Q3 2021 TJX Companies Inc Earnings Call
<unk> mode. Later, we will conduct a question and answer session at that time. If you. Other question you will need to press Star One as a reminder, this conference call is being recorded November 18, 2020, I would like to turn the conference call over to Mr., Ernie Hermann Chief Executive Officer, and President of the TJX companies incorporated. Please go ahead Sir.
Thank you Jordan before we begin debt has some opening comments.
Thank you Ernie good morning, the forward looking statements we make today about the companies results on plans are subject to risks and uncertainties that could cause the actual results and the implementation of the companies plan to vary materially. These risks are discussed in the companies at SEC filings, including without limitation.
On the form 10-K filed on March 27, 2020, and the form 10-Q filed August 28 2020. Further these comments on they came on a that follows are copyrighted today by the TJX companies, Inc. Any recording retransmission reproduction or other uses the same from profit or otherwise.
Without prior consent of TJX is prohibited and a violation of United States copyright and other laws. Additionally, while we have approved the publishing of a transcript of this call by a third party. We take no responsibility for inaccuracy that may appear on that transcript. Thank you and now I'll turn it back over to Ernie.
Good morning.
Joining me on Deb on the call is Scott Goldenberg.
I'd like to start our call today by expressing our sincere gratitude to all of our global associates for their continued hard work and dedication as we navigate the business from this health crisis.
They have helped us achieve monumental tasks over these past eight months.
We are especially proud of their commitment to our health and safety protocols for both associates and customers.
I want to give special recognition to our store distribution center in fulfillment Center associates, we are truly grateful for their commitment to keeping our business open and moving forward, which requires them to physically go into work.
In recognition of their efforts we have once again awarded a majority of them an appreciation bonus to be paid in November this month.
We will continue to look for opportunities to recognize associates in the fourth quarter for their continued contributions to the business.
As we keep managing through the global pandemic I want to share our continued concerned about the human impact of coated including on our associates and customers.
I know the news around the resurgence is difficult for all of us to see.
As an international retailer with operations around the World. We continue to follow government mandates in our regions.
Which means that this time, we have some stores temporarily closed.
Currently the vast majority of these are on Europe with only a very small number in North America.
Moving to the business update im going to start with a recap of our third quarter results followed by some comments on the fourth quarter and then move to the market share opportunities, we see for TJX in the medium and the long term.
Now to our third quarter results.
I am very pleased that both our sales and earnings per share well exceeded our plans.
Overall open only comp store sales were down 5% and earnings per share were 71 cents.
Further sales exceeded our plans across each of our divisions.
Our above plan third quarter results reinforce our confidence in the flexibility and strength of our business model over the long term.
The third quarter marked the first quarter this year that nearly all of our stores were open.
Despite the numerous macro headwinds, including co bid and its impact on consumer behavior and the limitations on costs of operating with new safety and occupancy protocols, we generated strong cash flow and saw a strong rebound to our top and bottom lines.
We are convinced that we can continue our successful profitable growth.
Once we are past this health crisis and the environment normalizes.
To provide more detail on the drivers of our above plan sales on the third quarter, we believe that the combination of improved merchandise mix huh.
Higher store inventory levels, our focus on safe in store shopping experiences and the restart of our marketing campaigns were all factors.
First we significantly improved our assortments in the seasonality of our product.
We have made progress in flexing, our buying dollars in shifting to higher demand categories.
We saw strength in our home beauty and active wear categories across Marmaxx, TJX, Canada and TJX International.
It's great to see consumer seeking out our banners for the categories that day currently deemed important.
Our buyers have done a terrific job delivering great merchandise and value throughout the store for all of our categories, including both the hub trending categories and the softer trending areas.
Second.
Overall inventory availability and the buying environment are excellent our buyers have done a great job communicating with our vendors and leveraging our global buying offices in this environment.
We've also added hundreds of new vendors this year are.
Our merchandise flow to stores has improved since last quarter and we felt good about bringing customers the terrific value as they expect from us in the third quarter.
We are we expect our inventory flow to incrementally improve throughout the fourth quarter.
I, especially want to highlight the outstanding sales resides results at our home goods banner, we believe that our aggressive expansion on home goods over the past five years has positioned us very well to capture outsized home share in this environment.
Next our merchandise margin was up significantly with excellent overall inventory availability Mark on was very strong mark.
Markdowns were also better than anticipated as sales exceeded our plans and consumers responded favorably to our fresh merchandise mix.
We also continue to receive very good feedback on our health and safety protocols from customers, who have shopped in our stores.
Our marketing organization works very closely with the store operations teams.
To develop clear and helpful signage to convey our commitment to a safe shopping experience to our customers.
We believe our health and safety focus will be important to consumers as they decide where they are comfortable doing their in store shopping this holiday season and beyond.
Lastly, we generated very strong cash flow and further increased our liquidity during the third quarter.
As we announced today, our current financial liquidity and flexibility gives us the confidence to reinstate our quarterly dividend subject to board approval.
We expect the dividend to be at an increased level compared to the last dividend we paid in March.
Scott of course, we'll talk more about this in the tender offer we announced this morning and his financial update in a moment.
Moving to the fourth quarter and our opportunities for the holiday selling season.
First we are convinced that we will be a gifting destination again this holiday season with our wide selections across many merchandise categories. We believe customers will find gifts for everyone on other less than our stores and online.
