TJX Companies Inc (TJX) — Q3 2017 Earnings Call Transcript

Thank you. Before we begin, Deb has some opening comments.

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. These risks are discussed in the Company’s SEC filings, including, without limitation, the Form 10-K filed March 29, 2016. Further, these comments and the Q&A that follows are copyrighted today by The TJX Companies Inc. Any recording, retransmission, reproduction or other use of the same for 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 inaccuracies that may appear in that transcript. Please note that the financial results and expectations we discuss today are on a continuing operations basis. Also, we have detailed the impact of foreign exchange on our consolidated results in our international divisions in today’s press release and the Investor Information section of our website, tjx.com. Reconciliations of the non-GAAP measures we discuss today to GAAP measures are posted on our website, tjx.com, in the Investor Information section. Thank you. And now I’ll turn it back over to Ernie.

Good morning. Joining me and Deb on the call is Scott Goldenberg. Let me begin by saying that I am extremely pleased that our momentum continued in the third quarter. Consolidated comp-store sales were strong, up 5% over a 5% increase last year, and well above our plan. We are thrilled that customer traffic continued to be the primary driver of our comp again this quarter, which tells us that our merchandise mix and amazing values are resonating with consumers. We have convenience that we are gaining market share across all of our divisions. We also saw excellent performance in both our apparel and home businesses. Further, merchandise margins were up significantly again this quarter, highlighting the strength of our model. Adjusted earnings per share went to $0.91, also well above our expectations. Importantly, we believe that we achieved these results despite significant wage and foreign currency headwinds and while simultaneously investing to support our growth. With our strong third quarter performance, we are raising our guidance for adjusted EPS growth. We are in an excellent position for the holiday selling season with many initiatives planned to drive traffic and sales throughout the quarter. As always, our management team is passionate about achieving its plans and striving to surpass them. We are very confident in our ability to continue our successful growth, both in the U.S. and around the world. Before I continue, I’ll turn the call over to Scott to recap our third quarter numbers.

Thanks, Ernie, and good morning, everyone. As Ernie mentioned, our third quarter consolidated comparable store sales increased a strong 5%, exceeding our plan. As a reminder, this growth excludes our e-commerce businesses. It was great to see the momentum in customer traffic continue. Once again, traffic was the primary driver of our consolidated comp increase as we offered shoppers the merchandise they wanted at excellent values. Diluted earnings per share were $0.83 versus last year's $0.86. As we detailed in today's press release, third quarter earnings per share included a debt extinguishment charge and pension settlement charge, which combined reduced EPS by $0.08. Excluding these charges, adjusted earnings per share were $0.91, a 6% increase over the same period last year and well above our plan. As expected, EPS growth was negatively impacted by 3% due to wage increases. Foreign currency and transactional foreign exchange negatively impacted EPS growth by 1% versus our plan for a 3% negative impact. Consolidated pretax profit margin was 10.7%, as we detailed in today's press release. The combination of the debt extinguishment and pension settlement charges reduced consolidated pretax profit margin by 100 basis points. Excluding these charges, adjusted pretax profit margin was 11.7%, down 40 basis points versus the prior year and significantly better than we planned. Gross profit margin was 29.5%, up 50 basis points versus last year and also significantly better than we planned. This was primarily due to our strong merchandise margins increase and gains on our inventory hedges. SG&A expense as a percentage of sales was 17.6%, up 90 basis points versus last year’s ratio. This increase was primarily due to wage increases and investments to support our growth, as we had anticipated. At the end of the third quarter, consolidated inventories on a per-store basis, including inventories held in warehouses but excluding in-transit and e-commerce inventories, were down 2% on a constant currency basis. We are very comfortable with the great liquidity in our inventory position entering the first quarter. We are in an excellent position to buy and flow fresh goods to our stores throughout the holiday season. Now to recap our third quarter performance by division, Marmaxx's strong momentum continued with comps up 5% on a comp of last year's 3% increase. Again, this quarter customer traffic was the primary driver of the comp and unit sales were up, both of which are nice indications of the strength of our largest division. Average ticket was down slightly more than planned, but the merchandise margins were up significantly. We continued our strategies of chasing hard categories and flexing within departments to offer the right merchandise mix in our stores. Our traffic, sales, and merchandise margin increases tell us our strategies are working. Segment profit margin decrease 40 basis points; our very strong merchandise margin increase was more than offset by wage increases and costs associated with the lower average ticket. Marmaxx keeps delivering sales increases year-after-year, which underscores our confidence in the major growth potential that still remains at our largest division. HomeGoods delivered another excellent quarter, with comps increasing 6% over last year’s 6% growth. We were very pleased that traffic was the primary driver of the comp increase. Segment profit margin was down 10 basis points, as expected; wage increases continue to have a significant negative impact on the margin. Further, we continue to incur costs related to the opening of our new distribution center last quarter, to support the long-term growth potential of our thousand customers. Our customers love HomeGoods, and we couldn’t be happier with the dispositions in traffic and growth prospects. At TJX Canada, comps grew an outstanding 8% this quarter, over last year’s 10% increase. Adjusted segment profit margin, excluding foreign currency, was down 100 basis points. The decrease was primarily due to the merchandise margin pressure from transactional foreign exchange as well as additional supply chain costs, including the opening of our new distribution center in Vancouver last quarter; the first new DC for Canada in about a decade. We continue to be very pleased with the excellent execution of our Canadian organization. TJX International’s comps were flat versus last year's strong 7% increase, while sales were not as strong as we would have liked. We held up better than most major European retailers in the face of the challenging retail environment and unseasonably warm fall weather. We are convinced we are gaining market share in Europe and are focused on keeping new customers we are attracting for the long term. Adjusted segment profit margin, excluding foreign currency, was down 170 basis points. The decline was primarily due to the integrating Trade Secret in Australia into our business, and some expense deleverage on the flat comp. That said, the team in Europe remained extremely disciplined in inventory management, which helped mitigate some of the margin pressure. As we enter the fourth quarter, we see opportunities to approve upon last year’s performance. I’ll finish with our shareholder distributions. During the quarter, we paid out $170 million in shareholder dividends and bought back $400 million of TJX stock, retiring 5.2 million shares. For the first nine months of the year, we have paid out $482 million in shareholder dividends and retired 15.4 million shares, buying back $1.2 billion of stock. We continue to anticipate buying back $1.5 billion to $2 billion of TJX stock this year. Now let me turn the call back to Ernie, and I’ll recap our fourth quarter and full-year fiscal 2017 guidance at the end of the call.

