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
TJX provides projections and other forward-looking statements in the following discussions particularly relating to the Company’s future financial performance. These forward-looking statements are estimates based on information currently available to the Company, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, and subject to the cautionary statements set forth on page 2 of this Form 10-K. The Company’s results are subject to risks and uncertainties including, but not limited to, those described in Part I, Item 1A, Risk Factors, and those identified from time to time in our other filings with the Securities and Exchange Commission. TJX undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future developments or otherwise.
The discussion that follows relates to our 53-week fiscal year ended February 3, 2018 (fiscal 2018) and our 52-week fiscal years ended January 28, 2017 (fiscal 2017) and January 30, 2016 (fiscal 2016).
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 full-price retailers’ (including department, specialty, and major online retailers) regular prices on comparable merchandise, every day. We operate over 4,000 stores through our four main segments: in the U.S., Marmaxx
(which operates T.J. Maxx, Marshalls and tjmaxx.com) and HomeGoods (which operates HomeGoods and Homesense); 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 T.K. Maxx in Australia). We also operate Sierra Trading Post (“STP”), an off-price Internet retailer that operates sierratradingpost.com and retail stores in the U.S. The results of STP are reported in our Marmaxx segment.
During the fourth quarter, the Tax Cuts and Jobs Act of 2017 referred to as “tax reform” or the “2017 Tax Act” was enacted. The 2017 Tax Act, along with the related reinvestments made by the Company, had a significant impact on our fiscal 2018 results (see “Tax Cuts and Jobs Act of 2017” below).
Highlights of our financial performance for fiscal 2018 include the following:
| — | Net sales increased to $35.9 billion for fiscal 2018, up 8% over the same period last year. The 53rd week in fiscal 2018 increased net sales by 2%. At February 3, 2018, the number of stores in operation increased 7% and selling square footage increased 4% over the end of fiscal 2017. |
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| — | Comp sales on a 52-week basis increased 2% in fiscal 2018 over an increase of 5% in fiscal 2017 and an increase of 5% in fiscal 2016. The fiscal 2018 increase was driven primarily by an increase in customer traffic at each of our four segments. |
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| — | Diluted earnings per share for fiscal 2018 were $4.04 compared to $3.46 per share in fiscal 2017. Fiscal 2018 earnings per share includes a $0.17 net benefit from tax reform along with the related investments made by the Company, an $0.11 benefit from the 53rd week in the Company’s fiscal 2018 calendar partially offset by a $0.10 impairment charge related to STP. Fiscal 2017 earnings per share includes a $0.07 reduction due to a loss on the early extinguishment of debt and a pension settlement charge during the third quarter. |
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| — | Our fiscal 2018 pre-tax margin (the ratio of pre-tax income to net sales) was 10.8%, a 0.4 percentage point decrease compared to 11.2% in fiscal 2017. The impairment charge relating to STP and the cost of incremental investments we made in connection with the 2017 Tax Act collectively reduced pre-tax margin by 0.6 percentage points while the 53rd week in the fiscal 2018 calendar lifted pretax margin by approximately 0.1 percentage point. Fiscal 2017 pre-tax margin was reduced by 0.3 percentage points due to the two third quarter charges referred to above. |
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| — | Our cost of sales, including buying and occupancy costs, ratio for fiscal 2018 was 71.1%, a 0.1 percentage point increase compared to 71.0% in fiscal 2017. This increase was driven by higher supply chain costs partially offset by the favorable impact of mark-to-market of inventory derivatives and a benefit from the 53rd week in the fiscal 2018 calendar. Merchandise margins were flat compared to fiscal 2017. |
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| — | Our selling, general and administrative (“SG&A”) expense ratio for fiscal 2018 was 17.8%, a 0.4 percentage point increase from 17.4% in fiscal 2017. The incremental investments described below related to the 2017 Tax Act increased the fiscal 2018 expense ratio by 0.3 percentage points. The remaining increase is primarily due to higher store payroll costs due to wage increases. |
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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, increased 6% on a reported basis and increased 4% on a constant currency basis at the end of fiscal 2018 as compared to the prior year. |
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| — | During fiscal 2018, we repurchased 22.3 million shares of our common stock for $1.7 billion, on a “trade date basis”. Earnings per share reflect the benefit of the stock repurchase program. With $1.1 billion remaining under previously announced stock repurchase programs, our Board of Directors approved our 19th stock repurchase program that authorizes the repurchase of up to an additional $3.0 billion. |
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The following is a discussion of our consolidated operating results, followed by a discussion of our segment operating results.