And our treasure Hunt shopping experience offers customers that element of discovery when they are looking for some inspiration for what to buy for the people on their holiday list.
Second we plan to flow fresh meat fresh product multiple times, a week to our stores and online throughout the holidays.
So that shoppers can find new gift, giving assortments every time they shop us.
Next we believe our holiday marketing campaigns, which started hearing earlier this month will help drive customer traffic.
We are highlighting our terrific gift assortments and excellent values with messaging such as spend less spend less gift better and big love small prices.
In the Us and Canada, we will leverage the strengths of our retail brands together in multi banner campaigns.
In Europe, we are leveraging our campaign across each of our European countries.
As the ecommerce we continue to add new categories and brands to our us and UK online businesses. This holiday season, we are planning to offer an expanded assortment of gifts for those shoppers who prefer to shop online.
We feel very good about what we have planned. This holiday season. However, we continue to see significant kobin related headwinds that we believe will make it difficult to achieve the level of sales that we would normally expect during this time of the year.
First is the Rhys recent resurgence of Cobra cases, and the consumer impact in addition to leading to more temporary store closures.
This also continues the uncertainty around shopping behavior.
We see some consumers are still reluctant to shop in stores and others may make fewer shopping trips. This holiday season again, we believe our health and safety measures will encourage consumers who are comfortable doing in store shopping this year to return to our stores.
Second.
We anticipate some pressure during peak shopping times in some stores from occupancy limits and social distancing protocols.
We have several initiatives plan to help mitigate some of this pressure and to improve traffic flow and speed of checkout.
Lastly, we are seeing softer demand for certain product categories, given the number of people continuing to spend more time on home.
While we are emphasizing the high demand categories of home beauty and activewear Theres a limit to how much of our mix, we would shift in the short term to medium term.
Okay.
Medium to long term, while much of what I just discussed our macro had headwinds that could persist until a vaccine is widely available and the environment normalizes, we feel very confident in the market share opportunities. We see ahead.
We are laser focused on the continued successful growth of TJX and see numerous opportunities to leverage our strengths.
First we are convinced that our great brands at great value is concept is an enduring retail formula that we will continue to be a major draw for consumers.
Our survey tell us that our customers love our differentiated treasure Hunt shopping experience and we are convinced that this will continue to serve us extremely well when more consumers are comfortable shopping our stores.
We believe our value proposition gives consumers a compelling reason to shop us from this environment and we'll continue to attract shoppers over the long term.
Second we believe our relationships with vendors will grow even stronger as other retailers closed stores, we see the power of our global sourcing from a universe of over 21000 vendors as a tremendous advantage.
Next is the flexibility of our buying store formats and distribution networks, which we see as a key strength in a rapidly evolving retail landscape. This flexibility allows us to offer consumers a broad mix of branded merchandise across a very wide consumer demographic.
Fourth we see a significant opportunity to continue our global store growth over the long term.
We are in an excellent position to take advantage of real estate availability to open new stores and relocate existing stores.
Further we plan to continue remodeling stores to further upgrade the shopping experience.
As we look to capitalize on opportunities to attract more new customers in the future we.
We want them to have a positive shopping experience when they visit us to keep them coming back.
Lastly, we see a great opportunity to capture additional share of the home category, which has been strong for us for many many years and.
In the short term, we have been increasing our home mix at all our banners to capture our piece of the incremental demand that is out there.
Going forward, we believe the strength of our buying team, which numbers over 400, homebuyers, our global buying offices and strong relationships with vendors around the world will allow us to capitalize on the best merchandise available in the marketplace and bring our shoppers exciting home fashions a terrific value.
Yes.
Today I am excited to share with you that we plan to launch E Commerce on home goods Dot Com later next year we.
We believe home goods ecommerce will allow us to leverage both our strength on the home category and the power of our global buying organization and sourcing universe.
We believe this will allow us to satisfy our current customer base, which is expanding and continue to attract new shoppers the.
The passion of our home goods customers is terrific to see and we're looking forward to bring them our great brands on values.
24 hours a day seven days a week.
In closing I want to reiterate that the entire management team is laser focused on navigating through these times to ensure the stability of the business in the short term.
At the same time, our sights remain on our strategic vision for the medium and long term and capitalizing on the numerous opportunities we see for our business.
We are prioritizing our investments in our associates store supply chain and systems to strengthen our infrastructure in positioning to execute on our growth plans.
We believe we are in excellent shape to build on our leadership positions in the US, Canada, Europe, and Australia over the long term.
TJX has success successfully grown its business. So many retail on economic cycles throughout our 43 year history.
And I believe that will come out of this health crisis, and even stronger company on the path to even greater success in the future.
Again, and most importantly.
I want to thank all of our associates worldwide to have shown an amazing commitment to TJX and it's on outstanding work over these past eight months.
Now I'll turn the call over to Scott for a financial update from that.
Then we'll open it up for questions Scott.
Thanks, Ernie and good morning, everyone.
I'd like to first Echo Ernie his comments and thank all of our global associates their hard work and commitment over these past eight months.
Now to Q3 results.
As Ernie mentioned opened only comp stores sales were down 5%. We were very pleased that overall sales and sales across all of our divisions well exceeded our plans.
Overall customer traffic was down but improved versus the second quarter average basket increased and was strong again as customers responded favorably to our fresh mix and put more items into their cards merchandise margin was up significantly this quarter driven by stronger March.
