filings.toolsItem 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The discussion that follows relates to our 52-week fiscal years ended January 30, 2016 (fiscal 2016), January 31, 2015 (fiscal 2015) and February 1, 2014 (fiscal 2014).
OVERVIEW
We are the leading off-price apparel and home fashions retailer in the U.S. and worldwide. We sell a rapidly changing assortment of apparel, home fashions and other merchandise at prices generally 20% to 60% below department and specialty store regular prices on comparable merchandise, every day. We operate over 3,600 stores through our four main segments: in the U.S., Marmaxx (which operates T.J. Maxx, Marshalls and tjmaxx.com) and HomeGoods; TJX Canada (which operates Winners, HomeSense and Marshalls in Canada); and TJX International, formerly TJX Europe (which operates T.K. Maxx, HomeSense and tkmaxx.com in Europe, and Trade Secret in Australia). In the U.S. we also operate Sierra Trading Post (STP), a leading off-price Internet retailer with a small number of stores. The results of STP are reported in our Marmaxx segment.
Fiscal 2016 was another successful year for TJX as we posted strong gains in net sales and solid earnings per share growth on top of strong increases in both fiscal 2015 and fiscal 2014. We continued to generate strong cash flows, allowing us to return value to our shareholders through cash dividends and share repurchases, while continuing to reinvest in our business by adding new stores and remodeling existing ones, and while continuing to strengthen our infrastructure in support of our continuing growth. In fiscal 2016, we implemented the first phase of an initiative to raise wages for our U.S. full- and part-time hourly store associates. The second phase of additional wage increases will occur in fiscal 2017.
Highlights of our financial performance for fiscal 2016 include the following:
| — | Same store sales increased 5% in fiscal 2016 over an increase of 2% in fiscal 2015 and an increase of 3% in fiscal 2014. The fiscal 2016 increase was driven by an increase in customer traffic. We also had a strong increase in units sold which was offset by a reduction in the average ticket. |
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| — | Net sales increased to $30.9 billion for fiscal 2016, up 6% over the same period last year. Net sales increased to $29.1 billion for fiscal 2015, up 6% over the prior year. At January 30, 2016, the number of stores in operation increased 6% and selling square footage increased 5% over the end of fiscal 2015. |
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| — | Earnings per share for fiscal 2016 were $3.33 per diluted share compared to $3.15 per diluted share in fiscal 2015. Fiscal 2015 earnings per share includes a charge of $0.01 from a loss on early extinguishment of debt. |
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| — | Our fiscal 2016 pre-tax margin (the ratio of pre-tax income to net sales) was 11.8%, a 0.4 percentage point decrease compared to our fiscal 2015 pre-tax margin. The loss on early extinguishment of debt reduced pre-tax margin by 0.1 percentage point in fiscal 2015. |
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| — | Our cost of sales ratio for fiscal 2016 was 71.2%, a 0.3 percentage point decrease compared to the fiscal 2015 ratio. This improvement was driven by buying and occupancy expense leverage on strong same store sales growth as well as an increase in merchandise margin. |
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| — | Our selling, general and administrative expense ratio for fiscal 2016 increased 0.7 percentage points to 16.8% from 16.1% in fiscal 2015. This increase is primarily due to higher store payroll costs due to our wage initiative and the impact of handling a large increase in units sold. |
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| — | Our consolidated average per store inventories, including inventory on hand at our distribution centers (which excludes inventory in transit) and excluding our e-commerce businesses, were up 5% (up 6% on a constant currency basis) at the end of fiscal 2016 as compared to the prior year. |
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| — | During fiscal 2016, we repurchased 26.5 million shares of our common stock for $1.8 billion. Earnings per share reflect the benefit of the stock repurchase program. In January 2016, our Board of Directors authorized our 17th stock repurchase program for an additional $2.0 billion. |
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The following is a discussion of our consolidated operating results, followed by a discussion of our segment operating results.
Net sales: Consolidated net sales for fiscal 2016 totaled $30.9 billion, a 6% increase over $29.1 billion in fiscal 2015. The increase reflected a 4% increase from new stores and a 5% increase from same store sales, offset by a 3% negative impact from foreign currency exchange rates. Net sales from our e-commerce businesses amount to approximately 1% of total sales and had an immaterial impact on fiscal 2016 sales growth. Consolidated net sales for fiscal 2015 totaled $29.1 billion, a 6% increase over $27.4 billion in fiscal 2014. The increase reflected a 4% increase from new stores and a 2% increase from same store sales. Foreign currency exchange rates and e-commerce sales had an immaterial impact on fiscal 2015 net sales growth.
Same store sales increases in the U.S. for fiscal 2016 were due to an increase in customer traffic. We also had a strong increase in units sold which was offset by a reduction in the average ticket. In fiscal 2016, home fashions performed better than apparel but both recorded strong same store sales growth. Geographically, in the U.S., sales were strong in virtually all regions, with the Southeast reporting the highest same store sales growth. In Canada, same store sales increases were well above the consolidated average while TJX International was slightly below the consolidated average.
Same store sales increases in the U.S. for fiscal 2015 were driven by increases in the value of the average transaction and customer traffic. In fiscal 2015, within apparel, sales from jewelry and accessories and activewear performed particularly well, as did home fashions. Geographically, in the U.S., sales were strongest in the Southeast and Southwest. Same store sales increases at TJX International and TJX Canada were above the consolidated average.
