FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
þQuarterly Report under Section 13 and 15(d) Of the Securities Exchange Act of 1934
For Quarter Ended April 30, 2005Commission file number 1-4908
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 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 April 30, 2005: 470,431,454
PART I FINANCIAL INFORMATION
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
At April 30, 2005, substantially all leases of discontinued operations that were rejected in bankruptcy and for which the landlords asserted liability against TJX had been resolved. It is possible that there will be future costs for leases from these discontinued operations that were not terminated or had not expired. We do not expect to incur any material costs related to our discontinued operations in excess of our reserve. The reserve balance amounted to $12.6 million as of April 30, 2005 and $15.3 million as of May 1, 2004.
During the first quarter ended April 30, 2005, we received a $2.2 million creditor recovery in the bankruptcy of one of our discontinued operations. The receipt of these proceeds was offset by a $2.2 million addition to our reserve. This recovery was in addition to a $2.3 million creditor recovery in this bankruptcy received in the quarter ended July 31, 2004. We expect to receive some additional creditor recovery in this bankruptcy, but the amount has not yet been determined.
We may also be contingently liable on up to 18 leases of BJ’s Wholesale Club, Inc. for which BJ’s Wholesale Club is primarily liable. Our reserve for discontinued operations does not reflect these leases, because we believe that the likelihood of any future liability to us with respect to these leases is remote due to the current financial condition of BJ’s Wholesale Club.
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The weighted average common shares for the diluted earnings per share calculation exclude the incremental effect related to outstanding stock options when the exercise price of the option is in excess of the related period’s average price of TJX’s common stock. There were 10,000 such options excluded for the quarter ended April 30, 2005, and no such options were excluded for the quarter ended May 1, 2004. The 16.9 million shares attributable to the zero coupon convertible debt are included in the diluted earnings per share calculation in all periods presented in accordance with Emerging Issues Task Force Issue No. 04-08, “The Effect of Contingently Convertible Debt on Diluted Earnings per Share.” This accounting change was implemented in the fourth quarter of the fiscal year ended January 29, 2005 and was applied retroactively.
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Presented below are the unaudited pro forma net income and related earnings per share showing the effect that stock-based compensation expense, determined in accordance with SFAS No. 123, would have on reported results (dollars in thousands except per share amounts):
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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.
TJX made voluntary funding contributions to its funded pension plan in the fiscal years ended in January 2005 and 2004, and we do not anticipate any contributions to that plan will be required for our current fiscal year.
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 provides a federal subsidy to sponsors of retiree health care benefits if the benefit they provide is at least actuarially equivalent to Medicare Part D. The FASB issued a FASB Staff Position (FSP FAS 106-2) entitled “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003.” The Company has determined that its plan is not actuarially equivalent to Medicare Part D, and accordingly, the above Postretirement medical cost does not reflect any federal subsidy.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTSOF OPERATIONS AND FINANCIAL CONDITION
The Thirteen Weeks EndedApril 30, 2005Versus the Thirteen Weeks Ended May 1, 2004
Results of Operations
Overview: Highlights of our financial performance for the first quarter ended April 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 April 30, 2005 were $3,651.8 million, up 9% from $3,352.7 million in last year’s first quarter and over a very strong 20% increase in last year’s first quarter over the comparable prior-year period. The 9% increase in net sales for this year’s first quarter includes 6% from new stores and 3% from same store sales. Same store sales for this year’s first quarter benefited by approximately 1 percentage point from foreign currency exchange rates. Sales of footwear, jewelry and accessories and women’s sportswear all performed well. Sales were negatively impacted by unseasonably cold weather in March and part of April. In regions of the country where the weather was seasonable (Florida, the Southwest and the West Coast), same store sales increases were strong.
Consolidated net sales for the quarter ended May 1, 2004 included an 8% increase in same store sales as compared to the prior year. Same store sales for last year’s first quarter benefited by almost 2 percentage points from foreign currency exchange rates. Sales for last year’s first quarter reflected strong demand for women’s spring apparel, footwear and accessories and also benefited from improved weather patterns in that quarter 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 are starting 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.
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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 the divisional 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, increased by 1.1% for the quarter ended April 30, 2005 as compared to the same period last year. The increase in this ratio for the quarter includes a .5% reduction in our consolidated merchandise margin, primarily due to increased markdowns at Marmaxx and Winners, which we believe were impacted by the unseasonably cool weather in March and part of April. The increase in this ratio also reflects an increase in occupancy costs as a percentage of sales of .5%. This increase is largely due to the de-levering impact of low single digit increases or slight reductions in same store sales across divisions other than Marmaxx.
