Q2 2022 TJX Companies Inc Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the T. J Maxx companies second quarter fiscal 'twenty 'twenty two financial results conference call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session at that time. If you have a question you will need to <unk>.
Press Star one as a reminder, this conference call is being recorded August 18, 2021, I would like to turn the conference call over to Mr. Ernie Herrman, Chief Executive Officer, and President of the T. J Maxx companies Inc. Please go ahead Sir.
Thanks, Sheila before we begin Deb has some opening comments.
Thank you Ernie and good morning, the forward looking statements, we make today about the company's results and plans are subject to risks and uncertainties that could cause the actual results and the implementation of the company's plans to vary materially. The drifts are discussed in the company's SEC filings, including without limitation the Form 10-K.
At March 31, 2021 further these comments and the Q&A that follows are copyrighted today by the T. J Maxx companies, Inc. Any recording retransmission reproduction or other use of the same for profit or otherwise without prior consent of T. J Maxx is prohibited and a violation of United States.
Right 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 in that transcript. Thank.
Thank you and now I'll turn it back over to Ernie.
Good morning.
Joining me and Deb on the call is Scott Goldenberg.
I'd like to start our call today by once again thanking all of our global associates for their continued hard work and dedication to T. J Maxx.
We are especially grateful for their efforts over the past 18 months and for their commitment to the health and safety of our associates and customers.
Now to an overview of our second quarter results.
First I'm extremely pleased that our overall open only comp store sales when compared to our fiscal year 2020 or calendar year, 2019 increased an outstanding 20%, which well exceeded our plans.
Comp growth in home continued to be excellent and we also saw a very strong low teens comp increase in apparel is that cat or category continued its upward trend this quarter.
We were particularly pleased with the strong execution, we saw across each of our divisions, which all drove double digit open only comp sales growth versus fiscal 2020.
Clearly, our branded mix and great values continue to resonate with consumers in the U S, Canada, Europe and Australia.
Next overall sales were $12.1 billion over $2 billion more than the second quarter of fiscal 2020.
Overall segment profit increased more than $300 million over the same period.
We're convinced that our sales growth and profit in the second quarter demonstrate that we are capturing profitable market share.
We are confident that many of our loyal customers have returned to our stores and our shopping us more frequently and that we are attracting new shoppers with our marketing and exciting treasure Hunt shopping experience.
Third I am very pleased with the sequential improvement of our pre tax margin versus the first quarter.
Our strong sales growth and merchandize margin increased more than offset the persistent expense headwinds we've been facing.
The buying environment has been excellent and our teams have done a terrific job sourcing the right mix of goods and getting them to our stores to satisfy the strong customer demand.
Lastly, second quarter earnings per share of <unk> 64 cents were also well above our plans as a reminder, this includes a negative <unk> <unk> impact from a debt extinguishment charge and the impact from our temporary store closures.
Our strong earnings per share in the second quarter were over EPS of <unk> 62.
In fiscal 2020.
Now I'll turn it over to Scott to cover more of our second quarter financial results in more detail.
Thanks, Ernie and good morning, everyone I'd like to Echo <unk> comments and thank all of our global associates for their hard work and continued commitment to our business.
I'll start with some additional details of our second quarter results as Ernie mentioned overall opened only comp store sales increased 20% over fiscal 'twenty well above our plans and segment profit was very strong in the second quarter. We continued to see an increase in our average basket across all <unk>.
Divisions, driven by customers, putting more items into their cards overall average ticket was down slightly versus fiscal 'twenty, but improved significantly compared to the first quarter, primarily due to the improved strength in apparel.
Further average ticket improved each month of the quarter and was up in July overall customer traffic in the United States.
Where we were open the entire quarter with minimal occupancy restrictions was up mid single digits versus fiscal 'twenty.
Across each of our divisions second quarter opened only comp store sales growth was also excellent and exceeded our plans at.
<unk> opened only comp store sales increased an outstanding 18% and profit dollars were up 19% versus fiscal 'twenty.
<unk> home business continued its excellent performance and once again posted a comp increase in line with Homegoods apparel comps were up mid teens and improved significantly versus the first quarter.
Further sales were strong across all geographies and by age of store.
At Homegoods opened only comps increased a phenomenal 36% with consistent strength across all major categories and geographic regions for Homegoods and <unk>.
We were also very pleased with Homegoods profit dollars, which were up 42% versus fiscal 'twenty. As a reminder, homegoods margin is disproportionately impacted by freight increases due to its product mix and further pressured by supply chain costs related to its new distribution center in wages when looking at.
Our homegoods <unk> and Homegoods divisions combined versus fiscal 'twenty total open only comp store sales for the U S increased 21% and profit dollars were up 22%.
During the second corner, Canada, Europe, and Australia, each basis, each face challenges with temporary store closures and occupancy restrictions. Despite these limitations, we saw very healthy sales.
When we were open with TJ Maxx is Canada second quarter opened only comp store sales, increasing 18% and T. J T. J Maxx is international comp sales increasing 12%.
Moving on overall sales increased 22% over the second quarter of fiscal 'twenty as.
