FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
[X] Quarterly Report under Section 13 and 15(d)Of the Securities Exchange Act of 1934
For Quarter Ended October 25, 2003Commission file number 1-4908
The TJX Companies, Inc.
(508) 390-1000
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 November 22, 2003: 503,275,923
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TABLE OF CONTENTS
PART I FINANCIAL INFORMATIONTHE TJX COMPANIES, INC. AND CONSOLIDATED SUBSIDIARIES
The accompanying notes are an integral part of the financial statements.
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THE TJX COMPANIES, INC. AND CONSOLIDATED SUBSIDIARIES
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NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
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* Includes the results of HomeSense stores.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTSOF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Net sales: Net sales for the third quarter ended October 25, 2003 were $3,387.5 million, up 11% from $3,045.0 million in last year’s third quarter. Consolidated same store sales increased 3% for the third quarter ended October 25, 2003 as compared to a 2% increase in same store sales for last year’s third quarter. For the thirteen weeks ended October 25, 2003, 76% of the increase in net sales was due to new stores, with the balance due to increased same store sales. For the thirteen weeks ended October 25, 2002, the increase in sales attributable to new stores amounted to 82% of the total increase, with the balance attributable to same store sales growth. Same store sales in the third quarter ended October 25, 2003 were favorably impacted by strong growth in our younger businesses and changes in foreign currency exchange rates. More seasonable fall weather patterns this year as compared to last year also aided third quarter sales.
Net sales for the nine months ended October 25, 2003 were $9,222.3 million, a 9% increase over the prior year. Consolidated same store sales increased 1% for the nine-month period ended October 25, 2003 as compared to an increase of 4% for the nine-month period ended October 26, 2002. For the thirty-nine weeks ended October 25, 2003, 89% of the increase in sales was attributable to new stores, with the balance due to same store sales growth. For the thirty-nine weeks ended October 26, 2002, the increase in sales attributable to new stores amounted to 73% of the total increase, with the balance due to same store sales growth. Sales for the nine months ended October 25, 2003 were negatively impacted by unseasonable weather in much of the United States and Canada throughout most of the 2003 first quarter, May and early June. Sales for the nine-months ended October 26, 2002, were 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, decreased for the quarter ended October 25, 2003 from the prior year’s third quarter, and increased for the nine-month period ended October 25, 2003. The decrease in this ratio for the quarter reflects a significant improvement in the merchandise margin at Marmaxx which led to a .7% reduction in its cost of sales ratio. Merchandise margins also improved at each of our younger divisions, HomeGoods, T.K. Maxx and A.J. Wright. The increase in this ratio for the nine months ended October 25, 2003 resulted from, higher distribution costs as a result of the opening of our new T.J. Maxx distribution facility in Pittston, Pennsylvania, and modest sales growth. Including the effect of the modest sales growth, store occupancy and depreciation costs as a percentage of net sales increased by .4% for the nine months ended October 25, 2003 over the same period last year and distribution costs for the first nine 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 October 25, 2003 from the prior year’s third quarter and increased for the nine-month period over the first nine months last year. Included in last year’s selling, general and administrative expenses for both the quarter and nine months ended October 26, 2002, was a pre-tax charge of $16 million for the estimated cost of settling claims relating to four California lawsuits. The absence of this charge this year is the primary reason selling, general and administrative expenses decreased for the quarter ended October 25, 2003. The quarter ended October 25, 2003 also included approximately $9 million in net charges related to foreign currency exchange losses as compared to a net charge of approximately $2 million last year. The increase in this expense ratio for the nine-month period ended October 25, 2003 is primarily due to the impact of modest sales growth. Also contributing to the increase in this expense ratio for the nine-month period were increases in retirement costs, medical benefits, insurance and foreign currency exchange losses. For the nine month period ended October 25, 2003, a net charge of approximately $10 million related to foreign currency exchange losses was included in selling, general and administrative expenses compared to a net charge of approximately $3 million last year. The majority of these losses relate to derivative contracts that provide an economic hedge on certain inventory purchases which will reverse in future periods when allocated to the appropriate division to offset similar gains recognized on the sale of the hedged inventory. For the periods ended October 25, 2003, these foreign currency exchange losses also included a $2.8 million charge related to the foreign currency exchange impact on the deferred tax liability associated with Winners’ unrepatriated earnings.
Interest expense, net: Interest expense, net includes interest income of $1.1 million in the third quarter of the current fiscal year versus $1.7 million of interest income last year. The thirty-nine weeks ended October 25, 2003 includes interest income of $4.3 million versus $7.8 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 October 25, 2003. Gross interest expense for the periods ended October 25, 2003 was comparable to that of the respective prior year periods.
Income taxes: Our effective income tax rate was 39.1% and 38.9% for the three and nine months ended October 25, 2003, respectively, and 38.4% and 38.3% for the three and nine months ended October 26, 2002, respectively. The increase in the income tax rate reflects the impact of a pre-tax foreign currency exchange loss on the deferred tax liability associated with Winners unrepatriated earnings. In addition, for the nine months ended October 25, 2003, the effective income tax rate reflects increases in state income taxes.
Net income: Net income for the third quarter of fiscal 2004 was $182.8 million, or $.36 per diluted share, versus $147.4 million, or $.28 per diluted share last year. Net income for the first nine months of
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fiscal 2004 was $419.6 million, or $.81 per diluted share, versus $424.1 million or $.78 per diluted share last year.
