TJX Companies Inc (TJX) — Q2 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 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 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 and 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 extremely pleased with our second quarter results. Both our consolidated comp store sales growth of 6% and earnings per share of $1.17 significantly exceeded our expectations. We saw a sharp execution of our off-price fundamentals by many of our teams across the company, and comp store sales growth was strong at all of our divisions. Further, customer traffic was up for the 16th consecutive quarter at TJX and Marmaxx. Clearly, our terrific brands, eclectic merchandise mix and great values continue to resonate with consumers around the world. We were especially pleased with the very robust performance of our apparel business. We're convinced that we are attracting new customers, driving more frequent visits to our stores and gaining market share. We are particularly pleased to see that we have been attracting new, younger customers at all divisions, which bodes well for the future. With our very strong second quarter results, we are raising our full year outlook, which Scott will detail in a moment. Looking ahead, the third quarter is off to a very strong start, and we have many opportunities and traffic-driving initiatives planned for the back half of the year. We are confident we will achieve our plans, and as always, we'll strive to surpass them. Before I begin, before I continue, I'll turn the call over to Scott to recap our second quarter numbers. Scott?

Thanks, Ernie, and good morning, everyone. As Ernie mentioned, our 6% consolidated comparable store sales increase was on top of last year's 3% increase and significantly above our expectations. To reiterate, 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 was the primary driver of our comp sales increases at all divisions. As a reminder, our comp increase excludes the growth from our e-commerce businesses. Second quarter diluted earnings per share were $1.17, excluding an $0.18 benefit from the 2017 Tax Act. Adjusted earnings per share were $0.99, a 16% increase over last year's $0.85. As expected, restructuring costs within our global IT function negatively impacted EPS growth by 3% and foreign currency benefited EPS growth by 3%. Consolidated pretax profit margin was 10.6%, down 10 basis points versus the prior year. Merchandise margin was down, but would have been significant, up significantly without the increased pressure from freight costs. Now to recap our second quarter performance by division. Marmaxx comps increased an outstanding 7%, significantly exceeding our plans. Comp sales were driven by customer traffic, and average ticket was up again this quarter. We were particularly pleased with the consistency we saw across all geographic regions. Further, Marmaxx's apparel business was very strong. Segment profit margin was up 10 basis points. We have many initiative plans planned in the back half of the year that we believe will continue driving traffic and sales. HomeGoods comps grew 3% on top of last year's very strong 7% comp increase. Segment profit margin was down 150 basis points, primarily due to significantly higher freight costs, increased supply chain costs and expenses related to new store openings. We are investing in our distribution network to support our store growth over the last couple of years. Looking ahead, we feel great about the long-term opportunity to capture additional market share in the United States home fashions sector, with both our HomeGoods and HomeSense banners. TJX Canada second quarter comps grew a strong 6% over a 7% increase last year. Adjusted segment profit margin, excluding foreign currency, was up 50 basis points, primarily due to the timing of transactional FX. Expense leverage on the strong comp offset most of Canada's significant wage pressure. We remain very pleased with the overall performance of our Canadian business. We have high awareness of our retail banners in Canada where we continue to attract very loyal customers. At TJX International, comps increased 4% in the second quarter. It was great to see comps accelerate versus the first quarter. Further, we were very pleased with our strong comp performance in the U.K. In Australia, sales continue to be excellent. Adjusted segment profit margin at TJX International, excluding foreign currency, was up 10 basis points. We are confident in our full year outlook for the division and our long-term growth opportunities. In Europe, we believe the gap in comp performance between us and many other major retailers has continued to widen, which underscores our confidence. I'll finish with our shareholder distributions. During the second quarter, we returned $844 million to shareholders through our buyback and dividend programs. We bought back $600 million of TJX stock, retiring 6.4 million shares and paid $244 million in dividends to our shareholders. Year-to-date, we have bought back $1 billion of TJX stock and paid $441 million in dividends. For the full year, we continue to anticipate buying back $2.5 billion to $3 billion of TJX stock. Now let me turn the call back to Ernie, and I will recap our third quarter and full year '19 guidance at the end of the call.

