TJX Companies - 10-Q quarterly report FY

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FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

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

The TJX Companies, Inc.

(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 [  ] .

Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Act).

     YES [X] NO [  ]

The number of shares of Registrant’s common stock outstanding as of August 23, 2003: 506,801,503

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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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     7.     The computation of basic and diluted earnings per share is as follows:

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

The Thirteen Weeks (Second Quarter) and Twenty-Six Weeks (Six Months) Ended
July 26, 2003
Versus the Thirteen Weeks and Twenty-Six Weeks Ended July 27, 2002

Results of Operations

Net sales: Net sales for the second quarter ended July 26, 2003 were $3,046.2 million, up 10% from $2,765.1 million in last year’s second quarter. Net sales for the six months ended July 26, 2003 were $5,834.9 million, a 7% increase over the prior year. Consolidated same store sales increased 2% for both the second quarter ended July 26, 2003 and the second quarter ended July 27, 2002. Consolidated same store sales were flat for the six-month period ended July 26, 2003 and increased 4% for the six-month period ended July 27, 2002. For the thirteen weeks ended July 26, 2003, 77% of the increase in net sales was due to new stores, with the balance due to increased same store sales. For the twenty-six weeks ended July 26, 2003, all of the increase in sales was attributable to new stores. Same store sales in the second quarter ended July 26, 2003 were favorably impacted by strong growth in our younger businesses and changes in foreign currency exchange rates, but were negatively impacted by the unseasonably cool and rainy weather that persisted throughout much of the eastern United States and Canada in May and early June. Sales for the six months ended July 26, 2003 were also negatively impacted by unseasonable weather in much of the United States and Canada throughout most of the first quarter. For the thirteen weeks ended July 27, 2002, the increase in sales attributable to new stores amounted to 85% of the total increase, with the balance attributable to same store sales growth. For the twenty-six weeks ended July 27, 2002, the increase in sales attributable to new stores amounted to 69% of the total increase, with the balance due to same store sales growth. The increase in same store sales for the second quarter and six months ended July 27, 2002 was aided by favorable spring weather in most regions of the United States and Canada.

We define same store sales as sales of those stores that have been in operation for all or a portion of two consecutive fiscal years, or in other words, stores that are starting their third fiscal year of operation. We determine which stores are included in the same store calculation at the beginning of a fiscal year and the classification remains constant throughout that year, unless a store is closed. We calculate same store sales results by comparing the current and prior year weekly periods that are most closely aligned. Relocated stores and expanded stores are classified in the same way as the original store. The impact of relocated or expanded stores on the same store percentage is immaterial. Consolidated and divisional same store sales are calculated in U.S. dollars. We also show divisional same store sales in local currency for our foreign divisions, because this removes the effect of changes in currency exchange rates, and we believe it is a more appropriate measure of their operating performance.

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

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Cost of sales, including buying and occupancy costs: Cost of sales, including buying and occupancy costs, as a percentage of net sales, increased for both periods ended July 26, 2003. Contributing to the increase in this ratio for both periods was a decrease in merchandise margin of 1.0% in the second quarter and 0.4% for the six months ended July 26, 2003. The decrease in merchandise margin for this year’s second quarter reflects additional markdowns incurred as we continued to aggressively manage our inventories in response to the unseasonably cool and rainy weather in May and early June. This change in merchandise margin also reflects a second quarter last year in which merchandise margins were very strong. Both periods ended July 26, 2003 were also adversely affected, to a much lesser extent, by higher distribution costs due to the opening of our new T.J. Maxx facility in Pittston, Pennsylvania. Additional items impacting the increase for the six months ended July 26, 2003 were an increase in employee benefits and insurance costs and the impact of more modest sales growth. Overall, including the effect of the modest sales growth for the six month period, store occupancy and depreciation costs as a percentage of net sales increased by .5% for the six months ended July 26, 2003 over the same period last year and distribution costs for the first six months as a percentage of net sales increased by .2% over last year.