Moving on and lower markdowns, which included a benefit due to the timing of markdowns between the second and third quarters.
As to the cadence of sales.
Overall opened only comp store sales were sluggish in August and improved significantly for the remainder of the quarter with September being the strongest month, while hard to quantify we believe much of this improvement was due to a combination of a more seasonally appropriate merchandise mix and improve.
In store inventory levels as the quarter progressed.
Moving to the bottom line third quarter earnings per share were 71 cents, which was significantly better than we anticipated earnings per share included a non sent benefit from our lower tax rate versus last year, which was due to a true up of our year to date tax rate as well as the shifting of income.
And loss positions across our operating jurisdictions.
I want to also remind you that our EPS reflects significant cost headwinds related to cove. It similar to the second quarter in the third quarter. These costs, primarily included incremental payroll in our stores for enhanced cleaning and to monitor monitor occupancy personal protective equipment for our range.
Associates, an incremental expense related to the third quarter associate appreciation bonus.
In total covert costs accounted for approximately 270 million of incremental expense in the third quarter.
As for our third quarter balance sheet inventory. The decline was due to a combination of items first we intentionally planned lower in store inventory levels to accommodate social distancing and to account for the planned decline in our year over year sales second sales were stronger than we expected.
In the third quarter, So we will replenish ing our inventory quicker than we planned and lastly, we continue to experience merchandise delivery delays due to continue bottlenecks in the supply chain.
Overall inventory was down in store inventory levels improved significantly compared to the second quarter and our close store, we want them to be in this environment.
To be clear availability of merchandise in the marketplace is excellent excellent and is not a factor impacting inventory levels.
Now I'd like to walk through our third quarter cash flow and liquidity.
During the quarter, we generated $4.1 billion of operating cash flow. This was primarily due to an increase in working capital and strong net income. We also benefited from lower capital expense capital spending and maintaining tight expense controls during the quarter. As a result, we ended the third.
Third quarter in a very strong liquidity position with $10.6 billion in cash.
With such a strong liquidity position, we were very pleased to announce that we expect to reinstate our quarterly dividend in the fourth quarter subject to board approval at a rate of 26 cents per share. This.
This would represent a 13% increase versus our previous dividend of 23 cents last paid in March of 2020, if approved by the board in December the dividend will be paid in March of 2021 net.
Next we announced this morning that we launched launched cash.
Cash tender offers for up to 750 million aggregate principal amount for certain of the bonds. We issued in April of this year.
The goal of these tender offers and the findings financing I'll discuss shortly is to lower our borrowing costs by reducing the outstanding amount.
Of our higher interest rate longer dated bonds and issuer issuing lower interest rate bonds, while we cannot give specific guidance at this time if any of the bonds are successfully tendered we would incur a pre tax cash charge in the fourth quarter related to the extinguishment of this debt.
Keep in mind, if nobody tenders their bonds. The charge will be zero is $750 million of bonds are tendered the onetime pretax charge could be in excess of $225 million. We will disclose the results of the tender offers and the approximate size of the extinguishment charge.
When available.
We also disclosed this morning that we plan to issue new bonds maturing in seven and 10 years, we plan to use the priest proceeds of this offering together with cash on hand to finance the tender offers which our conditional on our issuing the bonds. We may also use some of the offering proceeds for general corporate.
Purposes.
As we said in our release, we are not providing a financial outlook for the fourth quarter due to cove, it and the increasing uncertainty around temporary store closures and the consumer shopping behavior in this environment as a point of reference for the two weeks of the fourth quarter OEP overall opened only comp stores were down 7%.
Similar to the trend we saw on the last week of October as a reminder, regardless of comp sales trends overall sales for the quarter fourth quarter will be negatively impacted due to temporary store closures that said I do want to highlight a couple of significant items that will never negatively impact our fourth quarter, but.
From line versus last year first we are expecting an increase in the amount of incremental covert costs compared to what we saw in the third quarter.
Second there will be a negative impact due to the temporary store closed close closings, which are most currently mostly in Europe.
Lastly, we expect higher incremental freight costs in the fourth quarter due to capacity constraints and higher rates I also want to mention from a sequential standpoint merchandise margin in the fourth quarter will not get a benefit from a shift in Mark Downs like we had in the third quarter.
And further fourth quarter freight expense will be significantly higher than what was in the third quarter.
Wrapping up I want to reiterate reiterate the strength of our third quarter results, while operating in a non optimal environment. We believe that our third quarter sales earnings and cash flow demonstrate what TJX is capable of when nearly all of our stores are open for a full quarter.
We believe we have been prudent in our financial approach to planning the business and management of our balance sheet and we ended the quarter in a very strong liquidity position. We are confident in our ability to manage and manage the areas. We can control like buying merchandising and store operations, we have a proven.
Retail business model and we believe we are set up very well for continued success. Once this health crisis is behind us.
Now we are happy to take your questions to keep the call on schedule, we're going to ask that you. Please limit your questions to one per person. Thanks, and now we will open it up to questions.
Thank you we will now begin the question and answer session. If you would like to ask a question. Please press star one from your phone on mute.
Speaking on.
My name is planned to introduce your question.
Our first question comes from Matthew Boss Your line is open.
Great Thanks, and congrats on the business improvement.
Thank you.
