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 28, 2017 (fiscal 2017), January 30, 2016 (fiscal 2016) and January 31, 2015 (fiscal 2015).
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 3,800 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, (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), an off-price Internet retailer with a small number of stores. The results of STP are reported in our Marmaxx segment.
Fiscal 2017 was another successful year for TJX. We posted a strong increase in net sales and solid earnings per share growth on top of strong increases in both fiscal 2016 and fiscal 2015. We continued to generate strong cash flows, allowing us to return value to our shareholders through cash dividends and share repurchases. In addition, we continue to reinvest in our business by adding new stores and remodeling existing ones, while continuing to strengthen our infrastructure in support of our continuing growth, and we implemented the second phase of our wage initiative to raise wages for U.S. hourly store associates.
Highlights of our financial performance for fiscal 2017 include the following:
| — | Same store sales increased 5% in fiscal 2017 over an increase of 5% in fiscal 2016 and an increase of 2% in fiscal 2015. The fiscal 2017 increase was driven primarily by an increase in customer traffic. |
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| — | Net sales increased to $33.2 billion for fiscal 2017, up 7% over the same period last year. Net sales increased to $30.9 billion for fiscal 2016, up 6% over the prior year. At January 28, 2017, the number of stores in operation increased 5% and selling square footage increased 4% over the end of fiscal 2016. |
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| — | Earnings per share for fiscal 2017 were $3.46 per diluted share compared to $3.33 per diluted share in fiscal 2016. Fiscal 2017 earnings per share was reduced by $0.07 from a loss on the early extinguishment of debt and a pension settlement charge during the third quarter. |
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| — | Our fiscal 2017 pre-tax margin (the ratio of pre-tax income to net sales) was 11.2%, a 0.6 percentage point decrease compared to our fiscal 2016 pre-tax margin. The two third quarter charges reduced pre-tax margin by 0.3 percentage points in fiscal 2017. |
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| — | Our cost of sales ratio for fiscal 2017 was 71.0%, a 0.2 percentage point decrease compared to the fiscal 2016 ratio. This improvement was driven by an increase in merchandise margin. |
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| — | Our selling, general and administrative expense ratio for fiscal 2017 increased 0.6 percentage points to 17.4% from 16.8% in fiscal 2016. This increase is primarily due to higher store payroll costs due to wage increases and investments to support our growth. |
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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 down 5% (down 4% on a constant currency basis) at the end of fiscal 2017 as compared to the prior year. |
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| — | During fiscal 2017, we repurchased 22.3 million shares of our common stock for $1.7 billion. Earnings per share reflect the benefit of the stock repurchase program. In January 2017, our Board of Directors authorized our 18th stock repurchase program for an additional $1.0 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 2017 totaled $33.2 billion, a 7% increase over $30.9 billion in fiscal 2016. The increase reflected a 5% increase from same store sales and a 4% increase from new stores,
offset by a 2% 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 2017 sales growth. Consolidated net sales for fiscal 2016 totaled $30.9 billion, a 6% increase over $29.1 billion in fiscal 2015. The increase reflected a 5% increase from same store sales and a 4% increase from new stores, offset by a 3% negative impact from foreign currency exchange rates.
Same store sales increases in the U.S. for fiscal 2017 were primarily due to an increase in customer traffic. We also had a strong increase in units sold which was largely offset by a reduction in the average ticket. In fiscal 2017, 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 and the Great Lakes regions reporting the highest same store sales growth. In Canada, same store sales increases were well above the consolidated average while TJX International was below the consolidated average.
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.
