TJX Companies Inc (TJX) — Q1 2018 Earnings Call Transcript

Thanks, Ash. 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 risk 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 28, 2017. 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 and our international divisions in today's press release in the Investor 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 section. Thank you and now, I'll turn it back over to Ernie.

Thanks Deb. Good morning. Joining me and Deb on the call is Scott Goldenberg. Let me start with our first quarter results. Consolidated comp sales increased 1% over last year's strong 7% increase, and was driven by customer traffic. Earnings per share were $0.82 versus $0.76 last year and above our plan. We achieve the high end of our comp sales plan despite unfavorable weather in parts of the U.S. and Canada compared to last year. While sales were not as strong as we would have liked, we were pleased to see that the trends improved as the quarter progressed. Furthermore, we are convinced that we are growing our customer base and gaining market share at each of our four major divisions. Our first quarter results speak to the flexibility and resiliency of our off-price retail model. Our teams across all divisions did an excellent job taking advantage of the favorable buying environment and managing inventory levels, which helped drive an increase in our merchandise margin. Further, we flexed our stores and adjusted categories throughout the quarter as we responded to customer preferences. Looking ahead, the second quarter is off to a solid start, we are in a terrific inventory position and have plenty of liquidity to take advantage of a marketplace that is loaded with quality branded goods. We remain confident that we will achieve our plans for the year and as always, our management team will strive to surpass them. Before I continue, I’ll turn the call over to Scott to recap our first quarter numbers.

Thanks, Ernie, and good morning, everyone. As Ernie mentioned, consolidated comparable store sales increased 1% over a strong 7% increase last year. The first quarter comp increase was at the high end of our plan and driven by customer traffic. As a reminder, this comp growth excludes our ecommerce businesses. Diluted earnings per share increased 8% to $0.82 versus last year's $0.76 and above our plan. This increase is mostly due to the change in accounting rule for share-based compensation, which benefited EPS by $0.03 over last year. Additionally, the combination of foreign currency and transactional foreign exchange benefited EPS by 7%. Wage increases negatively impacted EPS growth by 3%. We were pleased that our merchandise margin increased in the first quarter as a result of our opportunistic buying and disciplined inventory management. At the end of the first quarter, consolidated inventories on a per-store basis, including inventories held in warehouses, but excluding in-transit and e-commerce inventories, were down 7% on a constant-currency basis. This compares to a 7% increase last year when we had a higher level of pack away. We are happy with our liquidity and are positioned well to take advantage of the plentiful buying opportunities in the marketplace. Now to recap our first quarter performance by division. Marmaxx comps were flat versus a 6% increase last year. As Ernie mentioned, we had unfavorable weather in certain U.S. regions compared to last year, which negatively impacted sales. Segment profit margin decreased by 80 basis points, due to expense deleverage on the flat comp, the negative impact from wage increases as expected, and additional supply chain costs from flowing more units at a lower average ticket. Merchandise margin increased, which is a testament to Marmaxx's disciplined buying and flexing of categories where trends were stronger. We are confident in our full-year outlook for Marmaxx, which is unchanged. We have many initiatives planned to drive traffic and sales, and the organization is highly motivated to surpass our goals. HomeGoods comps increased 3% over last year's 9% increase, with the segment profit margin down by 10 basis points. As we anticipated, wage increases and supply chain costs associated with opening our new distribution center negatively impacted HomeGoods margin. We are very pleased with the comp increases and traffic gains we continue to see at HomeGoods. TJX Canada first quarter comps grew 3% over a 14% increase last year. Again, we believe unfavorable weather in parts of the country dampened sales. The adjusted segment profit margin, excluding foreign currency, was down 130 basis points, primarily due to costs related to opening our new distribution center last year, as well as transactional foreign exchange. Once again, we were happy to see all three of our Canadian chains perform well during the quarter. TJX International comps were flat in the first quarter. The adjusted segment profit margin, excluding foreign currency, was down 180 basis points, primarily due to expense deleverage on the flat comp, supply chain and IT investments to support growth, and wage increases. In Europe, we believe we continue to perform better than most major European retailers despite the challenging retail environment. In Australia, we were pleased to see T.K. Maxx deliver very strong sales results. I'll finish with our shareholder distributions. During the first quarter, we bought back 350 million of TJX stock, retiring 4.5 million shares. We continue to anticipate buying back between $1.3 billion to $1.8 billion of TJX stock this year. In addition, we increased the per-share dividend by 20% in April, marking the 21st consecutive year of dividend increases. Now, let me turn the call back to Ernie, and I'll recap our second quarter and full-year fiscal 2018 guidance at the end of the call.