Ernie maybe where do we stand today with inventory replenishment in supply chain constraints relative to our conversation three months ago, and just given the industry disruption as a whole what's your confidence in accelerating market share out of this pandemic, maybe if you could just touch on some of the off price industry.
The barriers to entry that you think are important.
Sure Matt.
Well, let me, let me hit a high point that is first of all.
To separate at a high level, the short term versus the longer term. So the short term environment is.
And on a really address in the big picture, you're getting at is what happens to off price and das TJX as we kind of come out of this the short term environment right. Now we would say is a little more volatile than it was at the beginning of the third quarter. When you look at other closed cases, rising which were on multiple locations. So it's not just the us where.
Tuck in Europe us everywhere.
Pretty much we are as we mentioned we have on a number of stores over 400 stores closed in Europe right now so it's a little more volatile short term.
However, I'm going to give you a complete 180 and just say we are.
Very bullish on the longer term outlook, because that feels significantly better than it did at the beginning of Q3, when we Didnt know where all of this was heading certainly the recent news of the vaccines and what that could do in terms of helping as Scott mentioned when customers get comfortable shopping stores in general.
I think we are going to be positioned extremely well to come out of the box and gain more market share from.
Brick and mortar or across many categories not just on the homeira throughout the whole store I think we're going to be positioned. So if you look at all the other store closures that have happened it on guessing.
You are kind of getting at that issue with is this market share opportunity, but how is our inventory replenishment I think you asked in the beginning on supply constraints etcetera that we see getting incrementally better month.
Month by month as we move forward here certainly there's been some as you probably have heard industry wide. There was some west coast slowdowns that have impacted some categories, but not to the point.
In our case, where it has really satellite there had a material effect on our flow because we are actually right now fairly happy.
We're pleased with the amount of inventory we have in.
And really all of our divisions all the book.
All of the brick and mortar specifically of course in Europe right now is it.
Being shut down on for a few weeks doesn't matter with regard to inventory, but we are feeling really bullish medium term long term inventory replenishment availability is.
Pretty high we've had to recently slowed down all of our buying and most of the divisions and departments within the stores.
Because the availability out there is just.
As as you might expect it's it's more than it was a number of months ago and I think that just has to do with the cadence of the wholesalers.
Now trying to get back on track and project, where retailers are going to be and bring in more goods.
So hope that answers your question with regard to inventory replenishment supply, where we think the short term versus the long term again. This is why you're seeing us be a little more cautious on the fourth quarter book.
Because because of the volatility out there, but again as we look into next year feeling very good.
Thats, great maybe maybe Scott as a follow up could you just help quantify the magnitude of merchandise margin expansion in the quarter what drove the performance and then with inventories lean exiting the quarter, what's the best way to think about merchandise margin opportunity in the fourth quarter.
Well.
The last part of have Ernie just jump into right. There because I think I'll, just briefly and ill get back after Ernie talks, but our merchandise margin was strong across the board across all our divisions. The Mark on was extremely strong.
And I think significantly Sig and I think that in terms of the fourth quarter and markdowns were also math. This wouldn't surprise you because we were lean through a lot of that third quarter, we're still lean.
And the way our sales.
We're I don't want to say only down five but down five was well ahead of where we had thought they would be based on the environment on the inventories are marked on rates were all.
Much better than last year, the percentages were less than last year, which was healthy.
Inventory levels, we show were lean, but if you walk into our stores right now and this is any brand. We if you walked into winners TJ Maxx Marshalls home goods, you would feel the inventory levels still very appropriate based on social distancing the way consumers shop.
Versus three months ago inventory average store inventory levels are less than they are this time of the year. So when your sales are down whatever the number is whatever percent you are against those levels. The store is going to feel a little more naked than they are today. So today, they feel very appropriate when you walk walk in our store inventory levels, which is why were saying.
We're happy with and we're happy with the way the turns are right now they're not extreme in either direction.
Not too light not too heavy.
But again, we're trying to watch with what's going on the safety protocol and the social this on saying and balancing that whole store experience with our sales.
Yeah, and just Matt to just go on a little in terms of the rest of the merchandise margin.
There was the timing of the markdowns. So that was significant worth approximately 50 basis points that benefited us in the third quarter, having said that we still were up.
We were up still quite a bit on the markdowns home goods and Canada drove the majority of that is home goods as you would expect given the comp they had.
With chasing the inventory, we had very few markdowns compared to at any point it at home goods. So that was certainly the driver that but also strong margin performance in Canada in our gross profit.
We also had savings.
In some of the things that get booked into their like travel and other things on that we had savings store. We also had some government credits on other things that get booked into that.
That were also selling so and then there was a small benefit.
Well, that's small, but 30 basis points benefited from the hedges.
On the quarter, but having said all that yes. It was still an extremely strong.
Merchandise margin in the quarter.
Best of luck.
Thank you.
Our next question comes from Omar Saad Your line is open.
Thanks, Good morning, I appreciate all the information guys I wanted to ask a follow up on.
The market your confidence in the market share opportunity longer term.
Think about the consumer kind of step function migration online. During this pandemic is your confidence based on consumer is kind of re migrating away from on line and coming back to store I know traffic isn't quite back to where it is if.
If you have any data around that or especially given the home goods.
Ecommerce announce announcement are you do you have greater confidence that you'll be able to get greater penetration in the digital channels and gain market share that way or is it a combination of both thanks.
Great question Omar first of all a combination of both definitely I would say button way away more impactful on the store capturing.