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 our e-commerce businesses, meaning Sierra Trading Post (including stores), tjmaxx.com and tkmaxx.com, are not included in same store sales. We classify a store as a new store until it meets the same store sales criteria. The recently 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 by translating 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 2017 | Fiscal Year 2016 | Fiscal Year 2015 | ||||||||||
| Net sales | 100.0 | % | 100.0 | % | 100.0 | % | ||||||
| Cost of sales, including buying and occupancy costs | 71.0 | 71.2 | 71.5 | |||||||||
| Selling, general and administrative expenses | 17.4 | 16.8 | 16.1 | |||||||||
| Loss on early extinguishment of debt | 0.2 | — | 0.1 | |||||||||
| Pension settlement charge | 0.1 | — | — | |||||||||
| Interest expense, net | 0.1 | 0.1 | 0.1 | |||||||||
| Income before provision for income taxes* | 11.2 | % | 11.8 | % | 12.2 | % | ||||||
| Diluted earnings per share | $ | 3.46 | $ | 3.33 | $ | 3.15 |
| * | 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 71.0% in fiscal 2017 compared to 71.2% in fiscal 2016 and 71.5% in fiscal 2015. The improvement in this expense ratio was driven by an increase in our profit margin on merchandise sold (merchandise margin) along with leverage on buying and occupancy costs as a result of the 5% same store sales increase. Together these two items benefitted the fiscal 2017 expense ratio by approximately 0.5 percentage points. Merchandise margin improved despite the continued pressure transactional foreign exchange had on the cost of merchandise at our foreign segments this year versus the prior year. Although not as significant as in fiscal 2016, the change in exchange rates continued to impact the cost of merchandise that was denominated in currencies other than our foreign segments’ local currency, primarily the U.S. dollar. These improvements were partially offset by higher supply chain costs and the negative impact of the mark to market of inventory derivatives.
The improvement in the fiscal 2016 expense ratio as compared to fiscal 2015 was driven by leverage on buying and occupancy costs as a result of the 5% same store sales increase along with an increase in merchandise margin. Similar to fiscal 2017, 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 TJX Canada and Europe for fiscal 2016 versus fiscal 2015. The change in exchange rates increased the cost of merchandise purchased by TJX Canada and Europe that were denominated in currencies other than the divisions’ respective 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.
Selling, general and administrative expenses: Selling, general and administrative expenses as a percentage of net sales were 17.4% in fiscal 2017, 16.8% in fiscal 2016 and 16.1% in fiscal 2015. The increase in this ratio in fiscal 2017 was primarily due to a combination of higher employee payroll costs, due to wage
increases, investments to support our growth and supply chain costs, partially offset by the favorable impact of reduced contributions to the TJX charitable foundations in fiscal 2017.
Similar to fiscal 2017, 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 supply chain costs, along with our incremental investments. In addition the fiscal 2016 expense ratio was unfavorably impacted by higher contributions to TJX’s charitable foundations in fiscal 2016 as compared to the prior year.
Loss on early extinguishment of debt: On September 12, 2016 we issued $1.0 billion of 2.25% ten year notes. We used a portion of the proceeds to redeem our $375 million 6.95% notes on October 12, 2016, prior to their scheduled maturity of April 15, 2019. We recorded a pre-tax loss on the early extinguishment of debt of $51.8 million.
Pension settlement charge: During the fiscal 2017 third quarter, we offered eligible former TJX Associates, who had not yet commenced receiving their qualified pension plan benefit, an opportunity to receive a lump sum payout of their vested pension benefit. On October 21, 2016, TJX’s qualified pension plan paid $103.2 million from pension plan assets to those who accepted this offer. This transaction had no cash impact on TJX, but did result in a non-cash pre-tax settlement charge of $31.2 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 28, 2017 | January 30, 2016 | January 31, 2015 | |||||||||
| Interest expense | $ | 69,219 | $ | 68,253 | $ | 64,783 | ||||||
| Capitalized interest | (7,548 | ) | (7,984 | ) | (9,403 | ) | ||||||
| Interest (income) | (18,137 | ) | (13,869 | ) | (15,593 | ) | ||||||
| Interest expense, net | $ | 43,534 | $ | 46,400 | $ | 39,787 |
The decrease in net interest expense for fiscal 2017 is due to additional interest income as a result of an increase in investments as well as an increase in interest rates.