Tax Cuts and Jobs Act of 2017: On December 22, 2017, the 2017 Tax Act was enacted into law which, among other things, includes a one-time mandatory transition tax on accumulated foreign undistributed earnings and a reduction of the U.S. corporate income tax rate to 21 percent, effective January 1, 2018. The change in the U.S. income tax rate also requires us to revalue our deferred tax assets and liabilities. Although we are still evaluating the impact of the 2017 Tax Act on TJX, the Company has estimated the impact of the 2017 Tax Act which resulted in a reduction of the full year tax provision. The Company has reinvested a portion of these tax benefits by approving a discretionary bonus to eligible non-bonus plan Associates globally, providing an incremental contribution to the Company’s defined contribution retirement plans for eligible Associates in the U.S. and internationally, as well as making contributions to the Company’s charitable foundations, collectively referred to as “incremental investments related to the 2017 Tax Act.” The tax benefits recognized due to the 2017 Tax Act, offset by the after-tax impact of incremental investments we made related to the 2017 Tax Act, resulted in a net benefit to net income of $0.17 per share for the fiscal 2018 fourth quarter and full year.
Net sales: Consolidated net sales for fiscal 2018 totaled $35.9 billion, an 8% increase over $33.2 billion in fiscal 2017. The increase reflected a 4% increase from new stores, a 2% increase from comp sales, and a 2% increase from the impact of the 53rd week in the fiscal 2018 calendar. Foreign currency had a neutral impact in fiscal 2018. Net sales from our e-commerce businesses amounted to approximately 2% of total sales and had an immaterial impact on fiscal 2018 sales growth. 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 comp sales and a 4% increase from new stores, offset by a 2% negative impact from foreign currency exchange rates.
Comparable Store Sales: We define comparable store sales (“comp sales”), formerly referred to as same-store sales, to be sales of stores that have been in operation for all or a portion of two consecutive fiscal years, or in other words, stores that are starting their third fiscal year of operation. We calculate comp sales on a 52-week basis by comparing the current and prior year weekly periods that are most closely aligned. Relocated stores and stores that have changed 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 comp percentage is immaterial.
We define customer traffic to be the number of transactions in stores included in the comp sales calculation and 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 comp sales calculation.
Sales excluded from comp sales (“non-comp sales”) consists of:
| — | New stores- stores that have not yet met the comp sales criteria |
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| — | Stores that are closed permanently or for an extended period of time |
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| — | Sales from our e-commerce businesses, meaning Sierra Trading Post (including stores), tjmaxx.com and tkmaxx.com |
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We determine which stores are included in the comp sales calculation at the beginning of a fiscal year and the classification remains constant throughout that year unless a store is closed permanently or for an extended period during that fiscal year. In the third quarter of fiscal 2018, 37 stores were significantly impacted by hurricanes, mostly in Puerto Rico, and were excluded from comp sales. These stores will be included in the comp sales measures once they again meet the comp sales criteria.
Comp sales of our foreign segments are calculated by translating the current year’s comp 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.
Comp sales may be referred to as “same store” sales by other retail companies. The method for calculating comp sales varies across the retail industry, therefore our measure of comp sales may not be comparable to other retail companies.
Comp sales increases across all of our four segments for fiscal 2018 were primarily due to an increase in customer traffic. We also had an increase in the number of units sold, which was more than offset by a reduction in the average ticket. In fiscal 2018, home fashions and apparel both grew, with home fashions performing better than apparel. Geographically, in the U.S., the Southeast and the Southwest regions reported the highest comp sales increase, and the Northeast was below the consolidated average. In Canada, comp sales increases were well above the consolidated average and TJX International was at the consolidated average.
Comp sales increases in the U.S. for fiscal 2017 were primarily due to an increase in customer traffic. We also had an 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 comp 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 comp sales growth. In Canada, comp sales increases were well above the consolidated average while TJX International was below the consolidated average.
The following table sets forth our consolidated operating results as a percentage of net sales:
| Percentage of Net Sales | ||||||||||||
| Fiscal Year 2018 | Fiscal Year 2017 | Fiscal Year 2016 | ||||||||||
| Net sales | 100.0 | % | 100.0 | % | 100.0 | % | ||||||
| Cost of sales, including buying and occupancy costs | 71.1 | 71.0 | 71.2 | |||||||||
| Selling, general and administrative expenses | 17.8 | 17.4 | 16.8 | |||||||||
| Impairment of goodwill and other long-lived assets | 0.3 | — | — | |||||||||
| Loss on early extinguishment of debt | — | 0.2 | — | |||||||||
| Pension settlement charge | — | 0.1 | — | |||||||||
| Interest expense, net | 0.1 | 0.1 | 0.1 | |||||||||
| Income before provision for income taxes* | 10.8 | % | 11.2 | % | 11.8 | % | ||||||
| Diluted earnings per share | $ | 4.04 | $ | 3.46 | $ | 3.33 |
| * | 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 or a division’s local currency 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, 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 71.1% in fiscal 2018 compared to 71.0% in fiscal 2017 and 71.2% in fiscal 2016. The increase in this expense ratio during fiscal 2018 was driven by higher supply chain costs as we continue to invest and open new distribution centers. This was offset by the favorable impact of mark-to-market of inventory derivatives that benefitted expense ratio by approximately 0.1 percentage point as well as an estimated 0.1 percentage point benefit from the 53rd week in the Company’s fiscal 2018 calendar. Merchandise margin was flat to fiscal 2017.