Thanks, Scott. With our very strong second quarter performance, what I want to underscore on this call is our confidence and our strong position for today and the future in an evolving retail landscape. First, in a consumer environment, where experiences are increasingly important, we have great confidence in the enduring appeal of our treasure hunt shopping experience. With the vast majority of overall retail sales still happening in brick-and-mortar locations and online retailers of all sizes starting to open physical stores, we are convinced that our 4 decades of experience operating stores and responding to consumer trends is a tremendous advantage. How is our shopping experience differentiated? We aim to inspire and excite our customers every time they shop us. We do this by bringing them curated, rapidly changing selections of great brands and great quality products sourced around the globe at amazing off-price values. It is important to understand that we are delivering excellent value on comparable merchandise versus full price brick-and-mortar and major online retailers. Further, we offer consumers the convenience of shopping multiple categories in a simple, easy-to-shop layout in thousands of locations that they may visit frequently. We have spent 4 decades building consumers' trust with our local and neighborhood stores. We also offer that instant gratification of being able to touch and feel the merchandise and take items home the very same day. Second, we are convinced we will continue to gain market share by growing our customer base around the world and driving more shopping visits. Our marketing strategies are multilayered, and we believe our marketing initiatives are continuing to attract new customers. We have strong plans in place for the second half of the year, and I am very pleased with the various campaigns each of our banners has lined up. We are engaging with customers more than ever. Our loyalty programs are driving more frequent visits, and we are clearly seeing more cross-shopping across our retail banners. We are pleased with the growth of these programs, and are convinced significant opportunity remains to keep growing them in the U.S., Canada and the UK. We are particularly pleased that we have been attracting a significant share of millennial and Gen-Z shoppers among our new customers at each of our divisions. Importantly, the majority of new customers at Marmaxx are the younger customers, which indeed bodes well – very well for our future. We continue to see a meaningful opportunity to grow our retail banners around the world. We believe our long-term growth potential is 6,100 stores in just our current countries with just our current chains. We target an extremely wide customer demographic, which also gives us great flexibility to open stores in urban, suburban and rural locations. We believe our e-commerce sites are also driving customer traffic to our stores. Although still a small piece of our overall business, we feel great about our differentiation strategies and the growth of both our U.S. and UK e-commerce sites. We continue to increase customer awareness of our online businesses through integrated marketing campaigns and in-store signage. I am also pleased with our overall online metrics, particularly those related to Click and Collect in the UK. The last point I'll emphasize about our confidence, as the retail landscape continues to evolve, is our leadership and flexibility. The most important factor is our opportunistic buying. Our discipline in maintaining inventory liquidity and remaining open to buy allows us to be nimble in the marketplace and maximize the best opportunities for hot categories and hot brands. Further, our vast vendor universe of more than 20,000 vendors afford us tremendous flexibility in sourcing merchandise around the globe. Our flexible store format allows us to respond quickly to changing consumer tastes and offer shoppers a mix of relevant, on-trend quality merchandise. Our inventory turns very rapidly, and the freshness and newness of merchandise encourages and excites consumers to visit our stores more frequently. We have a strong focus on innovation and are constantly testing new ideas within our 4,000-plus stores as well as our online channels. We will learn what does and does not work, and if an idea resonates with consumers, we have the flexibility to roll it out in a meaningful way. These tests have the potential to drive significant growth for us as we have seen throughout our history. We are laser-focused on driving the business today while planning for the future. We target a very wide customer demographic with our portfolio of retail banners across multiple countries and multiple categories, which gives us great flexibility with our growth plans. In an ever-changing retail environment and with the emergence of new types of retailers, we will never be complacent. In closing, we're extremely pleased with our second quarter performance and have many initiatives planned to continue driving sales and traffic in the back half of this year. The marketplace is loaded with quality branded merchandise, and we love the buying opportunities that we are seeing. We believe our great values and differentiated shopping experience continue to set us apart from most other major retailers and highlights the resiliency of our business. We are highly confident that we can gain market share as we continue to leverage our winning retail formula to grow around the world. Now I'll turn the call over to Scott to go through our guidance, and then, we'll open it up for questions.