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 fiscal 2016 as compared to fiscal 2015.
Income taxes: Our effective annual income tax rate was 38.3% in fiscal 2017, 37.7% in fiscal 2016 and 37.6% in fiscal 2015. The increase in the fiscal 2017 income tax rate was due to the jurisdictional mix of income and the valuation allowance on foreign net operating losses. In addition, the fiscal 2016 effective income tax rates benefitted from a reduction in our reserve for uncertain tax positions related to our adoption of the new Tangible Property Regulations. The increase in the fiscal 2016 effective income tax rate, as compared to fiscal 2015, was primarily due to the jurisdictional mix of income and the valuation allowance on foreign net operating losses.
Net income and diluted earnings per share: Net income was $2.3 billion in fiscal 2017, a 1% increase over $2.3 billion in fiscal 2016, which in turn was a 3% increase over $2.2 billion in fiscal 2015. Diluted earnings per share were $3.46 in fiscal 2017, $3.33 in fiscal 2016 and $3.15 in fiscal 2015. The third quarter charges from the loss on early extinguishment of debt and the pension settlement, collectively reduced fiscal 2017 net income by $50.0 million, or $0.07 per share. Foreign currency exchange rates also affected the comparability of our results. Foreign currency exchange rates had a $0.07 negative impact on earnings per share in fiscal 2017 when compared to fiscal 2016, and a $0.09 negative impact in fiscal 2016 when compared to fiscal 2015.
Our stock repurchase programs, which reduce our weighted average diluted shares outstanding, benefited our earnings per share growth by approximately 3% in each fiscal year. We repurchased 22.3 million shares of our stock at a cost of $1.7 billion in fiscal 2017, 26.5 million shares of our stock at a cost of $1.8 billion in fiscal 2016 and 27.7 million shares of our stock at a cost of $1.7 billion in fiscal 2015.
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. 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, the pension settlement charge 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 28, 2017 | January 30, 2016 | January 31, 2015 | |||||||||
| Net sales | $ | 21,246.0 | $ | 19,948.2 | $ | 18,687.9 | ||||||
| Segment profit | $ | 2,995.0 | $ | 2,858.8 | $ | 2,736.7 | ||||||
| Segment profit as a percentage of net sales | 14.1 | % | 14.3 | % | 14.6 | % | ||||||
| Increase in same store sales | 5 | % | 4 | % | 1 | % | ||||||
| Stores in operation at end of period | ||||||||||||
| T.J. Maxx | 1,186 | 1,156 | 1,119 | |||||||||
| Marshalls | 1,035 | 1,007 | 975 | |||||||||
| STP | 12 | 8 | 6 | |||||||||
| Total | 2,233 | 2,171 | 2,100 | |||||||||
| Selling square footage at end of period (in thousands) | ||||||||||||
| T.J. Maxx | 26,614 | 26,158 | 25,461 | |||||||||
| Marshalls | 24,750 | 24,308 | 23,715 | |||||||||
| STP | 227 | 159 | 122 | |||||||||
| Total | 51,591 | 50,625 | 49,298 |
Net sales at Marmaxx increased 7% in fiscal 2017 as compared to fiscal 2016. The increase reflected a 5% increase from same store sales and a 2% increase from new store sales. The same store sales increase of 5% in fiscal 2017 is on top of a 4% increase in the prior year. Same store sales growth at Marmaxx for fiscal 2017 was primarily due to an increase in customer traffic. Marmaxx same store sales also reflect an increase in units sold, which was largely offset by a decrease in the average ticket. Geographically, same store sales were strong throughout most of the country with the Southeast and Great Lakes regions particularly strong. Home fashions outperformed apparel for fiscal 2017 with both categories posting same store sales growth. Overall, e-commerce sales represent approximately 2% of Marmaxx’s net sales.