The improvement in the fiscal 2017 expense ratio was driven by an increase in our merchandise margin along with leverage on buying and occupancy costs as a result of the 5% comp 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.
SG&A: SG&A expenses as a percentage of net sales were 17.8% in fiscal 2018, 17.4% in fiscal 2017 and 16.8% in fiscal 2016. The fiscal 2018 expense ratio increased by 0.3 percentage points due to the incremental investments related to the 2017 Tax Act. The remaining increase in fiscal 2018 was primarily due to higher employee payroll costs due to wage increases.
The increase in this ratio in fiscal 2017 was primarily due to a combination of higher employee payroll costs, due to wage increases and 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 as compared to fiscal 2016.
Impairment of goodwill and other long-lived assets, related to STP: Our fiscal 2018 results included a $99.3 million impairment charge, primarily related to goodwill, as the estimated fair value of STP fell below the carrying value due to a decrease in projected revenue growth rates. The impairment charge is included in the Marmaxx segment. As we continue transitioning this business to an off-price model, we saw improvement in the top line during the second half of fiscal 2018. We remain confident in the potential of STP and believe we are positioned for successful growth going forward.
Loss on early extinguishment of debt: During the fiscal 2017 third quarter, 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 and 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. As a result, 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 | February 3, 2018 | January 28, 2017 | January 30, 2016 | |||||||||
| Interest expense | $ | 69,237 | $ | 69,219 | $ | 68,253 | ||||||
| Capitalized interest | (4,942 | ) | (7,548 | ) | (7,984 | ) | ||||||
| Interest (income) | (32,707 | ) | (18,137 | ) | (13,869 | ) | ||||||
| Interest expense, net | $ | 31,588 | $ | 43,534 | $ | 46,400 |
The decrease in interest expense, net for fiscal 2018 and fiscal 2017 was driven by additional interest income, primarily due to an increase in invested balances and higher return rates.
Income taxes: Our effective annual income tax rate was 32.4% in fiscal 2018, 38.3% in fiscal 2017 and 37.7% in fiscal 2016. The decrease in the effective income tax rate in fiscal 2018 was primarily due to the favorable effect of the 2017 Tax Act, excess tax benefit from share-based compensation attributable to the adoption of ASU 2016-09- Compensation- Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, and the jurisdictional mix of income. 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 2017 Tax Act made broad and complex changes to the U.S. tax code which impacted fiscal 2018 including, but not limited to, reducing the U.S. federal corporate tax rate from 35% to 21% and requiring a one-time transition tax on certain undistributed earnings of foreign subsidiaries. The provisional tax benefit of the 2017 Tax Act is based on currently available information and interpretations, which are continuing to evolve. We will continue to analyze additional information and guidance related to the 2017 Tax Act as supplemental legislation, regulatory guidance, or evolving technical interpretations become available. The final impacts may differ from the recorded amounts as of February 3, 2018, and we will continue to refine such amounts within the measurement period provided by Staff Accounting Bulletin No. 118. We expect to complete our analysis no later than the fourth quarter of fiscal 2019.
Net income and diluted earnings per share: Net income was $2.6 billion in fiscal 2018 compared to $2.3 billion in both fiscal 2017 and fiscal 2016. Diluted earnings per share were $4.04 in fiscal 2018, $3.46 in fiscal 2017 and $3.33 in fiscal 2016. The tax benefits recognized due to the 2017 Tax Act, offset by the after-tax impact of the incremental investments related to the 2017 Tax Act, resulted in a net benefit to diluted earnings per share of $0.17 per share. The impairment charge related to STP reduced fiscal 2018 diluted earnings per share by $0.10 per share while the 53rd week in the fiscal 2018 calendar provided a benefit of approximately $0.11 per share. Foreign currency exchange rates had a $0.02 positive impact on earnings per share in fiscal 2018 when compared to fiscal 2017, and a $0.07 negative impact in fiscal 2017 when compared to fiscal 2016. During the third quarter of fiscal 2017, we incurred charges from the loss on early extinguishment of debt and the pension settlement, collectively reducing fiscal 2017 net income by $50 million, or $0.07 per share.
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 presented. We repurchased 22.3 million shares of our stock at a cost of $1.7 billion in both fiscal 2018 and fiscal 2017, and 26.5 million shares of our stock at a cost of $1.8 billion in fiscal 2016.
