TJX Companies Inc (TJX) — Q1 2019 Earnings Call Transcript

Thanks, Brad. Before we begin, Deb has some opening comments.

Thank you, Ernie, and good morning. The forward-looking statements we make today about the Company’s results and plans are subject to risks and uncertainties that could cause 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 on April 4, 2018. 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. We have detailed the impact of foreign exchange on our consolidated results in our international divisions in today’s press release in the Investors 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 Investors 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 very pleased with our first quarter results. Both our consolidated comp store sales growth of 3% and adjusted earnings per share of $0.96 exceeded our expectations. I am particularly pleased with the 4% comp sales increase at Marmaxx and the strong performance across their apparel and home categories. I am also very pleased to say that we successfully addressed the third quarter execution issues that we discussed last year, and they are now behind us. In the first quarter, customer traffic was once again the primary driver of our comp sales increases at all four of our divisions. Further, this quarter marks the 15th consecutive quarter of customer traffic increases for TJX and Marmaxx. We believe that this consistency in our customer traffic increases speaks to the strength of our underlying business, our ability to succeed through many types of economic and retail environments, and our resiliency as online retail is growing. We are convinced that our outstanding values, great brands, and a treasure hunt shopping experience will allow us to continue to gain market share around the world across our four major divisions. With our strong first quarter results, we are raising our outlook for our full year earnings, which Scott will detail in a moment. Looking ahead, the second quarter is off to a strong start, and we see many opportunities to drive consumers to our retail banners. We see a marketplace that is loaded with quality branded merchandise. Our management team is laser-focused on achieving our plans and, as always, will strive to surpass them. We are confident that we can continue to grow TJX around the globe today and for the future. Before I continue, I will turn the call over to Scott to recap our first quarter numbers. Scott?

Thanks, Ernie. And good morning, everyone. As Ernie mentioned, our 3% consolidated comparable store sales increase exceeded our expectations. To be clear, our comp sales in fiscal ‘19 are compared to a shifted fiscal ‘18 calendar, so that our comps are calculated on a like-for-like basis. Once again, customer traffic was up overall and the primary driver of our comp sales increases at each of our four major divisions. As a reminder, our comp increase excludes the growth from our e-commerce businesses. First quarter diluted earnings per share were $1.13. Excluding a $0.17 benefit from the 2017 tax act, adjusted earnings per share were $0.96, a 17% increase over last year’s $0.82. Adjusted EPS was $0.09 above our plan, primarily due to better than expected operating results which benefited EPS by an estimated $0.05. In addition, we had another four penny benefit from the combination of our mark-to-market gains on our inventory hedges and share-based compensation coming in above plan. Overall, foreign currency benefited EPS growth by approximately 3% versus our plan of 1%. As expected, wage increases negatively impacted EPS growth by about 2%. Consolidated pretax profit margin was 11%, up 30 basis points versus the prior year. This increase was due to several factors. These included expense savings, better flow through on a year-over-year sales improvement, a one-time lease buyout in Canada, and gains related to inventory hedges. These benefits were partially offset by higher supply chain costs, a decrease in merchandise margin, and wage increases. 