The same store sales increase of 4% in fiscal 2016 was on top of a 1% increase in the prior year. Same store sales growth at Marmaxx for fiscal 2016 was due to 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.
Segment margin in fiscal 2017 was 14.1% compared to 14.3% in fiscal 2016. Marmaxx results for fiscal 2017 reflect an increase in merchandise margin and buying and occupancy expense leverage, on same store
sales growth, of approximately 0.7 percentage points. However, these gains were more than offset by higher store payroll costs, primarily due to wage increases and processing more units at the store level, higher distribution costs, as well as an increase in credit card chargeback costs. Tjmaxx.com and STP (our U.S. e-commerce businesses) did not have a significant impact on year-over-year segment margin comparisons.
Segment margin in fiscal 2016 was 14.3%, compared to 14.6% in fiscal 2015. Marmaxx results for fiscal 2016 reflect improvements 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 continue to transition this business to a more fully off-price model and to adjust its merchandise mix.
In fiscal 2018, we expect to open approximately 65 Marmaxx stores, which would increase selling square footage by approximately 2%.
HomeGoods
| Fiscal Year Ended | ||||||||||||
| Dollars in millions | January 28, 2017 | January 30, 2016 | January 31, 2015 | |||||||||
| Net sales | $ | 4,404.6 | $ | 3,915.2 | $ | 3,414.4 | ||||||
| Segment profit | $ | 613.8 | $ | 549.3 | $ | 463.2 | ||||||
| Segment profit as a percentage of net sales | 13.9 | % | 14.0 | % | 13.6 | % | ||||||
| Increase in same store sales | 6 | % | 8 | % | 7 | % | ||||||
| Stores in operation at end of period | 579 | 526 | 487 | |||||||||
| Selling square footage at end of period (in thousands) | 11,119 | 10,234 | 9,537 |
HomeGoods’ net sales increased 12% in fiscal 2017, on top of a 15% increase in fiscal 2016. The increase in fiscal 2017 reflected a 6% increase from same store sales and a 6% increase from new store sales. The sales increase of 15% in fiscal 2016 reflected a same store sales increase of 8% and an increase from new stores of 7%. The increase in same store sales for fiscal 2017 and fiscal 2016 was primarily due to an increase in customer traffic.
Segment profit margin for fiscal 2017 was 13.9% compared to 14.0% for fiscal 2016. Segment margin for fiscal 2017 was favorably impacted by an increase in merchandise margin and expense leverage, primarily occupancy costs, on strong same store sales growth. These increases in segment margin were more than offset by higher payroll costs related to wage increases, an increase in distribution costs, which includes the opening of a new distribution center in fiscal 2017, and an increase in credit card chargeback costs. Segment profit margin for fiscal 2016 was 14.0%, up from 13.6% for fiscal 2015. The increase in 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.
In fiscal 2018, we plan an increase of approximately 81 HomeGoods stores, which would increase selling square footage by approximately 11%. We also plan on launching a new U.S. home concept, with the first few stores opening later in fiscal 2018.