Segment information: We operate four main business segments. Our Marmaxx segment (T.J. Maxx, Marshalls and tjmaxx.com) and the HomeGoods segment (HomeGoods and Homesense) 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 T.K. Maxx in Australia. We also operate STP, an off-price Internet retailer that operates sierratradingpost.com and retail stores in the U.S. 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, net. “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 | February 3, 2018 | January 28, 2017 | January 30, 2016 | |||||||||
| Net sales | $ | 22,249.1 | $ | 21,246.0 | $ | 19,948.2 | ||||||
| Segment profit | $ | 2,949.4 | $ | 2,995.0 | $ | 2,858.8 | ||||||
| Segment profit as a percentage of net sales | 13.3 | % | 14.1 | % | 14.3 | % | ||||||
| Increase in comp sales | 1 | % | 5 | % | 4 | % | ||||||
| Stores in operation at end of period | ||||||||||||
| T.J. Maxx | 1,223 | 1,186 | 1,156 | |||||||||
| Marshalls | 1,062 | 1,035 | 1,007 | |||||||||
| STP | 27 | 12 | 8 | |||||||||
| Total | 2,312 | 2,233 | 2,171 | |||||||||
| Selling square footage at end of period (in thousands) | ||||||||||||
| T.J. Maxx | 27,077 | 26,614 | 26,158 | |||||||||
| Marshalls | 24,916 | 24,750 | 24,308 | |||||||||
| STP | 470 | 227 | 159 | |||||||||
| Total | 52,463 | 51,591 | 50,625 |
Net sales for Marmaxx increased 5% in fiscal 2018 on top of a 7% increase in fiscal 2017. The increase reflects a 2% increase from new store sales, a 2% increase from the 53rd week and a 1% increase from comp sales. The comp sales increase of 1% in fiscal 2018 is on top of a 5% increase in the prior year. Comp sales growth at Marmaxx for fiscal 2018 was due to a 3% increase in customer traffic on top of a 4% increase in customer traffic in fiscal 2017, which was offset by a decrease in the average basket. Geographically, comp sales were strong throughout most of the country with the Southeast and Southwest regions particularly strong and the Northeast was below the segment average. Home fashions outperformed apparel for fiscal 2018, with apparel posting flat comp sales on top of strong comp sales in fiscal 2017. E-commerce sales represented approximately 2% of Marmaxx’s net sales.
Segment margin decreased to 13.3% in fiscal 2018 compared to 14.1% in fiscal 2017. Marmaxx results for fiscal 2018 reflect a 0.4 percentage point negative impact from the STP impairment charge. In addition, higher store payroll costs, primarily due to wage increases, and higher distribution costs, primarily due to processing more units, collectively reduced segment margin by approximately 0.5 percentage points. The fiscal 2018 segment margin was also negatively impacted by expense deleverage on the 1% comp sales but was favorably impacted by approximately 0.1 percentage point due to the 53rd week. Merchandise margin was flat for fiscal 2018 compared to fiscal 2017. Tjmaxx.com and STP, excluding the impairment charge, did not have a significant impact on year-over-year segment margin comparisons.
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 comp 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 did not have a significant impact on year-over-year segment margin comparisons.
In fiscal 2019, we expect to open approximately 65 Marmaxx stores, which would increase selling square footage by approximately 2%.
HomeGoods
| Fiscal Year Ended | ||||||||||||
| Dollars in millions | February 3, 2018 | January 28, 2017 | January 30, 2016 | |||||||||
| Net sales | $ | 5,116.3 | $ | 4,404.6 | $ | 3,915.2 | ||||||
| Segment profit | $ | 674.5 | $ | 613.8 | $ | 549.3 | ||||||
| Segment profit as a percentage of net sales | 13.2 | % | 13.9 | % | 14.0 | % | ||||||
| Increase in comp sales | 4 | % | 6 | % | 8 | % | ||||||
| Stores in operation at end of period | ||||||||||||
| HomeGoods | 667 | 579 | 526 | |||||||||
| Homesense | 4 | — | — | |||||||||
| Total | 671 | 579 | 526 | |||||||||
| Selling square footage at end of period (in thousands) | ||||||||||||
| HomeGoods | 12,448 | 11,119 | 10,234 | |||||||||
| Homesense | 81 | — | — | |||||||||
| Total | 12,529 | 11,119 | 10,234 |
HomeGoods’ net sales increased 16% in fiscal 2018, on top of a 12% increase in fiscal 2017. The increase in fiscal 2018 reflected a 10% increase from new store sales, a 4% increase from comp sales and a 2% increase due to the 53rd week. The sales increase of 12% in fiscal 2017 reflected a 6% increase from new store sales and a 6% increase from comp sales. Comp sales growth at HomeGoods for fiscal 2018 was due to a 4% increase in customer traffic on top of a 5% increase in customer traffic in fiscal 2017. Comp sales growth in fiscal 2018 and fiscal 2017 was also due to an increase in units sold, which was partially offset by a decrease in the average ticket.