Thank you, Scott. First, I'll review our growth initiatives which give us confidence that we can capture additional market share around the world. Our number one initiative remains driving customer traffic and comp sales. We believe tremendous opportunity remains in gaining additional market share in the U.S. and internationally. To further grow our customer base, we are targeting a very wide range of shoppers through our integrated approach to marketing. We want our retail banners to be visible wherever consumers are looking. We are also growing our loyalty programs to drive more frequent visits and encourage more cross-shopping of our chains. As always, we are committed to upgrading the shopping experience. We are on track with our store remodel program and are always looking to improve customer satisfaction. Most importantly, we plan to continue adding new brands and exciting fashions at amazing values. Regarding e-commerce, I'm pleased with the progress we have made in some of the initiatives we've put in place over the last year. These include centralizing key business groups, leveraging systems and talent, and transitioning Sierra Trading Post online business to offer great off-price values every day. While e-commerce is still a small piece of our overall business, we see it as complementary to our stores in another way to drive incremental sales and traffic. We plan to continue adding new categories and brands to each of our sites, while differentiating the merchandise mix from our stores. We are encouraged that on average our TJX Rewards cardholders are spending incrementally more when they shop both online and in our stores. Next, innovation is the key; we are always testing new ideas and initiatives across the company that could drive future growth. I would like to take a moment to update you on the initiatives we discussed on our year-end call. First, I'm pleased to share with you today the name of our new U.S. home concept. It will be called HomeSense. We plan to open our first store in late summer, with a few more stores slated for the fall. HomeSense will offer consumers a different mix of home fashions from HomeGoods, but at the same grade value. This approach has been key to our successful growth at T.J. Maxx and Marshalls in the U.S. and Winners and Marshalls in Canada. Further, we will be leveraging many aspects of our existing organization, including our distribution centers, supply chain, global buying organization, and many other areas. We believe we are significantly underpenetrated in the total U.S. home market, and enormous opportunity remains for us to gain share in this space. We are excited to bring HomeSense to U.S. shoppers and confident they will love it, just as much as they love HomeGoods. At our last call, I talked to you about our initiative to bring additional HomeGoods stores to the market more quickly and efficiently by opening them within existing Marmaxx locations. We converted several of these locations in the first quarter. While it is still early, we like what we are seeing with the initial sales at both the HomeGoods and Marmaxx sides of these stores leading our plans. We are thrilled to offer HomeGoods as an eclectic mix of home fashions to additional U.S. shoppers. In Australia, we have successfully converted our Trade Secret stores to T.K. Maxx, and we also kicked off our new marketing campaign. We continue to optimize the size of the business by leveraging the existing organization to implement best practices, add new brands, and become even better at shipping to our stores. We believe all of these actions will help us attract a broader set of value-oriented customers. As Scott mentioned, Australia sales performance in the first quarter was very strong, and we are just getting started. We cannot be more excited about the opportunity in Australia, and we are confident that shoppers there are going to love T.K. Maxx's terrific brands and values. I’m confident that our focus on innovation will keep us differentiated from the rest of the retail world and will help us achieve our growth goals. Our next major growth driver is our enormous global store growth potential. We are confident that we can continue to successfully open stores around the world. Long-term, we see the potential to grow to 5,600 stores at our four major divisions with just our current chains and our current markets alone. As a reminder, we expect to open approximately 250 stores across the company this year. This includes further testing of our Sierra Trading Post brick-and-mortar format with 15 additional store openings planned across the U.S. this year. Additionally, I’m excited to share with you that we are also opening our first two HomeSense stores in Ireland this summer. Shoppers in Ireland have enjoyed great merchandise and values at T.K. Maxx for over 20 years. We are confident they are going to love the eclectic mix of home fashions that we will be offering at HomeSense too. Let me take a moment to reiterate the reasons for our confidence in our long-term store growth targets. We have decades of operational expertise in the U.S. and internationally, and our real estate team takes a disciplined approach when selecting and opening stores. Our methodical approach has resulted in very successful store openings across all our geographies, with only a handful of store closings in the last several years. In the current volatile retail environment, when many other retailers are closing, we are in a great position to be opportunistic and take advantage of the best deals available. Moving on, I want to underscore the key strengths that we believe will continue to differentiate us and allow TJX to grow successfully for many years to come. First is a world-class buying organization with more than 1,000 associates. Secondly, we are a global sourcing machine buying merchandise from a universe of over 18,000 vendors in over 100 countries. Next, we have built and continue to refine our global supply chain, distribution network, and IT systems to support our highly integrated international off-price business model. Fourth, we are capitalizing on our global presence. Lastly, we operate one of the most flexible retail models in the world, which allows us to reach customers across a very wide customer demographic. All of these strengths give us confidence that we will be able to continue the successful expansion around the world while delivering shoppers an eclectic mix of merchandise at amazing values. To support our growth initiatives and strengthen our leadership positions, we continue to make significant investments in the business. This includes investing in our global supply chain, IT infrastructure, and new seeds, as well as continuing our investment in new stores, remodels, and talent training. We are convinced that these investments will allow us to capture additional market share in the long term. In closing, we feel very good about our business today, and we are always working hard to surpass our goals. We see many opportunities to grow our customer base in the U.S. and internationally, and have many initiatives still to drive sales and customer traffic. Our off-price treasure hunt offers consumers an exciting differentiated shopping experience; this has been key to our success in many types of retail environments, including the globe and e-commerce overall. We have a clear long-term vision and are excited about our future as we continue to grow TJX, the only major international off-price retailer in the world. Now I’ll turn the call over to Scott to go through our guidance. Then we will open it up for questions.