Foreign Segments:
TJX Canada
| Fiscal Year Ended | ||||||||||||
| U.S. Dollars in millions | January 28, 2017 | January 30, 2016 | January 31, 2015 | |||||||||
| Net sales | $ | 3,171.1 | $ | 2,854.6 | $ | 2,883.9 | ||||||
| Segment profit | $ | 413.4 | $ | 375.3 | $ | 393.6 | ||||||
| Segment profit as a percentage of net sales | 13.0 | % | 13.1 | % | 13.6 | % | ||||||
| Increase in same store sales | 8 | % | 12 | % | 3 | % | ||||||
| Stores in operation at end of period | ||||||||||||
| Winners | 255 | 245 | 234 | |||||||||
| HomeSense | 106 | 101 | 96 | |||||||||
| Marshalls | 57 | 41 | 38 | |||||||||
| Total | 418 | 387 | 368 | |||||||||
| Selling square footage at end of period (in thousands) | ||||||||||||
| Winners | 5,629 | 5,470 | 5,310 | |||||||||
| HomeSense | 1,984 | 1,900 | 1,824 | |||||||||
| Marshalls | 1,307 | 975 | 914 | |||||||||
| Total | 8,920 | 8,345 | 8,048 |
Net sales for TJX Canada increased 11% in fiscal 2017 compared to a decrease of 1% in fiscal 2016. The increase in sales for fiscal 2017 reflected same store sales growth of 8% and a 5% increase from new stores offset by 2% from the negative impact of foreign currency translation. The decrease in net sales of 1% in fiscal 2016 was due entirely to currency translation which negatively impacted sales growth by 16%, more than offsetting sales growth of 12% from same store sales and an increase of 3% from new stores. The same store sales increases in fiscal 2017 and fiscal 2016 were primarily due to an increase in customer traffic.
Segment profit margin decreased 0.1 percentage point to 13.0% in fiscal 2017. The decline in segment margin was driven by a decrease in merchandise margin and higher supply chain and distribution center costs, which included the opening of a new distribution center. The decline in merchandise margin, similar to the prior year, was primarily due to 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 segment margin were largely offset by expense leverage, primarily buying and occupancy costs, on the same store sales growth, as well as the benefit of transactional foreign currency activity resulting in foreign currency gains in fiscal 2017 as compared to foreign currency losses in fiscal 2016. These foreign currency gains and losses result from the timing and settlement of payables denominated in currencies other than the Canadian Dollar.
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.
In fiscal 2018, we plan an increase of approximately 35 stores in Canada, which would increase selling square footage by approximately 7%.
TJX International
| Fiscal Year Ended | ||||||||||||
| U.S. Dollars in millions | January 28, 2017 | January 30, 2016 | January 31, 2015 | |||||||||
| Net sales | $ | 4,362.0 | $ | 4,226.9 | $ | 4,092.3 | ||||||
| Segment profit | $ | 235.5 | $ | 316.9 | $ | 337.4 | ||||||
| Segment profit as a percentage of net sales | 5.4 | % | 7.5 | % | 8.2 | % | ||||||
| Increase in same store sales | 2 | % | 4 | % | 3 | % | ||||||
| Stores in operation at end of period | ||||||||||||
| T.K. Maxx | 503 | 456 | 407 | |||||||||
| HomeSense | 44 | 39 | 33 | |||||||||
| Trade Secret | 35 | 35 | — | |||||||||
| Total | 582 | 530 | 440 | |||||||||
| Selling square footage at end of period (in thousands) | ||||||||||||
| T.K. Maxx | 10,787 | 9,970 | 9,109 | |||||||||
| HomeSense | 714 | 639 | 545 | |||||||||
| Trade Secret | 667 | 667 | — | |||||||||
| Total | 12,168 | 11,276 | 9,654 |
Net sales for TJX International increased 3% in fiscal 2017 to $4.4 billion compared to $4.2 billion in fiscal 2016, on top of a 3% increase in fiscal 2016 compared to fiscal 2015. The increase in fiscal 2017 reflected a 12% increase from new store sales (which includes Trade Secret for the full fiscal year) and a 2% increase from same store sales, offset by the unfavorable impact from currency translation of 11%. The increase in same store sales for fiscal 2017 was primarily driven by an increase in customer traffic. Net sales for TJX International increased 3% in fiscal 2016 to $4.2 billion compared to $4.1 billion in fiscal 2015. 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 foreign currency translation of 10%. Overall, e-commerce sales represent approximately 2% of TJX International’s net sales.