As we detailed in our press release. This morning, we estimate that sales were negatively impacted by about $300 million to $350 million due to the temporary closing of our stores for about 3% of the quarter.
Pretax margin for the second quarter was eight 7%. This includes a 200 basis point negative impact due to a debt extinguishment charge and an estimated 60 basis point negative impact from the temporary store closures net.
Net COVID-19 costs moderated significantly versus the first quarter and negatively impacted pre tax margin by only 30 basis points in the second quarter.
Again, we are extremely pleased with our improved pre tax margin in the second quarter.
Our very strong sales and excellent merchandise margin increase more than offset the 150 basis points.
The incremental freight expense, the substantial supply chain and wage costs and higher incentive compensation accruals.
Moving to the bottom line second quarter earnings per share was <unk> 64, and well above our plans second quarter. EPS includes a 15 cent negative impact due to the debt extinguishment charge and an estimated 5% to 7% negative impact from the temporary store closures again EPS.
In the second quarter of fiscal 'twenty was <unk> 62 per share.
As for our balance sheet inventory it was down 3% on a constant currency basis versus the second quarter of fiscal 'twenty.
Store inventories were down, but essentially where we want them to be and our distribution of incentives inventory was lower as we have less pack away and more goods on order and in transit our borrowers are doing a great job sourcing merchandize and had been able to chase the goods, we need to satisfy the current strong consumer demand to read.
Iterate the availability of merchandise is excellent.
Moving on to our cash flow and liquidity during the second quarter. We generated one 4 billion in operating cash flow and ended the quarter with $7.1 billion in cash in June we completed the make whole calls for $2 billion.
A principal outstanding notes, which resulted in a pre tax debt extinguishment charge of $242 million as a result of these actions we have reduced our outstanding debt by $2.75 billion this year and lowered our annual interest expense by over $90 million.
As for the shareholder distributions in the second quarter, we returned $614 million to shareholders through our buyback and dividend programs for the full year, we've increased our stock buyback by $250 million and now expect to repurchase 125 to $1.5 billion of <unk> stock.
Now I will turn it back to Ernie.
Yes.
Thanks Scott.
Looking ahead I'd like to highlight the opportunities that we believe will allow us to drive sales and traffic in the second half of the year.
First we are convinced that our relentless focus on value is a tremendous advantage.
In an inflationary environment, we believe even more consumers will be seeking out value, we are confident that our value position.
We will be a very attractive option for consumers looking to stretch their dollars without sacrificing on quality and brands.
Second we are excited about our store and online merchandising plans for the back half of the year, especially the back to school and holiday shopping seasons.
The marketplace is loaded with a great selection of apparel and home merchandise across good better and best brands.
We have enormous confidence that our teams will execute on these initiatives to bring consumers the right brands and fashions at the right values every day.
Next.
We are planning exciting marketing campaigns for television and digital media for the fall and holiday season.
We believe these campaigns will help us continue to attract new shoppers and stay top of mind with our existing customers.
Each of our divisions will showcase our differentiated shopping experience by reinforcing our value leadership, while also highlighting discovery fashion and quality.
Further.
And then every evolving media landscape, we continue to learn and adapt to new digital outlets. So that we can broaden our consumer reach and ensure we are connecting with shoppers on the platforms, where they are spending their time.
Okay.
Additionally, our research tells us that overall, our marketing campaigns and greatest assortment and values continue to attract new shoppers of all ages into our stores, including an outsized number of Gen Z and millennial shoppers.
We are also encouraged by our strong overall customer satisfaction scores.
Lastly.
While most of our European and Canadian stores were opened in the second quarter. Many of them were still operating with stringent COVID-19 related occupancy restrictions. Many of these restrictions have eased and assuming this trend continues.
We expect overall sales and customer traffic to improve in the second half of the year in these regions.
Further with a significant number of permanent retail closures in these geographies over the last 18 months, we see a great opportunity to capture a bigger share of consumers' wallets going forward.
As to E. Commerce, we continue to be pleased with the sales at our U S and UK online businesses, we have.
We're excited to launch e-commerce on Homegoods Dot com in the third quarter.
We believe this is something our existing customers have been waiting for and there is another way for us to attract new shoppers.
Two our other online businesses Homegoods dot com will be complementary to our physical stores and allow customers to shop, our great values 24 hours a day seven days a week.
Yes.
Beyond this year, we are convinced that we are set up extremely well to significantly grow our market share and improve our profitability.
Let me take a moment and share the characteristics of our business that we believe will continue to draw consumers to our retail banners going forward.
First we are confident that the appeal of our treasure Hunt shopping experience, we will continue to resonate with consumers our merchandise.
Assortments are constantly changing so there's always something new to surprise excite and inspire shoppers in our stores and online.
Further.
We offer great value every day, so our customers know they are getting excellent deals every time, they visit and they don't have to think about coupons or promotions.
Second we believe our stores offer consumers a much more eclectic assortment of merchandise versus traditional department and specialty stores.
Our more than 1100 global buyers are in the marketplace every week sourcing fresh exciting merchandise from a universe of about 21000 vendors around the world.
