TJX Companies - 10-Q quarterly report FY

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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 October 26, 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      .

The number of shares of Registrant’s common stock outstanding as of November 23, 2002: 525,366,880

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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.

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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.

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

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

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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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The Thirteen and Thirty-Nine Weeks Ended
October 26, 2002
Versus the Thirteen and Thirty-Nine Weeks Ended October 27, 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 third quarter of fiscal 2003 were $3,044.9 million, up 11% from $2,741.8 million in last year’s third quarter. Net sales for the thirty-nine week period this year were $8,475.7 million, a 13% increase over the prior year. Consolidated same store sales increased 2% for the third quarter ended October 26, 2002 and increased 4% for the nine-month period. Consolidated same store sales increased 3% for the third quarter ended October 2001, and increased 2% for the nine-month period ended October 2001. For the thirteen weeks ended October 2002, approximately 80% of the increase in net sales was due to new stores, with the balance due to increased same store sales. For the thirty-nine weeks ended October 2002, the increase in sales attributable to new stores amounted to approximately 70%, with the balance due to same store sales growth.

Income from continuing operations for the third quarter of fiscal 2003 was $147.4 million, or $.28 per share, versus $149.5 million, or $.27 per share last year. For the thirty-nine week period, income from continuing operations was $424.1 million, or $.78 per share, versus $385.1 million, or $.69 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, increased from the prior year for the quarter ended October 2002, and decreased for the nine-month period. The increase in this expense ratio in the quarter reflects an increase of .5% attributable to the Marmaxx division, primarily due to increased markdowns and an increase in the inventory shortage reserve versus the prior year. These markdowns were the result of unseasonably warm weather in September. The increase in this expense ratio attributable to Marmaxx was largely offset by the improvement in this ratio at Winners, T.K. Maxx and HomeGoods, largely due to the strong improvement in merchandise margins at these divisions. The improvement in this ratio for the nine months ended October 2002 is largely due to the improvement in Marmaxx’s merchandise margin, which was driven by a reduction in markdowns on a year-to-date basis, along with an improvement in this ratio at Winners, HomeGoods and A.J. Wright.

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Selling, general and administrative expenses, as a percentage of net sales, increased from the prior year in both periods. Contributing to the increase in both periods is the pre-tax charge of $16 million for the estimated cost of settling claims relating to four California lawsuits. The lawsuits allege that TJX improperly classified store managers as exempt from California overtime laws. The impact of the tentative agreement increased selling, general and administrative expenses as a percentage of sales by .5% in the quarter and by .2% for the nine-month period. Also contributing to the increase in both periods were higher store payroll costs and an increase in retirement and medical costs as compared to the same periods last year. The increase in this expense ratio for the third quarter also reflects the effect of less than planned growth in sales.

Interest expense, net includes interest income of $1.7 million in the third quarter of the current fiscal year versus $2.0 million of interest income in the third quarter last year. The thirty-nine weeks ended this year includes interest income of $7.8 million versus $11.7 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 inclusion in last year’s reporting periods of amortization of debt expenses relating to the zero coupon convertible notes.

Our effective income tax rate was 38.4% and 38.3% for the three and nine months ended October 26, 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):

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Marmaxx same store sales were slightly below our expectations for the third quarter reflecting unusually warm weather in September. Operating income was 11% below last year for the third quarter and 5% ahead of last year for the thirty-nine week period. The decline in the third quarter reflects increased markdowns necessitated by weak sales in September as well as a charge of $15.9 million for the tentative settlement of the four California lawsuits. The reduction in operating margin for the nine months ended October 2002 is primarily due to the charge in connection with the California lawsuits. Marmaxx continued to manage inventory levels well, maintaining liquidity and the ability to take advantage of good buying opportunities in the marketplace. As of October 26, 2002 average per store inventories, including warehouses were down 8% from the prior year.

Winners comparable store sales increased 1% for the quarter, being impacted by unseasonably warm weather early in the third quarter, but sales were aided by the strong performance of new stores. Operating margins and income for the quarter and nine months ended October 26, 2002 were well ahead of last year. Both periods ended October 26, 2002 reflect a reduction in markdowns versus the prior year as Winners managed its inventories well, maintaining liquidity. The HomeSense operating results are included with Winners, but are not material.

T.K. Maxx same store sales were above plan for the quarter and operating income was also 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. T.K. Maxx’s operating margins also reflect the benefit of the levering of certain expenses as a result of its growth.

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HomeGoods same store sales were above plan for the quarter and 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. New stores performed well in both the three and nine month periods and operating margins in both periods also benefited from a high growth rate and the levering of expenses.

A.J. Wright’s operating income for the third quarter of fiscal 2003 was below plan. Same store sales for the third quarter were up 5% over last year. The third quarter was particularly impacted by the unseasonably warm weather during August and September. For the thirty-nine weeks ended October 26, 2002 same store sales were up 12%. A.J. Wright incurred higher operating losses in both the third quarter and year-to-date periods largely due to increased markdowns, especially in the third quarter.

Financial Condition

Cash flows from operating activities for the nine months ended October 26, 2002 and October 27, 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.

Cash flows from operating activities were reduced by $26 million for payments against our reserve for discontinued operations during the nine months ended October 26, 2002. This reserve relates 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. The companies that owned 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 TJX’s disposition of these businesses, when the companies suffered significant financial distress. These reserves reflect the estimated cost to TJX of these potential lease obligations. The reserves reflect mitigation of the number and cost of the lease obligations for which we may have liability as a result of various factors including assignments to third parties, lease terminations, expirations, subleases, 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 October 26, 2002, up to 16 leases remain for which we may be liable as a result of assignments to third parties, negotiated buyouts and lease expirations. As of October 26, 2002, the total present value of the after-tax cost of these remaining 16 leases was approximately $30 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. The net cost of the small number of remaining leases assumed by TJX in that reorganization, that have been only partially mitigated through subletting, 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 is liquidating its business. 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 and subsequently reduced this estimate to approximately 60 to 70 leases based on information received from Ames. As of October 26, 2002, Ames had rejected or

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sought authority to reject 14 leases for which we may be liable. In mid-November 2002, Ames sought authority to reject an additional 13 leases for which we may be liable.

The reserve for discontinued operations as of October 26, 2002 and October 27, 2001 is summarized below:

We have made significant progress on settling our obligations with respect to House2Home leases, but the recent number of lease rejections sought by Ames has exceeded our estimates. Overall, we believe our reserve for discontinued operations is adequate to meet the costs we may incur with respect to 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. Changes in the underlying assumptions, such as additional expenses for lease settlements or future Ames lease rejections, could require us to increase this reserve, although we do not expect that any increase would be material to our financial condition, results of operations or cash flows.

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.

Investing activities relate primarily to property additions for new stores, store improvements and renovations and expansion of our distribution network. Investing activities for the period ended October 27, 2001 included $5.5 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 October 26, 2002, include cash expenditures of $392.4 million for the repurchase of common stock as compared to $326.9 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 October 26, 2002, we have repurchased and retired 10.8 million shares at a total cost of $198.1 million. During the quarter ended October 26, 2002, we repurchased and retired 5.9 million shares at a total cost of $110.1 million. For the thirty-nine weeks ended October 26, 2002, we repurchased and retired 20.5 million shares at a total cost of $392.4 million. Financing activities for the

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period ended October 27, 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 revolving credit facility and a $300 million 364-day revolving credit facility, replacing our $500 million five-year and $250 million 364-day agreements 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.

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.

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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.

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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.

4.     The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

5.     The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

6.     The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

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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.

4.     The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

5.     The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

6.     The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

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