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. The sales of Sierra Trading Post (including stores), tjmaxx.com and tkmaxx.com (our e-commerce businesses) are not included in same store sales. We classify a store as a new store until it meets the same store sales criteria. The newly acquired Trade Secret stores will be included in same store sales when they meet the above definition. 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 have 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 consolidated same store percentage is immaterial. Same store sales of our foreign segments are calculated on a constant currency basis, meaning we translate the current year’s same store sales of our foreign segments at the same exchange rates used in the prior year. This removes the effect of changes in currency exchange rates, which we believe is a more accurate measure of segment operating performance. We define customer traffic to be the number of transactions in stores included in the same store sales calculation and define average ticket to be the average retail price of the units sold. We define average transaction or average basket to be the average dollar value of transactions included in the same store sales calculation.
The following table sets forth our consolidated operating results as a percentage of net sales:
| Percentage of Net Sales | ||||||||||||
| Fiscal Year 2016 | Fiscal Year 2015 | Fiscal Year 2014 | ||||||||||
| Net sales | 100.0 | % | 100.0 | % | 100.0 | % | ||||||
| Cost of sales, including buying and occupancy costs | 71.2 | 71.5 | 71.5 | |||||||||
| Selling, general and administrative expenses | 16.8 | 16.1 | 16.3 | |||||||||
| Loss on early extinguishment of debt | — | 0.1 | — | |||||||||
| Interest expense, net | 0.1 | 0.1 | 0.1 | |||||||||
| Income before provision for income taxes* | 11.8 | % | 12.2 | % | 12.1 | % | ||||||
| Diluted earnings per share | $ | 3.33 | $ | 3.15 | $ | 2.94 |
| * | Figures may not foot due to rounding. |
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Impact of foreign currency exchange rates****: Our operating results are affected by foreign currency exchange rates as a result of changes in the value of the U.S. dollar in relation to other currencies. Two ways in which foreign currency exchange rates affect our reported results are as follows:
| — | Translation of foreign operating results into U.S. dollars: In our financial statements, we translate the operations of TJX Canada and TJX International from local currencies into U.S. dollars using currency rates in effect at different points in time. Significant changes in foreign exchange rates between comparable prior periods can result in meaningful variations in consolidated net sales, net income and earnings per share growth as well as the net sales and operating results of these segments. Currency translation generally does not affect operating margins as a percentage of net sales, or affects them only slightly, as sales and expenses of the foreign operations are translated at approximately the same rates within a given period. |
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| — | Inventory-related derivatives: We routinely enter into inventory-related hedging instruments to mitigate the impact on earnings of changes in foreign currency exchange rates on merchandise purchases denominated in currencies other than the local currencies of our divisions, principally TJX Canada and TJX International. As we have not elected “hedge accounting” for these instruments as defined by U.S. generally accepted accounting principles (GAAP), we record a mark-to-market gain or loss on the derivative instruments in our results of operations at the end of each reporting period. In subsequent periods, the income statement impact of the mark-to-market adjustment is effectively offset when the inventory being hedged is received and paid for. While these effects occur every reporting period, they are of much greater magnitude when there are sudden and significant changes in currency exchange rates during a short period of time. The mark-to-market adjustment on these derivatives does not affect net sales, but it does affect the cost of sales, operating margins and earnings we report. |
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We refer to the impact of the above two items throughout our discussion as “foreign currency.” This does not include the impact currency exchange rates can have on various transactions that are denominated in a currency other than an operating division’s local currency. When discussing the impact on our results of the effect of currency exchange rates on such transactions we refer to it as “transactional foreign exchange.”
Cost of sales, including buying and occupancy costs: Cost of sales, including buying and occupancy costs, as a percentage of net sales was 71.2% in fiscal 2016 compared to 71.5% in both fiscal 2015 and fiscal 2014. The improvement in this expense ratio was driven by leverage on buying and occupancy costs as a result of the 5% same store sales increase along with an increase on our profit margin on merchandise sold (merchandise margin). Together these two items benefitted the fiscal 2016 expense ratio by approximately 0.5 percentage points. Merchandise margin improved despite the negative impact transactional foreign exchange had on the cost of merchandise for Canada and Europe this year versus last year. The change in exchange rates increased the cost of merchandise purchased by Canada and Europe that were denominated in currencies other than their local currency, primarily the U.S. dollar. This expense ratio was also negatively impacted by increased freight and distribution costs associated with moving more units through our supply chain and the mark to
market of inventory derivatives. The fiscal 2015 expense ratio was comparable to that of fiscal 2014 with a slight increase in the fiscal 2015 merchandise margin.
Selling, general and administrative expenses: Selling, general and administrative expenses as a percentage of net sales were 16.8% in fiscal 2016, 16.1% in fiscal 2015 and 16.3% in fiscal 2014. The increase in this ratio in fiscal 2016 was primarily due to a combination of higher employee payroll costs, due to our wage initiative and an increase in units handled at the stores, along with our incremental investments and increased contributions to TJX’s charitable foundations.
The reduction in this ratio for fiscal 2015 was largely due to a reduction in our reserves for former operations in fiscal 2015, as well as costs incurred in fiscal 2014 relating to our home office relocations.
Loss on early extinguishment of debt: On July 8, 2014, we redeemed our $400 million aggregate principal amount of 4.20% notes due August 2015 and recorded a pre-tax loss on the early extinguishment of debt of $16.8 million.
Interest expense, net: The components of interest expense, net for the last three fiscal years are summarized below:
| Fiscal Year Ended | ||||||||||||
| Dollars in thousands | January 30, 2016 | January 31, 2015 | February 1, 2014 | |||||||||
| Interest expense | $ | 68,253 | $ | 64,783 | $ | 57,084 | ||||||
| Capitalized interest | (7,984 | ) | (9,403 | ) | (10,993 | ) | ||||||
| Interest (income) | (13,869 | ) | (15,593 | ) | (15,010 | ) | ||||||
| Interest expense, net | $ | 46,400 | $ | 39,787 | $ | 31,081 |
The increase in net interest expense for fiscal 2016 reflects interest expense in fiscal 2016 on the financing lease obligation related to TJX Canada’s new home office of $3.7 million. The increase in net interest expense also reflects a reduction in capitalized interest costs and interest income in the fiscal 2016 periods as compared to the same periods last year.