Thanks, Ernie. I'll begin with our full-year fiscal 2018 guidance. As a reminder, this guidance includes the 53rd week in the fiscal 2018 calendar, which we expect will benefit full-year EPS growth by approximately 3% or about $0.11 per share. On a GAAP basis, we now expect fiscal 2018 earnings per share to be in the range of $3.82 to $3.89. Excluding the benefit from the 53rd week, we expect adjusted earnings per share to be in the range of $3.71 to $3.78, which would be up 5% to 7% versus the adjusted $3.53 in fiscal 2017. As a reminder, we have a few factors impacting our expected earnings per share in fiscal 2018. First, we continue to expect that wage increases will have a negative impact on fiscal 2018 EPS growth of about 2%. Secondly, we continue to assume the share-based compensation accounting change will benefit fiscal 2018 EPS growth by approximately 2% or about $0.08. As for FX, assuming current rates, we expect the net impact of foreign currency and transactional foreign exchange to have about a 1% negative impact on fiscal 2018 EPS growth. This guidance assumes consolidated sales in the $35.3 billion to $35.6 billion range, a 6% to 7% increase over the prior year. This guidance assumes a positive impact on reported revenue of approximately 1.5% due to the 53rd week and a negative impact on reported revenue of about 1% due to translational FX. We are continuing to plan a 1% to 2% comp increase on a consolidated basis. The comps by definition exclude the 53rd week. We expect pre-tax profit margin to be in the range of 11.1% to 11.3%, which would be down by 20 to 40 basis points versus the adjusted 11.5% in fiscal 2017. The 53rd week is expected to benefit the higher end of pretax margin by approximately 20 basis points. We are planning for gross profit margin to be in the range of 28.9% to 29.0% compared to 29.0% last year. The 53rd week is expected to have a 20 basis point benefit to gross profit margin. Our plans also assume we will maintain our strong merchandise margin. We are expecting SG&A as a percentage of sales to be in the range of 17.6% to 17.7% versus 17.4% last year. We do not expect the 53rd week to have a significant impact on full-year SG&A expenses. For modeling purposes, we are currently anticipating a tax rate of 36.8%, net interest expense of about $40 million, and a weighted average share count of approximately 650 million. Now to our full-year guidance by division. Sales and pretax margin guidance are on a 53-week basis. At Marmaxx, we are maintaining our full-year comp and margin guidance. We are expecting comp growth of 1% to 2% on sales of $22.3 billion to $22.4 billion and segment profit margin in the range of 13.7% to 13.9%. At HomeGoods, we expect comps to increase 2% to 3% on sales of $5.0 billion to $5.1 billion. We are increasing our segment profit margin guidance to a range of 13.4% to 13.6%. For TJX Canada, we are planning a comp increase of 2% to 3% on sales of $3.3 billion to $3.4 billion. We are raising our adjusted segment profit margin, excluding foreign currency, to a range of 14.0% to 14.2%. At TJX International, we are expecting comp growth of 1% to 2% on sales of $4.7 billion. We continue to expect adjusted segment profit margin, excluding foreign currency, to be in the range of 4.3% to 4.5%. Moving on to Q2 guidance; we expect earnings per share to be in the range of $0.81 to $0.83 versus last year's $0.84 per share. This guidance assumes an expected negative impact to EPS growth of approximately 4% due to the combination of foreign currency and transactional FX, and an additional 2% due to wage increases. It also includes a 1% expected benefit to EPS growth due to a change in accounting rules for base compensation. We are modeling second quarter consolidated sales of approximately $8.2 billion. This guidance assumes a 1% negative impact to reported revenue due to translational FX. For comp store sales, we are assuming growth in the 1% to 2% range on both the consolidated basis and at Marmaxx. Second quarter pretax profit margin is planned in the 10.3% to 10.5% range versus 11.6% in the prior year. We are anticipating second quarter gross profit margin to be in the range of 28.6% to 28.7% versus 29.4% last year. We are expecting SG&A as a percentage of sales to be in the 18.1% to 18.2% range versus 17.7% last year. For modeling purposes, we are currently anticipating a tax rate of 37.9%, net interest expense of about $10 million, and a weighted average share count of approximately 652 million. It’s important to remember that our guidance for the second quarter and full-year assumes that currency exchange rates will remain unchanged from the levels at the beginning of the second quarter. Now, we are happy to take your questions. To keep the call on schedule, we ask that you please limit your questions to one per person. Thanks, and now we will open it up for questions.