Thanks, Scott. I’d like to begin by highlighting our fundamental strengths, which we believe differentiate TJX from the marketplace and are key to continuing to gain market share. First, we have a world-class buying organization with over 1,000 associates worldwide today. We have more than doubled the size of our buying team over the last 10 years. During this time we have added hundreds of new people to our buying team, and we also have many buyers who have been with us for multiple decades. We believe we are one of the widest demographics in retail and that the depth of our buying organization is helping us to attract customers of all ages, including millennial shoppers as we have offerings in fashions and brands relevant to them. Further our seasoned buyers play a big role in teaching and training our new buyers and enhancing our off-price buying methodology. I truly believe that the collective knowledge and expertise of TJX's buying organization is the best in retail. Second, we see ourselves as a global sourcing machine. Today, we source from a universe of over 18,000 vendors and more than 100 countries. This is thousands more vendors and dozens more countries than a decade ago. We believe we are an increasingly attractive outlet for vendors; we operate almost 3,800 stores in nine countries, are opening new stores year after year, and are selling next to branded merchandise. We are flexible and straightforward in our dealings and offer vendors many ways to grow their business. Third, our global supply chain distribution network and IT systems have been developed and refined specifically to support our highly integrated international business and opportunistic buying. Our global distribution network can process thousands of buys from thousands of different vendors every week. Using our proprietary IT systems, our experienced planning and allocation team can precisely allocate that merchandise to the right store at the right time. Our flexibility allows us to react rapidly to changing market dynamics and consumer tastes to capitalize on hot product categories and the latest fashion trends. We see our global infrastructure as a major advantage of TJX. Next, we are capitalizing on our global presence. We have decades of operating experience in the U.S., Canada, and Europe that we can leverage across the Company. We have successfully opened in new countries and retail brands by utilizing the expertise and operating knowledge across our organization. Our four major divisions are highly synergistic and share ideas, talent, initiatives, and best practices. I believe that depth of our global off-price experiences is unmatched and a key advantage as we continue our domestic and international growth. All of these strengths allow us to offer consumers an ever-changing, eclectic mix of branded merchandise at amazing values every day. In addition, these elements of our business have taken us multiple decades to develop, which is why they would be extremely difficult for any retailer to replicate. Now, let's talk about our growth initiatives which we are confident will lead to further market share gains. Our number one initiative remains driving customer traffic and comp sales. We have grown our top line year after year and are convinced that huge opportunities remain to continue growing our customer base. We are very pleased that our latest research once again shows that millennial shoppers make up the biggest percentage of our new customers in the U.S. Further, our customer satisfaction scores increased that every division. Innovation continues to be a major focus to keep our stores exciting and responsive to customer tastes. We are confidently testing new ideas in each of our retail brands. Our next major growth driver is our enormous global store growth potential. Long-term we see the potential to grow to 5,600 stores with just our current change in our current markets alone. This represents more than 1,800 additional stores on top of our current base before contemplating the potential of new chains or new countries. Further, we see e-commerce as a complement to our physical locations and as a way to offer consumers the ability and convenience of shopping with us 24/7. To support our growth, we are making significant investments in our business, which we have discussed on prior calls. I am very confident that we are making the right investments in our global infrastructure and new seeds to build on our leadership positions to capitalize on our first-mover advantages. We believe that all of this positions us very well for the future. Now, onto our opportunities for the fourth quarter, which are numerous. First, we have a great gift-giving initiative underway. We are offering exciting selections from around the globe and plan to shift into our stores multiple times each and every week. Shoppers can expect to see something new and surprising every time they visit; a strategy that has worked well for us in recent years, and I believe differentiates us from most major retailers. We are also confident that our efforts to upgrade our stores and customer service will make the shopping experience an exciting and positive one for our customers this holiday season when their time is so very valuable. Second, we feel great about our marketing campaign, which all speak to who we are as a company. We are utilizing tried branded campaigns in the U.S. and Canada again this year. Our TV commercials have just launched and will be running every week throughout the holiday season. In addition, we are leveraging components of these campaigns across radio, digital, and social media. In Europe, we’ll be leveraging our holiday campaign across multiple geographies. Third, our loyalty programs in the U.S. and Canada are an important vehicle for encouraging customers to shop us more frequently and across more of our retail brands. Next, we believe we continue to get better at transitioning our stores every year and are very focused on our post-holiday plans. Most importantly, we’ll be offering consumers compelling values on fantastic merchandise. The marketplace is loaded with quality branded merchandise across all of our geographies. We plan to take advantage of the numerous opportunities and buy throughout December. In closing, I am very proud of our continued momentum of above-planned results and the sharp execution of our teams across the Company. It was great to see another quarter of such strong sales and traffic increases. The entire organization is laser-focused on bringing more shoppers into our stores this holiday season and throughout the year. We have a clear long-term vision for TJX and I am convinced that we will continue to drive market share gains and achieve our plans for global growth. I am proud of our ability to simultaneously invest in our growth drivers as well as infrastructure and organization to support our growth while returning cash to shareholders through our substantial share buyback program and dividends. I want to reiterate that our management team is passionate about achieving and surpassing our goals. We are very well on our way to becoming a $40 billion plus company. Now, I will turn the call over to Scott to go through our guidance. Then we’ll open it up for questions.