The increase in net interest expense for fiscal 2015 reflected the interest cost from the date of issuance (June 5, 2014) on the $750 million 2.75% seven-year notes. In addition, fiscal 2015 included 12 months of interest expense on the $500 million 2.50% ten-year notes, compared to fiscal 2014, which only reflected nine months of interest expense. These costs were partially offset by interest savings due to the redemption of the $400 million 4.20% notes. The reduction in capitalized interest on ongoing capital projects is partially offset by an increase in interest income driven by higher cash balances.
Income taxes: Our effective annual income tax rate was 37.7% in fiscal 2016, 37.6% in fiscal 2015 and 35.6% in fiscal 2014. The increase in the fiscal 2016 income tax rate was due to the jurisdictional mix of income and the valuation allowance on foreign net operating losses. The increase in the fiscal 2015 effective income tax rate, as compared to fiscal 2014, was primarily due to the impact on the fiscal 2014 income tax rate from tax benefits in fiscal 2014 of approximately $80 million, which were primarily due to a reduction in our reserve for uncertain tax positions as a result of settlements with state taxing authorities and the reversal of valuation allowances against foreign net operating loss carryforwards. These benefits reduced the fiscal 2014 effective income tax rate by 2.2 percentage points. See Note K to the consolidated financial statements for more information relating to income taxes.
Net income and diluted earnings per share: Net income was $2.3 billion in fiscal 2016, a 3% increase over $2.2 billion in fiscal 2015, which in turn was a 4% increase over $2.1 billion in fiscal 2014. Diluted earnings per share were $3.33 in fiscal 2016, $3.15 in fiscal 2015 and $2.94 in fiscal 2014. The after-tax cost for the loss on the early extinguishment of debt in the second quarter of fiscal 2015 reduced earnings per share for fiscal 2015 by $0.01 per share. The tax benefits referred to above added $0.11 to earnings per share for fiscal 2014. Foreign currency exchange rates also affected the comparability of our results. Foreign currency exchange rates had a $0.09 negative impact on earnings per share in fiscal 2016 when compared to fiscal 2015, and a $0.02 negative impact in fiscal 2015 when compared to fiscal 2014.
Our stock repurchase programs, which reduce our weighted average diluted shares outstanding, benefited our earnings per share growth in fiscal 2016 by approximately 3%. We repurchased 26.5 million shares of our stock at a cost of $1.8 billion in fiscal 2016, 27.7 million shares of our stock at a cost of $1.7 billion in fiscal 2015 and 27.0 million shares of our stock at a cost of $1.5 billion in fiscal 2014.
Segment information: We operate four main business segments. Our Marmaxx (T.J. Maxx, Marshalls and tjmaxx.com) and HomeGoods segments both operate in the United States. Our TJX Canada segment operates Winners, HomeSense and Marshalls in Canada, and our TJX International segment operates T.K. Maxx, HomeSense and tkmaxx.com in Europe and Trade Secret in Australia. In the U.S., we also operate STP, an off-price Internet retailer with a small number of stores. We currently consider all of STP, including its limited number of stores, as part of our e-commerce businesses. The results of STP have been included in our Marmaxx segment. The former TJX Europe segment has been renamed TJX International to reflect the acquisition of Trade Secret in Australia. We evaluate the performance of our segments based on “segment profit or loss,” which we define as pre-tax income or loss before general corporate expense, loss on early extinguishment of debt and interest expense. “Segment profit or loss,” as we define the term, may not be comparable to similarly titled measures used by other entities. The terms “segment margin” or “segment profit margin” are used to describe segment profit or loss as a percentage of net sales. These measures 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. Segments:
Marmaxx
| Fiscal Year Ended | ||||||||||||
| Dollars in millions | January 30, 2016 | January 31, 2015 | February 1, 2014 | |||||||||
| Net sales | $ | 19,948.2 | $ | 18,687.9 | $ | 17,929.6 | ||||||
| Segment profit | $ | 2,858.8 | $ | 2,736.7 | $ | 2,612.7 | ||||||
| Segment profit as a percentage of net sales | 14.3 | % | 14.6 | % | 14.6 | % | ||||||
| Increase in same store sales | 4 | % | 1 | % | 3 | % | ||||||
| Stores in operation at end of period | ||||||||||||
| T.J. Maxx | 1,156 | 1,119 | 1,079 | |||||||||
| Marshalls | 1,007 | 975 | 942 | |||||||||
| Total Marmaxx | 2,163 | 2,094 | 2,021 | |||||||||
| Selling square footage at end of period (in thousands) | ||||||||||||
| T.J. Maxx | 26,158 | 25,461 | 24,712 | |||||||||
| Marshalls | 24,308 | 23,715 | 23,092 | |||||||||
| Total Marmaxx | 50,466 | 49,176 | 47,804 |
At January 30, 2016, STP operated eight stores with selling square footage of 159,000. At January 31, 2015, STP operated six stores with selling square footage of 122,000. At February 1, 2014, STP operated four stores with selling square footage of 83,000.