The market share opportunity with the stores on.
And the home goods why Im excited about the home goods online businesses. We believe it's very complementary to add I think you and I have talked about this before.
That is a group of us some of our most most passionate customers or our home goods customers.
So clearly.
And then a lot of home business is being done online and so there's a there's just such a big territory out there of market share. We can go to grab from.
But a bulk of the market share I still think is customers as witnessed by what the home goods has been doing on comps recently, there's just a bulk of customers that really want to go shop our stores.
And.
The.
The market share opportunity as we as people get more comfortable for them to come back to our stores. We can just tell from what's been happening now when any area, where it's normalized.
We were in a running some some really strong.
Numbers sales revenue numbers on those markets. So.
The store closures issue across the country on brick and mortar because at the end of the day.
X percent of customers still would like to go to stores and not not everybody wants to buy their apparel, even though.
Online they don't always want to buy a sofa I'd.
Share.
On an accessory on they want to fill the fabric again, we've talked about this before that when things normalize we should get the increased market share because of all the store closures that have happened with brick and mortar I believe we're going to capture a lot of that.
Coming out of this so it's a little of both but I would say the store pickup.
Israeli were on the in the home I think on goods will be.
[music].
One of the healthiest divisions as we move forward into next year.
In terms of the ability to just keep capturing in especially in the medium term long term I think as as.
As businesses start.
Start to get into the vaccines kick in I guess, you could argue people will be less on home more but I do believe businesses across the country and and other countries, you're going to have X amount of us.
Employees stay at home that warrant at home, So thats, 25% of the office work force stays at on that wasn't that should still give went to the home goods busy.
Business I think for a for a handful of years.
Our next question comes from Keith.
Open.
Yes, hi, thanks, very much for taking my question on Ernie you filed obviously very bullish on home good on market share opportunity can you just speak to maybe how you're evaluating on longer term store counts, especially within that division on.
Seems like certainly easier.
You feel pretty optimistic about some of the opportunities out there and then just as home becomes a bigger piece is the mix what are some of the margin implications. We should consider just given higher free typically associated with that category. Thanks very much.
Sure Kate I'll start off and then I'll hand, it over to Scott the on the line on the store comps Weve started to obviously when Covance first started.
We start we.
Put a little bit of the brakes on but we only did that for a number of months and now if we look out I think Scott.
I don't have it as we look out to fiscal 23 calendar 22, well first of all with store openings.
Stores next year and then the year. After we will have now started to.
Ramp.
Ramp those up a little bit because.
Because we're bullish on it.
Theres, great real estate opportunity out there as we've talked about so what we've wanted to do and this applies by the way with.
Relocations in Marmaxx or in.
New stores and.
With Homesense in Canada, or our home business is great across the board.
But specifically on home goods, we've started to get.
Get more aggressive on flight 23 openings Scott on if you want to.
Got it on that I think it's across the board I think we have I mean again, we as.
As we've talked about the last two quarters, we slowed down significantly a lot of our openings. This year that even on stores that we had signed and move them from fiscal 21 to fiscal 22 or calendar 21.
So this year, we're opening up approximately 50 stores next year, you know already in the Hopper is well north of 100, and we will be hot will be high.
Our that we're just not giving out our plans, but as Ernie said, we're signing so it's across all of our divisions and you know for fiscal and science certainly signing stores for calendar 2002, and would expect to have you know start growing up into that at least that 3% range of store openings as a percent of the.
Of growth.
There's a lot of opportunity as Ernie said in his prepared remarks of it's not just the store openings were able to relocate a lot of stores, which are we're going to be repositioning and I think we will be back on track of relocations.
Next year on across all of our divisions with certainly a lot of opportunity in in Marmaxx as well and then obviously with lease to renegotiate. So in the above so I think there's a lot of opportunity in the real estate and we're starting to as Ernie said sign though so too early to give numbers for what next year on the year be on look on.
No beats in the triple will be well north of 100 openings and growing growing significantly.
I'll just jump in with one other thing Kate we're talking about home goods total, but in other places, where we're tweaking that and we will be opening some stores because our trend. There has also been strongest with some homesense store scattered amongst the other total home goods stores. So if there's if the real estate deal is right and its narrow home goods right Scott when it.
Take advantage of that with some some additional homesense stores as well.
Even though we might already be in the market again with the home goods, but again as we've as we've seen.
Our cannibalization on when we open up a home sense right now on home goods has been close to non exist and if anything were seeing a slight lift with the with the home goods. So because of differentiation, so again thats our or.
Our other vehicle I know, we don't talk about it as much but it's been performing well.
Over the last six months.
Great that's the book.
Thank you.
Our next question comes from Lorraine Hutchinson Your line is open.
Thanks, Good morning, I wanted to ask about assuming you spoke about the 270 million incremental cost this quarter.
You've done some offsets I was just wondering what those words and if there will be ongoing sales.
Secondly, the moving parts.
The 270 million cubic will go away.
Yeah.
Well I'll jump in just to start on that and then.
I think I.
I think what Ernie was alluded to in terms of the encouraging news on the vaccine is that over time stuff like the Cove. It costs will slowly get better but right now it's too early to say when our cobot costs are going to be decreased in the in line and I am I focus on that same it was more about the on.
The sales sales was really about our Lorraine the benefit we're going to see overtime. All it needs is a few point swing in on.