Our planning and allocation teams curate these goods to create a differentiated store by store mix that we believe no one else is offering.
Next we look at our stores in convenient easy to access locations to make it easy for shoppers to visit our stores in a timely and efficient way.
For example in the U S. We estimate that we have a T J maxx or Marshalls store within 10 miles of approximately 80% of the population.
Our retail banners are located across urban suburban and rural markets, which allows us to reach consumers across a very wide customer demographic.
Lastly, the flexibility of our business model allows us to adjust our buying store formats and distribution to take advantage of hot categories and brands and adapt to changing consumer preferences.
In terms of profitability I want to emphasize that we are highly focused on improving our pre tax margin profile next year and beyond.
Clearly our ability to keep gaining market share and drive outsized sales.
Is our best opportunity. In addition, we feel great about the opportunities. We are pursuing that we believe will help offset the margin pressures that we have seen over the last several years.
One of these is to surgically look for opportunities to adjust retails and select areas, while maintaining our great values to our shoppers just as we have throughout our history.
Scott will discuss this in more detail in a moment.
Now I would like to share some information about corporate responsibility at T. J Maxx.
For our nearly 45 year history, our mission has been consistent to deliver great value every day.
Similarly, since the very beginning we are also committed to acting as a responsible corporate citizen.
Throughout the pandemic, the health and safety of our associates and our customers has been a top priority and remains so today.
Simultaneously over the past year, and a half important issues like equity and Rachel Justice and climate change have become even more critical to be clear. These are areas that we have been committed to for many years and are proud of the actions we have taken recently to make additional progress.
Let me share a few key points on these.
In terms of equity and Rachel Justice for our 45 year history, we have been committed to making T J maxx and inclusive workplace.
In June we shared with our associates and on T. J Maxx Dot com. The most recent steps that we're taking to help us become a more inclusive and diverse organization at all levels.
These efforts include initiatives related to recruitment practices associate education training and development and an expanded focus on our process and programs to support an inclusive work environment.
We know we have work to do.
We're committed to improving in this important area.
As to the increasing importance of environmental sustainability, we have made progress working towards the goal. We set last June for our science based greenhouse gas emissions target mapped to the Paris climate agreement one five degree Celsius guidelines.
In the coming weeks, we will make our annual update to the environmental sustainability portion of TJ Maxx Dot com, including information about our climate and energy strategy, along with wasting chemicals management.
These are just a few of our initiatives. We recognize there is an increasing interest in our efforts related to environmental social and governance or ESG practices and we look forward to keeping you updated on our progress.
Our commitment to corporate responsibility is as important as ever and as always there is a lot of information on T. J Maxx Dot com.
In closing I want to again, thank each of our associates around the globe, who stepped up to support the business and helped us achieve outstanding second quarter results I could not be prouder of the collective efforts of our associates over the past 18 months and their commitment to working as one T J Maxx.
Throughout this health crisis.
I am extremely pleased with our excellent top and bottom line performance in the second quarter and I'm optimistic on the remainder of the year is in a price leader in every country. We operate in I am convinced that T. J Maxx is set up extremely well to gain market share for many years to come.
I am confident that our sales and traffic initiatives as well as our global store growth plans will drive even more shoppers to our retail banners.
In terms of the bottom line, we are very confident in the opportunities we see to drive higher profit margins beyond this year.
I truly believe the characteristics of our off price business model will continue to be our winning retail formula and that T. J Maxx is on its way to becoming a $60 billion plus revenue company.
Now I'll turn the call back to Scott for a few additional comments and then we'll open it up for questions.
Thanks, again, Ernie and just a few brief notes before we move to Q&A and.
In terms of the third quarter. We are very pleased that overall open only comp store sales trends are up very strongly to start the quarter at the mid teens level. This is despite what we believe is a negative sales impact from the Delta variant that we've seen since the last week of July currently all of our stores in the U.
The Us Canada and Europe are open and approximately 40 of our Australian stores are closed while we are not planning for overall store closes in the third quarter to be significant sales could also be negatively impacted the new COVID-19 related regulations are put in place as we mentioned in the press release due to <unk>.
Due to continued uncertainty with Covid, we're not providing guidance for the third quarter or the second half of the year today.
Lastly, I wanted to pick up on <unk> point about improving our margin profile next year and beyond as we pursue opportunities both on the macro level and within our business first while we expect the combination of freight supply chain and wage cost to be higher in the back half of the year, we do not envision freight and wage beginning.
We do envision freight and wage beginning to moderate as we move through next year second to the extent, we can drive outsized comps that is the easiest way for us to improve our margin going forward. Further we will remain focused on continuing to buy even better and opening more vendors also were seeing a less promotional.
<unk> environment, and rising inflation as well as stronger sales in our apparel categories. We feel all of these factors has opportunities for higher retails at the same time, we remain laser focused on continuing to offer consumers great values, just as we have throughout our 45 year history.
In closing, we feel great about the strength of the business, both operationally and financially and we are confident that we are capturing market share. We are extremely pleased to be in a strong financial position to make important investments in our business and returned significant value to our shareholders through both share buyback and.