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 up 6% on a constant currency basis, versus a 7% decrease last year. We feel very comfortable with our inventory liquidity as we enter the second quarter. We are well-positioned to capitalize on buying opportunities in a marketplace full of quality, fashionable branded merchandise. Now, to recap our first quarter performance by division. Marmaxx comps increased a strong 4%, well above our plan. Comp sales were driven by customer traffic, and both our apparel and home categories performed well. Again, we are very pleased to move past last year’s execution issues. Further, Marmaxx’s average ticket was slightly up and better than we planned. Segment profit margin increased 10 basis points, primarily due to better flow through on the 4% comp. We are very pleased with Marmaxx’s strong start to the year and are excited about the initiatives we have planned to drive traffic and sales. HomeGoods comps grew 2% over last year’s 3% increase. While sales were softer at the beginning of the quarter, business picked up in March and April to levels similar to the last couple of quarters. Further, overall sales at our first few Homesense stores continued to exceed our expectations. Segment profit margin was down 200 basis points. This was primarily due to lower merchandise margin, largely as a result of increased markdowns earlier in the quarter, increased supply chain costs, and expenses related to new store openings. We feel great about the opportunity we see to grow HomeGoods and Homesense for the long term. TJX Canada’s first quarter comps were 3% over a 3% last year. Adjusted segment profit margin excluding foreign currency was up 170 basis points, primarily due to a one-time gain related to lease buyout, which was contemplated in our plans. Canada’s significant wage pressure was mostly offset by an increase in merchandise margin which was up significantly, primarily due to favorable transactional foreign exchange. Without the lease buyout benefit, adjusted segment profit margin was still up. We continue to be pleased with the overall performance with our Canadian business. At TJX International, comps increased 1% in the first quarter. In Europe, while we were pleased with the solid execution of our organization, we believe sales were negatively impacted by periods of very unseasonable weather early in the quarter. In Australia, sales continued to be very strong. Adjusted segment profit margin at TJX International excluding foreign currency was up 40 basis points, primarily due to operating leverage in Australia. Further, merchandise margin was up. In Europe, we remain confident that we’re gaining market share despite the challenging retail environment. Our European organization is capitalizing on the numerous opportunities in the vendor marketplace that the environment is presenting to us as we add more exciting brands and vendors to our sourcing universe. I’ll finish with our shareholder distributions. During the first quarter, we bought back $400 million of TJX stock, retiring 4.9 million shares. We continue to anticipate buying back $2.5 billion to $3 billion of TJX stock this year. In addition, we increased the per share dividend by 25% in April, marking the 22nd consecutive year of dividend increases. Now, let me turn the call back to Ernie. And I will recap our second quarter and full year fiscal ‘19 guidance at the end of the call.