Thank you, Ernie. I will start with our full year fiscal '19 guidance. Please note that fiscal '19 is a 52-week year, unlike fiscal '18, which was a 53-week year. As we mentioned in our press release this morning, we are raising our EPS guidance based on our strong second quarter performance. We now expect earnings per share for fiscal '19 to be between $4.83 and $4.88 on a GAAP basis. We anticipate a benefit of $0.73 to $0.74 related to the 2017 Tax Act. Excluding this tax benefit, our adjusted earnings per share guidance range is increasing to $4.10 to $4.14, which represents a 6% to 8% increase compared to the adjusted $3.85 in fiscal '18. This EPS guidance assumes consolidated sales between $38.2 billion and $38.4 billion, which is a 7% increase over the prior 53-week year. We expect a comp increase of 3% to 4% on a consolidated basis due to our strong first half performance. Our pretax profit margin is projected to be between 10.7% and 10.8%, down 40 to 50 basis points from the adjusted 11.2% in fiscal '18. We plan for a gross profit margin to be between 28.5% and 28.6%, compared to the adjusted 28.8% last year. We anticipate SG&A expenses as a percentage of sales to be about 17.7% versus the adjusted 17.5% last year. For modeling, we expect a tax rate of 25.9%, net interest expense of around $17 million, and a weighted average share count of approximately $629 million. Now, regarding our full year guidance by division, at Marmaxx, we plan for a comp growth of 3% to 4% on sales of $23.5 billion to $23.6 billion, expecting average ticket to be flat or slightly up in the latter half of the year. We estimate segment profit margin to be between 13.4% and 13.5%. At HomeGoods, we are still expecting comp growth of 2% to 3% and sales of $5.7 billion, with segment profit margin planned to be between 11.4% and 11.5%. For TJX Canada, we are anticipating a comp increase of 3% to 4% on sales of $3.8 billion to $3.9 billion, with an adjusted segment profit margin, excluding foreign currency, expected between 14.3% and 14.4%. At TJX International, we expect comp growth of 2% on sales of $5.2 billion, with adjusted segment profit margin, excluding foreign currency, projected to be between 5.2% and 5.3%. Moving on to our Q3 guidance, we expect earnings per share to range from $1.18 to $1.20. Excluding an estimated benefit of $0.18 from items related to the 2017 Tax Act, adjusted earnings per share would be between $1 and $1.02, compared to $1 per share the previous year. This guidance takes into account a 4% negative impact on EPS growth due to foreign currency and a further 2% negative impact from wage increases. We are modeling third quarter consolidated sales of approximately $9.5 billion, which assumes a 2% negative impact on reported revenue from translational foreign exchange. For comparable sales, we expect growth in the range of 2% to 3% on a consolidated basis and from 3% to 4% at Marmaxx. The third quarter pretax profit margin is targeted to be between 10.7% and 10.8%, compared to 11.6% the prior year. We anticipate a gross profit margin in the range of 28.9% to 29.0%, down from 29.8% last year, reflecting a significant unfavorable impact from our inventory hedges. We expect SG&A as a percentage of sales to be between 18.1% and 18.2%, similar to last year’s 18.1%. For modeling purposes, we are looking at a tax rate of 26.5%, net interest expense of around $5 million, and a weighted average share count of approximately $627 million. It is important to note that our guidance for the third quarter and full year is based on the expectation that currency exchange rates will remain constant from the beginning of the third quarter. Now, we are ready to take your questions.

Just on the model really quickly, would you mind helping us isolate the comment in the press release that there was some SG&A in the quarter related to the IT restructuring, just so that we can kind of think about that and how much SG&A in the quarter goes away next year.

It's approximately $0.02 or $0.03 due to the restructuring cost in the second quarter. Again, as we put in our original plans and as we guided to in the last quarter. So no variance to what we both originally guided and what we had put in our guidance for the quarter.

And I guess just one more small model question on freight. I know that was a concern and you were seeing some moving parts through the quarter. Any change to your outlook on freight pressure on margins for the year?