Dividend programs now we are happy to take your questions as we do every quarter, we're going to ask that you. Please limit your questions to one per person in one part to each question, we respectfully ask that everyone's stick with this request both to keep the call on schedule and so that we can answer questions from as many analysts as we can thanks.
And now we'll open it up for questions.
Thank you we will now begin the question and answer session. If you would like to ask a question. Please press star one on mute your phone and record your name clearly.
You need to withdraw your question press star queue again.
Question. Please press star one.
Our first question will come from Lorraine Hutchinson Your line is open.
Thank you good morning.
Ernie and Scott you made a few references toward adjusting retails and I was just curious was that specifically for homegoods was that across the entire portfolio of brands.
And how do you balance increasing your prices with also providing great value to the customer.
Sure Lorraine Great question first of all.
When we referred to we are talking about all of the businesses.
We believe perhaps there might be a little bit more opportunity there.
That we're seeing in the home area, but we are at <unk>.
In effect talking about all of the banners.
We also have seen that.
We started.
The big change from the first quarter. When we had talked about this as we were on a more wait and see what happens around us.
And as you would have expected with the inflation on the cost pressures that I think all the other retailers are receiving.
We're observing that there is less promotion as well as more pockets than we saw a quarter ago in terms of ability to raise retails surgically and selectively.
In certain areas of the store.
And again that applies not just in the home area.
Even though I think they'll home areas disproportionately a place where we'll do more of that.
We also think that the.
The the freight that has hit everybody you by the way is created.
Wade, which we all knew this could be an unusual time to see this opportunity first quarter again, when we talked about this week, we were going to be looking hard at it we have just seen the ability to to do that more than we were thinking we could do before.
And I'm sorry, the second what was your second part of the question.
Just how you think about raising prices, but also still profit.
Maintaining value I think is what you were questioning right. So we mentioned I mentioned in the script, but we bottom up this strategy. It's a little like we used to talk to on our average ticket.
I'd say, our ticket was down or whatever.
Although that's been moderating in a nice direction and we're feeling good about that upside as we move forward, but our buyers drive where the retail adjustment opportunities are it is not top down driven as far as what items, we do that on.
So their first mission as always and again in the script.
I mentioned this a couple of times as we've done in our 40 plus year history, we're always making sure our retail adjustment is providing still a tremendous GAAP and value for us versus the out the door retails of competition. So buyers do not do that unless we are still showing a great value. So.
If it wasn't for the fact that the retails around us.
Are up a little bit or less promotional we wouldn't be able to do what we're doing there to the degree that we think we can do it and by the way to the degree, which we think will be able to do it going forward.
We also feel the.
Another cost pressure, we have been dealing with for the last handful of years was the ticket lowering and in this environment.
What we're starting to see now is that moderating so again, what Scott and I have looked at it with the teams as we look at next year.
Really as we get to fourth quarter into next year I think we really start.
Seeing the it really start seeing more opportunity to do more of what we just talked about because we've just started this mission.
I think we are in a great position to surgically look at the way we're retailing goods.
Throughout the whole corporation over the next couple of years and I think thats.
That's going to bode well for us, but great questions.
Thank you.
Next we'll hear from Matthew Boss Your line is open.
Great. Thanks, and congrats on a really nice quarter. Thank you Matt.
So Ernie you cited material market share opportunity remaining where are you. The most excited from here and Scott maybe just a follow up on margins.
Is there a way to rank the opportunities that you cited to improve profitability in the medium term and I guess, what I'm really trying to figure out is is there opportunity to close the international profit margin GAAP or any structural constraints that would prevent more max from returning to that 13% to 14% operating margin profile.
As we think about it.
So Matt I'll go first and then.
Scott will back clean up as they say and.
The markets you saw market share man, we we see it on a lot of fronts. So clearly the most obvious one is the home area, which we've talked about in the script.
Truly phenomenal results in our home area, Yes, we see that as a continued strength and that we are so differentiate our home areas very fashion driven extremely fast turning it is.
<unk>.
With great value great brands, all the different categories in the World you would want and it's probably our most impulsive oriented.
Right form of shopping banner that rehab, so when a customer walks in.
And let's talk we didn't talk much about it earlier in the script about the entertainment treasure Hunt value in a homegoods. It is off the charts as we know which is why we are having these just amazing outsized comps there.
The home business throughout the corporation the full family stores, so whether that's in maxx or Marshall's the same thing applies our home businesses. There are just as healthy.
And when we look at.
International and also a very healthy so I would say the number one market share thing will continue to be home. However, as we mentioned in the call our apparel.
And some other areas of the store, which I don't want to put out there specifically right now has been extremely healthy across men's ladies kids and as those start to kick in as you know in our business that helps us with our average ticket, but it also helps us I think with continued market share gain because.
Based on a lot of store closures around us a lot of them were branded.
Apparel retailers, where certain boxes of closed and I think this presents an unusual opportunity for us to continue to gain more market share because of our branded content.