Thanks, Ernie. Now, the fiscal '17 guidance beginning with the fourth quarter, we expect earnings per share to be in a range of $0.96 to $0.98 versus last year's $0.99 per share. This guidance assumes an expected negative impact on EPS growth of about 3% due to wage increases and approximately 6% due to foreign currency and transactional foreign exchange. We are modeling fourth-quarter consolidated sales of $9.3 billion to $9.4 billion. This guidance assumes a 2% negative impact on revenue due to translational FX. For comp store sales, we are assuming growth in the 1% to 2% range on both a consolidated basis and at Marmaxx. This compares to a strong 6% comp increase for both TJX and Marmaxx in the fourth quarter last year. Fourth-quarter pretax profit margin is planned in the 11.0% to 11.1% range versus 11.9% last year. We are anticipating fourth-quarter gross profit margin to be in the range of 27.9% to 28.0% versus 28.7% last year. We are expecting SG&A as a percent of sales in a range of 16.8% to 16.9% versus 16.7% last year. For modeling purposes, we are anticipating a tax rate of 38.3% and net interest expense of about $10 million. We anticipate a weighted average share count of approximately 657 million. Moving on to full-year guidance, on a GAAP basis, we expect fiscal '17 earnings per share to be in the range of $3.39 to $3.41. As we noted in our press release today, we are raising our adjusted full-year diluted earnings per share guidance to reflect above-plan third-quarter results, excluding the combined impact from the third-quarter debt extinguishment and pension settlement charges. We are now expecting adjusted earnings per share to be in the range of $3.46 to $3.48, which would be up 4% to 5% versus $3.33 in fiscal '16. Our plan assumes a negative impact on EPS growth of about 3% due to wage increases and approximately 3% due to foreign currency and transactional foreign exchange. As a reminder, we expect that wage increases will have a similar negative impact of approximately 3% on fiscal '18 EPS growth. On a consolidated basis, we are expecting a comp increase of 4% in fiscal '17. For the year, we expect pretax profit margin to be approximately 11.2%, excluding the negative impact from the third-quarter debt extinguishment and pension settlement charges of approximately 20 basis points. We expect adjusted pretax margins to be in the range of 11.3% to 11.4%, versus 11.8% last year. We are looking for gross profit margin to be approximately 28.9% versus 28.8% last year. We expect SG&A as a percentage of sales to be about 17.4% versus 16.8% last year. For modeling purposes, we are anticipating a tax rate of 38.4% and net interest expense of about $44 million. We anticipate a weighted average share count of approximately 664 million. Now to our full-year guidance by division. At Marmaxx, we are now planning comp growth of 4% on sales of $21.1 billion. Additionally, we expect segment profit margin to be about 14%. For the fourth quarter, we are assuming Marmaxx’s average ticket to be down versus last year. At HomeGoods, we now expect comps to increase 5% to 6% on sales of $4.4 billion. We now expect segment profit margin to be in the range of 13.4% to 13.5%. At TJX Canada, we are now planning a comp increase of 8% to 9% on sales of $3.2 billion. We now expect adjusted segment profit margin, excluding foreign currency, to be in the range of 13.6% to 13.7%. At TJX International, we are expecting comp growth of about 2% on sales of $4.4 billion and adjusted segment profit margin excluding foreign currency to be about 5.8%. It’s important to remember that our guidance for the remainder of the year assumes that currency exchange rates will remain unchanged from the levels at the beginning of the fourth quarter.

