TJX Companies - 10-Q quarterly report FY

 

(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 þ. No o.

Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Act). YES þ NO o

The number of shares of Registrant’s common stock outstanding as of July 30, 2005: 465,922,597

PART I FINANCIAL INFORMATION

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

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

PART I FINANCIAL INFORMATION

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

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

THE TJX COMPANIES, INC. AND CONSOLIDATED SUBSIDIARIES

BALANCE SHEETS
(UNAUDITED)
IN THOUSANDS

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

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.

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

In December 2004, the FASB issued SFAS No. 123R which will require that the cost of equity-based awards be recognized in the financial statements. The effective date of the new standard has been delayed by the Securities and Exchange Commission and compliance with the new standard will be required by the Company in the first reporting period of the fiscal year ending in January 2007. The Company is in the process of evaluating the new standard, including the timing of its implementation.

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 30, 2005
Versus
The Thirteen Weeks (second quarter) and Twenty-Six Weeks (six months) Ended July 31, 2004

Overview: Highlights of our financial performance for second quarter and six months ended July 30, 2005, include the following:

The following is a summary of the operating results of TJX at the consolidated level. This discussion is followed by an overview of operating results by segment. All references to earnings per share are diluted earnings per share unless otherwise indicated.

Net sales: Consolidated net sales for the quarter ended July 30, 2005 were $3,647.9 million, up 7% from $3,414.3 million in last year’s second quarter. Consolidated net sales for last year’s second quarter ended July 31, 2004 increased 12% over the comparable prior-year period. The 7% increase in net sales for the second quarter ended July 30, 2005 includes 6% from new stores and 1% from same store sales. The increase in consolidated net sales for last year’s second quarter included 7% from new stores, 3% from same store sales and 2% from the acquisition of Bob’s Stores. Same store sales increases for the quarters ended July 30, 2005 and July 31, 2004 benefited by approximately 1/2 percentage point and 1 percentage point, respectively, from foreign currency exchange rates.

On a year-to-date basis, consolidated net sales for the six months ended July 30, 2005 were $7,299.7 million, up 8% from $6,767.0 million in last year’s comparable period. Last year, for the six months ended July 30, 2004, consolidated net sales increased 16% over the comparable prior-year period. The 8% increase in net sales for the six months ended July 30, 2005 includes 6% from new stores and 2% from same store sales. The increase in net sales for the six months ended July 31, 2004 includes 8% from new stores, 6% from same store sales and 2% from the acquisition of Bob’s Stores. Same store sales increases for the six months ended July 30, 2005 and July 31, 2004

benefited by approximately 1 percentage point and 1 1/2 percentage point, respectively, from foreign currency exchange rates.

Net sales for the six months ended July 30, 2005 were negatively impacted by unseasonably cold weather throughout much of the United States and Canada during our first quarter, which continued into May and negatively impacted second quarter results. In the United States, where TJX generated 82% of its second quarter sales, same store sales were very strong in warm weather regions, while the Midwest and Northeast trailed the Company average. Net sales for the second quarter and six months ended July 30, 2005 reflect continued strong demand for footwear, jewelry and accessories, and men’s apparel, partially offset by weak demand for home fashion categories.

Overall sales for both last year’s three and six month periods ended July 31, 2004 reflect strong demand for women’s apparel, footwear, jewelry and accessories, partially offset by weaker demand for men’s apparel and home fashions categories. Sales in last year’s year-to-date period benefited from improved weather patterns last year compared to the prior year when weather was unusually harsh across much of the United States.

We define same store sales to be 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 have started their third fiscal year of operation. We classify a store as a new store until it meets the same store criteria. We determine which stores are included in the same store sales 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 stores that are increased in size are generally classified in the same way as the original store, and we believe that the impact of these 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:

Cost of sales, including buying and occupancy costs: Cost of sales, including buying and occupancy costs, as a percentage of net sales, decreased by .2% for the quarter ended July 30, 2005. The improvement in this ratio for the quarter reflects improved merchandise margins partially offset by an increase in both occupancy costs and distribution costs as a percentage of net sales. Consolidated merchandise margins for this year’s second quarter improved by 1.2% primarily due to fewer markdowns resulting from effective execution of inventory management and close-to-need buying strategies and improved seasonal transition. The occupancy and distribution expense ratios increased a combined .8% primarily due to the negative impact on these ratios of the 1% same store sales increase, which was lower than planned.