So we had largely on the last quarter call built in, I would say, the majority of the freight pressure. Although we did have some additional pressure in the second quarter versus our guidance primarily in the HomeGoods division, and we are seeing some additional pressure in the back half of the year. But I would say, we did include most of that when we did our last guidance. To get that out, it's on a full year. The incremental pressure, when you, when not including additional volume, it was worth approximately $0.07 on the year. And that was largely reflected in our previous guidance. That's reflected in our full year guidance at this point.

Okay. And I guess the more important and probably final question for you to answer is on the AUR, something you've spoken about a lot. This year, you said, I think flat to up very modestly. I would assume in a quarter, since you said most of it's transaction-driven, but you pointed to flat deposits through the rest of the year. I think that there are some implications for the P&L on that. Would you mind just talking to us a little bit about what's helping drive the AUR? And whether the leverage point on the comp changes through the year as you drive hopefully some positive AUR?

So Michael, let me just jump in on some of the dynamics why it's moderating and heading slightly up, and then Scott can jump in on the second part. So as we talked about similarly to what drove it down with the mix of departments, et cetera, in it, again, it is not necessarily a top-down-driven strategy to actually bring it back the way it's coming back. And it's driven down at the merchandise manager buyer levels and category department levels and the mix within those departments and the brands in there is really what's helping us to moderate the average retail and bring it back. Also, it doesn't hurt that our apparel has been rather healthy over the last quarter as well, and as we look out, if that continues, that will be another tailwind to help us with the average ticket.

Yes. Michael, in terms of the breakeven and from a comp basis, we're not seeing, we're seeing it, first of all, it's at this point very close to what we originally planned. So I would say, there is no significant benefit or pressure due to the average retail versus what we originally planned. At the modest flat to slightly up, it doesn't really change the breakeven point at this point. If it was to go up a couple points, that would be a difference-maker.

Okay. Thanks a lot, guys.

Thank you. I wanted to follow up on the Marmaxx merchandise margin. Was that positive in the quarter if you exclude the freight pressures?

At Marmaxx, the merchandise margins would have been slightly up compared to our initial plans despite the freight pressures. However, the impact was more significant on our HomeGoods division than on Marmaxx. Overall, the merchandise margins for TJX would have improved if not for the additional pressures we faced versus our expectations. In terms of variance from our plan, we would have seen a slight increase. Ernie can provide more details about how we were unable to fully offset the pressures, but as he mentioned, the strong availability helped us achieve a solid mark.

I want to emphasize that this situation was intentional. The Marmaxx merchants deserve significant recognition. Despite the challenges with freight and the overall environment, they successfully purchased goods and targeted popular categories, which resulted in a strong comparable sales performance in the third quarter. Our primary focus has been on increasing market share and boosting revenue, and this team has excelled in executing profitable purchases. Additionally, I want to acknowledge HomeGoods, which has faced greater freight challenges than Marmaxx. Their sales have been steadily improving. Although they are dealing with a markup issue due to rising freight costs, they are making commendable efforts to manage that situation.

Thank you.

Great. Nice quarter then guys.

Thank you.

Ernie, so you're clearly seeing an inflection in traffic at Marmaxx. I guess, do you believe this is your core consumer with a few extra dollars in their pocket? Is it better product on the shelves and execution? My guess is it's probably a little bit of all. But I guess, as we look forward, can you also just elaborate on the very strong start that you cited for the third quarter? Any specific callouts by category?

We expected someone to recognize the strong start. It all connects when you consider Marmaxx's robust momentum. In the script, we aimed to highlight that we cater to a broad audience. Yes, we have a core customer, but I mentioned that we are attracting a larger share of younger customers as part of our new customer base. This is significant because while our core customers are shopping more frequently, we're also bringing in younger customers, which is a major positive both now and in the future. As we pursue this market share in Q3, especially considering some of the younger-focused departments contributing to this business, we are pleased with the increase in younger customers. We see this as a long-term advantage. So, we would have expected the strong start to raise questions on maintaining momentum. Our goal is not solely to focus on our existing core customers; we want to attract new and younger customers and continue this momentum. We have been successful in this endeavor for the past two years, and we believe we are paving the way for the future, which is crucial to our strategy. That’s a great question.