Net sales at Marmaxx increased 7% in fiscal 2016 as compared to fiscal 2015. The increase reflected a 3% increase from new store sales and a 4% increase from same store sales. The same store sales increase of 4% in fiscal 2016 is on top of a 1% increase in the prior year. Same store sales growth at Marmaxx for fiscal 2016 was driven by an increase in customer traffic. Marmaxx same store sales also reflect an increase in units sold, which was more than offset by a decrease in the average ticket. Our merchandise mix and pricing strategy throughout fiscal 2016 resulted in the lower average ticket which we believe contributed to strong growth in customer traffic and in units sold. Geographically, same store sales were strong throughout most of the country with the Southeast region particularly strong. Home fashions outperformed apparel for fiscal 2016 with both categories posting same store sales growth.
Same store sales for Marmaxx were up 1% in fiscal 2015, on top of a 3% increase in the prior year. Same store sales growth at Marmaxx for fiscal 2015 was driven by an increase in the average transaction with a slight
increase in customer traffic. Same store sales increases for home fashions were above the chain average while apparel overall was below the chain average. Within apparel, jewelry and accessories and activewear were well above the average. Geographically, same store sales increases were strongest in the Southeast and Southwest.
Segment margin in fiscal 2016 was 14.3% compared to 14.6% in fiscal 2015. Marmaxx results for fiscal 2016 reflect an increase in merchandise margin and occupancy expense leverage on same store sales growth of approximately 0.6 percentage points. However, these gains were offset by higher distribution costs, reflecting the increase in units processed as well as higher store payroll, primarily due to our wage initiative, and processing more units at the store level. In addition, tjmaxx.com and STP (our U.S. e-commerce businesses) had a negative impact on year-over-year segment margin comparisons of 0.3 percentage points. Our e-commerce businesses operate at lower profit margins and at STP, we incurred additional costs as we work to transition this business to be less promotional to align more closely with our off-price model and to adjust its merchandise mix. Overall, e-commerce sales represent less than 2% of Marmaxx’s net sales.
Segment margin in fiscal 2015 was 14.6%, flat compared to fiscal 2014. Improvements in merchandise margin as well as a reduction in administrative costs and insurance costs as a percentage of sales were offset by the impact of our e-commerce businesses and expense deleverage, primarily occupancy costs, on the 1% same store sales growth.
In fiscal 2017, we expect to open approximately 60 Marmaxx stores and increase selling square footage by approximately 2%.
HomeGoods
| Fiscal Year Ended | ||||||||||||
| Dollars in millions | January 30, 2016 | January 31, 2015 | February 1, 2014 | |||||||||
| Net sales | $ | 3,915.2 | $ | 3,414.4 | $ | 2,993.7 | ||||||
| Segment profit | $ | 549.3 | $ | 463.2 | $ | 386.5 | ||||||
| Segment profit as a percentage of net sales | 14.0 | % | 13.6 | % | 12.9 | % | ||||||
| Increase in same store sales | 8 | % | 7 | % | 7 | % | ||||||
| Stores in operation at end of period | 526 | 487 | 450 | |||||||||
| Selling square footage at end of period (in thousands) | 10,234 | 9,537 | 8,865 |
HomeGoods’ net sales increased 15% in fiscal 2016, on top of a 14% increase in fiscal 2015. The increase in fiscal 2016 reflected a 7% increase from new store sales and an 8% increase from same store sales. The same store sales increase of 8% in fiscal 2016 is on top of a same store sales increase of 7% in fiscal 2015. The increase in same store sales for fiscal 2016 was primarily due to an increase in customer traffic. Same store sales growth in fiscal 2015 was driven by an increase in the value of the average transaction along with an increase in customer traffic.
Segment profit margin for fiscal 2016 was 14.0%, up from 13.6% for fiscal 2015. The growth in segment margin for fiscal 2016 was driven by expense leverage, primarily buying and occupancy costs, on strong same store sales growth and an increase in merchandise margin, partially offset by an increase in distribution costs and higher payroll costs related to our wage initiative. Segment profit margin for fiscal 2015 was 13.6%, up from 12.9% for fiscal 2014. The increase in fiscal 2015 was driven by expense leverage on the 7% same store sales increase, due to buying and occupancy costs as well as administrative costs, and an increase in merchandise margins.
In fiscal 2017, we plan an increase of approximately 50 HomeGoods stores and plan to increase selling square footage by approximately 8%.
Foreign Segments:
TJX Canada
| Fiscal Year Ended | ||||||||||||
| U.S. Dollars in millions | January 30, 2016 | January 31, 2015 | February 1, 2014 | |||||||||
| Net sales | $ | 2,854.6 | $ | 2,883.9 | $ | 2,877.8 | ||||||
| Segment profit | $ | 375.3 | $ | 393.6 | $ | 405.4 | ||||||
| Segment profit as a percentage of net sales | 13.1 | % | 13.6 | % | 14.1 | % | ||||||
| Increase in same store sales | 12 | % | 3 | % | 0 | % | ||||||
| Stores in operation at end of period | ||||||||||||
| Winners | 245 | 234 | 227 | |||||||||
| HomeSense | 101 | 96 | 91 | |||||||||
| Marshalls | 41 | 38 | 27 | |||||||||
| Total | 387 | 368 | 345 | |||||||||
| Selling square footage at end of period (in thousands) | ||||||||||||
| Winners | 5,470 | 5,310 | 5,196 | |||||||||
| HomeSense | 1,900 | 1,824 | 1,748 | |||||||||
| Marshalls | 975 | 914 | 666 | |||||||||
| Total | 8,345 | 8,048 | 7,610 |
Net sales for TJX Canada in fiscal 2016 were down 1% compared to fiscal 2015. While net sales reflected a 3% increase from new store sales and a 12% increase from same store sales, these were more than offset by currency translation that negatively impacted sales growth by 16%. The same store sales increase of 12% in fiscal 2016 was primarily due to an increase in customer traffic. Same store sales increased 3% in fiscal 2015. Net sales for TJX Canada were essentially flat in fiscal 2015 compared to fiscal 2014 as a 4% increase from new store sales and a 3% increase in same store sales were completely offset by a 7% negative impact from foreign currency.