Segment information: 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):
The increase in net sales at Marmaxx for both periods ended October 25, 2003 was the result of new stores. Marmaxx same store sales were slightly below our expectations for the third quarter ended October 25, 2003, but our new stores performed better than plan. Segment profit for the quarter ended October 25, 2003 benefited from this year’s normal fall weather patterns, compared with unusually warm weather during September last year. A significant improvement in merchandise margin led to a .7% reduction in Marmaxx’s cost of sales ratio. Marmaxx segment profit improvement in the third quarter also reflects last year’s charge of $16 million related to the California lawsuits. The decrease in segment profit as a percentage of net sales for the nine months ended October 25, 2003, as compared to last year, reflects a decrease in merchandise margin of .2% as well as an increase in store occupancy costs of .3% and an increase in distribution costs of .2%. Marmaxx continued to manage inventory levels well with average-per-store inventories, including warehouses, up 2% at the end of the quarter over the same quarter last year versus being down 8% at the same time last year over the prior year.
The increase in net sales at Winners for both periods ended October 25, 2003, which exceed our expectations, was primarily due to favorable changes in the foreign currency exchange rates. Winners
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same store sales (in local currency) were up 6% for the quarter and 3% for the nine months ended October 25, 2003. Segment profit for the quarter ended October 25, 2003 increased over last year by 24%, and 13% for the nine months ended October 25, 2003. This growth is also primarily due to favorable changes in the foreign currency exchange rates over last year. Winners results for the periods ended October 25, 2003, benefited from seasonable fall temperatures in the third quarter this year compared to unusually warm temperatures last year. The HomeSense operating results are included with Winners, but are not material.
T.K. Maxx same store sales (in local currency) were up 8% for the quarter and 7% for the nine months ended October 25, 2003. T.K. Maxx sales were above our expectations for the quarter primarily due to growth in same store sales. Like Winners, but to a much lesser extent, sales were aided by favorable changes in foreign currency exchange rates. Segment profit for the quarter ended October 25, 2003 increased by 43% over last year’s third quarter, and by 74% for the nine months ended October 25, 2003 over the same period last year. T.K. Maxx results for the quarter and nine 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.
HomeGoods same store sales growth was below plan for the quarter and nine months ended October 25, 2003, but total sales were close to our expectations in both periods, reflecting the continued strong performance of new stores. Segment profit significantly increased for both the quarter and nine months
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ended October 25, 2003 over the prior year’s periods. The segment profit improvement over last year for both periods reflects HomeGoods’ solid execution of its merchandising and inventory management strategies.
A.J. Wright’s segment profit for the quarter and nine month periods ended October 25, 2003 was 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. The improvement in the segment profit margins over last year for the quarter and nine month periods reflected sales performance that exceeded expectations, strong merchandise margins and further levering of expenses as a result of growth. Segment profit for the nine months ended October 25, 2003 included a gain of $1.7 million from a store closing. Same store sales for the quarter were up 14%, compared to a 5% increase in the prior year, and net sales increased by 56% over a year earlier, reflecting the strong performance of new stores.
General corporate expense
General corporate expense includes costs not specifically related to the operation of our business segments and is included in selling, general and administrative expense. The increase in general corporate expense for both the quarter and nine months ended October 25, 2003, is due to the impact of charges for foreign exchange losses. General corporate expense includes approximately $9 million in foreign exchange losses for the quarter ended October 25, 2003 and approximately $10 million in losses for the nine months ended October 25, 2003 compared to approximately $2 million and $3 million respectively, for the quarter and nine months ended October 26, 2002. The majority of these losses relate to derivative contracts that provide an economic hedge on certain inventory purchases which will reverse in future periods when allocated to the appropriate division to offset similar gains recognized on the sale of the hedged inventory. For the periods ended October 25, 2003, these losses also included a $2.8 million charge related to the foreign currency exchange impact on the deferred tax liability associated with Winners’ unrepatriated earnings.
Financial Condition
Cash flows from operating activities for the nine months ended October 25, 2003 and October 26, 2002 are comparable and 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 were reduced by $26 million for payments against our reserve for discontinued operations during each of the nine month periods ended October 25, 2003, and October 26, 2002. Please see Note 4 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 October 22, 2003, TJX announced that it
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signed an agreement to purchase substantially all of the assets of Bob’s Stores, Inc. and its subsidiaries (“Bob’s Stores), pursuant to Sections 363 and 365 under the U.S. Bankruptcy code. Bob’s Stores is a value-oriented retail chain in the Northeast U.S., offering branded apparel and footwear. Under the agreement, TJX would purchase the assets of Bob’s Stores for $100 million, less various adjustments, and assume certain liabilities including store leases and operating contracts to be designated by TJX. TJX expects to assume most, but not all, of Bob’s Stores’ leases. The purchase price will be reduced for various adjustments, including reductions in inventory from September 27, 2003 to the closing and the customer obligations, employee vacation obligations and post-bankruptcy petition trade payables assumed by TJX. The transaction is subject to a number of conditions, including bankruptcy court approval. TJX expects to fund the acquisition cost of Bob’s from internally generated cash.
Financing activities for the period ended October 25, 2003, include cash expenditures of $390.0 million for the repurchase of common stock as compared to $392.4 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 25, 2003, we have repurchased and retired 37.3 million shares at a total cost of $692.9 million. During the quarter ended October 25, 2003, we repurchased and retired 6.2 million shares at a total cost of $125 million.
During 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.
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. Availability under our revolving credit facilities at October 25, 2003 and October 26, 2002 was $700 million and $690 million, respectively. We believe our internally generated funds and our revolving credit facilities are more than adequate to meet our operating needs.
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
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affecting or mitigating our liability; changes in laws and regulations; satisfaction of closing conditions and other factors which affect our ability to acquire Bob’s Stores and factors which affect our ability to execute our business plan for Bob’s Stores and achieve profitability; 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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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.
Date: December 8, 2003
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