Cost of sales, including buying and occupancy costs, as a percentage of net sales, increased by ..4% on a year-to-date basis, as compared to the same period last year. Improved merchandise margins reduced our consolidated cost of sales ratio by approximately .4%, but were more than offset by higher occupancy costs and administrative costs as a percentage of sales. The year-to-date increase in these expense ratios reflects the negative impact on these ratios of the 2% same store sales increase, which was lower than planned.

Selling, general and administrative expenses: Selling, general and administrative expenses, as a percentage of net sales for the second quarter increased .4% over the second quarter last year and increased .5% for the six month period as compared to the comparable period last year. Store payroll and benefit costs as a percentage of net sales

increased ..2% in both the current second quarter and year-to-date periods, largely due to the negative impact on expense ratios of low single digit same store sales increases and an increase in health care costs. In addition this expense ratio increased by .1% in the current second quarter and the year-to-date periods, as a result of closing costs associated with three Winners stores and a HomeGoods distribution center. The increase in this ratio for both periods also reflects the negative impact on other expense ratios of low single digit same store sales increases, which were lower than planned. Disciplined expense management during the periods and a second quarter reduction in store supply expense helped to partially offset this negative impact on expense ratios.

Interest expense, net: Interest expense, net of interest income, for the second quarter and six months ended July 30, 2005 increased slightly over the comparable prior year periods. Both periods reflect higher interest costs due to an increase in short term borrowings. This increase in net interest expense was partially offset by reduced interest costs due to the repayment of $100 million of 7% unsecured notes in June 2005.

Income taxes: Our effective income tax rate was 38.6% for the quarter ended July 30, 2005 and 38.5% for the year-to-date period, as compared to 38.8% for both periods ended July 31, 2004. The lower rates for the current year reflect the benefit of the Work Opportunity Tax Credit (WOTC), which was effective in the third quarter of last year.

We are still evaluating the possibility of repatriating the undistributed earnings of our foreign operations in accordance with the American Jobs Creation Act of 2004.

Net income: Net income for this year’s second quarter was $123.1 million, or $.25 per diluted share, versus $118.2 million, or $.23 per diluted share, in last year’s second quarter. Net income for the six months ended July 30, 2005 was $272.5 million, or $.55 per diluted share, compared to $286.4 million, or $.56 per diluted share last year. The change in earnings per share, year over year, reflects the favorable impact of our share repurchase program. Diluted earnings per share for all periods reflect the impact of EITF Issue No. 04-08 which requires the inclusion of shares associated with contingently convertible debt in the calculation of diluted earnings per share even if the related contingencies have not been met. This accounting change was implemented in the fourth quarter of the fiscal year ended January 29, 2005 and was applied retroactively.

Segment information: The following is a discussion of the operating results of our business segments. We consider each of our operating divisions to be a segment. We evaluate the performance of our segments based on “segment profit or loss” which we define 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 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):

Marmaxx posted a 2% same store sales increase for the second quarter ended July 30, 2005, and a 3% increase for the six months ended July 30, 2005. Same store sales growth in this year’s second quarter was negatively impacted by unseasonable weather in May, and we did not see a strong rebound in June and July when weather was more seasonable. Same store sales in warmer regions of the country (Florida, the Southwest and the West Coast) performed well above the chain average, with sales in the Midwest and Northeast below the chain average. Same store sales were adversely impacted by home fashions, which were down 3% in both the current quarter and year-to-date periods. Sales of jewelry/accessories and footwear continue to be strong as same store sales of these categories

increased 11% in both the quarter and year-to-date period. We continue to see an overall sales lift in stores with the expanded jewelry/accessories and footwear departments.