Being really second to none I think in terms of also doing good better and best which is another advantage. We have when you look at some of our competition.
Tend to be a little narrower in their scope of goods. They don't trade up as quite as high and I think that range for us will allow us.
To continue to again Thats why im so excited about it.
Before I hand, it over to Scott the other thing I would like to say is on the margins.
What we're seeing here is another plus is all of these areas just like the rain had asked me are presenting.
Opportunities for us to either raise our ticket and total.
Or.
Adjust our retails surgically on select amount of goods and doing that in the right way.
But I think thats going to kind of play out as we move forward next year and it does allow US a goal you were asking Scott about the margins overall internationally et cetera, but we're feeling pretty bullish about really starting to.
To get back to those double digit.
Margins as we look out to next year are getting very close and I'm sure Scott will and I'm talking in total, but I'm sure. He will get into more of that international that he asked about.
Yes so.
I think Ernie the setup is that we think we can do this across all divisions. So I think we wouldn't be looking.
For any one division to get better we're really looking for all divisions to get better then you know.
And getting not necessarily.
I think as I already said it is going to be a paced we have to see what we want to make sure. We're doing this prudently and do it do it right, but it would be over the course of time I think the first thing as we get up to those double digits is once we get there and go beyond is that we would be look to and I think it's mostly.
B through a strong merchandise margin offsetting a lot of cost pressures.
I think Ernie alluded to the higher average retail or the moderation in retail I think then resulting in a higher average retail will some of those expenses will moderate on the store and distribution and freight line as we get a higher average retail and.
To be determined on the pace of that but it could be two thirds merchandise margin one third on the expenses because you do get a significant benefit but a lot of that will be the pace and we'll have to see as we move through the fourth quarter into next year as we start buying and get this benefit that's when we would expect more of it to happen is next.
Each year.
So I think the other point that Ernie.
Was making is that once we get to those levels for the first point is get to a point where our.
Are we can leverage on a.
We would be flat or better on a.
A low three four type of comp and Thats what our.
Expectations would be.
In the longer term of getting to that level. Once we get to that then I think we'll be talking about higher overall pre tax levels, but first as you know for many many years, we've been delevering on the slightly on on some strong comps and I think now would be how do we get to a point and we feel confident that we can do it that we can.
Stop that bleeding, but on a low to mid single comp.
That's great color best of luck.
Thank you.
Our next question comes from Michael Binetti. Your line is now open.
Hey, guys. Thanks for thanks for all the help there on the AUR and the margins I wanted to follow up with a question on SG&A Scott I think.
If we just run rate out the SG&A in the quarter.
It could it could be trending to 1 billion and a half or even $2 billion higher than COVID-19, I know there's been there was some COVID-19 costs during the first quarter, but I don't think that was much of a.
An explanation and <unk> you gave us the 30 basis points. So can maybe you talk about what's in that base of dollars. This year.
Sticks, what becomes more leverage able what's an investment this year what are you investing in but what becomes more leverages Bill as you look out to 2022 and a lot of the focus in your prior answer was on the.
The shift in retail that you spoke about let me unpack Q2, a little better because it's not strange.
As you know Theres a lot of noise.
Quarter to quarter and some there are things that are different quarter to quarter.
When you look at when you just look at the surface on our 28%.
Overall.
<unk> growth.
In SG&A compared to the 23% you say on the surface.
Not that great.
Accounting for that.
That deleverage of 70 basis points, but if you.
If you exclude and you look at it on a per store basis, just the COVID-19 costs, which we don't believe will be hopefully around next year, we had.
Approximately a <unk>.
21%.
Per store growth and about a 19% after stripping out COVID-19 grow so leveraged a bit there there was.
One line item that we don't think it will be as it was more of a catch up due to the strong sales growth overall and plans and profit both in the first and second quarter made us do a bit of a catch up on a lot of line items on the incentive accruals. It's a bit just the way things are either lower than plan or under.
Our water and then all of a sudden the catch up we had a bit of that when you strip out the incentive accruals. This quarter, we had approximately a 6% growth.
Per store on a 10% comp growth when you look at it over two years remember a lot of these are over a two year period. So I would say that we felt pretty good and when you look to the third quarter, although not giving guidance that incentive accruals will be there'll be some of it but much much much less and so.
No.
The level of.
Of deleverage there is deleverage will be less than what it is this quarter. So when you strip out just two line items, which we don't think are comparable and not necessarily go forward, we feel pretty good about that terms of long term go going forward.
Little hard to say that will depend on the level of sales and the level of what Ernie said on the growth on the average ticket so too early to call, but don't see anything in the SG&A. That's unusual other than the same level of minimum wage growth that we would expect to see.
<unk>.
<unk>.
Going forward.
Hello.
If I try to Orient that's in the past it took about a three comp was 3% inflation on SG&A was about normal maybe a little higher.
Per store per foot. However, you want to measure it and then but in the past more of the what was accomplished driven by unit volume that came with a lot of AUC costs I think I think the AUR in the surgical flow through it at a much higher rates. So if more of the growth.
Yes.