Thanks, guys. Can you talk specifically about the drag from wages this quarter? You mentioned what it would be in the second quarter. Can you talk about where you expect for the second half of the year? Does it become less of a drag? And kind of same question on the DC side? You have some pressure this quarter. Can you quantify that, what would be in the second quarter and again in the back half of the year? Thanks, guys.

Sure. Thank you, Paul. I’ll start by getting to a few of the changes in some of those major components. We haven’t literally given guidance for the back half. But the first quarter EPS drag was approximately 3% on wage; it moderates every quarter from a basis point basis, from the mid-30s down to about the mid-20s in the second quarter and then we have a 1% EPS impact in the back half. So it moderates every quarter. We cycle our wage initiatives in the second half of this year, and so what we are left with as we move into the back half is the state and local mandated wage increases. In the full year, it’s 2%, but moderating in the back half. The DC deleverage is pretty equal in the first and second quarter, moderates just slightly in the back half. So a significant difference of much less deleverage in the back half of the year versus the first two quarters. As we opened those DCs last year and HomeGoods and Canada in the first half of the year, and this year, we also have a DC in the UK opening up in the second quarter. So those are obviously the big changes on a deleverage.

Got you. And then any color on February versus March, April? Any additional color you can give us there and if the improvement that you saw was traffic-driven in the comp metrics? Thanks.

Yes, Paul, it’s Ernie, I’m jumping in here. We had obviously, as we called out, a weather dynamic going on there. Interestingly, if anyone looks back at last year in the first quarter, we called out that we weren’t as actually good as we reported; we talked about that our sales were helped by the weather. So this year, really the one comp that we would like to do better than that was jumped back to weather. I would say that there was no other noise or effects that we could really decide from that. We had a couple of areas in Marmaxx where we think we could have left some business on the table and maybe next year we will be able to do a little bit better job there. I would say that also applies in Europe. But in terms of any fundamental dynamic, you added calendar shifts with Easter, and that obviously was normal and we planned on that, and that kind of played out the way we thought it would. But the business did get better as the quarter went on, so sales did accelerate as you went into April beyond what was just a holiday shift. So hopefully that helps you.

Yes. Thank you, guys, and good luck.

Thank you.

Thanks. Good morning. Thank you. I wanted to ask a little bit more color on the home category. You are obviously launching HomeSense, you got HomeGoods, home has become a bigger part of the Marmaxx business. It sounds like you are adding home good space to Marmaxx, stores may be converting some stores. How do we think about this broader shift that’s been going on in the business and now it seems to be accelerating for maybe more the traditional apparel and footwear and accessory types categories more towards the home category? Is this a reflection of your view on the marketplace? Is home maybe a category where there is less competition? Less internet disintermediation? Help us think about why you are so bullish on these categories. Thanks.

Well, great question, Omar. You pointed to a couple of points. We think we are uniquely positioned in a way we execute our home business from a product standpoint as well as the store experience. So, our home customers shop HomeGoods or HomeSense in Canada or HomeSense in Europe. They are truly going into, I think, one of the most impulsive treasure hunt experiences that is out there anywhere. And it’s not just a matter of utilitarian product, right? We have so much passion-driven home product. When you look at our deck here in the center of the store, all those different categories, and you look at the sizing from small items to large item categories, HomeGoods is really one of the ultimate shopping experiences we believe and one of the most differentiated retail formats from any other retail format, I think that’s out there. When we look at the results clearly, that would point to something over the last few years, I think in terms of going forward that home is a driver for TJX. As you pointed out, home has been a little stronger than apparel, especially when you run into weather time periods like we just had. But regardless of that, we had such consistent home performance across all of our home businesses, and that’s not just in the free-standing; that’s in the full family stores as well, that we think it’s untapped potential going forward, which is why HomeSense, the newly announced HomeSense brand which will come out towards the end of the summer, is just something we are excited about. We also have one of the most, I would say broadly based, closely working buying teams in all of retail that really differentiates us from whatever the competition can do in terms of the way we source home product. So when you look at the product that’s in our store, of course, we buy it, but we think nobody can replicate the fashion at the quality level that we have in our home business. And that’s the reason we are bullish on it; we think strategically this is not a short-term vision. This is something we plan on using as a market share opportunity as we look out over the years to come. So you are going to be hearing a lot about this over the next five to 10 years, and it won't be just as a short-term timeframe initiative, obviously when we are launching a brand. So you really hit the nail on the head with your question. We also, the things we like about HomeSense is it leverages from an efficiency standpoint, the central organization and HomeGoods right away, just like Marshalls did up in Canada. So I don’t want to take the whole call up with all of this, but as you can tell we are excited about it, and we can't wait for the first store to open. We will be getting out some news on when that happens. Aside from that, we continue to be happy about our existing home store business, and these convergence stores have just really been strong. So we are nothing but pleased and excited about the opportunity to continue to open more of our existing HomeGoods stores at an advanced rate.