Segment profit for the second quarter grew 4% to $211.6 million. Segment profit as a percentage of net sales (segment margin) for the quarter ended July 30, 2005 was consistent with last year’s second quarter. Despite below plan sales, Marmaxx improved its merchandise margin through the execution of its inventory management and merchandising strategies. Merchandise margin for the second quarter increased by .6%, primarily due to fewer markdowns. Segment margin was also favorably impacted by a reduction in store supplies expense. These improvements in segment margin were offset by increases in the percentage of net sales of occupancy costs (.3%), administrative costs (.2%), store payroll and benefit costs (.2%) and distribution costs (.1%). These increases are primarily due to the de-levering impact of a 2% increase in same store sales for the second quarter. The increase in store payroll and benefit costs as a percentage of net sales also reflects higher health care costs.

Segment profit for the six months ended July 30, 2005 was $479.2 million, slightly above the prior year, and segment profit margin declined .4% to 9.4%. These results were impacted by essentially the same factors that impacted the second quarter, but to a lesser extent. Merchandise margins improved .2% but were more than offset by increases in operating costs as a percentage of net sales, primarily occupancy costs and store payroll and benefit costs.

As of July 30, 2005, average per store inventories, including distribution centers, were up 13% over the prior year, compared to a decrease of 5% at July 31, 2004 as compared to prior year. While per store average inventories increased, the bulk of this increase is in our distribution centers and primarily relates to the timing of receipts of fresh product for the third quarter. Overall our inventory position remains liquid, giving us the ability to buy into current market trends.

Winners’ net sales for the second quarter ended July 30, 2005 increased 8% over the prior year and for the current six month period net sales increased 12%. Currency exchange rates accounted for the entire increase in the second quarter and about 75% of the sales increase for the year-to-date period. Same store sales (in local currency) for Winners and HomeSense decreased by 9% during this year’s second quarter, compared to an 11% increase in last year’s second quarter. For the six months ended July 30, 2005, same store sales decreased 5% compared to an 8% increase for the six months ended July 31, 2004. These same store sales declines are primarily due to lower clearance sales volume than last year’s second quarter, as well as an overall decline in the average selling price per unit (the “average ticket”). Despite the same store sales declines, Winners improvement in its inventory management and buying close to need strategies resulted in a significant improvement in merchandise margin and second quarter segment profit that was essentially flat with the prior year.

Segment margin decreased by .7% to 6.5% for the second quarter ended July 30, 2005. Merchandise margin improved by 3.5%, largely due to fewer markdowns, which was offset by the adverse effect on expense ratios of a

9% same store sales decline. Expense ratios increased across virtually all major categories, with the most notable increases occurring in occupancy and distribution costs (2.4%), store payroll and other store costs (1.2%) and administrative costs (.5%). Winners second quarter also included $1.4 million of costs associated with the closing of three stores.

The decline in segment profit and segment margin for the six months ended July 30, 2005, as compared to the prior year reflects an increase in merchandise margin of approximately .5% which was more than offset by the de-levering impact on expense ratios of a 5% decrease in same store sales and the incremental costs this year associated with three store closings. Currency exchange rates, including the earnings impact of derivatives that hedge inventory purchases, reduced segment profit for both the quarter and year-to-date period by approximately $0.8 million.

T.K. Maxx’s same store sales (in local currency) increased 2% for the current quarter and were flat for the six month period compared to an increase of 1% for last year’s second quarter and a 3% increase for last year’s six month period. T.K. Maxx’s sales continue to be negatively impacted by a weak retail environment in the United Kingdom. The increase in segment profit for the second quarter ended July 30, 2005 compared to the prior year is due to currency exchange rates which favorably impacted segment profit by approximately $1 million in both the second quarter and year-to-date periods. T.K. Maxx segment margin for both the quarter and year-to-date periods reflects improvement in merchandise margin, due to fewer markdowns, and the levering of distribution and administrative costs despite the low single digit same store sales increases. These improvements in segment margin were more than offset by the de-levering impact on other expense ratios, primarily occupancy costs, of the weak same store sales growth. Segment margins were also impacted by higher store preopening costs in the periods ended July 30, 2005, as T.K. Maxx completed a greater proportion of its new store openings earlier this year.