Segment profit margin decreased 2.1% percentage points to 5.4% in fiscal 2017 compared to fiscal 2016. The inclusion of Trade Secret for the full year negatively impacted segment margin by 0.9 percentage points. In addition fiscal 2017 segment margin was negatively affected by the unfavorable impact of the mark-to-market adjustment of inventory derivatives, higher store payroll costs and expense deleverage on the weak same store sales growth.
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.
We expect to add approximately 49 stores to TJX International in fiscal 2018, which would increase selling square footage by approximately 6%. We plan to rebrand the Trade Secret stores to T.K. Maxx stores during fiscal 2018.
General Corporate Expense:
| Fiscal Year Ended | ||||||||||||
| Dollars in millions | January 28, 2017 | January 30, 2016 | January 31, 2015 | |||||||||
| General corporate expense | $ | 408.2 | $ | 395.6 | $ | 324.4 |
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. The increase in general corporate expense for fiscal 2017 is driven by continued investments in corporate systems and technology along with increases in compensation, benefits and professional services. These increases were partially offset by the impact of lower contributions to the TJX charitable foundations in fiscal 2017 than fiscal 2016.
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.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities: Net cash provided by operating activities was $3,602 million in fiscal 2017, $2,937 million in fiscal 2016 and $3,008 million in fiscal 2015. The cash generated from operating activities in each of these fiscal years was largely due to operating earnings.
Operating cash flows for fiscal 2017 increased by $665 million compared to fiscal 2016. Net income, adjusted for non-cash items and the early extinguishment of debt, increased operating cash flows in fiscal 2017 as compared to fiscal 2016 by $86 million. The change in merchandise inventory, net of the related change in accounts payable, resulted in an increase of cash of $60 million in fiscal 2017, compared to a use of cash of $290 million in fiscal 2016, positively impacting year-over-year cash flows by $350 million. The positive cash flow impact of the change in inventory and accounts payable in 2017 was due to lower inventory levels at fiscal 2017 year end and increased payments in fiscal 2016 due to 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 $536 million in fiscal 2017 versus a favorable impact of $353 million in fiscal 2016. This favorable impact of $183 million in year-over-year cash flows from operations was driven primarily by increased liabilities for deferred compensation, gift cards and deferred revenue, sales taxes and income taxes payable. Fiscal 2016 cash flow from operations was reduced by $23 million for the cost to acquire favorable lease rights.
Operating cash flows for fiscal 2016 decreased by $71 million compared to fiscal 2015. Net income adjusted for the non-cash impact of depreciation and deferred income tax provision, provided cash of $2,926 million in fiscal 2016 compared to $2,906 million in fiscal 2015, an increase of $20 million. 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.
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 28, 2017 | January 30, 2016 | January 31, 2015 | |||||||||
| New stores | $ | 191.2 | $ | 199.1 | $ | 201.5 | ||||||
| Store renovations and improvements | 274.8 | 299.7 | 266.8 | |||||||||
| Office and distribution centers | 558.7 | 390.6 | 443.2 | |||||||||
| Capital expenditures | $ | 1,024.7 | $ | 889.4 | $ | 911.5 |
We expect our capital expenditures in fiscal 2018 will be approximately $1.2 billion, including approximately $600 million for our offices and distribution centers (including buying and merchandising systems and
information systems) to support growth, approximately $350 million for store renovations and approximately $250 million for new stores. We plan to fund these expenditures through internally generated funds.
In fiscal 2017, we purchased $717 million of investments, compared to $798 million in fiscal 2016. Additionally, $529 million of investments were sold or matured during fiscal 2017 compared to $681 million in the prior year. 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, fiscal 2016 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 $1,562 million in fiscal 2017, $2,176 million in fiscal 2016 and $1,560 million in fiscal 2015.
During the fiscal 2017 third quarter we received net proceeds of $992.5 million from the issuance of $1 billion of 2.25% ten-year notes. A portion of the proceeds were used to redeem our $375 million 6.95% notes prior to their scheduled maturity. The redemption of the notes, including the prepayment penalty, resulted in cash outflows of $426 million. The remainder of the proceeds from the notes offering were used for working capital and other general corporate purposes.