Consumer current comfort that consumer feeling more comfortable to shop brick and mortar and and that literally translates into a few point increased trend in our sales.
So that's really what I was referring to but in terms of the current bid costs at this point, it's too early to say that we you know we have no plans at this point to be reducing our cobot costs I mean, when they'll reduce I guess, we'll know there when we get there but.
But we're not going to be doing that until customers are going to be comfortable shopping in our store.
And taking those costs away. So at this point for the fourth quarter and then we'll address it as we get to year end, we would expect to have.
The full.
The full amount of.
Of.
Cobra costs continued to be implemented in terms of.
The offsets to that.
And the third to fourth quarter, yes, what's what we do have.
Government release that Weve been getting per.
Particularly in the third quarter from Canada in Europe that are still selling that were offsetting the cost Unfortunately that will be decreasing in the fourth quarter.
As we will not have some of the subsidiary subs sidor subsidies that we had in the third quarter. So the net will be going up a bit also as we increase our hours.
We do are we are increasing our cost per cove it.
In the fourth quarter offsetting some of that is we've had pretty good savings.
On the third quarter on advertising travel and other payroll related areas some of which we've talked about is we do have some closure of threat of our fitting rooms et cetera. Some of that will be reduced as we as we open up the you know the business on our spending money on net.
Marketing, we will have less saving so we would expect some of the net costs for Cove. It to go up in the fourth quarter.
But.
Overall.
Net covert costs and why we delivered 160 basis points essence, DNA is the kovar costs.
We're up a bit in the third quarter.
But still we didn't have enough savings to offset that.
If I could just also jump in Lorain, one thing we're conscious about.
Where we think it's a benefit to us coming out of this is really.
The last thing we want to give up strangely enough on the call that costs us because we're getting a lot of credit with the consumer on our safety measures that we put in and with our associates and then.
We get this from survey data.
We're we're surveying constantly and different on the.
The store throttle throughout the country and we're getting high scores, which is one reason we think we're doing as well as we are actually we believe our sales wouldn't be this good of the customers that are willing to shop brick and mortar right now are coming into us and based on the surveys that we've been doing are failing.
Sales and the experience of safe and organized and so we know where we know we're spending to do that I'm on us looking at that spend is yes safety for our customers on our associates number one priority, it's almost indirectly on marketing business getting spend at the same time and I think thats going to plant.
A loyalty.
Issue with customers coming out of this as we move forward so to Scott's point, we are not.
On the on the coal that costs were not letting go of those too quickly because we think it's helping our top line.
That makes sense. Thank you.
Okay.
Our next question comes from Paul Lejuez. Your line is open.
Hey, guys. Thanks, a couple quick ones Ernie you mentioned you signed on 100.
Vendors. This year I think you do that every year. So I'm curious if you've seen any different from the vendors that are that are coming on board with you haven't come on how you might categorize them versus what you would see in a normal year and on Scott payables inventory relationship looks a little little out of whack. Just curious if that's something that will go back to normal.
When and where if there were something that has changed as a result of this environment.
And that will continue to benefit you in future quarters.
Just those two items thanks.
Sure Paul So the first one.
Very good margin question, yes, there is a little different complexity on the new vendors because what's happening is day attended on the new ones have tended to not be.
The big a huge enormous.
Household name vendors they've been some of the more we would call on icing.
More nichey type vendors that at a nice flavor to our mix because some of those vendors where historically they haven't.
They haven't had that many goods or the need because they're not huge vendors, but they give a nice eclectic excitement level to our mix. So it's been really neat for us to enter and I get recaps frequently.
From the divisions at shown that we've really opened some vendors recently that in we Didnt think there were many vendors left that we weren't doing business with but there. There are some of these nichey vendors that we've actually been doing more business within the last quarter.
That are making on more of those new vendor numbers than we had had before whereas before you would have more of the mainstay we'd open up more than mainstream guys always knew now we've had some of these more special guys.
Sometimes not huge quantity by the way, but it's it's great because you feel there's a relationship that just started that should benefit us on next year on the thereafter.
So great Great question. It is it is a way it because it's not just about the numbers to your point.
It's about the quality of from.
We are opening up.
Yeah, and Paul in terms of the overall inventory levels I think as Ernie said, we we started to get to the level at the store is that we wanted to be I think.
Store inventories will still remain lighter than last year, primarily due to social distancing.
And having no planning our inventory our sales lower than last year. So I think that will remain some probably pretty constant and we're still chasing the good so we're on.
Overall, DC level inventories will be lighter.
Then at the end of the year than they were in the previous year I think they will go down a bit from where we are now.
As going back to some of the.
Efforts to Ernie alluded to in terms of mitigate the impact that the supply chain has with the overall will go down, but we will still not at the same levels on just to be clear when you looked at the two previous years, we had some fairly significant.
Inventory increases that were going against and some of that was in the distribution center. So when you look at it on a two or three year stack, it's not as not as debt is not is different but it but I would say the big difference is just we will have less.
Distribution center inventory than we normally would have and.
I think the overall freight aspects of it were going to be getting better, but it's still.
As you probably heard from others. The some of the capacity and other freight issues are not going away I think we're just doing a good job paying for it.
To get the inventory into our you know into our locations this year.
Got him go from asking about the the payables relationship inventory and if you've seen something change there on a more permanent basis or that might have additional debt ratio might come back to something more normal.
That will be true what.
What we've seen is.