Thank you, good morning. I wanted to follow up on the commentary around Marmaxx’s average ticket being down slightly more than planned? Was that due to mix or you continuing to see pressure from some of the department stores or other competitors on pricing? And then what’s the outlook, I know you said ticket is down versus last year. Do you think that gets worse in the fourth quarter or do you think you can hold this current level?

I’ll start and Ernie will add as well. Regarding average ticket, as mentioned earlier, much of the decline in the third quarter is related to chasing specific categories. It’s more about the mix based on consumer preferences that we are currently adapting to. Additionally, I want to highlight that we are improving our purchasing strategies and passing some of those savings onto our customers, as evidenced by our improved merchandise margin, which is driven by better markdown performance due to strong sales and an enhancement in our mark-on.

Yes, Lorraine. I believe this ties into our product mix. We experienced some seasonal influences due to warmer weather and intentionally planned to delay the introduction of certain seasonal categories, which tend to be more expensive. As Scott mentioned, we focused on some of the more challenging categories, but this also affected our average transaction value by postponing items like outerwear and leaning more toward sweaters that generally come with a higher price tag. I hope this clarifies things and addresses your question. We will continue to adjust as needed. The only variable is that the market is saturated with goods, which Scott referred to regarding ongoing challenges. We aim to capitalize on these opportunities. It's hard to predict, but we still have considerable purchasing power as we look ahead to the spring season. I hope this helps.

Yes, the only other thing to add is that on our last call, we didn’t make a call on the average ticket. So, we have now average retail down in Marmaxx in the fourth quarter, so that’s a change from our prior guidance.

Thanks. On the gross margins, can you just breakdown the 50 basis point expansion this quarter between the merchandise margin improvement and the FX gain? And then just the headwinds embedded in the fourth quarter guide, any commentary there? And then finally on FX as we think to next year, if rates held exactly where they are at today, how do we think about the headwinds from FX next year versus the 3% bottom line that you outlined this year?

I’ll address all three of your questions, Matt. First, regarding the gross margin increase of 50 basis points, most of this improvement came from a strong merchandise margin primarily driven by Marmaxx. We also experienced benefits from hedges, which would have resulted in an even larger increase if not for the offsetting costs related to our supply chain, including investments in our distribution centers that mitigated some of the leverage we gained from buying and occupancy costs. So, we had a solid merchandise margin and some gains from hedges, but these were counterbalanced by supply chain costs. As for the next question about next year's foreign exchange, it’s too soon to make a prediction. We will definitely discuss it in the next quarter, but as mentioned last quarter, the ongoing decrease of the pound could lead to some foreign exchange pressures next year, particularly affecting our European business.

And then fourth quarter headwinds?