Thanks for all the color, Ernie. Good luck. Appreciate it.

You are welcome, Omar.

Thank you, good morning. Just one quick clarification on the second quarter gross margin guidance. Is the bulk of that decline driven by FX?

Hi Lorraine, it’s Scott. Yes, so on an ex-FX basis, just drawing up to the big picture for a second, we have an impact in the second quarter of 4% for translation and FX. No one has asked the question. We also have a bit of a timing versus at least our own original plans on having less share-based compensation in the second quarter as we are a bit over-planned compared to the full year. In terms of gross margin, as you said, that the gross margin in the second quarter are getting impacted by the hedges in the second quarter and the distribution center expenses that I talked to. So those would be the two largest decreases on the 70 basis points to 80 basis points decrease. Merchandise margins are planned flat to slightly up, so again, it’s the opposite of the first quarter where we got a big benefit of the hedges and a similar amount of distribution supply chain expense. In the first quarter, we had a bit more of a drag on the gross margin or the buying and occupancy because we had the one comp. So I hope that answers your question. But yes, it's basically almost the flip of the hedges benefit we had in the first quarter to a decrease in the second quarter on the gross margin.

Great, and then you talked about HomeSense having a different mix of home fashion. Can you give us any more clarity on what that looks like and how will you ensure that the concepts are different enough to avoid cannibalization?

So Lorraine, I can't unfortunately give you today we will not go public today with the major differentiated categories. However, literally right around the corner, and I would tell you as we said late this summer, probably in August you will be able to go to a nearby store and what we will tell you right now is that we are framing in which you will be invited to, and you are going to see firsthand. So basically in three months you can see a dramatically different shopping experience, and when I say experience, I mean talking about the families of business that we are going to carry down the depth and the way we are going to present it and the way it will be serviced from our sales associates in the store that will be very different in HomeGoods. So you will be able to actually, in August, see in back-to-back, you can see HomeGoods and you will be able to see a HomeSense and see how extremely visible our differences are and why someone would want to shop both. I just can’t today. We don’t want to go public with what the big category differences are and design differences in the store, as well as obviously we will have different marketing programs and different graphics. And actually operationally, they are being differentiated as well, the way customers will check out in the store, where they check out in the store.

Okay. Thank you.

Welcome.

Hi. Thanks. Just wondering how you guys think about market share. So you are certainly better than department stores, but some online-only competitors, i.e. Amazon, seem to be growing faster than you. So how do you guys think about your apparel market share? And are you gaining, losing or maintaining your share?

Mike, great question. We have information sources we track, and we are still gaining apparel market share in the U.S. And I think our total market share is going up as well. Now, I’m sure what is happening; if you look at all the sector, retail sector information you will see that yes, online growth rate is by far the biggest. But if you look after that, I think it will show you that brick-and-mortar is the healthiest. And so by definition, a lot of the other pockets of apparel market share that are being taken away from many different other formats, which I don’t name, but you know what they are. And so what happens is we are still gaining apparel market share not at the rate that I think we are gaining total market share. But we are feeling great about that, and again I’m likely in the way that we are beginning the second quarter because I feel like we are in a good place the way we are starting off here as the weather has broken into May and just believe we would continue to gain market share in Q2 on the offense as we come off categories.

Understood. And as a follow-up. Do you think you’re gaining share? Is it mostly from immature stores or how do your older stores perform relative to your less old stores?

Mike, this is Scott. Yes. So again, pretty consistent for the last several years, I’ll take Marmaxx, largest division, obviously. The results in Canada and HomeGoods, the results in all the stores virtually have been pretty high comps. But in Marmaxx, where the stores are 10 to 15 years old, 15 to 20, 20 to 25, they are slightly less than the total average comp whether you go back last year, the year before, but they are pretty darn close. So there is not much of a drop-off once you maintain your old stores to the 30-year-old store, and we think largely has to do with making sure that all stores get treated equally and we keep the renovations and the remodeling of the stores pretty much on schedule. So obviously, these stores that are in that one to five year age group had a higher comp than the rest, but that’s been pretty similar in terms of those comps that you get benefit for year-over-year being higher. But overall stores perform well, from 10 to 30 years old.

The other encouraging thing is I think as our opening of new stores, not many retailers are opening as many new stores, which obviously we are selling a lot of apparel in our new Marmaxx stores, which we are at a healthy run rate of opening new stores there. And so that is additional and above the comps. Granted, I know they are new, but it’s additional market share gain on the top line.

So in other words last year you had 20 to 25 real stores that were comping in the high four range.

I would say they vary from two, three, four, but everything was - no matter what the age group, they are all strong comps.