Selling, general and administrative expenses: Selling, general and administrative expenses, as a percentage of net sales, decreased for the quarter ended July 26, 2003 from the prior year’s second quarter and increased for the six-month period over the first six months last year. The decrease in this expense ratio for the quarter ended July 26, 2003 was the result of savings in a number of expense categories, including administrative expenses and bank credit card expense. Increases in store payroll and benefit costs, which had been causing this ratio to increase in prior periods, moderated in the second quarter ended July 26, 2003. Selling, general and administrative expenses for both periods ended July 26, 2003 were reduced by a $1.7 million gain from an A.J. Wright store closing. The increase in this expense ratio for the six-month period ended July 26, 2003 is primarily due to the modest sales increase of 7% this year compared to a 14% increase for the prior year. Also contributing to the increase in this expense ratio for the six month period were increases in retirement and medical benefits and insurance costs. Overall, including the effect of the modest sales growth, store payroll and benefit costs, as a percentage of net sales for the six months ended July 26, 2003, increased approximately .3% over last year.

Interest expense, net: Interest expense, net includes interest income of $1.4 million in the second quarter of the current fiscal year versus $3.1 million of interest income last year. The twenty-six weeks ended this year includes interest income of $3.2 million versus $6.1 million of interest income last year. The reduction in interest income is due to lower cash balances and lower interest rates during each of the periods ended July 26, 2003. Gross interest expense for the periods ended July 26, 2003 was comparable to that of the respective prior year periods.

Income taxes: Our effective income tax rate was 38.7% for the three and six months ended July 26, 2003 and 38.5% and 38.3% for the three and six months ended July 27, 2002. The increase in the income tax rate reflects increases in state income taxes.

Net income: Net income for the second quarter of fiscal 2004 was $123.3 million, or $.24 per diluted share, versus $129.6 million, or $.24 per diluted share last year. Net income for the first half of fiscal 2004 was $236.8 million, or $.46 per diluted share, versus $276.7 million or $.51 per diluted share last year.

Segment information: We evaluate the performance of our segments based on “segment profit or loss” which is defined as pre-tax income before general corporate expense and interest. “Segment profit or loss,” as defined by TJX, may not be comparable to similarly titled measures used by other entities. In addition, this measure of performance should not be considered an alternative to net income or cash

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flows from operating activities as an indicator of our performance or as a measure of liquidity. Presented below is selected financial information related to our business segments (U.S. dollars in millions):

The increase in net sales at Marmaxx for both periods ended July 26, 2003 was the result of new stores. Marmaxx same store sales were below our expectations for the second quarter ended July 26, 2003 reflecting the unseasonably cool and rainy weather patterns in much of May and June. Segment profit was also below our expectations for the quarter. The below-plan sales resulted in our taking more markdowns than we had anticipated. Segment profit as a percentage of sales declined in both the quarter and six month periods ended July 26, 2003. The decrease in the quarter is primarily due to a reduction in merchandise margin and, to a much lesser extent, an increase in distribution costs. Marmaxx did see some benefits in the second quarter from lower administrative and bank credit card costs. On a year-to-date basis the decrease in segment profit as a percentage of net sales also reflects, in addition to those items impacting the quarter, an increase in store occupancy and labor costs and the effect of more modest sales growth. We anticipated an increase in inventory levels for the quarter ended July 26, 2003 and Marmaxx continued to manage inventories well. Average per store inventories, including warehouses, were up 5% at the end of the quarter versus being down 12% at the same time last year.

The increase in net sales at Winners for both periods ended July 26, 2003 was primarily due to new stores and favorable changes in the currency exchange rates. Winners same store sales (in local currency) were up 3% for the quarter and 2% for the six months ended July 26, 2003. Segment profit for the quarter ended July 26, 2003 increased over last year by 11%, and 2% for the six months ended July 26, 2003. This growth is due to favorable changes in the currency exchange rates. Winners was up against a strong performance in the second quarter last year and was also negatively impacted by extended cold weather in Canada during May and June 2003. The HomeSense operating results are included with Winners, but are not material.

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T.K. Maxx same store sales (in local currency) were up 4% for the quarter and 6% for the six months ended July 26, 2003. Favorable spring weather patterns aided T.K. Maxx’s sales growth in both periods ended July 26, 2003. Segment profit for the quarter ended July 26, 2003 increased over last year by 20%, and by 199% for the six months ended July 26, 2003. T.K. Maxx results for the quarter and six month periods were driven by excellent merchandise and inventory management strategies. T.K. Maxx’s segment profit gain over last year was also aided by favorable foreign currency exchange rates during both reporting periods.