The fourth quarter faced several challenges; a significant factor in the gross margin was related to the reversal of the gain we previously had on the hedge, which accounted for nearly half of the 70 basis point decline in our gross profit margin for the fourth quarter. Additionally, we experienced ongoing supply chain costs, along with some deleveraging in the buying and occupancy line related to the high-end comparatives. These were the three main challenges affecting the gross margin in the fourth quarter.

Can I just continue on our last question, what level of comp do you think would help you mitigate that deleverage you talked about on some of the supply chain costs in the fourth quarter?

Yes, typically it's a strong three that you need to leverage your buying and occupancy costs.

Thank you. We've noticed that department stores are generally reducing their inventories, and you're indicating that average unit retail prices have declined, partly due to the product mix. It appears that there may be a growing gap in pricing strategies compared to department stores. Historically, this has allowed room for those retailers to increase their prices. Are you viewing this trend as an opportunity for us, especially as we focus on gaining market share? How do you assess the significant changes happening in the industry right now in terms of your expectations for average unit retail prices?

Michael, you’re addressing two important points. First, we view this as an opportunity for market share. We are hesitant to increase prices unless we see others doing so. We don’t lead this process; instead, we allow the retailers, as you mentioned, to manage their inventories. Unfortunately, they often face declining sales, so they may not be inclined to raise prices; we haven’t observed that happening. We let the pricing adjustments come from our buyers and merchandise managers, who continuously monitor what other retailers are doing. Yes, there are opportunities for us to raise prices slightly, and as we observe this occurring, we adjust accordingly. This isn't something we impose at our level; we prefer a bottom-up approach. Just as when average ticket prices were declining, that was a strategy initiated at the buyer and merchandise manager level. Adjustments are made very carefully, focusing on specific items and vendors at the department level. I hope that clarifies your question. You are correctly highlighting both aspects.

And can I just ask you, you referenced the comments you made last quarter about looking ahead to your fiscal 18 to next year a little bit and some of the headwinds for us to be thinking about as we do some longer-range modeling? Would you mind truing us up, another quarter has gone by at this point, FX has moved a little bit. Minimum wages, you guys have done a good job of offsetting a lot of the wages. You also mentioned some investments to leave a little bit of flexibility. I think it all rounded out to 500 to 600 basis points of headwind in the model for next year, similar to this year. Is that still the right range to be thinking about? Any kind of updates to the way you've been thinking about that over the last three months? Thanks.

This is Scott. I don’t have any new updates regarding store performance in terms of wages, investments, or the foreign exchange question Matt asked about earlier. We will provide long-term guidance and updates on the next call, but there is really no new information to share at this time. Michael, we plan to delve deeper into this in fiscal year 2018.

Hi. Good morning, guys. I was wondering if you could add any color on performance by region or by store type.

The only thing that we talked about in terms of region and in terms of our largest division Marmaxx, the sales were strong across all of our regions in the U.S. I’m not sure if you’re asking about the divisions or you’re asking about Marmaxx, but sales were strong across all divisions, and we are pleased that both parallel sales were getting strong for the year third quarter in a row at Marmaxx as well.

Okay. Great. And just a follow-on. Inventory per store, excluding currency down, versus your comp, and has slowed or has been slowing for a few successive quarters. I was hoping maybe you could give a little more color as to what's going on, if there's any shift in your approach to buying and any sort of change in the availability of goods out there for you to buy? Thanks.

Lindsay, when you mention slower, are you referring to the decreasing inventory levels we've noticed recently? There is consistently a high volume of goods available. However, as we've mentioned in previous discussions, the market has shown some improvement with a more loaded marketplace across various categories than we’ve seen before. Despite reports indicating inventory challenges, we are not experiencing issues with market availability in the wholesale sector. This presents us with an opportunity to manage our inventories more strategically, allowing us to buy closer to demand. Essentially, we plan to adopt a more immediate buying approach compared to a year ago, taking advantage of the current availability.

Yes, I mean we just to echo on what Ernie, we ended the second quarter with our inventories on a constant currency flat, and we delivered a flat comp. And I think going back over many periods whether our inventories have been low or slightly higher than that it really hasn’t impacted our ability to procure the inventory and fit whatever sales are out there for us to get. Having said that, as Ernie said, also we are very comfortable in our per-store inventories; across all our divisions are pretty much where we want them to be.

Yes, I would say right now this is textbook where we would like to be. We couldn't ask for to be in a better position going into this quarter than where we are right in the inventories and the open buy.

Curious about your future investment in e-com? What are those investments going to look like relative to what you spent in the past? Are you thinking about kicking them up? Pulling them back? And also curious as relates to e-com, if you included the e-com business in your US Marmaxx business comp, and your UK e-com business and the international comp, just wondering if it would move the dial?