Mike, and the other interesting thing we have been able to do on the old store discussion, is we have been aggressive on our remodels. So when we know a store is still in a very viable location or strip center, right Scott? We are pretty aggressive on the remodel of it to keep it up-to-date, and we have been more and more aggressive on relocations over the last few years. So if there is down the street a more desirable center, we will relocate. So by definition, we are keeping an eye; we are almost making sure that we don’t erode on our older stores, because we are investing in them one way or the other.

Understood. Thanks. Appreciate it.

You are welcome.

I have a broader question. Could you discuss the relationship between the declining department store category and your model? As these stores become more promotional, could that create challenges for your business?

Hi, we actually believe not because ironically, the growth in e-com is almost taking the place and validating our comp values, taking the place of the traditional brick-and-mortar e-com business. So what is happening now is and this is actually a benefit for us, the visibility of branded apparel and specialty store websites, as well as the departments stores with their own online websites, makes it easier for us to see the out-to-door value because it’s right in front of you; you can go right to the screen and see them. But B, it's actually validating and making it easier for us to better position our value gap between us and them, as well as showing the credibility of both exact items is something that we can price really well. So to speak, as well as the customer has a frame of reference on what the goods are and what retail is. So if we didn’t have the e-com to help validate to create the frame of reference, I think we, yes to your point, first of all the more promotional department store along with those may be less visibility of them. But I think what is happening is they head and start point promotions, it's so much the promotional thing that worried us; it would be the lack of visibility, but that’s being offset with the e-com presence strangely enough. So that’s working for us. Does that make sense?

Yes, it does. Great, thank you so much.

You are welcome.

Thanks, good morning everyone. Wanted to ask on merchandise margins at Marmaxx. I think you said that they were up despite the sort of flat comp. I was wondering if you could give a little bit more color on sort of magnitude of improvement versus what we've historically seen and whether the rate of improvement decelerated with the weaker tone of business in 1Q, but you are looking for that to reaccelerate in the back half of the year moving forward?

Hi, Lindsay, it is Scott. The merchandise margin, it was a strong merchandise margin. I wouldn’t say it was at the same levels of the prior year, but it was still up nicely. Would it have been up a bit more had we not had the zero comp at Marmaxx? So the mark on was strong and we took a bit more markdowns given the comp level, but overall we came in pretty close to where we had planned. We actually had the merchandise margin planned up; it just came in slightly less, but still very positive. And again, a bit of the pressure on the margins on the gross margins that we had a bit more average ticket decrease that impacted the gross margin at Marmaxx. And as we move out, we are not giving detail by division, but we still expect the merchandise margin to be flat to slightly up against what has been very strong merchandise margins over the last several years.

Great, and then Ernie if I could just follow up on a comment that you made earlier which was that April was strong even more than you would expect from a normal holiday shift, and you are feeling very good about the start to 2Q. Is there just any more color you can give us because the guidance for 2Q and your enthusiasm for April and May there is a bit of a mismatch? So I was just hoping to get a better understanding maybe benchmarking of how trends have been running of late?

Yes, Lindsay. I would say that the weather is really the driver of that for both months. When the weather heads, we could see the business kick in because, as you can imagine, the apparel areas build the benefit of the weather. So in April it wasn’t just the holiday shift; we believe that the weathers got better. But it's been a bit of a rollercoaster ride. Having said that, May was really with only two weeks and really not great weather, but we are pleased with how we are starting off here.

Okay, great. Thanks so much, guys.

Thank you.

Thanks. So inventory exiting this quarter was 10% below your sales trend. I guess, Scott, how should we think about this spread going forward? And then I would be curious, what is the lead time today between the buy and when goods are on the floor? Are you making any changes with the open to buy just given all the lateral disruption and store closures that are happening around you?

I'll just give a few of the technical and Ernie will give the color on this one. The total inventory of the 7% decrease once you exclude the pack away that we had less this year than last year would have been down in the low single-digits. And again, at the store level the inventories, which we've been pretty consistent on, was exactly where we wanted to be pretty much across the board. So in terms of the inventory levels, by definition, the decreasing inventory versus last year were in a distributor center. I’m going to turn it over to Ernie.

Yes. Matthew, a couple of thoughts on that. First of all, the inventory at the minus seven is actually a good thing based on what you brought up in your second question, which is actually what is going on in the market with all of the disruption or whatever you want to call it. Clearly, there is more of an unusual amount of measurable that we are having the buyers take advantage of. And as usual, we are actually having to hold our selling back to ensure that we don’t buy too much too soon. The good news is and I’m very proud of actually all the divisions to be able to come out of the quarter with the sales warrant. For whatever reason, we are not up to where we normally would be and then come out with this liquidity and leaner inventory. Just shows you the level and what is they are executing how this business model is. I know it doesn’t sound like something you would be excited about having in the one comp. But for us, having the one comp showing that liquidity is we have the weather situation, showing the liquidity is in such a good situation. And like Scott said, that doesn’t mean just because inventories are down seven does not mean that we can’t manage the store inventory, which is actually only a couple of points up. So we are very excited about all the in-season close-out opportunities that we are going to run into right now. So pack away really isn’t for us, something that we overlay manage at spot and time; we don’t overly manage it year-after-year, it depends on which vendor comes out at which time. And again, this is really an apples-to-apples comparison at spot in time; look at pack away that way and the environments change, we are actually in season close outs in many cases or less desirable if not more so. Even from a margin perspective, as pack away have been.