Segment profit margin decreased 0.5 percentage points to 13.1% in fiscal 2016. The decrease in segment margin was primarily due to a decrease in merchandise margins, the unfavorable impact of mark-to-market adjustments on inventory-related derivatives and an increase in incentive pay due to the above-plan performance. Collectively, these items reduced segment margin by 1.2 percentage points. The decrease in merchandise margin was driven by transactional foreign exchange as the year-over-year changes in currency exchange rates increased TJX Canada’s cost of merchandise purchased in U.S. dollars. These declines in the segment margin were partially offset by expense leverage on same store sales, particularly buying and occupancy costs.
Segment profit margin decreased 0.5 percentage points to 13.6% in fiscal 2015. The decrease in segment margin was due to a decrease in merchandise margins and the unfavorable impact of mark-to-market adjustments on inventory-related derivatives, which collectively reduced segment margin by 0.8 percentage points. The decline in merchandise margin in fiscal 2015 as compared to fiscal 2014 was also largely related to transactional foreign exchange. The decline in the fiscal 2015 segment margin was partially offset by expense leverage on same store sales, particularly buying and occupancy costs, along with a reduction in advertising costs as a percentage of sales.
In fiscal 2017, we plan an increase of approximately 30 stores in Canada and plan to increase selling square footage by approximately 7%.
TJX International
| Fiscal Year Ended | ||||||||||||
| U.S. Dollars in millions | January 30, 2016 | January 31, 2015 | February 1, 2014 | |||||||||
| Net sales | $ | 4,226.9 | $ | 4,092.3 | $ | 3,621.6 | ||||||
| Segment profit | $ | 316.9 | $ | 337.4 | $ | 275.5 | ||||||
| Segment profit as a percentage of net sales | 7.5 | % | 8.2 | % | 7.6 | % | ||||||
| Increase in same store sales | 4 | % | 3 | % | 6 | % | ||||||
| Stores in operation at end of period | ||||||||||||
| T.K. Maxx | 456 | 407 | 371 | |||||||||
| HomeSense | 39 | 33 | 28 | |||||||||
| Trade Secret | 35 | — | — | |||||||||
| Total | 530 | 440 | 399 | |||||||||
| Selling square footage at end of period (in thousands) | ||||||||||||
| T.K. Maxx | 9,970 | 9,109 | 8,383 | |||||||||
| HomeSense | 639 | 545 | 464 | |||||||||
| Trade Secret | 667 | — | — | |||||||||
| Total | 11,276 | 9,654 | 8,847 |
Net sales for TJX International increased 3% in fiscal 2016 to $4.2 billion compared to $4.1 billion in fiscal 2015, on top of a 13% increase in fiscal 2015 compared to fiscal 2014. The increase in fiscal 2016 reflected a 9% increase from new store sales and a 4% increase from same store sales, offset by the unfavorable impact from currency translation of 10%. The increase in same store sales for fiscal 2016 was primarily driven by an increase in customer traffic. Net sales for TJX International increased 13% in fiscal 2015 to $4.1 billion compared to $3.6 billion in fiscal 2014. The increase in fiscal 2015 reflected an 8% increase from new store sales, a 3% increase from same store sales and a 2% favorable impact from foreign currency translation.
Segment profit margin decreased 0.7 percentage points to 7.5% in fiscal 2016 compared to fiscal 2015. The fiscal 2016 segment margin was favorably impacted by strong buying and occupancy expense leverage on the strong same stores sales increase, which was more than offset by the impact of several of our investment initiatives and a decrease in merchandise margin. The investment initiatives include costs associated with centralizing support areas of our business, investing in our infrastructure to support our growth plans, our new store openings in Austria and the Netherlands and the acquisition of Trade Secret in Australia.
Segment profit margin increased 0.6 percentage points to 8.2% in fiscal 2015 compared to fiscal 2014. The improvement in segment margin was primarily due to an increase in merchandise margins and expense leverage on same store sales, particularly buying and occupancy costs. The mark-to-market adjustment on inventory-related derivatives also had a positive impact. These margin improvements were partially offset by an increase in store payroll costs as a percentage of sales as well as investments in talent and research to open stores in two new countries in fiscal 2016.
We expect to add approximately 50 stores to TJX International in fiscal 2017 and plan to increase selling square footage by approximately 8%.
General Corporate Expense:
| Fiscal Year Ended | ||||||||||||
| Dollars in millions | January 30, 2016 | January 31, 2015 | February 1, 2014 | |||||||||
| General corporate expense | $ | 395.6 | $ | 324.4 | $ | 329.5 |
General corporate expense for segment reporting purposes represents those costs not specifically related to the operations of our business segments. Virtually all general corporate expenses are included in selling, general and administrative expenses. Increased contributions to the TJX charitable foundations, higher incentive
compensation accruals due to our above-plan performance and costs related to the acquisition of Trade Secret in Australia accounted for approximately $61 million of the increase in general corporate expense in fiscal 2016 as compared to fiscal 2015.
General corporate expense for fiscal 2015 decreased slightly from the prior year primarily due to a favorable adjustment to our reserve for former operations as well as costs incurred in fiscal 2014 relating to our home office relocations. These reductions in general corporate expense were partially offset by an increase in stock compensation expense and higher contributions to the TJX Foundation.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities: Net cash provided by operating activities was $2,937 million in fiscal 2016, $3,008 million in fiscal 2015 and $2,600 million in fiscal 2014. The cash generated from operating activities in each of these fiscal years was largely due to operating earnings.