Michael, I would add to Ernie's comments regarding new customers that while all our divisions are performing well in attracting new customers, at Marmaxx, most of our new customers are from the 18 to 34 age group.

And then just a follow-up. Nice improvement in International comps this quarter. I guess, maybe could you just touch on some of the drivers, what you're seeing from a traffic perspective? And I guess longer term, how you think about the market share opportunity?

Yes. We are very pleased with the momentum we have seen, particularly in our International segment, which includes Canada, Europe, and Australia. Our European business has experienced the most significant change, serving as a major growth driver compared to the market. We are performing well there and have been successfully gaining market share. This success is largely due to the exceptional efforts of our team in Europe, who have implemented innovative marketing strategies to attract customers to our stores. They have improved the flow to the stores, achieving a new level of execution for that division, despite facing operational challenges related to real estate, such as tighter stockrooms and smaller store sizes. They have handled these challenges effectively in the second quarter, and we have also seen improved merchandise availability from desirable brands that have not been available in such quantities for some time. Louis, our division president in Europe, and her team have fostered strong vendor relationships, which is vital for long-term success. The team has been aggressive in opening new vendor partnerships in Europe, providing us with necessary flexibility in our operations. Flexibility is a crucial aspect of the TJX model, differentiating us from many traditional brick-and-mortar retailers. In Europe, this is particularly evident, as many competitors are more rigid in their planning, whereas our T.K. Maxx division operates with agility and responsiveness.

Yes, to add a couple of points to what Ernie mentioned, our business remains strong in Mainland Europe, including Poland, Austria, the Netherlands, and Germany. The significant change is in the U.K. Until this quarter, we observed that our performance in South London, where we have around 60 stores, was better than the rest of the U.K. This quarter, however, we've seen a more uniform performance between London and other areas like Wales, Scotland, and the rest of England, indicating a consistent performance. This is driven by several factors, including our conversion rates, which remained strong despite a decline in foot traffic on the high street. Now, we are witnessing a notable increase in transactions across the board. This trend is similar to what we saw with Marmaxx, where consistency was evident across different regions. Overall, this quarter was very consistent throughout the U.K.

I wanted to ask about the HomeGoods. Accelerated comps there despite a more difficult compare. If you can just touch on the assortment and inventory and outlook on HomeGoods. And then second, I just wanted to follow up on a question, I believe, Matt asked earlier around the strong traffic. You're discussing the millennial customer coming in mass to the stores. Just curious, if there, of your research or discussions with them, is telling you what the most, what they find to be the most attractive feature driving them to shop with you? Is it the price points, the shopping experience or the brands available? Just curious of how you would rank that and if it differs from other age groups?

All right. Paul, let me, let's start with the HomeGoods question. So the outlook, yes, we were very pleased with the acceleration in the HomeGoods business in the second quarter. I mean a lot of it there, I think, had to do with their execution. Again, we can't say it enough that in TJX, we have found over the years, generally, that we, and it applies to HomeGoods or Marmaxx. Last year, when we had a couple of execution issues, or Europe 8 years ago, 10 years ago, whenever that was, generally, if we have a slowdown, it tends to be our own execution issues. Having said that, in the HomeGoods case, we're up against enormous comps. So I think you said at the beginning when you asked this question, nice to see on top of a big comp that they're up against next year because they had a big comp in Q2 last year, I mean. And so that was a nice performance to see that kick against it. They, I think, had a market improvement in a number of the categories that weren't, I wouldn't say they were execution issues in the first quarter, but the flow in inventory, which, I think, we talked about back in the first quarter, we had an inconsistent flow at kind of not the best timing coming out of holiday into Q1. And so we got past that pretty quickly. Again, I go back to the flexibility of the business model. We're able to address problems rather fast and move forward and correct them, and we had that in first quarter, and I would say, one of the biggest reasons we accelerated in the second quarter is we got beyond that. The stores were exceptionally fresh going into May and June, and we had some great fashion content. I think we were very happy with some of our seasonal categories and the way they looked, and there was a major treasure hunt. We were peaking in terms of our unpredictable treasure hunt, which Home business the best at, I think, by the middle of July. So that's really, I think, what helped us there. Millennial customers that you're asking about in terms of what they're going after, first of all, there's some information there we don't really give out in terms of specifically where they're buying or what they're buying from us. But I would say that we, they are buying some of the key categories and departments, and some of our growth areas certainly lend themselves to continuing to appeal to younger customers. Scott, I don't know if you wanted to add anything to that.