HomeGoods same store sales were flat for the quarter ended July 30, 2005, compared to a 1% decrease for the quarter ended July 31, 2004. On a year-to-date basis, same store sales were flat compared to a 2% increase for the six months ended July 31, 2004. We continue to rebalance the merchandise mix at HomeGoods which has resulted in a lower average ticket at this division. While customer transactions and unit sales have increased, these increases have not offset the impact of the decline in the average ticket, resulting in flat same store sales results for both the quarter and year-to-date periods. Although segment results declined in both the current quarter and year-to-date periods, merchandise margins improved in both periods. The merchandise margin improvement was more than offset by the de-levering impact of flat same store sales results for the second quarter and six months ended July 30,

2005, with the most significant increases, as a percentage of sales, occurring in occupancy costs, store payroll and benefits and distribution center costs. Segment margin was also negatively impacted in both the quarter and year-to-date periods by approximately $2 million of costs related to the planned closing of our Mansfield, MA distribution center as we moved operations to Bloomfield, CT.

A.J. Wright’s same store sales for the quarter ended July 30, 2005 increased 1% compared to a 2% increase in the prior year’s second quarter. For the six months ended July 30, 2005, same store sales also increased 1% compared to a 5% increase in the prior year. Segment margin for this year’s second quarter improved by 1.6% over the second quarter last year and segment margin for the current year-to-date period improved by 1.1% over the comparable prior year period, both primarily due to improved merchandise margins. A.J. Wright did an excellent job managing inventories and buying close to need throughout the current reporting periods and limiting markdown exposure while improving markon. Effective expense management also contributed to the improvement in segment profit margin, despite the de-levering impact on expense ratios of a 1% same store sales increase for both the quarter and year-to-date periods.

Net sales for Bob’s Stores for the second quarter and six months ended July 30, 2005 were less than the comparable prior year periods, which reflects a shift away from promotional advertising circulars. In addition, Bob’s Stores has incurred incremental store costs and administrative costs this year in support of changes to this division’s merchandise mix and presentation. This sales decline and incremental costs resulted in an increased segment loss for the six months ended July 30, 2005 compared to the prior year. The impact of the sales decline and incremental costs on second quarter segment loss were largely offset by significant improvements in merchandise margin due to better buying and more consistent inventory flow as compared to last year’s second quarter.

General Corporate expense

General corporate expense for segment reporting purposes are those costs not specifically related to the operations of our business segments, and is included in selling, general and administrative expenses. General corporate expense for the second quarter and six months ended July 30, 2005 was comparable to the prior year periods.

Operating activities for the six months ended July 30, 2005 provided cash of $185.5 million while operating activities for the six months ended July 31, 2004 provided cash of $350.3 million. Cash flows from operating activities for the current six month period, as compared to the prior year decreased by $38.5 million due to a reduction in the deferred income tax provision, as last year’s cash flow benefited from accelerated depreciation on certain assets allowed for U.S. income tax purposes. The net change in inventory and accounts payable from year-end levels had an unfavorable impact on cash from operations of $131.0 million for the six months ended July 30, 2005 as compared to the prior year, and is largely due to the timing of receipts at Marmaxx (as described earlier). In addition, an increase in accounts receivable and other current assets (primarily due to an increase in prepaid rent and credit card receivables) reduced operating cash flows for the six months ended July 30, 2005 as compared to last year by approximately $64 million. These reductions to operating cash flows were offset by an increase in accrued expenses and other liabilities, which had a favorable affect on cash flows of $65 million in the current year-to-date period as compared to last year. The increase in accrued expenses and other current liabilities for the six months ended July 30, 2005 includes the impact of classifying as a current liability $173 million of checks outstanding in excess of the book balance in certain cash accounts. Last year, $96 million of checks outstanding were classified as a current liability. These are zero-balance cash accounts maintained with certain financial institutions which we fund as checks clear and for which no other right of offset exists.

Investing activities relate primarily to property additions for new stores, store improvements and renovations and expansion of our distribution network, which totaled $219.1 million this year as compared to $138.2 million last year. The six months ended July 30, 2005 reflects increased capital expenditures, as compared to the prior year period, relating to the expansion of the jewelry/accessories and footwear departments. This year, the majority of these expansions were completed in the first half of the year while last year the majority were completed in the second half of the year.

Financing activities for the six months ended July 30, 2005, include cash expenditures of $383.3 million for the repurchase of our common stock as compared to $315.8 million last year. Since the inception of our new $1 billion stock repurchase program in May 2004, through July 30, 2005, we have repurchased 34.1 million shares at a total cost of $796.3 million. During the quarter ended July 30, 2005, we repurchased and retired 5.5 million shares at a cost $126.9 million.