Operating cash flows for fiscal 2016 decreased by $71 million compared to fiscal 2015. Net income plus the non-cash impact of depreciation provided cash of $2,894 million in fiscal 2016 compared to $2,804 million in fiscal 2015, an increase of $90 million. The change in the deferred income tax provision unfavorably impacted year-over-year cash flows by $71 million, which was driven by the deferred tax impact of the higher contributions to the pension plan in fiscal 2015. The change in merchandise inventory, net of the related change in accounts payable, resulted in a use of cash of $290 million in fiscal 2016, compared to a use of cash of $47 million in fiscal 2015, negatively impacting year-over-year cash flows by $243 million. The cash flow impact of the change in inventory and accounts payable was primarily due to an increase in packaway inventory at the end of fiscal 2016 as compared to the prior year as well as the impact of merchandise received late in the fourth quarter of fiscal 2015 that was paid for in fiscal 2016. The change in accrued expenses and other liabilities favorably impacted cash flows by $353 million in fiscal 2016 versus a favorable impact of $166 million in fiscal 2015. This favorable impact of $187 million in year-over-year cash flows from operations was driven primarily by an additional $100 million of voluntary contributions to our qualified pension plan in fiscal 2015 as compared to fiscal 2016. Lastly, fiscal 2016 cash flow from operations was reduced by $23 million for the cost to acquire favorable lease rights.
Operating cash flows for fiscal 2015 increased $408 million compared to fiscal 2014. Net income plus the non-cash impact of depreciation provided cash of $2,804 million in fiscal 2015 compared to $2,686 million in fiscal 2014, an increase of $118 million. The change in the deferred income tax provision, which was driven by the tax treatment of the voluntary contributions to our funded pension plan of $150 million in fiscal 2015, favorably impacted fiscal 2015 operating cash flows by $50 million. The change in merchandise inventory, net of the related change in accounts payable, resulted in a use of cash of $47 million in fiscal 2015, compared to a use of cash of $117 million in fiscal 2014, favorably impacting year-over-year cash flows by $70 million. The cash flow impact of the change in inventory and accounts payable was driven by the timing of receipt and payment of merchandise purchases. The improvement in operating cash flows in fiscal 2015 as compared to fiscal 2014 reflects an increase in the receipt of merchandise later in the fourth quarter that was paid for in the following fiscal year. The change in accrued expenses and other liabilities favorably impacted cash flows by $21 million in fiscal 2015 versus an unfavorable impact of $30 million in fiscal 2014. This favorable impact of $51 million in year-over-year cash flows from operations was driven by a payment in fiscal 2015 of approximately $80 million for settlements with tax authorities reducing our fiscal 2014 reserve for uncertain tax positions. Additionally, operating cash flows increased by $122 million year-over-year due to the change in income taxes payable and recoverable, which was largely driven by the increase in the current tax provision.
Investing activities: Our cash flows for investing activities include capital expenditures for the last three fiscal years as set forth in the table below:
| Fiscal Year Ended | ||||||||||||
| In millions | January 30, 2016 | January 31, 2015 | February 1, 2014 | |||||||||
| New stores | $ | 199.1 | $ | 201.5 | $ | 185.4 | ||||||
| Store renovations and improvements | 299.7 | 266.8 | 308.0 | |||||||||
| Office and distribution centers | 390.6 | 443.2 | 453.3 | |||||||||
| Capital expenditures | $ | 889.4 | $ | 911.5 | $ | 946.7 |
We expect our capital expenditures in fiscal 2017 will be approximately $1.1 billion, including approximately $600 million for our offices and distribution centers (including buying and merchandising systems and information systems) to support growth, approximately $300 million for store renovations and approximately $200 million for new stores. We plan to fund these expenditures through internally generated funds.
In fiscal 2016, we purchased $798 million of investments, compared to $431 million in fiscal 2015. Additionally, $681 million of investments were sold or matured during fiscal 2016 compared to $388 million in the prior year. The increased investment activity in fiscal 2016 reflects the impact of changing the investments of our Executive Savings Plan. This change in investments resulted in $154 million of assets being liquidated and then reinvested in new investment options. The balance of this activity primarily relates to short-term investments which had initial maturities in excess of 90 days and, per our policy, are not classified as cash on the consolidated balance sheets presented. Finally, investing activities include the initial payment of $57 million for the acquisition of Trade Secret.
Financing activities: Cash flows from financing activities resulted in net cash outflows of $2,176 million in fiscal 2016, $1,560 million in fiscal 2015 and $1,144 million in fiscal 2014.
TJX repurchased and retired 26.5 million shares of its common stock at a cost of $1.8 billion during fiscal 2016, on a “trade date basis.” TJX reflects stock repurchases in its financial statements on a “settlement date” or cash basis. Under our stock repurchase programs, we spent $1.8 billion to repurchase 26.6 million shares of our stock in fiscal 2016, $1.7 billion to repurchase 27.6 million shares of our stock in fiscal 2015 and $1.5 billion to repurchase 27.3 million shares of our stock in fiscal 2014. See Note D to the consolidated financial statements for more information. In February 2016, we announced that our Board of Directors authorized an additional repurchase program authorizing the repurchase of up to an additional $2.0 billion of TJX stock. We currently plan to repurchase approximately $1.5 billion to $2.0 billion of stock under our stock repurchase programs in fiscal 2017. We determine the timing and amount of repurchases based on our assessment of various factors including excess cash flow, liquidity, economic and market conditions, our assessment of prospects for our business, legal requirements and other factors. The timing and amount of these purchases may change.