Thanks, Scott. I would like to reiterate the major reasons for our confidence in continuing to gain market share around the world. First and foremost, we are convinced that our excellent values, fashions, and brands will continue to drive consumers to our stores. In today’s evolving retail environment, with the growth of e-commerce in general, we are delivering excellent value on comparable merchandise versus both brick-and-mortar and online retailers. In fact, we believe the growth of online retail has heightened the visibility of our values for consumers, which is very positive for our business. Second, we are confident in the enduring appeal of the treasure hunt shopping experience we offer. We are convinced that the ability to touch and feel the merchandise and the inspiration that our shopping experience elicits leads to instant gratification, all important factors for shoppers. Further, we offer a wide variety of branded items across multiple categories in a simple easy-to-shop layout. We also locate our stores in convenient, easy-to-access locations. Our flexible store format and rapidly changing assortments allow us to quickly react to changing consumer trends. This helps us ensure that our stores are fresh and there is always something to surprise and excite our customers. Third, while we continue to attract customers of all target age groups in all divisions, we are especially pleased that we have been disproportionately attracting new millennial and Gen Z customers. This bodes very well for the future of TJX. Next, we are laser-focused on driving customer traffic and comp sales. We have many initiatives planned to attract new consumers, encourage more frequent visits and drive cross-banner shopping. We are excited about our marketing plans which are moving towards a more continuous media strategy to support our business throughout the year. This includes more reach on television this year as well as a continued focus on digital platforms to ensure our retail banners show up wherever the consumer is looking. Further, we are emphasizing our loyalty programs across the U.S., Canada, and the UK and are pleased with the strong growth and the number of customers joining our programs. We are focused on enhancing the shopping experience, improving customer satisfaction, and as always, innovating. We feel good about the continued growth of our e-commerce sites. While still a small part of our business, we are happy to offer our customers the choice of when and where to shop us, and our marketing is helping to make them aware that they can shop us 24/7. Next, we see a tremendous opportunity to keep growing our global store base. Giving us confidence is our disciplined approach to real estate and decades of operational experience. Long-term, we see the potential to grow our four major divisions to a total of 6,100 stores within our current countries alone. The last reason for our confidence is product availability. We are extremely confident that we will always have great access to quality branded merchandise to support our growth plans. Availability of inventory continues to be terrific and we are thrilled with what we are seeing in the global marketplace from both existing and new vendors. Let me share with you some of what we do at TJX to make it attractive for vendors to do business with us. First, we aim to establish long-term, mutually beneficial relationships. Our buyers around the world constantly work with vendors to find additional ways to do business. Next, we have over 4,000 stores across nine countries in addition to our online sites, and we are still growing. In an environment where other retails are closing stores, we can offer vendors an excellent way to grow their business and access new markets. Further, we are very flexible in our dealings and offer vendors an efficient way to clear merchandise. We can purchase an extremely wide assortment of items, styles and sizes as well as quantities ranging from small to very large. Finally, we offer such great brands in our stores and see that vendors appreciate that their products will be mixed in with our other great brands. This is extremely desirable to them. Before I wrap up, I want to remind you that we are committed to reinvesting in our global business. While we’re expecting investment spending to be significant over the next few years, we believe we are making the right strategic investments to support our long-term growth plans. Furthermore, in an environment where cost pressures continue to rise, we are using our off-price approach to look at long-term structural ways to reduce expenses. In closing, we feel great about our strong start to the year and our plans for the second quarter and back half of 2018. We are extremely focused on our near-term execution while simultaneously having our sights set on our long-term vision for TJX. The many strengths of our business give us enormous confidence. We believe that the depth and breadth of our off-price knowledge in the U.S. and internationally is unmatched and extremely difficult to replicate. We are confident that our relentless drive to bring consumers an exciting treasure hunt shopping experience both in-stores and online, and never-changing mix of excellent brands at outstanding values will continue to be a winning strategy for us. Again, our management team is passionate about surpassing our goals. Now, I’ll turn the call over to Scott to go through our guidance and then we’ll open it up for questions. Scott?