HomeGoods same store sales were slightly below plan for the quarter and six months ended July 26, 2003, but total sales were above our expectations both periods, reflecting the continued strong performance of new stores. Segment profit significantly increased over the prior year for both the quarter and six-months ended July 26, 2003, aided by an increase in merchandise margin, as HomeGoods continues to do an excellent job managing its inventories.

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Despite unseasonable weather during the first half of the quarter, A.J. Wright’s segment profit for the quarter was significantly ahead of our expectations and the prior year. A.J. Wright’s merchandise margins increased over the comparable periods last year as a result of improved merchandising and strong inventory management. Segment profit for the quarter included a gain of $1.7 million from a store closing. Same store sales for the quarter were up 11%, compared to a 10% increase in the prior year, and net sales increased by 61% over a year earlier, reflecting the strong performance of new stores. The improvement in the segment profit margins over last year for the quarter and six month periods reflected strong merchandise margins and further levering of expenses as a result of growth.

General corporate expense

General corporate expense, which increased slightly from fiscal 2003 to fiscal 2004, includes costs not specifically related to the operation of our business segments and is included in selling, general and administrative expense.

Financial Condition

Cash flows from operating activities for the six months ended July 26, 2003 and July 27, 2002 are primarily driven by 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 for the six months ended July 26, 2003 as compared to the six months ended July 27, 2002 reflect a reduction in net income and greater increases in inventory and accounts payable from year end levels. Increases in inventory and accounts payable were largely driven by normal seasonal requirements and new stores as well as a planned increase in average per store inventory levels. This planned increase in average per store inventory level for the current year resulted in a greater use of cash in the six months ended July 2003 than in the comparable prior year period.

Cash flows from operating activities were reduced by $19 million for payments against our reserve for discontinued operations during the six months ended July 26, 2003, and by $9 million during the six months ended July 27, 2002. Please see Note 5 to the consolidated financial statements for more information on our discontinued operations reserve and related contingent liabilities.

Investing activities relate primarily to property additions for new stores, store improvements and renovations and expansion of our distribution network.

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.

Financing activities for the period ended July 26, 2003, include cash expenditures of $277.3 million for the repurchase of common stock as compared to $274.5 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 26, 2003, we have repurchased and retired 31.1 million shares at a total cost of $567.9 million. During the quarter ended July 26, 2003, we repurchased and retired 6.8 million shares at a total cost of $125.3 million.

During fiscal 2003, we entered into a $370 million five-year revolving credit facility and a $320 million 364-day revolving credit facility, replacing similar agreements scheduled to expire during fiscal 2003. On March 24, 2003, the 364-day agreement was renewed and increased to $330 million, with substantially all of the other terms and conditions of the original facility remaining unchanged. During

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the second quarter ended July 26, 2003 we entered into two separate interest rate swaps on an aggregate of $100 million of our fixed rate long-term debt. The interest rate swaps have the effect of replacing the fixed interest cost of 7.45% on this debt with a variable interest cost indexed to the six-month LIBOR rate.

Forward Looking Information

Some statements contained in this report are forward-looking and involve a number of risks and uncertainties. Statements that address activities, events and results that we intend, expect or believe may occur in the future are forward-looking statements. Among the factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements are the following: general economic conditions including affects of wars, other military actions and terrorist incidents; consumer confidence, demand and preferences; weather patterns; competitive factors, including continuing pressure from pricing and promotional activities of competitors; the impact of retail capacity and the availability of desirable store and distribution center locations on suitable terms; recruiting and retaining quality sales associates and other associates including key executives; the availability, selection and purchasing of attractive merchandise on favorable terms and the effective management of inventory levels; import risks, including potential disruptions in supply and duties, tariffs and quotas on imported merchandise, including economic and political problems in countries from which merchandise is imported; currency and exchange rate factors in our foreign and buying operations; ability to continue successful expansion of our store base at the rate projected; risks in the development of new businesses and application of our off-price strategies in additional foreign countries; factors affecting expenses including pressure on wages and benefits; 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; changes in laws and regulations; and other factors that 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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PART I    (Continued)

Item 4       Controls and Procedures

PART II.    Other Information

Item 6(a)     Exhibits

Item 6(b)     Reports on Form 8-K

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SIGNATURE

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