And that will have to see what that level of growth is on the on the AUR exactly okay. Thanks, guys. Congrats on a great quarter.
Thank you.
Our next question will come from Kimberly Greenberger Your line is open.
Okay, great. Thanks, so much so nice to see the momentum here in the business.
Wanted to sort of tackle the unpacking the operating margin in slightly different way, but if we could just start with the 150 basis points that you called out in.
Incremental freight expense as well as supply chain and wage costs Scott could.
Could you breakdown the 150 million is the incentive comp in <unk>.
150 as well.
Yes.
You already noticed that a few people.
Obviously, we werent as clear as we thought we were the 150 is just freight.
So we had we had other we had that we had.
Other de levers in term in terms of supply chain and wage as well and then obviously, we called out the impact from the store closures. So the 150 was just freight and Thats a combination of both.
<unk>, which is inbound and outbound.
But also our ocean freight ocean freight is probably the the biggest sticky one for at least the near term the rates increases.
<unk> been up on both intermodal and <unk>.
On trucking and the Ocean freight and Thats, why we talked and put in we believe the costs are still going up higher in the back half.
As the ocean freight rates.
In some cases has gone up 200%, which we would expect in the third and fourth quarter. We don't think this level of freight.
<unk> deleverage, which will be more than that 150 at least what we're seeing now will be at the sustained levels.
They are that means the sales levels that can keep continuing because that means there is tremendous demand. So we would expect those to moderate to some degree and hopefully a lot as we move through next year. So on top of the 150, we had we had deleverage.
From wage we also had the bonus accruals, which was a substantial amount.
And some supply chain again, the strong leverage on the 'twenty comp and the strong merchandise margin more than offset all of that.
Okay got it.
So as.
I think about just sort of.
Youre drawing the bridge from your operating margin in the quarter eight 7% add back the two points for debt extinguishment.
The basis points for closures 30 basis points for Covid, then we get to like 11, 6%. If you were to get all the freight back next year that would that would suggest like 13% or so margin.
And obviously, you're probably not going to get all of that back next year, but.
It sounds like that that 13% sort of adjusted.
Result, this year.
You think.
There were still some higher cost in there with <unk>.
Supply chain wages and incentive compensation.
And those are the leverages ball in future years.
I hearing you correctly.
Again to the extent, it's not just that linear like that overall correct.
We also the merchandize margin was extremely bad you got a lot of benefit from.
On the markdown line that might not be at the same level because of the 20th comp, but overall, we see more positives than negatives.
But you just can't add up all the positives and take out all the negatives to your point because.
It may it may we still going to we still may have some incremental increases off of this year just at a moderating rate.
Okay.
The higher it's a question of how high.
You just can't add it all back in there and we don't know that Kimberly that's a good discussion, but we don't know of the freight necessarily go significantly down as a rate next year.
Sure.
You are saying I mean that would be great.
And certainly add to our bullishness on the on those double digit margins.
Yes.
Other way to look at it though would be.
Okay.
We'd like to think you can run double digit comps forever, but it might not be able right. So you have to also back down what happens if you go to a more normalized comp.
Youll have less leverage, but then youll have also less expense so.
I think theres a lot of moving factors I think what Ernie said is as you approach and be double digits, when you get to a lower comp that.
We think it was about being not deleveraging and over time leveraging on that lower comp.
Yes in order to deliver those higher margins over time.
Thank you exactly right yes.
Our next question will come from Paul Lajoie. Your line is now open.
Scott sorry, if I missed it but did you say what merch margin was up this quarter and then if you could provide any color by segment.
Then just a longer term question for Ernie just talking about that $60 billion opportunity I'm curious if you could talk about the international growth and the role that plays in getting to that level, maybe talk about the store opportunity in each of the markets that you operate in today versus new markets, just how youre thinking about that long term.
Absolutely so.
I think I'll go first and then Scott will come back to you on the merchandize margin so longer term.
Also a great question, Paul because we're looking at this all the times in terms of the growth.
Because obviously, we have a higher growth opportunity.
National is a growth rate not necessarily in dollars.
But we are as you could see from the results very pleased with our open only results in Canada.
Europe, Australia has been.
Absolutely terrific. So we're also looking we didn't get into it on that.
<unk> a couple of minutes ago, but we are looking at making some positive margin improvements.
And those divisions also over the next 18 months, we feel there is opportunity there.
Regardless of what happens with exchange rates, we would love to see the exchange rate. Obviously go in the right direction since we buy so much in U S dollars, specifically for Canada and Europe.
But regardless of that we're feeling.
Feeling very bullish on the market share opportunities many store closures Paul in.
In the U K and.
And Canada continue in Canada is one of our most dominant market shares that we're already and we have a higher market share.
There than we even do in the states so.
<unk> bullish I think more opportunity in terms of pure growth rate in Europe in terms of new stores I think you mentioned new store opportunity.
So what we did there and you've seen the cycle is when things got more challenging there in terms of Brexit margin exchange rate and then what was going on obviously with Covid.
We pulled back on.
On store openings, there, but now we are we looking at that and ramping it up to a more of a.