Selling, general and administrative expenses: Selling, general and administrative expenses, as a percentage of net sales, were 17.0% for the quarter ended April 30, 2005 compared to 16.5% for the quarter ended May 1, 2004. The increase in this ratio reflects an increase of .2% in store payroll and benefit costs as a percentage of sales, primarily due to the expanded department initiatives at Marmaxx as well as an increase in health care costs. This expense ratio also increased by .1% due to increased costs for remodeling and relocation of stores. The balance of the increase in this ratio is primarily due to an increase in the pro rata share of the consolidated results of divisions other than Marmaxx and Winners, which operate at higher expense ratios.
Interest expense, net: Interest expense, net of interest income was $6.0 million in this year’s first quarter compared to $6.6 million for the first quarter last year. Interest income was $2.5 million in the current year’s first quarter versus $1.5 million in the prior year. The increase in interest income was primarily due to higher interest rates on invested cash balances in the current year.
Income taxes: Our effective income tax rate was 38.5% for the three months ended April 30, 2005 and 38.7% for the three months ended May 1, 2004. The lower rate this year reflects the benefit of the Work Opportunity Tax Credit (WOTC), which was effective in the third quarter of last year.
Net income: Net income for this year’s first quarter was $149.3 million, or $.30 per diluted share, versus $168.1 million, or $.32 per diluted share last year. Earnings per share in both years reflect the favorable impact of our share repurchase program. Diluted earnings per share for each period also 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):
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Marmaxx had a 3% same store sales increase for the quarter ended April 30, 2005, over the comparable period last year. Marmaxx’s sales results were driven by continued strong sales of jewelry/accessories and footwear. Combined same store sales of these categories increased 11% over a 19% increase last year, and we continued to see significant sales lifts in the stores with expanded jewelry/accessories and footwear departments. Women’s sportswear was also strong, with same store sales up 4% this year over a 10% increase last year. Unusually cold weather in many parts of the country negatively impacted sales in March and part of April of this year, but in regions of the country where weather was seasonable, including Florida, the West Coast and the Southwest, sales were strong.
Segment profit for the first quarter ended April 30, 2005 was $267.7 million, slightly lower than the prior year, and segment profit margin declined to 10.4% from 11.2%. Merchandise margin was down .3% compared to the prior year, primarily due to higher markdowns that were triggered by weak same store sales increases in March and part of April. Last year, Marmaxx recorded the highest first quarter merchandise margin in its history and, while merchandise margins for the quarter ended April 30, 2005 were less than the prior year, they were at the high end of our historical range. Segment profit margin was also impacted by a .2% increase in occupancy costs as a percentage of sales compared to the prior year and a .2% increase in store payroll and benefit costs as a percentage of net sales. The increase in store payroll and benefit costs relate primarily to the expansion of jewelry/accessories and footwear departments and to higher health care costs.
As of April 30, 2005, average per store inventories, including distribution centers, were up 14% over the end of the quarter last year, compared to an 11% decrease in last year’s first quarter. While per store average inventories are up, the majority of this increase is in our distribution centers and relates to the timing of receipts, and our inventory position is more liquid than at the end of the first quarter last year.
Marmaxx’s operating results for the prior year’s first quarter ended May 1, 2004, were also favorably impacted by strong demand for women’s spring apparel, footwear and accessories.
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Same store sales (in local currency) for Winners and HomeSense decreased by 1% for the first quarter ended April 30, 2005. Segment profit for the quarter declined to $12.3 million from $24.4 million last year, and segment profit margin decreased by 5.2%. Unseasonably cold weather in March drove a 7% decrease in same store sales in March (in local currency) resulting in aggressive markdowns. This led to merchandise margins that were 2.6% lower than the first quarter ended May 1, 2004. The de-levering impact of a 1% same store sales decrease this year contributed to the decline in segment profit margin with the largest impact on occupancy costs, which increased .5%, and store payroll and benefit costs which increased .4%, as a percentage of sales.
T.K. Maxx’s same store sales (in local currency) decreased 1% for the quarter ended April 30, 2005 compared to a 5% increase for the first quarter ended May 1, 2004. T.K. Maxx’s sales were negatively impacted by a weak retail environment in the United Kingdom. Segment loss for this year’s first quarter was $.3 million, compared to a profit of $1.9 million in the prior year, and segment profit margin declined by .8% in this year’s first quarter over last year. However, T.K. Maxx effectively managed its inventory and, despite the decline in same store sales, posted a merchandise margin that was higher than last year. This improved merchandise margin was more than offset by the de-levering impact of a 1% decrease in same store sales with occupancy costs increasing by 1.6% as a percentage of net sales and store payroll and preopening costs increasing by .6% as a percentage of net sales, as compared to last year’s first quarter.