Thanks, Ernie. I’ll begin with our full year fiscal 2019 guidance. For modeling purposes, I remind you that fiscal 2019 is a 52-week year compared to fiscal 2018, which was a 53-week year. As we mentioned in our press release this morning, we are increasing the high end of our adjusted EPS guidance by $0.02. Our full-year plan assumes that $0.07 of our $0.09 first quarter EPS beat will be offset by the following factors. First, we’re expecting a $0.03 negative impact due to a combination of factors. This is primarily due to significantly higher freight costs than we originally anticipated, partially offset by the stronger operational performance we now expect as we’ve seen our non-comps store results exceeding our plans. Second, we expect about $0.02 of the first quarter benefit from our inventory hedge gains to reverse throughout the remainder of the year. Lastly, we now expect the full year benefit from translational foreign exchange to come in $0.02 lower than we originally planned. I want to point out that we would have increased the high end of our EPS guidance further if not for the reduction of the expected translational FX benefit. On a GAAP basis, we expect fiscal ‘19 earnings per share to be in the range of $4.75 to $4.83. We now expect a benefit of $0.72 to $0.73 from items related to the 2017 tax act. This benefit is approximately $0.02 lower than our previous guidance as we continue to evaluate the impact from the 2017 tax act. Again, excluding this tax benefit, we are increasing our adjusted earnings per share guidance from $4.04 to $4.10. This would be a 5% to 6% increase versus the adjusted $3.85 in fiscal ‘18. Our guidance includes an assumption that wage increases will have a negative impact on EPS growth of about 2%. This EPS guidance assumes consolidated sales in the $37.7 billion to $37.9 billion range, a 5% to 6% increase over the 53-week prior year. We are assuming a 1% to 2% comp increase on a consolidated basis, similar to our plans for the prior year. We expect pre-tax profit margin to be in the range of 10.7% to 10.8%, down 40 to 50 basis points versus the adjusted 11.2% in fiscal ‘18. We are planning gross profit margin to be in the range of 28.5% to 28.6% compared with the adjusted 28.8% last year. We are expecting SG&A as a percentage of sales in the range of 17.7% to 17.8% versus the adjusted 17.5% last year. For modeling purposes, we are currently anticipating a tax rate of 26.2%, net interest expense of $23 million, and a weighted average share count of approximately 624 million. Now, to our full year guidance by division. At Marmaxx, we are continuing to plan comp growth of 1% to 2%. We are now planning sales of $22.9 billion and segment profit margin in the range of 13.2% to 13.3%. At HomeGoods, we continue to expect comps to increase 2% to 3% on sales of $5.7 billion. We are planning segment profit margin to be in the range of 11.6% to 11.8%. For Canada, we continue to plan a comp increase of 2% to 3% on sales of $3.9 billion. The reduced total sales expectation is entirely due to translational FX. We are now assuming a lower Canadian dollar rate for the remainder of the year, which may cause transactional FX to negatively impact segment margin. Adjusted segment profit margin, excluding foreign currency, is expected to be in the range of 14.6% to 14.8%. At TJX International, we continue to expect comp growth of 1% to 2% on sales of $5.3 billion to $5.4 billion. Adjusted segment profit margin, excluding foreign currency, is expected to be in the range of 5.1% to 5.3%. Moving on to Q2 guidance. We expect earnings per share to be in the range of $1.02 to $1.04. Excluding an estimated benefit of $0.15 from items related to tax reform, adjusted earnings per share would be in the range of $0.87 to $0.89 versus the prior year’s $0.85 per share. This guidance assumes that restructuring costs within our global IT department will negatively impact EPS growth by 3% to 4% and wage increases will negatively impact EPS growth by another 2%. We’re also anticipating that foreign currency will benefit EPS growth by 4%. As we noted in the press release this morning, these IT restructuring costs were contemplated in our original plans. So, to be clear, these restructuring costs have no incremental negative impact on our expected fiscal 2019 EPS growth versus our original guidance. We’re modeling second quarter consolidated sales of approximately $9 billion. This guidance assumes a 1% benefit to reported revenue due to translational FX. For comp store sales, we’re assuming growth in the 1% to 2% range on both a consolidated basis and at Marmaxx. Second quarter pretax profit margin is planned in the 9.7% to 9.9% range versus 10.7% for the prior year. We’re anticipating second quarter gross profit margin to be in the range of 28.3% to $28.4% versus 28.5% last year. We’re expecting SG&A as a percent of sales to be approximately 18.5% versus 17.8% last year. The expected increase in SG&A is primarily due to the restructuring costs, which again were contemplated in our original plan. For modeling purposes, we’re currently anticipating a tax rate of 26.6%, net interest expense of about $5 million, and a weighted average share count of approximately 629 million. It is 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’re happy to take your questions. To keep the call on schedule, we’re going to ask you that please limit your questions to one per person. Thanks. And now, we will open it up to questions.