We declared quarterly dividends on our common stock which totaled $0.84 per share in fiscal 2016, $0.70 per share in fiscal 2015 and $0.58 per share in fiscal 2014. Cash payments for dividends on our common stock totaled $544 million in fiscal 2016, $466 million in fiscal 2015 and $394 million in fiscal 2014. We also received proceeds from the exercise of employee stock options of $132 million in fiscal 2016, $143 million in fiscal 2015 and $146 million in fiscal 2014. We expect to pay quarterly dividends for fiscal 2017 of $0.26 per share, or an annual dividend of $1.04 per share, subject to the declaration and approval of our Board of Directors. This would represent a 24% increase over the per share dividends declared and paid for fiscal 2016.
In June 2014, we issued $750 million aggregate principal amount of 2.75% seven-year notes generating proceeds, net of debt issuance expenses and fees, of $743 million. In July 2014, we used a portion of the proceeds from the 2.75% seven-year notes to redeem the $400 million aggregate principal amount of 4.20% notes paying $416 million to the note holders for the present value of principal and future remaining interest payments due on the notes. In fiscal 2014, we issued $500 million of 2.50% ten-year notes generating proceeds, net of debt issuance expenses and fees, of $495 million. See Note J to the consolidated financial statements for more information.
We traditionally have funded our working capital requirements, including for seasonal merchandise, primarily through cash generated from operations, supplemented, as needed, by short-term bank borrowings and the issuance of commercial paper. As of January 30, 2016, our cash and cash equivalents held outside the U.S. were $1.2 billion, of which $355.4 million was held in countries where we have the intention to reinvest any undistributed earnings indefinitely. We have provided for deferred U.S. taxes on all undistributed earnings of our subsidiaries in Canada, Puerto Rico, Italy, India and Hong Kong. If we repatriate cash from such subsidiaries, we would not expect to incur additional tax expense, but our cash would be reduced by the amount of taxes paid. For all other foreign subsidiaries, no income taxes have been provided on the undistributed earnings because such earnings are considered to be indefinitely reinvested in the business. We have no current plans to repatriate cash balances held by such foreign subsidiaries. We believe our existing cash and cash equivalents, internally generated funds and our credit facilities are more than adequate to meet our operating needs over the next fiscal year. Our credit facilities were amended subsequent to the fiscal year end and are more fully described in Note J to the consolidated financial statements.
Contractual obligations: As of January 30, 2016, we had known contractual obligations (including current installments) under long-term debt arrangements, operating leases for property and equipment and purchase obligations as follows (in thousands):
| Payments Due by Period | ||||||||||||||||||||
| Tabular Disclosure of Contractual Obligations | Total | Less Than 1 Year | 1-3 Years | 3-5 Years | More Than 5 Years | |||||||||||||||
| Long-term debt obligations(1) | $ | 2,089,437 | $ | 63,950 | $ | 136,723 | $ | 473,313 | $ | 1,415,451 | ||||||||||
| Operating lease commitments(2) | 7,997,821 | 1,368,050 | 2,424,060 | 1,851,037 | 2,354,674 | |||||||||||||||
| Purchase obligations(3) | 3,075,339 | 2,894,674 | 161,346 | 19,308 | 11 | |||||||||||||||
| Total obligations | $ | 13,162,597 | $ | 4,326,674 | $ | 2,722,129 | $ | 2,343,658 | $ | 3,770,136 |
| (1) | Includes estimated interest costs and financing lease obligations. |
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| (2) | Reflects minimum rent. Does not include costs for insurance, real estate taxes, other operating expenses and, in some cases, rentals based on a percentage of sales; these items totaled approximately one-third of the total minimum rent for fiscal 2016. |
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| (3) | Includes estimated obligations under purchase orders for merchandise and under agreements for capital items, products and services used in our business, including executive employment and other agreements. Excludes agreements that can be cancelled without penalty. |
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We also have long-term liabilities for which it is not reasonably possible for us to predict when they may be paid which include $418.2 million for employee compensation and benefits, and $33.4 million for uncertain tax positions.
CRITICAL ACCOUNTING POLICIES
We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (GAAP) which require us to make certain estimates and judgments that impact our reported results. These judgments and estimates are based on historical experience and other factors which we continually review and believe are reasonable. We consider our most critical accounting policies, involving management estimates and judgments, to be those relating to the areas described below.
Inventory valuation: We use the retail method for valuing inventory for all our businesses except STP and Trade Secret. The businesses that utilize the retail method have some inventory that is initially valued at cost before the retail method is applied as it has not been fully processed for sale (i.e. inventory in transit and unprocessed inventory in our distribution centers). Under the retail method, the cost value of inventory and gross margins are determined by calculating a cost-to-retail ratio and applying it to the retail value of inventory. It involves management estimates with regard to markdowns and inventory shrinkage. Under the retail method, permanent markdowns are reflected in inventory valuation when the price of an item is reduced. Typically, a significant area of judgment in the retail method is the amount and timing of permanent markdowns. However, as a normal business practice, we have a specific policy as to when and how markdowns are to be taken, greatly reducing management’s discretion and the need for management estimates as to markdowns. Inventory shrinkage requires estimating a shrinkage rate for interim periods, but we take a full physical inventory near the
fiscal year end to determine shrinkage at year end. Historically, the variance between estimated shrinkage and actual shrinkage has not been material to our annual financial results. We do not generally enter into arrangements with vendors that provide for rebates and allowances that could ultimately affect the value of inventory.