Paul, those are excellent questions. Regarding our investments, we are taking a very measured approach. Unlike others, we aren't investing at the peak service levels. We are actually stabilizing our investments as we have been in the tjmax.com business for a couple of years. We feel confident about the traffic and sales performance. On the cost side, we are being cautious. For our domestic e-commerce businesses, particularly tjmax.com and STP, we have thoroughly reviewed the cost structures to ensure our investments remain at an appropriate and stabilized level. We are applying a similar strategy in Europe and managing those investments efficiently. Addressing your second question about why we are doing this, our e-commerce business currently constitutes just over 1% of our total business. While the growth in our e-commerce segment contributes positively to our comparable earnings per share, its impact is not substantial mathematically due to its small share of the overall business. Still, it is growing at a faster rate than our brick-and-mortar operations, albeit from a small base.

It's growing so fast that it would actually kick the comp up a bit not the region. If I, Paul, it's Scott, as Ernie said, it's 1% of our total sales growth; by definition, the most you can round it would be to round it potentially to a 1% on TJX basis.

Yes, ironically, Paul, in Europe it would actually move the comp there a little bit because we’re a little bigger in Europe as a percent to our business. And I was just in Europe last week coincidentally and we spent quite a bit of time talking strategically about where we’re going with e-commerce as well as looking at the metrics and what it's doing for the total in terms of traffic, etc. And it would actually move the comp in Europe, but not a full point, but a little bit just under that actually.

Hi, wanted to stick with that Europe theme? Just curious, your margins there used to be 7%, 8%, I think you had somewhat more aspirational goals than that. So just curious what kind of comp do you need in Europe to get the margins close to that high single digits? When does Trade Secret become more neutral to the earnings? And then the second question, hypothetically at a 15% tax rate, you guys would be throwing off an additional $1 billion of free cash next year. So curious—I know you have a mix of international as well as many domestic taxes, but is there really a thought internally that this is what could play out next year? And would you use that additional $1 billion for share repurchase versus dividends? Any thoughts along those lines would be helpful. Thanks very much.

I’ll begin before Ernie discusses Europe in more depth, Brian. However, it's too early to make predictions about the potential impact of new policies or legislation until they are enacted, and we will only comment if it's relevant to our business. Starting with Europe, I'll touch on a few things before turning it over to Ernie. The most significant impact has been from foreign exchange, particularly with Canada this year. We've also been expanding into new countries over the past couple of years and increasing our store count. With over 50 stores opened this year, we're approaching the level we saw last year, although it takes several years for new locations to significantly affect earnings due to the systems and infrastructure required to support these stores. So, it's really not just about the same level of comparable sales when reaching a growth range across all divisions. All factors being equal, the usual breakpoint occurs, but with wage systems and the expansion of stores in new countries, there is some pressure. Additionally, before Ernie discusses Trade Secret and Europe generally as we move into the fourth quarter, we acquired Trade Secret at the end of October last year. Therefore, we anticipate that the deleverage will moderate, which will have a meaningful impact as we enter the current quarter.

That’s what I was going on that. So, Brian, in terms of Europe, it’s the good timing for your question. I was there all last week coincidentally and we went hit a lot of floor walks with the merchants as well as our field store personnel and we are well poised for the fourth quarter. I have to tell you that I am extremely bullish on what I saw over there last week for where we are heading into mid-November in terms of mix in the stores and how we’re presenting and how we’re staffed for servicing the customers, so feeling very good about that. The other things to keep in mind there and this I think starts to answer your question at least in terms of yes, comp would help. Why do I think the comp will get better is they're positioned well, but the sales that we have the flat quarter, we were dealing with unseasonably warm weather there. And you look at the environment as it is and we are clearly gaining market share. If you look at some of those results that come out and we don’t like to get specifics on that, but you can see that we are making very major in-roads, not dissimilar than we are seeing here. It’s just all of the numbers are lower there. There are bigger decreases, some store closings we just announced from a couple of the retailers over there, which you can figure out who they were. And so we’re very bullish on our market share gain there. The FX is really put a bit of damper on the margin rate starting now often and talking about how they have to come back to us at one point. And the medium-and short-term here that I am looking for us to continue to gain more customers and that team over there, I wish sometime you could see the team over there, they are extremely diligent and successful execution even when times get tough. So one of the things I get them credit for, I think you notice the profit over there was slightly above our segment profit plan and that was due to how diligently they control their liquidity and managed expenses on the quarter when the sales are only flat. So I give that a lot of credit for managing liquidity, watching expenses and getting employees for availability which you can imagine, they have enormous availability over there for the fourth quarter, so again feeling very good about that.

