On November 7, 2001, House2Home, Inc. filed for a voluntary petition for relief under Chapter 11 of the Federal Bankruptcy Code and is liquidating its business. At the time of House2Home’s announcement we believed there were up to 41 leases for which we could be liable. As of July 27, 2002, this number had been reduced to up to 31 leases as a result of assignments to third parties, negotiated buyouts and lease expirations. As of July 27, 2002, the total present value of the after-tax cost of the remaining 31 leases for which we may have liability, was approximately $50 million without reflecting any mitigating factors other than indemnification by BJ’s Wholesale Club.

TJX completed the sale of the former Zayre Stores division to Ames Department Stores, Inc. in 1988. In a 1992 bankruptcy reorganization of Ames, many former Zayre leases were disposed of by Ames or TJX through assignments and buyouts. There were also a small number of leases assumed by TJX, which have been mitigated through subletting, the net cost of which is charged to the reserve. On August 20, 2001, Ames again filed a voluntary petition for relief under Chapter 11 of the Federal Bankruptcy Code and on August 14, 2002, announced its intention to liquidate its business. As of July 27, 2002, Ames had rejected five leases for which we may be liable, of which we settled one by a negotiated buyout. At the time of the 2001 Ames bankruptcy announcement, we believed that there were up to approximately 60 to 90 leases of former Zayre stores for which we may have contingent obligations. Based on information received from Ames, we believe there remain up to approximately 60 to 70 leases for which we may have contingent obligations. We believe that most of the leases for which we may have contingent obligations have favorable terms and that any future liability to TJX with respect to these leases will be minimal.

We are also contingently liable on up to 25 leases of BJ’s Wholesale Club, Inc. for which BJ’s Wholesale Club, Inc. is primarily liable. We believe that the likelihood of any future liability to TJX with respect to these leases is remote due to the current financial condition of BJ’s Wholesale Club.

14

Table of Contents

The reserve for discontinued operations as of July 27, 2002 and July 28, 2001 is summarized below:

We believe that our reserve for discontinued operations is adequate to meet the costs we may incur with respect to the House2Home and Ames leases and that the future liability to TJX with respect to these leases will not have a material adverse effect on our financial condition, operating results or cash flows.

Investing activities relate primarily to property additions. Investing activities for the period ended July 28, 2001, included $4.8 million of advances we made under a construction loan agreement in connection with the expansion of our leased home office facility.

On April 10, 2002, the Board of Directors approved a two-for-one stock split in the form of a 100% stock dividend. The shares were distributed on May 8, 2002, to shareholders of record on April 25, 2002, resulting in the issuance of 269.4 million shares of common stock. The split was recorded in the second quarter of fiscal 2003, the period in which it was distributed; however all historical per share amounts and basic and diluted share amounts utilized in the calculation of earnings per share have been restated to reflect the two-for-one stock split.

Financing activities for the period ended July 27, 2002, include cash expenditures of $274.5 million for the repurchase of common stock as compared to $259.8 million last year. During July 2002, we completed our $1 billion stock repurchase program and announced our intention to repurchase an additional $1 billion of common stock over several years. Since the inception of the new $1 billion stock repurchase program, through July 27, 2002, we have repurchased and retired 4.9 million shares at a total cost of $88.1 million. On a post-split basis, during the quarter ended July 2002, we repurchased and retired 9.5 million shares at a total cost of $180.3 million. For the twenty-six weeks ended July 2002, we repurchased and retired 14.7 million shares at a total cost of $282.3 million. Financing activities for the period ended July 28, 2001, include the proceeds of $347.6 million received from the February 2001 issue of $517.5 million zero coupon convertible subordinated notes.

On March 26, 2002, we entered into a $350 million five-year, and a $300 million 364-day revolving credit facilities, replacing our $500 million five-year and $250 million 364-day credit facilities which were scheduled to expire during fiscal 2003. The new credit facilities have essentially the same terms and conditions as the credit facilities they replaced. Effective May 3, 2002 and July 19, 2002 amendments to these agreements were signed that have increased the $350 million, five-year credit facility to $370 million and the $300 million 364-day credit facility to $320 million.

In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets.” This statement addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. We implemented SFAS No. 142 during our fiscal year beginning January 27, 2002. As a result of the new standard we no longer amortize goodwill or the Marshalls tradename which has an indefinite life. For the twelve months ended January 26, 2002, amortization of goodwill and tradename amounted to $2.6 million and $3.2 million, respectively.

15

Table of Contents

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This statement addresses financial accounting and reporting for costs associated with exit or disposal activities including store closing activities. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002, with early adoption encouraged. We are evaluating the effect of the adoption of SFAS No. 146 and do not expect the adoption of SFAS No. 146 to have a material impact on our financial position or results of operations

Forward Looking Information

Certain statements contained in this report are forward-looking and involve a number of risks and uncertainties. Among the factors that could cause actual results to differ materially are the following: general economic conditions including affects of terrorist incidents and military actions and consumer demand and preferences; weather patterns in areas where we have concentrations of stores; competitive factors, including pressure from pricing and promotional activities of competitors; the impact of excess retail capacity and the availability of desirable store and distribution center locations on suitable terms; recruiting quality sales associates; the availability, selection and purchasing of attractive merchandise on favorable terms; our ability to effectively manage inventory levels; potential disruptions in supply and duties, tariffs and quotas on imported merchandise, as well as economic and political problems in countries from which merchandise is imported; currency and exchange rate factors in our foreign operations; expansion of our store base, development of new businesses and application of our off-price strategies in foreign countries; our acquisition and divestiture activities; our ultimate liability with respect to leases relating to discontinued operations including indemnification and other factors affecting or mitigating our liability; and other factors that are or may be described in our filings with the Securities and Exchange Commission. We do not undertake to publicly update or revise our forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized.

16

Table of Contents

Item 4 Controls and Procedures" -->

PART I.   (continued)

Item 4 Controls and Procedures

There were no significant changes in the Company’s internal controls or in any other factors which could significantly affect those controls, subsequent to the date of the most recent evaluation of the Company’s internal controls by the Company, including any corrective actions with regard to any significant deficiencies or material weaknesses.Other Information" -->

PART II.   Other InformationExhibits" -->

Item 6(a)   Exhibits

Item 6(b)   Reports on Form 8-K

17

Table of Contents

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934 the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

18

Table of Contents

CERTIFICATIONS

I,  Edmond J. English, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of The TJX Companies, Inc.;

2.     Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.     Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.

Date:  September 10, 2002

I,  Donald G. Campbell, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of The TJX Companies, Inc.;

2.     Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.     Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.

Date:  September 10, 2002

19