Yes. I think I'd just, to be, echo what Ernie said is that the flow issues were largely to blame. And as we move through the second quarter, what we had said that part of our markdowns that were higher than in the first quarter than the previous year were largely due to those flow issues, really, in the first part of the February, March time frame. And our clearance and full price sales were back to normal by the time we exited the second quarter. And hence, our markdown rate was pretty comparable to last year. So all, which went as we had guided.

Scott, could I just start with the gross margin? I'm wondering if you could unpack a little bit what looked to be kind of the key, the 3 key drivers. I think you said merchandise margin would have been up, you may have said significantly without the higher freight pressure. So is there a sort of any order of magnitude you could help us with on the merchandise margin improvement as compared to the freight cost? And then it seemed like the third moving part in there might have been inventory hedges. So I just wanted to see if you could kind of quantify those. And then Ernie, I wanted to give you a chance to expand on some of your comments around great availability in the market, and then, I think, you talked about the great mark-on that you're seeing, which would suggest terrific availability kind of broadly speaking. It's not always intuitive, I think, for investors when they see a generally rising-tide environment that you're still seeing fantastic availability. So I'm wondering if you could comment on that as well.

Sure. I'll let Scott go first.

In terms of gross profit margin, it increased by 40 basis points on a reported basis. However, if we exclude the foreign exchange impact and the inventory hedge effect from last year, we would have remained flat. Starting from that flat position, our strong sales allowed us to exceed our guidance for gross profit by 50 basis points, primarily due to better performance on planned comparisons. Year-over-year, our merchandise margins experienced a slight decline, roughly around 10 basis points, with a significant trade impact contributing approximately 20 basis points to that. Without this trade pressure, our margins would have improved significantly, although the freight impact was slightly greater. Overall, while we faced these challenges, the strong mark-on relative to our plan helped offset some pressure. To summarize, we achieved a 50 basis points improvement over our guidance, primarily reflected in our gross profit margin versus our plan.

So Kimberly, regarding availability, the healthy mark-on has been somewhat of a byproduct. This can be attributed to factors we have discussed previously. The cycle and, counterintuitively, the perception that fewer goods might be on the market as conditions improve can actually be misleading. When the economy shows signs of improvement and retail activity increases, wholesalers grow more optimistic, leading to a decrease in pessimism and an increase in goods being cut. This cycle typically plays out over time. If retail conditions continue to improve, we would expect a favorable environment with an increase in goods over the next six to twelve months, reinforcing the notion that our business model remains strong and adaptable regardless of economic fluctuations. Additionally, the e-commerce sector presents unique challenges. As much as there is competition at the consumer level, it also leads to excess inventories. Many e-commerce retailers struggle to accurately forecast their needs, and they generally procure products in advance, creating opportunities for closeouts that we haven't previously encountered to this extent. This situation is not limited to the U.S.; it affects markets globally, including the UK, Europe, Australia, and Canada, providing a significant influx of closeout opportunities from online businesses. Furthermore, our buying team has expanded, comprising over 1,000 buyers strategically positioned worldwide to explore deals. We've increased our vendor relationships from about 18,000 to 20,000 and are continually expanding that number, enhancing our access to excess inventory. Availability in this quarter remains similar to previous ones, as we aim to manage our buyers to prevent excessive purchases too early. Based on the dynamics I mentioned, I don't foresee significant changes in the next twelve to twenty-four months. As the retail environment improves further, it is likely to foster more optimism and generate additional merchandise.