You know we had increased some of our payable terms you know across the board we have a decrease them, but still at levels higher than we what will that normally would have free cove. It.
That will be a to be determined as we go through the next year. So obviously a lot as I said in the prepared remarks said lot of our benefit had to do with the.
A lower inventory levels, but also significantly higher payables balance.
That should start to normalize and that and you know some of that will some of that will clip as we move into next year. So it will still be a bit higher in terms of the terms, but it is going down.
Got it. Thank you guys luck. Thank you.
Our next question comes from Kimberly Greenberger Your line is open.
Oh, great. Thank you so much on the long term benefit in terms of just the positioning of the business was very very clear.
Then obviously here in Q3, we saw on exactly how resilient the business is on.
So it makes a lot of sense I wanted to ask you about two things.
First from the operating margin in the quarter, even with the incremental cobi costs and I understand the day, where a couple of different other.
The three items that benefited gross margin, but the operating margin on the business here in the third quarter was very much in line with what you've delivered for the last two years in the third quarter.
So I am wondering if there has been any learning.
And so we just coded period on board.
Any kind of efficiencies that you've been able to.
Glean that would you know.
Potentially allow you to deliver higher margin post co then did pre co bid.
Right, yes, so Kimberly I get exactly what you get obviously, obviously, we're very pleased with the margin coming out of this.
One of the dynamics, that's going on to help offset the Kobe costs is this extremely healthy merchandise margin.
On.
Which the question is when we come on a co bid will that still be to that degree and it's kind of a.
You know you're right on the already.
Weird situation, where we're taking advantage of coming out of cobot and we're still doing this now as well as we look out where we placed on.
On the opportunities in the marketplace at the markup I think that Scott referred to has just been very advantageous do we believe there is some of that opportunity.
In the future I believe there is some of that because we will mean more now even more than we did before to many of these vendors because of so many of the brick and mortar guys going on and we're so branded focused so if you're a key branded player.
And you want to deal with a solid retailer who is also again not.
Very visible with the product right and it's it's part of a treasure Hunt shopping experience.
I believe there will be some benefit still going forward I, just don't think we will be able to maintain as.
To this degree however, due I think we've learned some things from it to probably come out of this and say hey, we've learned some ways to buy and work with certain vendors and inventory levels by the way Kimberly to your point that maybe we can help with our markdown rates, even a little more than we thought.
I think all of our teams would say, yes to those things and so I think on the merchant side, which is a which.
Which is a big chunk of what allowed us to deliver the margins right Scott in the quarter I think we did have some pretty good learnings I just don't know if we can move it to that degree on the margin rates.
Over the line over the.
Long long term over the next.
Few years I think yes, some good learning good question Okay.
Yes, I think on the expense side, it's a mixed bag I mean, a lot of other savings that we got in the second and third quarters were due to just shutting things debt down right that would not necessarily be good for the business for in a looking out over a couple of years such as some of the average.
Sizing and capital and others, which really cut to the bone with young which certainly we benefited by.
There are certainly are areas that will be less but I don't think there in other hundreds of millions of dollars like on travel on others, which we will certainly have learned and we will certainly do different things on some occupancy and other things, which will benefit from the very long term.
But on the other hand, there are costs, such as whether its wages in the distribution center or freight costs, which are to be determined whether there youre going to are they incrementally up and you know on what that growth will be like so net net it's still it's we're still not it's not clear clear exactly how it's all going to play out the space.
Actually on the expense on the expense on Kimberly, whereas on the on the on the merchandise margin side I think yes, there's there's definitely some learnings and more.
More tangible things, we can look to the future and say, we should be able to use some of that for the future I think the expense items are a little right I do think given our cash position on we'll have to see its an uncertain environment, but we'll have to.
See how we you know where we end up at the end of the year going into the first quarter, but given the strength of our balance sheet at the moment, we certainly took on.
On the covert debt that we did in the you know in the early April timeframe that certainly.
We would look to as were doing in the marketplace. Today, we look longer term to try to de lever the balance sheet as we move through next year on and getting rid of some of those incremental interest costs that we have.
That's great. Thank you for that color that was extremely extremely helpful and I just wanted to.
A quick follow up early on you said in your prepared remarks you.
You said something about there a limit on how.
Severely you would be willing to shift your mix of good in niche Tom add on more.
Okay.
And I was just wondering if you could just add a little color to that.
I think so we we have actually been running on our trending this is about the how drastically would we shift our category mix right within the stores and I would tell you that we have.
At this point without being too specific we have been running at a little over half of our business is being done at this point, which is not the case a quarter ago and the high what you would call the hot.
Trending categories or departments within the business.
And a lot of those obviously were the ones that we have benefited from a co head and environment and then.
The other so but that still leaves you with a chunk of the store.
That the one reason we were able to achieve on minus five is we were not.
It can't drop 80% in those other areas of the store, we wouldn't do that we wouldn't normally run a minus five does that make sense. So what I was trying to bring as a balance and you know we're in a treasure hunt shopping experience, we wouldn't want our store, we wouldn't want to TJ maxx share marshals to be a home only store right walk in and that two thirds of the store as home.
That would not be a healthy thing.
Again, I'm, giving you. These extreme cases, because I want one day I'm trying to answer your question without into it in a given the exact numbers, but little over half of our business was done in the hot trending areas.
So that was very aggressive we got there very quickly.
And then we're going to watch that balance we actually continued to drive those hot businesses over the next three.