Impairment of long-lived assets, goodwill and tradenames: We evaluate the recoverability of the carrying value of our long-lived assets, goodwill and tradenames at least annually and whenever events or circumstances occur that would indicate that the carrying amounts of those assets are not recoverable. Significant judgment is involved in projecting the cash flows of individual stores, as well as of our business units, which involve a number of factors including historical trends, recent performance and general economic assumptions. If we determine that an impairment of long-lived assets has occurred, we record an impairment charge equal to the excess of the carrying value of those assets over the estimated fair value of the assets.
Retirement obligations: Retirement costs are accrued over the service life of an employee and represent, in the aggregate, obligations that will ultimately be settled far in the future and are therefore subject to estimates. We are required to make economic, demographic and other assumptions regarding variables, such as the discount rate for valuing pension obligations, the long-term rate of return assumed to be earned on pension assets and assumptions about mortality, all of which impact the net periodic pension cost for the period. These assumptions, including the discount rate, which we determine annually based on market interest rates, and our estimated long-term rate of return, which can differ considerably from actual returns, can have a significant impact on the annual cost of retirement benefits and the funded status of our qualified pension plan. If our discount rate decreased 0.25 percentage points, our fiscal 2016 pension cost for our funded plan would have increased by approximately $8 million. Similarly, an increase in the discount of rate of 0.25 percentage points would result in a comparable reduction of pension cost. A change of 0.25 percentage points in our long-term rate of return would increase or decrease our fiscal 2016 pension cost by approximately $3 million. During fiscal 2015, we adjusted our assumptions relating to mortality (the expected lives of our pension participants) in light of new mortality tables issued by the Society of Actuaries which project longer life expectancies. The change in our mortality assumptions added $59 million to the projected benefit obligation for the funded plan as of January 31, 2015 and added approximately $7 million to our fiscal 2016 pension cost. When the discount rate, market performance of our plan assets, changes in laws, regulations, actuarial standards or other factors have a negative impact on the funded status of our plan, our required contributions may increase. We also consider these factors in determining the amount of voluntary contributions we may make to the plan in excess of mandatory funding requirements. In fiscal 2016, we funded our qualified pension plan with a voluntary contribution of $50 million.
Share-based compensation: In accordance with GAAP, we estimate the fair value of stock awards issued to employees and directors under our Stock Incentive Plan. The fair value of the awards is amortized as “share-based compensation” over the vesting periods during which the recipients are required to provide service. We use the Black-Scholes option pricing model for determining the fair value of stock options granted, which requires management to make significant judgments and estimates such as participant activity and market results. The use of different assumptions and estimates could have a material impact on the estimated fair value of stock option grants and the related compensation cost. A 5% increase in expected volatility would increase the per-option value of our most recent option award by 4% while a decrease of the same amount would decrease the per-option value of our most recent option award by 5%.
Casualty insurance: Our casualty insurance program is a self-insured program which requires us to estimate the total claims we would incur as a component of our annual insurance cost. The estimated claims are developed, with the assistance of an actuary, based on historical experience and other factors. These estimates involve significant judgments and assumptions, and actual results could differ from these estimates. If our estimate for the claims component of our casualty insurance for fiscal 2016 were to change by 5%, the fiscal 2016 pre-tax cost would increase or decrease by approximately $4 million. A large portion of these claims is funded with a non-refundable payment during the policy year, offsetting our estimated claims accrual. We had a net accrual of $19.7 million for the unfunded portion of our casualty insurance program as of January 30, 2016.
Reserves for uncertain tax positions: Like many large corporations, our income and other tax returns and reports are regularly audited by federal, state and local tax authorities in the United States and in foreign jurisdictions where we operate and such authorities may challenge positions we take. We are engaged in various administrative and judicial proceedings in multiple jurisdictions with respect to assessments, claims, deficiencies and refunds and other tax matters, which proceedings are in various stages of negotiation, assessment, examination, litigation and settlement. The outcomes of these proceedings are uncertain. In accordance with GAAP, we evaluate our uncertain tax positions based on our understanding of the facts, circumstances and information available at the reporting date, and we accrue for exposure when we believe that it is more likely than not, based on the technical merits, that the positions we have taken will not be sustained. However, in the next twelve months and in future periods, the amounts we accrue for uncertain tax positions from time to time or ultimately pay, as the result of the final resolutions of examinations, judicial or administrative proceedings, changes in facts, law, or legal interpretations, expirations of applicable statute of limitations or other resolutions of, or changes in, tax positions may differ either positively or negatively from the amounts we have accrued, and may result in reductions to or additions to accruals, refund claims or payments for periods not currently under examination or for which no claims have been made. Final resolutions of our tax positions or changes in accruals for uncertain tax positions could result in additional tax expense or benefit and could have a material impact on our results of operations of the period in which an examination or proceeding is resolved or in the period in which a changed outcome becomes probable and reasonably estimable.
Loss contingencies: Certain conditions may exist as of the date the financial statements are issued that may result in a loss to us but will not be resolved until one or more future events occur or fail to occur. Our management, with the assistance of our legal counsel, assesses such contingent liabilities. Such assessments inherently involve the exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against us or claims that may result in such proceedings, our legal counsel assists us in evaluating the perceived merits of any legal proceedings or claims as well as the perceived merits of the relief sought or expected to be sought therein.
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be reasonably estimated, we will accrue for the estimated liability in the financial statements. If the assessment indicates that a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot be reasonably estimated, we will disclose the nature of the contingent liability, together with an estimate of the range of the possible loss or a statement that such loss is not reasonably estimable.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note A to the consolidated financial statements included in this annual report on Form 10-K for recently issued accounting standards, including the dates of adoption and estimated effects on our results of operations, financial position or cash flows.
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