Okay. Wonderful. Thank you so much. Good morning and congratulations on a really excellent first quarter. Scott, I wanted to ask about your commentary with regard to your global IT. I think, you said reorganizational restructuring. I know, you’ve been in process for a number of years now on improving the whole technology infrastructure. Can you just talk to us about the progress on that, the expected benefits, and the need to do this reorganization, just what’s driving that? Thanks.

Kimberly, it’s Ernie. I’ll take over for Scott. Essentially, this is always a challenging task for various reasons, but it comes down to preparing us for the future in the IT sector. Regarding our growth plans, we typically don’t disclose specific benefits, but as Scott mentioned, this was already part of our strategy, and we believed it was essential to drive our growth rates in the coming years.

Ernie, can I just ask a follow-up on your commentary during the prepared remarks with regard to inventory availability? It seems very clear to us having followed the Company here for almost 20 years that that is never really an issue for you. But, we are still hearing sort of resurgent concerns out there, given the inventory position, it looks like you are able to find every bit as much inventory as you’d like to buy. But I thought I’d just give you a forum to opine on the availability of the inventory and the quality of goods you’re seeing. Thanks so much.

Kimberly, I really appreciate your question, especially considering your long history with us. You've witnessed the market's fluctuations over the years. While I can't recall any recent instances, there has been a notable amount of supply across all levels of vendors, goods quality, and brands. Generally, we're seeing more quality brands available. We frequently hear discussions in the industry about vendors and manufacturers reducing their operations, but that does not reflect what we're experiencing with our buyers. In fact, the situation is quite the opposite. My team has faced unprecedented challenges in being selective about how much we purchase and how quickly, given the abundance available. Typically, availability varies by category, but right now, it appears consistent across most categories and tiers. This situation is a bit puzzling. Additionally, I want to emphasize that what we're hearing aligns with what others are discussing, but it doesn't correlate with our current experience at all.

Hey. Thanks for the insight on inventory availability, Ernie. Scott, I wanted to ask you to maybe dive in a little bit deeper on the rising freight costs. You obviously have been dealing with payroll over the last few years. We are watching commodities and energy prices go up. Amazon is raising its prime membership fee. We are seeing a rise in kind of transportation and freight costs across the industry. How are you guys thinking about this tactically over the next or two? And then, does it eventually evolve into a situation where kind of the entire industry needs to elevate prices to accommodate the higher expenses to deliver goods to consumers?

Let me explain our situation regarding retail and cost factors. We've accounted for rising freight costs in our projections, but the actual increases haven't been as significant as we expected. The main reason for this discrepancy is the new government regulations that affect drivers and transportation. Consequently, we've experienced higher rate increases than we initially planned, which have exceeded our mid-single-digit estimates. This is impacting our logistics expenses. Additionally, we're facing increased fuel surcharges due to significant price hikes in fuel recently, along with higher volumes, particularly as we adjust our forecast for the remaining year, especially at Marmaxx. It's also important to note that while spot rates have risen considerably, this isn't significantly affecting the majority of our operations, as we primarily rely on contracted rates for shipping. This gives you a clearer picture of our cost situation.

And so, as a follow-up, do you guys see, anticipate an opportunity or response in terms of pricing as the company and other retailers presumably are synthesizing similar cost increases?

We are closely monitoring the situation. When it comes to retail, we typically follow the lead of others in the market and adjust our out-the-door pricing to ensure we offer competitive savings compared to our competitors. Your question raises the possibility of these retailers increasing their prices, which could then prompt us to do the same. However, there is currently a lack of specific information regarding how much other retailers have been impacted. Our business model, including our shipping practices and delivery frequency, might result in a slightly increased freight impact compared to some competitors, although it's not significant. We are still trying to determine the extent of the situation based on available information from other retailers, which is mentioned in various reports. Nothing immediate is planned; if the trend continues, it's possible we would adjust our pricing. Additionally, if the situation worsens, as Scott mentioned, that could further affect freight costs and potentially lead to adjustments in retail pricing. We are attentive to your concerns and appreciate the question.

Got it, Ernie. Great job. Thanks.

Thank you.

Hi. Thank you. On the Marmaxx side, the ticket being up was encouraging and different from prior trends. Could you just help us understand what’s happening there in terms of what you’re thinking about categories? And a bigger picture question was around strategy and M&A. One of the markets that we’ve been following closely is resale and resale disruptors. What are your thoughts about that business and opportunity as it gets more mainstream and as millennials and new generations continue to be interested in different ways to drive value-driven experience? Thank you.

So, Oliver, I’m going to let Scott take the average ticket one and then I’ll take the second one.

Yes. Regarding our strategies, we prefer not to disclose specific details about our actions. What I can say is we are observing a better mix with more top brands, which is certainly a factor. Another aspect, although indirectly related, is that as we achieve a healthy mix of both our parallel operations, it helps overall, but I won't specify the categories that contributed to that. Additionally, for the second quarter, our retail plan for Marmaxx is currently flat, which is a bit better than we anticipated, with plans for the latter half expected to remain flat or show slight growth. This marks a reduction in pressure for the first time in years, as we have discussed retail declines at Marmaxx in the past. This is a significant change.