Great. And then just a follow-up. Ernie, can you just touch on the international business? Not as much time spent on it during the call. But what are you seeing from product availability and just the customer reception to the concept as you guys build scale?

Yes. Well, first of all, let me start with your last point first, which is, yes, we are building scale there. What you are aware of, as we look out a year or two. So we are starting to reduce our store openings slightly. So as to deal with some of the unknowns; so like to do with anything, but we are confident is greater. Brexit has created a little bit of unknown situation there. So we have taken the pedal off on the new store openings just a little bit or cut those back 10 to 15. And really we are looking at - the vulnerability over there is really been more in the UK. Because our mainland Europe business has been very healthy and it’s in the UK. And I think this is part of where you are getting at. We are seeing and it’s a little bit of an unknown with Brexit in the UK. So we are kind of in wait and see mode, and we don’t want to be too aggressive on what is going on there. Our sales have been to your point softer there in the UK, helping in mainland Europe. If you look at the market share gain though on that report on our flat business or zero comp, we were gaining market share by a considerable degree in the first quarter again. So we are feeling good about our business relative to the marketplace. We are just trying to play it more cautiously on some of the things that are going on there and we have so many great other opportunities that feel like growing improved in TJX with HomeSense and our home business and our Marmaxx business where we think we are heading over the next balance of the year, so hopefully that makes sense.

Yes, it does. Thanks a lot.

Thank you.

This is a question for Brian. Thank you for taking our question. I have a question about the effect of store closures and the liquidation sales happening throughout the quarter. In the long run, we believe price and TJX will benefit from these sales resulting from closed stores, but in the short term, during this liquidation phase, did you notice any impact on traffic? The flat Marmaxx comp was at the low end of guidance, and you've exceeded your guidance in the previous quarters. I wanted to find out if these liquidation sales influenced that outcome.

I would say no; we saw no impact from that, and I would still just go back to on Marmaxx, it was still more about weather. And maybe a couple of areas of business that we could do a little bit of job on ourselves. I would say that was 90% of it and really no impact from store closures.

Okay. And then I think earlier you mentioned that you might have left some business on the tables for Marmaxx. If you can provide any more color on that maybe.

That would have just been in a couple of categories. I would still say weather is by far the biggest issue, but there would have been just a handful of departments where we think we could probably do a better job on flowing certain types of goods. We never give those specific departments, but this I think you would know us from the past when we focus on an area that we feel like we need to do a better job in that area, we end up executing better. We are in the Marmaxx team who has always driven to exceed expectations as certainly diving into those, it was really just three or four areas that I'm talking about and again that wasn’t major; weather was still the major impact.

Okay. Thanks very much.

Thank you.

Yes, great, thanks a lot. Quick question on the superstore kind of format. Just want to get some clarity on how many do you have in Canada? It sounds like a bigger opportunity in the United States, just maybe you could just give us some perspective off the superstores you kind of have open, what does the productivity look like from a differential perspective per foot versus a regular type of store? And what is the reality of how much of the Marmaxx fleet you think you could turn into a superstore type of format leveraging the home advantage? And then just lastly, if you can give us some perspective on your real estate philosophy around HomeGoods versus HomeSense because you said it’s compelling enough for the consumer to want to shop both formats, would that be indicative of you would be looking to put HomeSense and HomeGoods in the same strip center in some locations? Just curious there. Thanks.

Sure, Randy, few questions. Scott and I will both try to tackle these. Let’s start up again with the last one, very easy to answer. We are absolutely looking to have them both in the same centers or nearby—that’s one of the reasons because some of the category that will be in the HomeSense and some of the exact items will not be in HomeGoods, so the customer will shop both. So by the way, the example that we pointed out and framing in here, it is literally one Plaza across a street. I guess you would say it's about a quarter mile away from our HomeGoods. And the other three sites we are doing one in the same center, and the other two are within I believe a mile. So that's exactly the idea. Two: on the conversion you are asking about, or are you asking about the conversion or superstores that already exist because we have both?

I'm just trying to get some sense of if you add these concepts together, what kind of productivity lift can you start to see versus the core? And this is a strategy where you want to almost look to combine some of this stuff. You have a dual nameplate structure where you can get just added extra productivity versus a single format Marmaxx because of the idea that the home business seems to be really turning a lot faster than the apparel type of business.