Segment profit margin decreased to 13.2% for fiscal 2018 compared to 13.9% for fiscal 2017. The decrease in segment margin for fiscal 2018 includes a decline in merchandise margin of 0.5 percentage points, primarily as a result of increased freight costs. In addition, higher distribution center costs primarily due to opening a new distribution center, higher store payroll costs, primarily due to wage increases, as well as costs in connection with opening more stores as compared to fiscal 2017, including our first Homesense stores, collectively reduced segment margin by approximately 0.8 percentage points. These costs were partially offset by expense leverage on comp sales growth as well as the benefit of the 53rd week which lifted segment margin by approximately 0.2 percentage points.
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 comp 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.
In fiscal 2019, we plan an increase of approximately 85 HomeGoods stores and 15 Homesense stores, which would increase selling square footage by approximately 18%.
Foreign Segments:
TJX Canada
| Fiscal Year Ended | ||||||||||||
| U.S. Dollars in millions | February 3, 2018 | January 28, 2017 | January 30, 2016 | |||||||||
| Net sales | $ | 3,642.3 | $ | 3,171.1 | $ | 2,854.6 | ||||||
| Segment profit | $ | 530.1 | $ | 413.4 | $ | 375.3 | ||||||
| Segment profit as a percentage of net sales | 14.6 | % | 13.0 | % | 13.1 | % | ||||||
| Increase in comp sales | 5 | % | 8 | % | 12 | % | ||||||
| Stores in operation at end of period | ||||||||||||
| Winners | 264 | 255 | 245 | |||||||||
| HomeSense | 117 | 106 | 101 | |||||||||
| Marshalls | 73 | 57 | 41 | |||||||||
| Total | 454 | 418 | 387 | |||||||||
| Selling square footage at end of period (in thousands) | ||||||||||||
| Winners | 5,780 | 5,629 | 5,470 | |||||||||
| HomeSense | 2,179 | 1,984 | 1,900 | |||||||||
| Marshalls | 1,621 | 1,307 | 975 | |||||||||
| Total | 9,580 | 8,920 | 8,345 |
Net sales for TJX Canada increased 15% in fiscal 2018, on top of an 11% increase in fiscal 2017. The increase in sales for fiscal 2018 reflected comp sales growth of 5%, a 5% increase from new stores, 3% from the positive impact of foreign currency translation and a 2% impact of the 53rd week. The increase in sales for fiscal 2017 reflected comp sales growth of 8% and a 5% increase from new stores offset by 2% from the negative impact of foreign currency translation. The comp sales increases in fiscal 2018 and fiscal 2017 were primarily due to an increase in customer traffic.
Segment profit margin increased 1.6 percentage points to 14.6% in fiscal 2018 compared to 13.0% in fiscal 2017. The increase in segment margin was primarily due to the combination of an increase in merchandise margin of 0.6 percentage points, which benefitted from the year-over-year increase in the Canadian dollar, and expense leverage on the strong comp sales. The increase in the segment margin also included a favorable impact of 0.3 percentage points due to foreign currency, primarily the mark-to-market impact of the inventory derivatives. The fiscal 2018 segment margin also benefitted from the 53rd week, which lifted the segment margin by approximately 0.1 percentage point.
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 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 comp 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.
In fiscal 2019, we plan an increase of approximately 30 stores in Canada, which would increase selling square footage by approximately 6%.
TJX International
| Fiscal Year Ended | ||||||||||||
| U.S. Dollars in millions | February 3, 2018 | January 28, 2017 | January 30, 2016 | |||||||||
| Net sales | $ | 4,856.9 | $ | 4,362.0 | $ | 4,226.9 | ||||||
| Segment profit | $ | 249.2 | $ | 235.5 | $ | 316.9 | ||||||
| Segment profit as a percentage of net sales | 5.1 | % | 5.4 | % | 7.5 | % | ||||||
| Increase in comp sales | 2 | % | 2 | % | 4 | % | ||||||
| Stores in operation at end of period | ||||||||||||
| T.K. Maxx | 540 | 503 | 456 | |||||||||
| Homesense | 55 | 44 | 39 | |||||||||
| T.K. Maxx Australia | 38 | 35 | 35 | |||||||||
| Total | 633 | 582 | 530 | |||||||||
| Selling square footage at end of period (in thousands) | ||||||||||||
| T.K. Maxx | 11,379 | 10,787 | 9,970 | |||||||||
| Homesense | 883 | 714 | 639 | |||||||||
| T.K. Maxx Australia | 714 | 667 | 667 | |||||||||
| Total | 12,976 | 12,168 | 11,276 |
Net sales for TJX International increased 11% in fiscal 2018 on top of a 3% increase in fiscal 2017. The increase in sales for fiscal 2018 reflected a 7% increase from new stores, comp sales growth of 2%, and a 2% benefit from the 53rd week. Foreign currency translation had a neutral impact on fiscal 2018 sales growth. The increase in comp sales for fiscal 2018 was primarily driven by an increase in customer traffic. E-commerce sales represent less than 3% of TJX International’s net sales.