Oliver, I'll add something here that Scott mentioned earlier regarding the mix of departments and how that has brought some improvements. Similar to the beginning, this was not a top-down strategy but driven at the merchandise managerial and category level, which you referenced in your question. What's happening now, as Scott was explaining, is that some of the trending categories are positively influencing our performance. This is also a bottom-up initiative that we are not pushing from the top. I want to emphasize that just like the ticket was driven down without a top-down approach, it's now being influenced from that merchandise manager and buyer level as well as from the GMM. It's encouraging to see this happening because historically, when this occurs, it often follows a cycle. We hope to continue seeing positive trends in those categories that will boost our ticket sales. Regarding your question about the retail market, I believe when you asked if we find it appealing or if there is potential for expansion if it becomes more mainstream, we do find it interesting. However, it's not currently significant enough for us to pursue strongly. That said, we explore all options, and we are interested in the platforms where we see it emerging. The business model aligns with ours, and there's real value in it, especially given that the retail market features many quality designer-branded products that are well-reviewed in terms of content and fashion and certainly their pricing. While we won’t make any commitments during this call, we consider it to be highly intriguing. Good question.

Okay, thanks. And just a quick on the distribution centers in terms of supply chain, as you continue to really look at great opportunities in non-apparel. Are there things we should think about on a longer-term basis? Because you have done a really good job entering categories which have very different dynamics in terms of handling and also differentiation with the pack sizes. So, what should happen there, just because it isn’t very easy to move around such, the home product et cetera?

Are you asking us about the ability to process goods more efficiently? Maybe…

And also the future of the DCs and how that might reorientate just in the nature of the non-apparel mix and that growing over time?

So, I mean, we have expanded our home area processing DCs. I think that’s part of where you’re getting, in terms of the new processes that we’re taking a look at to put that we can externally talk about that. But, we’re looking at always ways to increase our efficiency out of the DCs in the home area specifically. Because as you mentioned it is one of our least efficient categories for processing. However, obviously an enormous sales opportunity as we move forward. So, I don’t know, I guess Scott, do you have…

Yes. I believe the main point to highlight is that we previously mentioned how a significant portion of our business, over 30%, comes from home goods. We are quite effective at handling bulky and challenging items for shipping, which is something we excel at. With the growth of HomeGoods, we have been increasing our supply chain capacity to manage this efficiently. Admittedly, this model can be somewhat more costly, but the key advantage is our ability to manage a wide range of items efficiently compared to others who may not handle the same volume or have been doing this for an extended period.

Thank you. Good morning. I was hoping you could comment a little further on HomeGoods, what the challenges were early in the quarter. And then, do you feel that you’re back on track to put up positive merchandise margins for the remainder of the year at HomeGoods specifically?

Yes, I’ll take it and Ernie will jump in. Regarding the merchandise margin, we anticipated some markdown pressure in the first quarter due to flow issues we experienced as we moved through the end of the year. This pressure lasted longer than expected and affected our markdowns and sales at the beginning of the quarter. However, as we mentioned, sales trends improved to what we observed for most of last year. As we progressed through the quarter, clearance levels returned to normal by March and April, along with a normal level of fresh flow. Therefore, we expect the markdown component to normalize as we move through the rest of the year.

Yes. I will add to what Lorraine mentioned regarding the top-line and sales. It was a mixed situation. Coming out of January, we faced flow disruptions that we previously discussed. As Scott noted, this affected our markdowns in January and February, as well as our sales. However, to elaborate, our transaction volume actually increased during the first quarter. From February to March to April, we saw improvement month by month. We anticipated starting a bit slowly due to the flow issues, but we were encouraged by the end of the quarter. Another point to consider moving forward is that we have been strategic with our real estate over the past couple of years. This has led to an increase in our store count and new store openings at HomeGoods because we secured favorable real estate deals in various locations nationwide. In the last 15 months, before that quarter, we opened 115 HomeGoods stores from a relatively small base. This expansion, roughly a 20% growth in new stores, likely contributed to slightly more transfer sales impacting our comparable sales. Scott and I have evaluated this as we look ahead to the next few quarters. Growth may continue to increase due to the increased number of new stores. If you compare our top-line growth at HomeGoods this year to last year, you'll see it is even stronger because of the many new locations. While our comparable sales were slightly below our typical expectations for the reasons discussed, our top-line performance is solid. I want you to keep in mind that we may see some cannibalization issues in the upcoming quarters. However, we believe this strategy is still beneficial. We are very pleased with our positioning in HomeGoods, and we believe our store openings will lead to significant income in the future. Great question, Lorraine.