Three to six months, but we buy so hand to mouth as you know we can adjust based on trends, but we believe those hot categories will stay flat over the next six months anyway.
As home will go longer than that for sure.
We just are trying to do as good as our merchants are doing a very good job on the non trending areas you would call them on really trying to do the best mix of excitement and value and you know, we always talk about good better and best brands et cetera, and levels of product in all of those areas that even aren't considered hot our merchants have been going out.
On really trying to deliver a great excitement and do maximize the sales.
On the demand that's out there we want to maximize the sales within that demand thats out there on those non trending areas. So thats why I was trying to say we want to limit we don't want to artificially swing, a pendulum too far which as.
As you know retailers can do thats on kinds engaged get yourself in trouble debt and Kimberly I would just add to that that were.
On some of those both the trending and the non trending areas were buying better in both so one might not expect that but we are and the second thing is alignment Kimberly you can see that Scott has been trying to get closer to the merchandising area of recently.
Thanks, I'm not going on I'm, not going to take the bait on that okay.
But.
[laughter] also I think you know going back to other news talking about market share opportunities book, we as Ernie said, we are still very much in business and in many of those non in all of those non trending categories and on one's customers start coming back both on the ones that are on our average basket. It up so the average bask.
Good day up is there a cure rating their visits to go a little less ones that once they get more comfortable on don't want it we're going to have more shopping visits from our existing let alone the new customers, but once the customers that haven't been shopping come back in some of these non trending categories. They are shopping elsewhere. You know it was mentioned earlier, whether its online or at the mass.
Merchants and I think.
Those a lot of that those that benefit that others are getting they're going to be shopping and getting going to our store for the value as we have on those not trending categories. So I think we will get market share back not just from the closed stores, but from others, absolutely benefited that once customers shop more in.
Want to enter comfortable going into multiple visits were going to get more than our fair share.
Excellent. Thank you both.
Thank you.
The final question on the day comes from Alexander Walter Your line.
Good morning, Thanks for taking my question here.
I have two questions one on home goods and book at this.
Stage on this on the potential for that online business is the absolute percentage of the total and anything on margin implications on that and given that the cost of.
Shifting some of that product on the mine.
Second question on was just a follow up on this great discussions any thoughts at this stage on on how much of the headwind that could be on them in the medium term as we go into <unk>.
Next year on a little too early to talk about that.
Okay I will on.
Okay. So on home goods I want to make sure I know I heard the first the first part so.
We are so this is so early so we're going on we're planning right now on on launching home goods Dot com and the back half of next year and so right now obviously it is not something we would we would.
Would be giving our numbers out as to what we're expecting to do for business.
Again, what I would say is were hoping its going to be a complementary to our stores because the way we might orchestrate homegoods dotcom will be different than some other home retailers because we have so many brick and mortar home goods stores, where we feel we can encourage other visit based on an online purchase and encouraging not just.
The return, but a potential visit to the store as well as well as obviously do straightforward home goods purchases. So.
So we're still again worry wary pretty much a year away from the launch of this so we really don't have any.
Tangible numbers that we would be giving out on that at this point.
On intra I'm sorry on the second part of the question was that about was that about margins or on home goods or yeah. Just on the margin implications on the home goods, specifically on building an online business.
On the that yes, clearly it is not it is not the same it is a.
I guess, you would call it a de lever right Scott to begin with without.
Without a doubt our mission here, though is for the future again, it's more of a longer term play to capture market share over the next five years and there was shown line.
It's a bit of a tiger by the tail I would call with home goods anyone that knows home goods customers and their passion for it knows we are I think going to do a decent amount of sales fairly quickly. We're also going to on to try to help with the profit though.
Where we're going to operate this differently I can tell you. This we are going to set it up where its being done as a week.
We would call in conjunction with our home goods business, we're going to take inventory that's been bought from a home goods and use that to final to our online business. So we're going to be more efficient in the organization that we set up there from a cost perspective.
Different than most online businesses when you set it up as an entirely separate team. This will have only a small separate team where it's working in conjunction with our planning.
And our.
Story, a home goods and basically peeling the goods off from that so thats going to be.
That's going to be a really neat approach for us on it.
So very excited about it.
Yeah, and not to end with negative news on some other costs, but you you alluded to the costs of two other things one Ernie alluded to is the probably the biggest one for the quarter is just the fact at the moment that we have.
471 stores closed not in our control based on government.
Announcements on current guidelines and you know on their closed in a point in time right now from now through sometimes the early early December where you know that that impact is could be 3% to 4% of our sales. So if you do the math Thats a.
A significant amount of dollars and it's probably the biggest impact to the fourth quarter on the second you alluded to is on freight yes.
Yes freight costs will be going up.
You know I think right now we are paying higher rates. This will probably start to we will hope go down as we move through next year, but it could be 30 to 40 basis points of incremental de leverage in the fourth quarter.
Again, but I think our guys have been doing a great job of getting the product.
And delivering it to our distribution centers.
So thank you out.
Great. Thank you for other color. Thank you Alex.
Okay. So I think weve reached the end of our call I. Thank you all for joining us today.
We will be updating you again on our fourth quarter earnings call on February.
And from the team here at TJX, We hope the last day, well and we wish you good health take.
Take care everybody.
Ladies and gentlemen that concludes your conference call. Today, you may all disconnect. Thank you for participating.
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