The increase in fiscal 2017 reflected a 12% increase from new store sales (which includes a full fiscal year of T.K. Maxx in Australia) and a 2% increase from comp sales, offset by the unfavorable impact from currency translation of 11%. The increase in comp sales for fiscal 2017 was primarily driven by an increase in customer traffic.
Segment profit margin decreased to 5.1% for fiscal 2018 compared to 5.4% for fiscal 2017. The decline in segment margin was driven by higher supply chain costs associated with the opening of a new distribution center and higher store payroll, which collectively reduced segment margin by approximately 0.7 percentage points. Segment margin was also negatively impacted by expense deleverage on the 2% comp sales growth. These declines in segment margin were partially offset by a favorable impact of 0.4 percentage points due to foreign currency, primarily the mark-to-market impact of the inventory derivatives as well as the benefit of the 53rd week, which lifted the segment margin by approximately 0.2 percentage points.
Segment profit margin decreased 2.1% percentage points to 5.4% in fiscal 2017 compared to fiscal 2016. The inclusion of T.K. Maxx in Australia 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 lower comp sales growth.
We expect to add approximately 35 stores to TJX International in fiscal 2019, which would increase selling square footage by approximately 5%.
General Corporate Expense:
| Fiscal Year Ended | ||||||||||||
| Dollars in millions | February 3, 2018 | January 28, 2017 | January 30, 2016 | |||||||||
| General corporate expense | $ | 515.0 | $ | 408.2 | $ | 395.6 |
General corporate expense for segment reporting purposes represents those costs not specifically related to the operations of our business segments. General corporate expenses are primarily included in SG&A expenses. The mark-to-market adjustment of our fuel hedges is included in cost of sales, including buying and occupancy costs.
The increase in general corporate expense for fiscal 2018 was primarily driven by the incremental investments related to the 2017 Tax Act. These investments include a discretionary bonus to eligible non-bonus plan associates, additional retirement plan contributions and contributions to TJX’s charitable foundations, which totaled $100 million in fiscal 2018.
The increase in general corporate expense for fiscal 2017 was primarily driven by incremental systems and technology costs as well as 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 as compared to fiscal 2016.
Liquidity and Capital Resources
Our liquidity requirements have traditionally been funded through cash generated from operations, supplemented, as needed, by short-term bank borrowings and the issuance of commercial paper. As of February 3, 2018, there were no short-term bank borrowings or commercial paper outstanding.
We believe our existing cash and cash equivalents, internally generated funds and our credit facilities, described in Note J – Long Term Debt and Credit Lines of Notes to Consolidated Financial Statements, are more than adequate to meet our operating needs over the next fiscal year.
As of February 3, 2018, TJX held $2.8 billion in cash and $0.5 billion in short-term investments. Approximately $1.8 billion of our cash was held by our foreign subsidiaries with $398.6 million held in countries where we provisionally intend to indefinitely reinvest any undistributed earnings. TJX has provided for all applicable state and foreign withholding taxes on all undistributed earnings of its foreign subsidiaries in Canada, Puerto Rico, Italy, India, Hong Kong and Vietnam through February 3, 2018. If we repatriate cash from such subsidiaries, we should not incur additional tax expense and our cash would be reduced by the amount of withholding taxes paid. We expect to repatriate more than $1 billion in cash from our subsidiary in Canada during fiscal 2019. Additionally, as part of the 2017 Tax Act we recorded a transition tax related to the undistributed earnings of our foreign subsidiaries of $193 million which is payable over 8 years.
Operating activities: Net cash provided by operating activities was $3.0 billion in fiscal 2018, $3.6 billion in fiscal 2017 and $3.0 billion in fiscal 2016. The cash generated from operating activities in each of these fiscal years was largely due to operating earnings.
Operating cash flows for fiscal 2018 decreased by $0.6 billion compared to fiscal 2017. Net income, adjusted for non-cash items increased operating cash flows in fiscal 2018 as compared to fiscal 2017 by $0.3 billion. This increase in cash flows was more than offset by a $0.3 billion decrease in cash flows related to merchandise inventories, net of related accounts payable, a $0.3 billion decrease in cash flows related to accounts receivable and prepaid expenses and a $0.3 billion decrease in cash flows related to accrued expenses and other liabilities. Merchandise inventories, net of related accounts payable increased in fiscal 2018 due in part to the lower inventory levels we carried at fiscal 2017 year end. The increase in accounts receivable was driven by credit card receivables. The increase in prepaid expenses and other current assets was primarily due to the prefunding of certain service contracts as well as the timing of rent payments which was impacted by the change in our fiscal year end dates. The change in accrued expenses and other liabilities was driven by a reduction in sales taxes and income taxes payable, primarily due to timing of payments and benefits associated with the 2017 Tax Act, as well as a contribution of $100 million to the Company’s defined benefit pension plan in fiscal 2018, as compared to $50 million last year.