Selectively obviously, because we have to look at the right sites that make sense for us in the different countries such as in Germany.
Where we still have a tremendous amount of new store opportunities and still do.
So we're pretty bullish on that.
And obviously, Poland and Austria, Netherlands.
All have all have performed well so pretty bullish on margins and sales overseas improving.
One thing I would like to mention that ties in with the new stores, there as well as here in.
Is over all.
We are pretty well.
We have a remodel program, which we moderated recently during COVID-19, but now that.
As we can see how strong we're coming out of this and how well we are starting to so.
Good about leveraging going forward.
Scott and I have been looking at really ramping up our remodel program.
And all of the divisions to continue with this market share and that would apply to.
That would apply to Europe and Canada.
Not not as much Australia, because those are all relatively new.
Homegoods and <unk> specifically.
We are capturing all of these new customers along with existing customers and one of the best ways to invest cash and the use of our cash is to invest in the business and we feel remodels given what's going on for US right. Now are a great return on investment in terms of maintaining our new customer sharper. So I know you didn't kind of ask about that but it does relate to.
I think our international opportunities as well.
And I'll turn it back to Scott as far as the merchandize margin, yes, Paul so thanks.
I'll, probably what you would expect given that.
I said that we had freight pressures of all in approximately 150 basis points, which included both our ocean freight and our.
All of our other domestic and inbound freight were up over seven were up 70 basis points after including that freight.
Approximately 220 basis points up.
Prior to freight compare it really broken down half between markdown marks down markdowns and Mark on again.
The markdowns was a function.
Some of it was.
We had a little over accrual and some of our European business on when we were closed but just strong markdown performance across the board and then Mark on again was was very strong as well so again.
Very pleased with with that similar type of performance, we had in the first quarter on that as well. The one thing we would say is that freight line feels to be pressured.
As we at least move through the third and fourth quarter.
Thanks, Kevin.
By segment, our merch margin.
No no no breakdown at this point.
Okay. Thanks, Thanks, guys. Good luck.
<unk>.
Our next question will come from Omar Saad Your line is open.
Thanks for taking my question great job this quarter.
You guys mentioned Homegoods dot com, which is going to be launching in the third quarter I'd love to get a little bit more of an update and some color around that is it going to be a similar strategy to what you've used in the <unk> division in terms of separate customers separate inventory kind of a separate differentiated experience versus what's going on in the stores.
And then I also is there any opportunity to kind of create a more integrated experience in the home category versus some of your traditional categories, where you could have connected inventory between stores and online.
And I also Scott if you don't mind could you clarify the comment I think you said you've seen some delta impact from the Delta variances late July Im assuming you mean, Europe and Australia, but if you could just care clarify that thanks.
Alright, Omar I'll go first.
First of all very excited about Homegoods dot com as you know our boy with some of our most passionate customers I think you and I have talked about this in the past right. Our homegoods customers are so passionate.
So with that there is a little tweak in the strategy and I think we've talked about this briefly but youre asking for a little bit more color, which I'm happy to provide here. It is a little different than the approach than <unk> for a couple of reasons and I think I'm going to answer both of your questions at the same time, because your second part of the question.
Was.
Is there any opportunity to have it be a little more connected and so we would say, yes, and so as opposed to having a different buying organization completely which is we have it marked maxx and Marshalls.
As you know is our fastest turning most the collect deck.
Business that we have out there so.
By a natural nature of the Beast, even our homegoods stores tend to vary more from store to store.
They turn so fast.
And there is so many skus.
So we've approached the Homegoods online business to.
Try to get the both that the best of both World. So we have.
Really leveraging actually are our merchant organization and Homegoods and we're really peeling off.
Goods from our Homegoods inventories and using that to create the site and the <unk>.
And the eventual shipping.
But really using our merchants and our planning organizations are more joined together in homegoods than they are in more IMAX and the way. We are buying we are more point people homegoods, but we're really buying the similar mix, which is I think what you were asking about so.
The benefit is when you want to get multiple purchases as you know we tend to ship some things not incomplete sets we ship it sets, but when they are in the store that customer could buy two of something and leave two chairs et cetera.
This is where our homegoods dotcom business should be extremely complementary because it allows that allows a customer to be more connected like you were asking.
So if somebody see something in the store and online they can almost execute a buy.
Complementary where it all kind of goes together, so you could really outfit a room.
Our our whole look a little easier by kind of supplementing your in store purchases with your online purchases with Homegoods and that's why it's been a bit of a different strategy on the way, we're buying it which by the way should leverage profit for us faster.
We don't have as much overhead as we do and the T J Maxx and Marshalls online as we.
Do there this is much leaner setup and.
We are currently playing with a shipping strategy and how we're going to add.
Ask the customer to pay for shipping that might be a little different but I won't get into that here. It's just what you need to know is it we believe it's really set up to supplement in a very.
Conducive way, where we should get multiple purchases and it should actually help our store and online at the same time. So a great question. The way you asked it because it is it is going to be executed differently.
Now I will have Scott thanks Ernie.
The question I think it was about the.