TJX repurchased and retired 22.3 million shares of its common stock at a cost of $1.7 billion during fiscal 2017, 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 $1.7 billion to repurchase 22.3 million shares of our stock in fiscal 2017, $1.8 billion to repurchase 26.6 million shares of our stock in fiscal 2016 and $1.7 billion to repurchase 27.6 million shares of our stock in fiscal 2015. See Note E to the consolidated financial statements for more information. In February 2017, we announced that our Board of Directors authorized an additional repurchase program authorizing the repurchase of up to an additional $1.0 billion of TJX stock. We currently plan to repurchase approximately $1.3 billion to $1.8 billion of stock under our stock repurchase programs in fiscal 2018. 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 $1.04 per share in fiscal 2017, $0.84 per share in fiscal 2016 and $0.70 per share in fiscal 2015. Cash payments for dividends on our common stock totaled $651 million in fiscal 2017, $544 million in fiscal 2016 and $466 million in fiscal 2015. We also received proceeds from the exercise of employee stock options of $164 million in fiscal 2017, $132 million in fiscal 2016 and $143 million in fiscal 2015. We expect to pay quarterly dividends for fiscal 2018 of $0.3125 per share, or an annual dividend of $1.25 per share, subject to the declaration and approval of our Board of Directors. This would represent a 20% increase over the per share dividends declared and paid in fiscal 2017.
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 28, 2017, our cash and cash equivalents held outside the U.S. were $1.3 billion, of which $341.7 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. One of our credit facilities was amended subsequent to the fiscal year end and is more fully described in Note K to the consolidated financial statements.
Contractual obligations: As of January 28, 2017, 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) | $ | 2,808,964 | $ | 64,774 | $ | 129,173 | $ | 870,380 | $ | 1,744,637 | ||||||||||
| Operating lease commitments(2) | 8,521,086 | 1,455,642 | 2,629,436 | 1,997,670 | 2,438,338 | |||||||||||||||
| Purchase obligations(3) | 3,440,995 | 3,307,565 | 86,016 | 45,865 | 1,549 | |||||||||||||||
| Total obligations | $ | 14,771,045 | $ | 4,827,981 | $ | 2,884,625 | $ | 2,913,915 | $ | 4,184,524 |
| (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 2017. |
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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 $471.7 million for employee compensation and benefits, and $36.7 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, goodwill and tradenames 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. We determine the fair value of our business units using the discounted cash flow method which requires assumptions for the weighted average cost of capital (WACC) and revenue growth for the related business unit. The fair value of our business units exceeds their carrying value by a significant amount with the exception of
Sierra Trading Post (STP). Currently the fair value of STP exceeds the carrying value by approximately 10%. Our valuation for STP assumes a WACC of 10.1% for similar type entities and a perpetuity growth rate of 2%. An increase of 50 basis points in the WACC reduces the valuation by approximately $30 million and a decrease in the perpetuity growth rate of 50 basis points reduces the fair value by approximately $10 to $15 million. The valuation also assumes 15 to 20 new stores are opened annually over the next 10 years. We continue to transition STP from a promotional model to the off-price model and expand its store base. Although we are optimistic about the future of STP, since its acquisition these changes have resulted in operating results that have not met our short term expectations. The operating results of STP are not material to TJX’s consolidated results, if however their operating results continue to fall short of our projections it is possible we could be faced with an impairment of some or all of the $97 million of goodwill recorded at the time of acquisition.
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 2017 pension cost for our funded plan would have increased by approximately $10 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 2017 pension cost by approximately $3 million. 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 2017, 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 6% while a decrease of the same amount would decrease the per-option value of our most recent option award by 6%.
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 2017 were to change by 5%, the fiscal 2017 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 $30.8 million for the unfunded portion of our casualty insurance program as of January 28, 2017.
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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