Ernie, that last point you made is actually going to be my question. I was curious, if there was any quantification of the stores, the HomeGoods stores that if you look at comps of the stores impacted by new store opening versus those that are not impacted, if you could share with us what the difference might be there? And then, also sticking with the home theme, the early reads on Homesense and the performance of HomeGoods stores nearby and anything that you are seeing there from a category perspective that might impact your thinking on HomeGoods? Thanks.

Yes. Paul, I will let Scott deal.

Yes, I want to reiterate what Ernie mentioned. There is a bit more cannibalization, but it isn’t significantly different. The impact varies between stores that have been affected versus those that haven’t, but overall, compared to last year, the difference is slightly more noticeable. Ernie's main point is that, despite the number of new stores opening, we consistently observe across all divisions that stores perform better once they reach their first, second, or third year in operation. Starting next year, we should begin to see benefits as several hundred stores will be two years old or younger and transitioning into comp status. Additionally, referring back to a previous question from Lorraine, I want to note that the merchandise margin shortfall is primarily due to markdowns. Across many of our divisions, we are experiencing strong mark-on, which largely offsets our freight pressures, particularly at HomeGoods for the last quarter. I just wanted to mention that.

We constantly monitor Homesense, and their sales continue to outperform at those stores. We are pleasantly surprised by the nearby HomeGoods stores, which are experiencing less transfer than we anticipated. Currently, we are succeeding on both fronts. The differentiation between the categories has been significant, which is why we initially removed soft home from Homesense to further enhance that differentiation. This has led to reduced cannibalization from nearby HomeGoods, exceeding our expectations. We are very pleased with the top-line performance of Homesense compared to the pro formas for each new store, as it has been better than we expected.

Great. Can you just touch on Home versus apparel in Canada and Europe?

Yes. Home has been performing well in both areas. How's that?

Outperforming apparel though?

We don't want to provide that information right now.

Good morning. Congratulations on the great start to the year.

Thank you.

You’re welcome. Ernie, I wanted to follow up on the inventory supply sources. Is there inventory growth that’s coming from pure play e-commerce brands? And then, Scott, can you talk about the e-commerce strategy, the percent it is today, how aggressively you want to build that? Thank you very much.

Hey, Adrienne. Regarding your first question, I’m not sure if you noticed in the prewritten script that the online players, as well as those in our vertical, contribute to an overall value for us in terms of comparative value. This has become an additional advantage of our online business. Additionally, we’ve been able to source products from both vertical and non-vertical markets, and we expect this trend to continue. We all believe that online retailers and those using an omnichannel approach will keep expanding over the next few years. I don’t foresee any issues with the availability of merchandise, but it’s important to note that these businesses often face challenges predicting and managing the right amounts of goods to sell online. This can be a tough task for them. However, we've seen that they value the ability to partner with us in offering products that will be showcased online, integrated into an appealing treasure hunt experience alongside other reputable brands, as we've mentioned in the script regarding their appreciation for being associated with strong brands at T.J. Maxx and Marshalls. Therefore, we believe this is not only something we’re already engaged in, but it also represents a growing opportunity.

Great. Very helpful.

Yes. In terms of e-commerce, I'll let Ernie discuss the future strategy. We're observing significant growth at tjmaxx.com and tkmaxx.com in the first quarter. We're pleased with the metrics we're seeing; website awareness and customer satisfaction scores are increasing. In the UK, we've experienced nearly a 200 basis point increase in sales as a percentage of our business compared to last year, which indicates substantial growth. We have a few advantages, such as offering click and collect in nearly all our UK stores, with about 40% of our online sales being fulfilled this way. We're very satisfied with the results. Looking ahead, we hope to maintain similar growth rates. Although it's still a small portion of our business, we're encouraged by the increase in visits and the returns to the store, which we believe positively contributes to TJX overall.