Covid in the as we move start at the second and third quarter.
First it was.
It wasn't necessarily do Youre right. We do have stores closed in Australia wasn't really that really wasn't there.
Really what our comment was about that we put in the in the release in the script. There was more that we pretty much in the U S and in Canada, we had seen a slowdown.
I use the word.
The sales are still very strong and there are strong both in apparel and home.
Versus.
We moved into the last week of July and the first two weeks of <unk>.
August the basket has remained strong our traffic is still up but you know.
The other thing I also would say is that as a reminder, the Q3 of FY 'twenty that we're reporting and going against also had a higher comp both in the overall third quarter than the second quarter and also was higher in the beginning of the third quarter.
Well, so that's probably a piece of that when you look at it on a two year stack.
Thanks for the color gentlemen, thanks.
Thank you Omar.
The final question of the day comes from Adrian <unk>. Your line is now open.
Great. Thank you very much Ernie I agree with your comment towards the end of your prepared remarks that being set up extraordinarily well for 'twenty two.
One of my question for you is Canada.
The inventory is always a topic and I know you guys talked about be availability of it basically state look at the balance sheet inventory fine wine down to $5.1 billion two years ago on the $2 billion in extra sales.
Are you doing that what is the efficiency gain there and can you sustain that because youre comfortable with that position and then my second question for my one question for Scott what are we going to get back to that 4% non comp our new store growth exactly the next year I'm sure you're working on your plans now thank you very much and great great quarter.
Yes.
I'll go first.
Sure.
For a loop Adrian unusually I go first.
But go ahead Scott.
[laughter] pay for them.
Yeah.
<unk>.
Just to be clear on the.
The inventory at the end of the second quarter was in a similar position on an average per store compared to 'twenty.
Both quarters, both in the stores and overall on the DC, we had a lot of in transit inventory at the end of the first quarter a lot of in transit inventory at the end of the second quarter obviously.
We didn't specifically say, but we certainly have a lot on order and.
Talk about our ability to availability has been great.
The.
Inventory position like we said compared to two years ago, we have less store inventory <unk>.
Structurally the <unk>.
The stores from a shop ability and all that we have less fixtures and all that so.
<unk>, 10% is just do at the store level due to that.
So we have we're turning faster.
Almost one turn faster both in the first and second quarter due to having the lower inventory in it.
It's paid dividends in terms of the markdown. So we feel good about that and the other thing is <unk>.
Part of it which is hard to.
We have less pack away inventory.
So that's a bit of the piece of it in our Dcs and the last thing is.
Particularly in the first quarter.
And in the second quarter.
The trends, we were buying to better trends clearly we saw the home trends were up but the apparel trends have done also up and so we're chasing more than we typically would have been compared to two years ago.
So Adrian let me give you a little more color also on how it's well firstly I would like to do is give credit to our teams because they have really.
All the teams and when I say that.
The buyers are logistics teams, our distribution services teams the stores getting the goods out so what we've done here is every every functional area has had to.
Really execute a little differently and it varies by category, but I am very proud of all of them because they've been at.
You alluded to it's been a it's a <unk>.
Strange market out there and the inventories at points in times of been up and down.
But a couple of things that have been happening the buyers when if theyre in a category where things are.
Where things were a little light they've been pulling the trigger a little sooner on buying with longer lead times than we typically would.
Versus as there are out there there are many categories that are extremely loaded and they'll buy it even closer at hand to mouth.
I really give them a lot of credit the logistics teams have been securing the freight capacity and we need to get the goods to our Dcs and stores to meet our strong demand and we're paying more than we need to.
So as always and I know, we've talked to you and others about this we do that because we think we will figure out as witnessed by what we're talking about today.
We will figure out later, how to offset that cost, but we want to continue to gain the market share and gained customers for the future again, the best thing for our business for the next couple of years is to continue to grab this outpaced.
Market share market share opportunity that we're on right now.
Here's the ironic thing I believe the disruption in the supply chain is going to create a future buying opportunity for us. So when you look out at the end of this year, Here's what I think so we've talked about these margin opportunities for next year, but what we haven't factored in because those are really more based on retail adjustments app.
<unk> gone up but we're not factoring in is.
If the supply chain convenient continues to be choppy, which it has been.
We will be well this is going to be classic off price textbook execution, where there will be more uneasiness out there, which in my eyes typically creates even more opportunity buying opportunity. So in that case, we probably get the buy goods a little bit better. So then you are getting it out of the cost and helping your merchandise margin on the.
Other side, so I'm, just kind of pretty excited about what's going on right now, but I am glad you asked that because it really is there is a lot going on on that front right now in terms of inventory and supply chain et cetera.
Very well said and it just underscores the flex in the model just tremendous so great job and best of luck. Thank.
Thank you Adrian.
Okay that was our last call we really appreciate and thank you all for joining US today, we will be updating you again on our third quarter earnings call in November and I really can't say enough from the team here at T. J Maxx, We hope you all stay well.
And wish you good health. Thank you everybody.
Ladies and gentlemen that concludes your conference call for today.
Thank you for participating.
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