Thanks. Good morning. Great quarter, guys. I still wanted to ask about the comp guide for the fourth quarter? I know you initially gave that guidance last quarter, I think at the time you said you'd give more insight around it. You've been giving 2% to 3% comp guides I think for the last six or seven quarters until now, is there something different you're seeing in the fourth quarter this year? Is it just a more difficult compare? Are there other dynamics underlying that we should think about? Trying not to read too much into it.

So Omar, in response to your points at the end about not overinterpreting our product approach, I want to emphasize that we are committed to maintaining our conservative planning strategy. Our aim is to exceed our expectations, but we have a considerable way to go in this quarter. We've planned our inventory since the start of the year against one of our stronger quarters. Looking back at a couple of years' worth of stock, we believed it was prudent to be careful and conservative. There's no decline in the underlying numbers. Therefore, as you mentioned, I wouldn’t read too much into it. We are optimistic about our situation, but this is how we thought it best to plan for this quarter in relation to our previous two to three quarters.

Thank you and good morning. Scott, I wanted to discuss the growth investments from 2017. It seems that some of these will be rolling off in the first or second quarter. Let's specifically look at the 2016 growth investments, as I believe some of them will roll off throughout 2017. You mentioned the HomeGoods distribution center and the opening of the Canadian distribution center in the second quarter of this year, and after Q1, those will effectively be behind us. Could you please go over the list of 2016 investments and provide an update on the timing of how these investments are affecting the expense structure? Additionally, could you update us on your ongoing system upgrades? Looking ahead to 2017, while we understand you are not offering guidance today, are there any expense pressures or investments we should be aware of for 2017? Thank you.

Hi, Kimberly. To reiterate, there is really no new information to share. The key point we highlighted today is the 3% wage increase, which will still have a 3% impact on EPS growth next year. Regarding foreign exchange, it’s too early to assess the impact, especially with the ongoing decline of the pound over the last two quarters. While it will have some effect, we can't specify it at this time due to the significant buying that hasn't occurred yet. As we know, there has been considerable currency fluctuation over the past two years, so it's premature to comment further on mark-to-market implications beyond what we have provided in our guidance for the fourth quarter. As for our investments in systems and supply chain, we acknowledge the two distribution centers in Canada and HomeGoods that were established this year. However, we haven't provided specific details beyond what has been mentioned in the last two quarters, which indicates that we expect overall supply chain and IT costs to have a similar impact next year. We will give more clarification on this during our year-end call. Unfortunately, there are no new updates regarding the timing of how these investments will affect the quarters next year.

Understood. Thank you for that, Scott. I am wondering if you can just remind us what were the supply chain and IT headwinds that you articulated for a calendar year 2016 and your fiscal 2017?

We never actually broke out the specific other than in terms of an EPS growth we were really just calling out the FX and the wage increases. So other than and that’s really it.

Understood. Okay, thanks so much.

And the only other thing I would add is the thing that’s been a bit of as Ernie talked about earlier, and I think Ernie would say out, is the average ticket impact to next year, so too early.

Hi. Good morning. Just a couple questions. Can you talk a little about the month-to-month progression throughout the quarter? And the second question that I have is, can you talk about the performance of the home business, really both within HomeGoods and also within the home business at Marmaxx and how that's been trending?

Sure, Bob. We’ll talk a little bit about the progressions and Scott will get that a little bit together. On the home business, I think we talked about it, and one thing by the way I would like everyone to know is our apparel business has been strong throughout the year and the last quarter. So, it has been healthy all the way across the board, but our home business in particular, as you guys can see from HomeGoods results, has continued to take major market share and accelerate. That would apply to Marmaxx's home business, which is healthy. We don’t give the numbers, obviously, and I would just say domestically our home business continues to present an opportunity for us, and we will continue to expand there and execute. And again, we like our model there; it's quite the treasure hunt and quite the impulsive model that has resonated extremely well with consumers all year long and we don’t see that changing, so a great question.

And Bob, in terms of the cadence, and unfortunately to disappoint you, that’s been several years and that we don’t comment on the entire quarter sales trends.

Thanks. So you're very liquid in terms of your open to buy? How quickly can you react to that and get product into the stores? What kind of lead time do you need to get things into the stores before Christmas?