Hey guys. Can you remind us of the easy comparison that you have at Marmaxx in the third quarter with the down 1 comp? What was the driver of that from a traffic versus ticket perspective? And I'm curious about the categories that were weak in the third quarter last year, how have they been performing in the recent quarters? And then just a follow-up on the home category. Can you talk about the performance of HomeSense outside the U.S. and any reads on the new HomeSense stores in the U.S.? Thanks.

Hi, Paul, so Scott has some comments for you.

Yes, our traffic was slightly higher compared to last year. It was one of our weaker quarters, and we experienced significant impacts from hurricanes that mainly affected Marmaxx and HomeGoods, contributing to the negative one comp at Marmaxx. Additionally, as Ernie mentioned, we faced some execution issues across various departments at the end of the third quarter last year, and he will elaborate on that as well.

Yes. First of all, Paul, we cannot disclose the specific categories at this time, nor did we do so last year. However, we did experience a weather dynamic that we mentioned previously, and there were also execution issues on our part in three key areas. You also asked about performance since then. We noted in the first quarter that performance in those categories has gradually improved, to the extent that now Scott and I have reviewed it. Part of the challenge is that they're facing tougher comparatives, but they are actually outperforming the Marmaxx chain over the last quarter. So it is...

Was that true in 2Q, Ernie?

I'm sorry?

Was that true in 2Q as well?

Yes. In the second quarter, they were improving and getting close to the performance we mentioned earlier.

By the time we ended Q1, they were equal to slightly better.

And in Q2, as Scott said, they were above the chain average. So in our traditional retail, that would be a tough, probably take a little longer to get a turnaround like that. So I go back to the flexibility and the nimbleness and that shortened time frame that we buy goods and the way we aggressively markdown this, when they not like the goods, which is what happened in these cases. I think you also had a question on HomeSense. So about HomeSense or was it about home?

HomeSense, the performance outside the U.S. but also an update on how the new stores are performing in U.S.?

Oh. I would say all kind of where our expectations would be right now.

Yes, we are very pleased with the comparable performance of HomeSense in the U.K. The first two quarters showed good results. While we are not in a comparable position, we are happy with the sales and particularly with the key operational aspects despite having only a few stores open. We are seeing positive trends in payroll and, more importantly, improvement in our merchandise margin. I'll let Ernie add.

Yes. I think we have some work to do in HomeSense in Canada. We've been not as healthy there. So we, Doug Mizzi who is our Senior Executive Vice President as well as Robert Greening who is our new President up there, we have had some movement around. Business, overall by the way is healthy, it's just not up to the level that we would normally like to see our HomeSense Canada business at. Having said that, more recently, the trend has gotten better and so we're feeling much more bullish about it for the third quarter and fourth quarter coming up on the back half. Okay?

My first question is about the UK in particular. I think you mentioned improvement in availability there and I was just wondering if you are seeing any, there's been some prominent receivership system in a department store. One department store there. If you're seeing any change recently either in the consumer or in terms of that availability? And then the second one was just the, can you just comment on the labor picture in the U.S.? I'm just wondering, a couple of quarters ago, you talked about you're not seeing any signs of labor shortages. Is that still how you feel about the market?

I'll talk about the wage pressure. So we're largely in the first half of the year, we had taken a market by market approach and we're largely on our plans thus far. We're starting to see some pressure in some markets on wage. So we have a little bit more wage built into the back half than originally guided. So that I would say is a change. In terms of, and obviously, that's market by market driven, sales differences, we're not seeing any sales differences. Attrition has been very good. So it's really just a market by market where we're adjusting where we need to be hot, it's becoming a bit more difficult to hire but no major changes. Just starting to see some pressure. We have some of that built into the back half.

And Jamie, as far as the UK availability or maybe I think you're getting at is the demand shift or whatever at the retail level since some of the closures or, we have not felt that. So again, we were gaining market share consistently there even when we did not have a comp like, that division just delivered. So we've been pretty consistent and what Scott alluded to earlier. We're even a little healthier this go around. So for us, again, we're a little different than some of the other retailers that have been running into trouble there. We are so much more value and opportunistically driven that it sometimes won't line up. But certainly, the environment as much as we're seeing, we're feeling good about it. The environment there is absolutely, I don't know what you would call it, volatile. Volatile.