At July 30, 2005, we had $415 million of commercial paper outstanding as compared to no short-term borrowings a year ago. These short-term borrowings were required to fund a higher net inventory position as of July 30, 2005, the repayment of $100 million of our 7% unsecured notes and incremental property additions and stock repurchases.

In May 2005, we entered into a $500 million four-year revolving credit facility and a $500 million five-year revolving credit facility. These arrangements replaced our $370 million five-year revolving credit facility entered into in March 2002 and our $330 million 364-day revolving credit facility, which had been extended through July 15, 2005. The new agreements have no compensating balance requirements and have various covenants including a requirement of a specified ratio of debt to earnings. These arrangements serve as back up to our commercial paper program. At July 30, 2005, we had $415 million of commercial paper outstanding. Combined availability under our revolving credit facilities at July 30, 2005 was $585 million. Combined availability under our prior revolving credit facilities at July 31, 2004 was $700 million. We believe our internally generated funds and our revolving credit facilities are more than adequate to meet our operating needs.

As of September 2, 2005, twelve of the Company’s stores were closed as a result of damage from Hurricane Katrina. TJX is in the process of assessing the extent of the damage to these stores, as well as actions it may take with respect to its affected associates, its business, and other consequences of the hurricane, and is unable at this time to determine the related costs.

Various statements made in this report are forward-looking and involve a number of risks and uncertainties. All statements that address activities, events or developments that we intend, expect or believe may occur in the future are forward-looking statements. The following are some of the factors that could cause actual results to differ materially from the forward-looking statements:

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 in such statements will not be realized.

We are exposed to foreign currency exchange rate risk on our investment in our Canadian (Winners and HomeSense) and European (T.K. Maxx) operations. As more fully described in Note D to our consolidated financial statements, on page F-14 of the Annual Report on Form 10-K for the fiscal year ended January 29, 2005, we hedge a significant portion of our net investment and certain merchandise commitments in these operations with derivative financial instruments. We enter into derivative contracts only when there is an underlying economic exposure. We utilize currency forward and swap contracts, designed to offset the gains or losses in the underlying exposures, most of which are recorded directly in shareholders’ equity. The contracts are executed with banks we believe are creditworthy and are denominated in currencies of major industrial countries. We have performed a sensitivity analysis assuming a hypothetical 10% adverse movement in foreign currency exchange rates applied to the hedging contracts and the underlying exposures described above. As of January 29, 2005, the analysis indicated that such market movements would not have a material effect on our consolidated financial position, results of operations or cash flows.

Our cash equivalents and short-term investments and certain lines of credit bear variable interest rates. Changes in interest rates affect interest earned and paid by the Company. We periodically enter into financial instruments to manage our cost of borrowing, however, we believe that the use of primarily fixed rate debt minimizes our exposure to market conditions.

We have performed a sensitivity analysis assuming a hypothetical 10% adverse movement in interest rates applied to the maximum variable rate debt outstanding during the previous year. As of January 29, 2005, the analysis indicated that such market movements would not have a material effect on our consolidated financial position, results of operations or cash flows.

The Company has carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of July 30, 2005 pursuant to Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. There were no changes in internal controls over financial reporting during the fiscal quarter ended July 30, 2005 identified in connection with the Chief Executive Officer’s and Chief Financial Officer’s evaluation that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

As of July 30, 2005, we had repurchased 34.1 million shares at a cost of $796.3 million under our $1 billion share repurchase program announced in May 2004.

In addition to those elected, the following are directors whose term of office continued after the Annual Meeting:

David A. Brandon
Bernard Cammarata
Gary L. Crittenden
Edmond J. English
Richard G. Lesser
Robert F. Shapiro
Fletcher H. Wiley

Ratification of appointment of independent registered public accounting firm:

Approval of amendment to Certificate of Incorporation to declassify Board of Directors:

Proposal presented by certain shareholders requesting implementation of a code of corporate conduct based on ILO human rights standards:

Proposal presented by certain shareholders regarding a Vendor Compliance Program:

Proposal presented by certain shareholders regarding the Director election vote standard:

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.