Okay, so first of all, I'll let Scott jump in the segment. But just to understand, our apparel business also turns fast, not as fast as home, but it's extremely fast; it’s like a few ticks slower. The other thing is we, for years, have had HomeGoods, and when they were opened new, a lot of stores were started with both brands in some call it superstores and some have a different name, but the stores are basically together. And then recently, what we've done is this idea of taking existing Marmaxx stores where there is no HomeGoods in the market or not nearby and adding it after the fact. So you would not do that in some cases where there is already—the limitation on that is if you already have a HomeGoods say in the same center, you are not going to have then go out a HomeGoods into the Marmaxx because you already have a HomeGoods nearby. So strategically we are able to look at the chain, and we are not prepared yet to say how many of these we would do. I think Scott wants to jump in here as well.

We are limited; I think it's exactly what Ernie said we are limited by what Ernie said, where we already have HomeGoods, but a vast majority of the 2,000-plus Marmaxx stores are of such a size that you couldn’t carve out a HomeGoods and be able to have a full-service Marmaxx and then a full-service home for HomeGoods. So we are taking a technical opportunity where we have larger format Marmaxx, where we can get the benefit of still feeling that we have the appropriate mix for Marmaxx and could have the close to the expanded HomeGoods and thereby yes, we do think we will have higher productivity in the store, you get a lot of new customers for both badges and thereby having the same rent in the same overall square footage, but we think higher sales thus far. I think, as Ernie alluded to, we are seeing a higher productivity in these stores that we converted.

Which was a key part of your question, right? Are we going to get a lift in terms of productivity? Yes, that is part of the idea.

To answer your question though, pick both Canada and the U.S., we do open stores and have been opening stores in Canada recently, or at least plan to open up stores in Canada where we will open up a Marshalls with our HomeSense or Winners with our HomeSense where we don’t have one of those boxes already, and we open up just a big overall box and get this. We see the same type of synergies where you get more customers coming to both boxes and yes the productivity is good, you have one queue line at the front and overall efficiencies. So the productivity in the past on those existing superstores that we had in the U.S. have been the same or better than the overall combined boxes of the existing stores.

Can I ask one other thing real quick? Just as a blast from the past, have you ever had A.J. Wright stores in the same locations or centers as Marmaxx stores? And if you did, any lessons you kind of take away from that A.J. Wright business that you say and we do or we don’t want to have that type of item go on when we think about our real estate philosophy and product positioning with HomeSense and HomeGoods and we have those in the same locations?

Yes, there were very few of those, so A.J. Wright in a different demo.

And we know that; market knows that. I’m just saying just any lessons learned or et cetera from that?

Not really, I don’t think that we could apply to this one.

Okay, fair enough.

Thank you.

Hi, guys. I love being the closing act. So I’m going to ask about inventory. I was going to ask you about inventory, but not availability of apparel or product inventory. It’s more focus on real estate inventory. As you look out over the next couple of years, there are a lot of stores closing and probably more to close. How much flexibility do you have in your current model versus how many leases are coming up for renewal every year and how much flexibility do you have in your current leases to negotiate as far as what the terms are?

Quite a bit. We are, in fact, Scott and I talk about this all the time as well as with our real estate team. And we stay very flexible on our positioning in terms of the lease renewals and in terms of our ability because we are still looking to open stores. So we take that into account, and in fact we’ve obviously already been taking advantage of service store closing going on. And to your point, we are going to use that in some of our negotiations, because of the nature of the beast is the way rents will be coming down in certain locations. But like anything else, it varies location by location, so every deal is a specific deal. We have deal makers throughout the country. Scott and his team are always looking at where we are in terms of flexibility on the old leases. When they query that comes up each year, what we would want to do in terms of releasing? Part of it is, as you know, most of our stores, the large percentage of our stores are doing so well in making money that we don’t want to do a major overhaul there. Scott.

Yes. I think, just to follow up on Ernie’s point, Canada has had a big benefit in the last several years and going forward with a lot of store closing. So a good chunk of their leases have opportunities based on store closings. In the U.S., our real estate groups, as Ernie said, a lot has been on relocations as leases end and the retail note of activity. Well be determined, because going forward in the U.S., a lot will depend on the boxes that are in the strip malls and that a lot of the closings in that have been any larger format boxes, a lot of it in the malls, which don’t necessarily present an immediate opportunity. But I think we are well positioned given that most of our— to answer your question, it’s several hundred leases a year that are coming up for renewal. So that would be the opportunity to even move to a better location and we hope in time, we haven’t seen yet get lower rates.

That makes sense. Best of luck for the second quarter, guys.

Thank you.

Thank you. That was our last question. So thank you all for joining us today. And we look forward to updating you on our second quarter earnings call in August. Thank you.