Operating cash flows for fiscal 2017 increased by $0.7 billion 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 $0.1 billion. The remaining increase in operating cash flows was primarily due to a $0.3 billion increase in cash flows related to merchandise inventory, net of related accounts payable and a
$0.2 billion increase in cash flows related to accrued expenses and other liabilities. The positive cash flow impact from the change in inventory, net of related 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 positive impact from accrued expenses and other liabilities was driven primarily by increased liabilities for deferred compensation, gift cards and deferred revenue, sales taxes and income taxes payable.
Investing activities: Net cash used in investing activities include capital expenditures for the last three fiscal years as set forth in the table below:
| Fiscal Year Ended | ||||||||||||
| In millions | February 3, 2018 | January 28, 2017 | January 30, 2016 | |||||||||
| New stores | $ | 226.0 | $ | 191.2 | $ | 199.1 | ||||||
| Store renovations and improvements | 335.2 | 274.8 | 299.7 | |||||||||
| Office and distribution centers | 496.4 | 558.7 | 390.6 | |||||||||
| Capital expenditures | $ | 1,057.6 | $ | 1,024.7 | $ | 889.4 |
We expect our capital expenditures in fiscal 2019 will be approximately $1.4 billion, including approximately $800 million for our offices and distribution centers (including buying and merchandising systems and information systems) to support growth, approximately $400 million for store renovations and approximately $200 million for new stores. We plan to fund these expenditures through internally generated funds.
In fiscal 2018, we purchased $0.9 billion of investments, compared to $0.7 billion in fiscal 2017. Additionally, $0.9 billion of investments were sold or matured during fiscal 2018 compared to $0.5 billion 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.
Financing activities: Net cash used in financing activities resulted in net cash outflows of $2.3 billion in fiscal 2018, $1.6 billion in fiscal 2017 and $2.2 billion in fiscal 2016. These cash outflows were primarily driven by debt transactions, equity repurchases and dividend payments.
Debt
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.
For further information regarding debt, see Note J – Long Term Debt and Credit Lines of Notes to Consolidated Financial Statements.
Equity
TJX repurchased and retired 22.3 million shares of its common stock at a cost of $1.7 billion during fiscal 2018, 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 $1.6 billion to repurchase 22.2 million shares of our stock in fiscal 2018, $1.7 billion to repurchase 22.3 million shares of our stock in fiscal 2017 and $1.8 billion to repurchase 26.6 million shares of our stock in fiscal 2016.
For further information regarding equity repurchases, see Note D – Capital Stock and Earnings Per Share of Notes to Consolidated Financial Statements.
In February 2018, we announced that our Board of Directors authorized an additional repurchase program authorizing the repurchase of up to an additional $3.0 billion of TJX stock. We currently plan to repurchase approximately $2.5 billion to $3.0 billion of stock under our stock repurchase programs in fiscal 2019. 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.
Dividends
We declared quarterly dividends on our common stock which totaled $1.25 per share in fiscal 2018, $1.04 per share in fiscal 2017 and $0.84 per share in fiscal 2016. Cash payments for dividends on our common stock totaled $764 million in fiscal 2018, $651 million in fiscal 2017 and $544 million in fiscal 2016. We also received proceeds from the exercise of employee stock options of $134 million in fiscal 2018, $164 million in fiscal 2017 and $132 million in fiscal 2016. We expect to pay quarterly dividends for fiscal 2019 of $0.39 per share, or an annual dividend of $1.56 per share, subject to the declaration and approval of our Board of Directors. This would represent a 25% increase over the per share dividends declared and paid in fiscal 2018.