Great question, Mike. This is we’ve talked about in some of the supply chain advantages that we’ve created over the last few years. What we have enabled the merchants to do is buy a little closer, and we’ve probably saved, and we can’t really give you an exact amount of time but it's really down to how about this, it's down there more like a few weeks. And it used to be double that not so long ago. So what that has allowed our merchants to do is continue to buy later into the season with more knowledge and take advantage of more inventory closeout lists that sometime show up at a time when before, it would have become a pack away. And now we can become an in-season sales driver that is going for the vendor because they don’t have to deal with us on a pack away. And at the same time, straight for our customers, more importantly, because they get to see this fresh goods hitting just before Christmas or just before Thanksgiving that are very fresh and just recently in other stores. So, a great question; again it’s been one of the big needle movers I think in our buying approach over the last five or seven years.

Okay, great, thanks for the color. I don't know if other people stuck to the one question, I can't remember. So I'll try one more. SG&A, the expected deleverage is a lot less in the fourth quarter than it was in the third quarter, which by the way is opposite what you're saying about the gross margins? I'm wondering why that might be in the fourth quarter?

Yes, Mike. So we have the same amount of wage and I’ll call supply; the investments that we have and except last year, we’re in the fourth quarter; we’re against the contribution we made to our foundation and some incentive accruals that due to the great fourth quarter we had last year that were more booked, we’re a higher percentage we booked in the fourth quarter. So recycling that, so we have a benefit and that’s why we have the significantly lower SG&A rate in the fourth quarter.

Great. Thanks and good afternoon. My question is on the increase globalization of your product. I’m just wondering if you can update us on your buying strategy, particularly from Marmaxx. As you take a more global approach to your product and merchandise? Thank you.

Okay. Roxanne, when you say global I just want to make sure I'm answering the question correctly. When you say a global approach in terms of Marmaxx, are you referring to goods you see in the stores or?

Yes, and even in your prepared remarks, you talked about getting more eclectic goods from around the world in your stores. And I’m just wondering how you’re buying your merchandise?

Well, so we have a few different ways. One is our divisions are more linked up. So we have a division in Europe, which has many buyers in Europe; a division in Canada that travels to Europe and internationally as well as satellite buying offices. We have buyers in Europe and satellite offices that represent HomeGoods and Marmaxx. Our buying offices do a lot more exploratory trips. All the different buying offices will try going in the new places where we think that our new categories of goods that will be exciting. Examples are like leather goods out of Italy, so or something that is out of Africa that would be great in the home deck area. Those are the types of things you’re talking about that we hit Marmaxx that are more global type buys. There’s clearly if you look, we even had like outdoor type items that are bought HomeGoods and are going to be brought certainly obviously internationally sourced. We’ve added to, like, I think I talked about the buying staff has doubled over the last 10 years, and part of that buying structure is buying global merchandise, buying from other areas. So that has been a huge, huge advantage. That’s why we have the 1,000 buyers now. And when you see that, I think I mentioned that we have 18,000 vendors, and that has grown significantly really just in the last five years. A lot of those vendors are international vendors and are giving us that different flavor. So, it's a great question because what we get out of it we think is a differentiating piece in our mix that other retailers really can't show. And it's because as I said in my script that’s why I think our sourcing machine is really we just have a very talented buying team that gets a lot of ground cover in a lot of parts of the world. Hopefully that answers your question.

Thanks very much, guys. And just a digression to Sierra Trading? It was an interesting acquisition several years ago, wondering how that's playing out, how accretive it's become and perhaps more importantly, could you talk about some of your learnings from that business? Thank you.

Sure Richard, regarding Sierra Trading Post, since we acquired it, we've been learning quite a bit about remodeling the business. The website was more promotional than we would ideally want for an aggregate value-price retailer. It's relevant that you're asking this now because we recently shifted a significant portion towards everyday value, about a month ago. We weren't satisfied with our results before this change, but since then, we've seen an improvement in daily traffic and purchases. We're still not entirely pleased with the website performance; it's still early to assess. After our store initiative, we have more opportunities to explore the new business model due to this value pricing approach. We've reorganized our merchandising team and feel optimistic about the future. We have some interesting marketing plans for the website that I believe will be beneficial along with the new value pricing. We're bringing in new merchants to enhance the website business. On the store side of the STP business, we're seeing positive long-term success, but it's still very early in developing that business. We'll have more detailed discussions during the year-end call about some new store openings and provide further insight into the overall business at that time. So, I believe that is the end of our call. Thank you all for joining us today. And we look forward to updating you at our year-end earnings call in February. Thank you everybody.