HomeGoods total sales increased 14% and same store sales were flat compared to the first quarter ended May 1, 2004, when HomeGoods delivered a 4% same store sales increase over the prior year. Segment profit declined to $.6 million from $5.2 million in the prior year’s first quarter, and segment profit margin decreased by 2.1%. The de-levering impact of flat same store sales contributed to the decrease in segment profit margin, with the most significant increases, as a percentage of sales, in occupancy costs (.5%), store payroll and benefits (.3%) and distribution costs (.2%). In addition, merchandise margin for HomeGoods decreased by .3% compared to last year’s first quarter.
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A.J. Wright’s same store sales for the quarter ended April 30, 2005 increased 1% on top of a very strong 9% increase in the prior year’s first quarter. Sales in the first quarter were negatively impacted by the cold weather in March and April throughout the Northeast and Midwest of the United States, where most of A.J. Wright’s stores are located. A.J. Wright did an excellent job managing inventories during the quarter and, despite the soft sales, was able to limit markdown exposure by maintaining a more liquid inventory position and buying close to need. As a result merchandise margins were in line with the prior year. The improvement in segment profit margin is due to a reduction in distribution costs as a percentage of sales as a result of leveraging new distribution center capacity brought online at the beginning of fiscal 2005. This improvement was partially offset by the de-levering impact on expense ratios of a 1% same store sales increase.
Bob’s Stores recorded net sales of $59.4 million and a segment loss of $6.5 million for the quarter ended April 30, 2005. Bob’s opened 2 new stores during the quarter and now operates 34 stores as compared to 31 stores a year ago.
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 first quarter ended April 30, 2005 increased 6% to $22.0 million from $20.8 million, which is attributable to the growth in payroll and benefit costs.
Financial Condition
Operating activities for the quarter ended April 30, 2005 provided cash of $187.1 million, while operating activities for the quarter ended May 1, 2004 provided cash of $193.3 million. Cash flows from operating activities for the first quarter, as compared to the prior year, decreased by $7.3 million due to a decrease in net income, partially offset by an increase in depreciation expense. The net change in inventory and accounts payable from year-end levels had an unfavorable impact on cash from operations of $105.8 million this year as compared to the first quarter of the prior year. In addition, an increase in prepaid rent and a reduction of deferred tax benefits reduced operating cash flows in the current quarter as compared to last year’s first quarter by approximately $61 million. These reductions to operating cash flows were offset by an increase in accrued expenses and other liabilities. This increase in accrued expenses for the quarter ended April 30, 2005 includes the impact of $172 million of checks outstanding in excess of
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the book balance in certain cash accounts. 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 investment in existing and new distribution centers.
Financing activities consist primarily of our share repurchase program. During the first quarter ended April 30, 2005, we repurchased and retired 11.0 million shares of our common stock at a cost of $262.9 million. On a cash basis we spent $241.4 million this year for the repurchase of common stock as compared to $133.8 million last year. In May 2004, we completed a $1 billion stock repurchase program and announced our intention to repurchase up to an additional $1 billion of common stock. Since the inception of the new $1 billion stock repurchase program through April 30, 2005, we have repurchased 28.7 million shares at a total cost of $669.4 million.
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 agreements serve as back up to our commercial paper program. At April 30, 2005, we had $35 million of commercial paper outstanding. Combined availability under our prior revolving credit facilities at April 30, 2005 and May 1, 2004 was $665 million and $700 million, respectively. We believe internally generated funds and our revolving credit facilities are more than adequate to meet our operating needs.
Forward Looking Information
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:
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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.
PART I (Continued)
Item 3 Quantitative and Qualitative Disclosure about Market Risk
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.
Item 4 Controls and Procedures
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 April 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 an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosures. There were no changes in internal controls over financial reporting during the fiscal quarter ended April 30, 2005 identified in connection with the Chief Executive Officer’s and
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Chief Financial Officer’s evaluation that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. Other Information
Item 2 Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
Information on Share Repurchases
The number of shares of common stock repurchased by TJX during the first quarter of fiscal 2006 and the average price per share paid is as follows:
As of April 30, 2005, we had repurchased 28.7 million shares at a cost of $669.4 million under our $1 billion share repurchase program announced in May 2004.
Item 4 Submission of Matters to a Vote of Security Holders
There was no matter submitted to a vote of TJX’s security holders during the first quarter ended April 30, 2005.
Item 6 Exhibits
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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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