Thanks. Ernie, is it fair to think about the execution issues that both HomeGoods and Marmaxx is now fully in the rearview mirror and any key learnings or maybe guardrails that you’ve now put in place to reduce the likelihood of reoccurrence?

Matthew, great question. Yes, the execution issues with Marmaxx are behind us. We have established some guardrails, although our business isn’t completely rigid or structured. Remember, the issues with Marmaxx were primarily related to fashion, which involves subjective taste and the balance of the products we buy and their quantities. The chance of those issues arising again is lower. However, it's challenging to create firm guardrails because of the qualitative nature of the industry. That said, we're confident in our ability to quickly identify and resolve execution issues, as we've demonstrated over the years. I've approached this conservatively, but we have implemented new strategies to minimize the risk of recurrence. We take pride in our ability to fix and recover efficiently from any execution challenges, which we've proven over time. Thank you for the question.

Got it. And then, Scott, this year’s current guide at tax reform I think now calls for 5% to 6% bottom line growth. If we were to look through some of the more transitory items, I guess, can you talk to some of the margin efficiency initiatives as we look forward and just maybe how to think about the earnings profile in the years ahead?

Nothing really new to add there. We're not going to discuss what we could be doing at this point. However, as we mentioned during the year-end call, our current plan is to continue to increase EPS growth with no significant changes to that. This clearly suggests we will maintain a healthy merchandise margin and strong expense control.

I hope you left me for last because you’re closing with the best.

That’s very good, Marni.

I just wanted to follow up on a couple of things that you’ve implemented over the years. We’ve concentrated a lot on strategy misses, technology, and foreign exchange. Could you update us on whether THE RUNWAY is still being rolled out? Is it going international and what about the CUBE? You’ve mentioned the shoe departments at Marmaxx and the beauty departments in general, but those have taken a back seat to more pressing issues. Are all of these initiatives still in progress? And are they being introduced internationally, for instance, in Australia?

Okay. So, let’s deal with the first couple. So, it’s good, Marni, because that was like a…

Ten part?

It's one question with several parts. Regarding THE RUNWAY, we've been gradually adding RUNWAY stores, and you might not have received an update recently. Scott can provide more details on this. Yes, we are indeed adding THE RUNWAY stores, and we are pleased with our progress there. We place THE RUNWAY in select stores and aim to avoid placing it in unsuitable locations that might detract from our existing RUNWAY stores. Can you clarify your question about shoes? What specifically are you asking?

There was a push for an extended expanded shoe department at Marshalls at one point. And you guys rolled it out into a whole bunch of stores. And then, again, like all these little sub-segments, you went a little radio silent on it. And I didn’t know where that stood.

Yes. The expanded shoe format has been implemented in all of our Marshalls stores. We haven't communicated much about it lately because it has become a standard part of our operations. It is actually a significant differentiator for us between T.J. Maxx and Marshalls. We have introduced it in Canada when we opened Marshalls there, but we haven't done so in the UK as we need to manage each business independently. In the UK, there isn’t as much real estate available, which limits our options. While we have upgraded the racks, we are still constrained by space. Therefore, it resembles T.J. Maxx more. However, every new Marshalls store opened has that expanded footwear area. What was the other category?

Beauty and personal care has been experiencing significant growth, particularly in T.J. Maxx. Could you share what that department looks like currently and your thoughts on it? It has certainly been a very popular category, but there have been many ups and downs in the past six to twelve months.

Yes. We can't provide specific details about the category. However, as you might have noticed in our stores, we've made significant strides in this area. That said, we prefer not to share our future department strategy regarding potential expansions until we have a clearer perspective. Additionally, we cannot disclose certain internal details.

Yes, yes. Fair enough. Best of luck with the summer.

Thank you, Marni. Same to you. I think, was that our last caller?

At this point, I would really like to thank all of you for joining us today. And I look forward to updating you on our second quarter earnings call in August. Thank you, everybody.