Contractual obligations: As of February 3, 2018, we had known contractual obligations under long-term debt arrangements (including current installments), other long-term obligations, 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 and other long-term obligations (1) | $ | 2,960,726 | $ | 83,782 | $ | 166,810 | $ | 886,782 | $ | 1,823,352 | ||||||||||
| Operating lease commitments (2) | 9,494,751 | 1,600,536 | 2,924,504 | 2,233,360 | 2,736,351 | |||||||||||||||
| Purchase obligations (3) | 3,689,892 | 3,474,158 | 153,249 | 62,485 | — | |||||||||||||||
| Total obligations | $ | 16,145,369 | $ | 5,158,476 | $ | 3,244,563 | $ | 3,182,627 | $ | 4,559,703 |
| (1) | Includes estimated interest costs, financing lease obligations and other long-term liabilities. |
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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 2018. |
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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 $442.6 million for employee compensation and benefits, and $44.8 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 T.K. Maxx in Australia and STP. 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 test our long-lived assets, goodwill and tradenames at least annually for impairment and whenever events or circumstances occur that would indicate that the carrying amounts of those assets may be impaired. 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 or 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. If we determine that an impairment of goodwill has occurred, we record an impairment charge equal to the excess of the carrying value of the applicable reporting unit over the estimated fair value of the reporting unit, but not in excess of the carrying amount of goodwill. 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 STP. As a result of a reduction in the projected revenue growth rates of STP the estimated fair value of this reporting unit was less than its carrying value, and therefore we have recorded an impairment charge of $97.3 million for the goodwill recorded at the time of acquisition. 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, operating results have not met our short term expectations. The operating results of STP are not material to TJX’s consolidated results.
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 2018 pension cost for our funded plan would have increased by approximately $7 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 2018 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, any 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 2018, we funded our qualified pension plan with a voluntary contribution of $100 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 2018 were to change by 5%, the fiscal 2018 pre-tax cost would increase or decrease by approximately $5 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 $39.6 million for the unfunded portion of our casualty insurance program as of February 3, 2018.
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, such as the recently enacted tax reform. Finally, foreign governments may enact tax laws in response to the 2017 Tax Act that could result in further changes to global taxation and materially affect our financial position and results of operations. 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.
The 2017 Tax Act significantly changes how corporations are taxed, requiring complex computations to be performed that were not previously required in U.S. tax law, significant judgments to be made in interpretation of the provisions and significant estimates in calculations, and the preparation and analysis of information not previously relevant or regularly produced. The U.S. Treasury Department, the IRS, and other standard-setting bodies could interpret or issue guidance on how provisions of the 2017 Tax Act will be applied or otherwise administered that is different from our interpretation. As we complete our analysis of the 2017 Tax Act, collect and prepare necessary data, and interpret any additional guidance, we may make adjustments to provisional amounts that we have recorded that may materially impact our provision for income taxes in the period in which the adjustments are made.
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
For a discussion of accounting pronouncements, see Note A- Basis of Presentation and Summary of Accounting Policies of Notes to Consolidated Financial Statements included in this annual report on Form 10-K, including the dates of adoption and estimated effects on our results of operations, financial position or cash flows.
| ITEM 7A. | Quantitative and Qualitative Disclosure about Market Risk |
|---|
TJX is exposed to market risks in the ordinary course of business. Some potential market risks are discussed below:
FOREIGN CURRENCY EXCHANGE RISK
We are exposed to foreign currency exchange rate risk on the translation of our foreign operations into the U.S. dollar and on purchases of goods in currencies that are not the local currencies of stores where the goods are sold and on intercompany debt and interest payable between and among our domestic and international operations. Our currency risk primarily relates to our activity in the Canadian dollar, British pound and Euro. As more fully described in Note E- Financial Instruments of Notes to Consolidated Financial Statements, we use derivative financial instruments to hedge a portion of certain merchandise purchase commitments, primarily at our international operations, and a portion of our intercompany transactions with and within our international operations. We enter into derivative contracts only for the purpose of hedging the underlying economic exposure. We utilize currency forward and swap contracts, designed to offset the gains or losses on the underlying exposures. The contracts are executed with banks we believe are creditworthy and are denominated in currencies of major industrial countries. Our foreign exchange risk management policy prohibits us from using derivative financial instruments for trading or other speculative purposes and we do not use any leveraged derivative financial instruments. We have performed a sensitivity analysis assuming a hypothetical 10% adverse movement in foreign currency exchange rates applied to the hedging contracts and the underlying exposures described above as well as the translation of our foreign operations into our reporting currency. As of February 3, 2018 and January 28, 2017, the analysis indicated that such an adverse movement would not have a material effect on our consolidated financial position but could have reduced our pre-tax income by approximately $78 million and $65 million, in fiscal years 2018 and 2017, respectively.
EQUITY PRICE AND OTHER MARKET RISK
The assets of our funded qualified pension plan, a portion of which are equity securities, are subject to the risks and uncertainties of the financial markets. We invest the pension assets (described further in Note I- Pension Plans and Other Retirement Benefits of Notes to Consolidated Financial Statements) in a manner that attempts to minimize and control our exposure to market uncertainties. Investments, in general, are exposed to various risks, such as interest rate, credit, and overall market volatility risks. A significant decline in the financial markets could adversely affect the value of our pension plan assets and the funded status of our pension plan, resulting in increased required contributions to the plan or other plan-related liabilities. Our pension plan investment policy prohibits the use of derivatives for speculative purposes.
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