I wanted to see if I could follow up on the comments made around the apparel industry. On the apparel side category, seems like a pretty big inflection overall for the business this quarter. We'll see how it plays out in the coming quarters. But apparel hasn't been perhaps maybe the strongest category for you guys or for the overall kind of softline space the last few years. And maybe you can elaborate on what you're seeing there or how sustainable it is? And could this be something that's more multi-year in nature happening within the apparel dynamic?

Yes, Omar, we are pleasantly, I wouldn't say surprised, hopeful that it will continue but we were a little surprised that it did exceed our expectations in the quarter but it wasn't just this recent because if we go back to really in Marmaxx and in Winners and in TK, our apparel businesses have been pretty healthy. But for sure, here, it's been just getting stronger and stronger. And I first of all, I think a fair amount of, I'd say our branded mix is better than it has been in a long time in terms of the balance of brands that we have. You've heard us talk in the past about if our fashion is out of kilter, which we talked about last year when fashion was not healthy in terms of the way, our content of fashion. So we try to have a mix and not have a pendulum swing and that is in a very good place right now. And so when our merchandise mix of fashion is, of apparel, I mean, is balanced with fashion and basic goods and the right type of balance, we tend to perform well. There are some fashion lines, which we won't call out, that have been executed very well by our merchants, our buyers, our merchandise managers and that I think as we continue to go into third quarter where we had some misses in some of those areas. Remember, we are up against some of those execution misses last year, we think we're feeling pretty bullish that we should be able to run some good increases in those areas. Specifically, in those apparel areas. So it's a great question, on your part. We do think it's sustainable because some of it is we've got some more experienced buyers and management that have been in positions now a little bit longer, which is always a challenge when they're not. So we sometimes run into a little bit of a hiccup when we have a new team in place, especially in our apparel area. So we're pretty solid and don't have much movement over the next year in those areas, which I think will bode up well for our at least continued apparel there. And I really have been talking about Marmaxx, we have similar dynamics going on in Winners. If you look at our Canada division, they've been performing very well in apparel. And I would say similar dynamics there and in Europe as well. So it's good. Apparel can be an up-and-down type business but certainly right now, we seem to be in the sweet spot.

Just quickly thinking about the second quarter and especially Marmaxx, was there anything like advertising that you felt like helped drive this degree of comp strength above your expectations? And then thinking about the fact that you have an easier comparison in the third quarter, I know you guys are always trying to be conservative but is there anything that would cause comps to slow kind of on a 1 and 2 year basis aside from just conservatism. Anything unique in 2Q? And then I guess lastly, you talked about many kind of initiatives for the second half, anything that you could elaborate on there? Thanks very much.

So Daniel, you ask a lot of questions we can't answer, but they're good ones. First of all, yes, marketing played a crucial role in our strategy. We executed on several fronts, focusing on the fundamentals of the business. Our marketing team effectively conveyed the surprise and messaging. In the second quarter, our creative was focused on concepts like MaxxLife and MarshallsSurprise, emphasizing the treasure hunt and education messaging about why consumers should shop with us. This approach has resonated well with our audience. While we can't disclose specifics about our advertising strategy or media selection, we have made changes in how we approach media buying, and I'm pleased with the results. We have similar strategies across all divisions regarding media buys and new creative, which has been largely effective. It's not just one singular aspect, but we believe marketing will continue to be essential in the second half of the year. Additionally, our marketing spend is expected to increase slightly as the year progresses. What was the next question? Yes. The initiatives we are unable to discuss are based on recent trials rather than those from a year or two ago. They involve actions that are being tested in our Marmaxx or Winners stores in the first and second quarters, focusing on categories we plan to pursue aggressively. As I mentioned earlier, the flexibility of our model enables us to quickly ramp up in key categories, which has significantly contributed to our business performance over the last six months. Some of the initiatives in testing are showing promising results, and while I can't share specific details, these are the areas we'll focus on in the second half. It's a familiar approach for us, and I believe we have a few more categories prepared to explore. Thank you. All right. So thank you all for joining us today. And we look forward to updating you on our third quarter earnings call in November. Thank you.