TJX Companies Inc (TJX) — Q3 2021 Earnings Call Transcript

Thank you, Jordan. 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 March 27, 2020, and the Form 10-Q filed August 28, 2020. 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 the 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 on that transcript. Thank you. And now, I'll turn it back over to Ernie.

Good morning. Joining me and Deb on the call is Scott Goldenberg. I'd like to start our call today by expressing our sincere gratitude to all of our global associates for their continued hard work and dedication as we navigate the business through this health crisis. They have helped us achieve monumental tasks over these past eight months. We are especially proud of their commitment to our health and safety protocols for both associates and customers. I want to give special recognition to our store distribution center and fulfillment center associates. We are truly grateful for their commitment to keeping our business open and moving forward, which requires them to physically go into work. In recognition of their efforts, we have once again awarded a majority of them an appreciation bonus to be paid in November, this month. We will continue to look for opportunities to recognize associates in the fourth quarter for their continued contributions to the business. As we keep managing through the global pandemic, I want to share our continued concern about the human impact of COVID, including on our associates and customers. I know the news around the resurgences is difficult for all of us to see. As an international retailer with operations around the world, we continue to follow government mandates in our regions, which means at this time we have some stores temporarily closed. Currently, the vast majority of these are in Europe, with only a very small number in North America. Moving to the business update. I'm going to start with a recap of our third quarter results followed by some comments on the fourth quarter and then move to the market share opportunities we see for TJX in the medium and the long-term. Now to our third quarter results. I am very pleased that both our sales and earnings per share well exceeded our plans. Overall open-only comp store sales were down 5% and earnings per share were $0.71. Further, sales exceeded our plans across each of our divisions. Our above-plan third quarter results reinforce our confidence in the flexibility and strength of our business model over the long-term. The third quarter marked the first quarter this year that nearly all of our stores were open. Despite the numerous macro headwinds, including COVID and its impact on consumer behavior and the limitations in the cost of operating with new safety and occupancy protocols, we generated strong cash flow and saw a strong rebound to our top and bottom lines. We are convinced that we can continue our successful profitable growth once we are past this health crisis and the environment normalizes. To provide more detail on the drivers of our above planned sales in the third quarter, we believe that the combination of improved merchandise mix, higher store inventory levels, our focus on safe in-store shopping experiences, and the restart of our marketing campaigns were all factors. First, we significantly improved our assortments and the seasonality of our products. We have made progress in flexing our buying dollars and shifting to higher demand categories. We saw strength in our Home, Beauty, and Activewear categories across Marmaxx, TJX Canada, and TJX International. It's great to see consumers seeking out our banners for the categories that they currently deem important. Our buyers have done a terrific job delivering great merchandise and values throughout the store for all of our categories including both the hot trending categories and the softer trending areas. Second, overall inventory availability and the buying environment are excellent. Our buyers have done a great job communicating with our vendors and leveraging our global buying offices in this environment. We've also added hundreds of new vendors this year. Our merchandise flow to stores has improved since last quarter and we felt good about bringing customers the terrific values they expect from us in the third quarter. We expect our inventory flow to incrementally improve throughout the fourth quarter. I especially want to highlight the outstanding sales results at our HomeGoods banner; we believe that our aggressive expansion of HomeGoods over the past five years has positioned us very well to capture outsized home share in this environment. Next, our merchandise margin was up significantly, with excellent overall inventory availability; mark-on was very strong. Markdowns were also better than anticipated as sales exceeded our plans and consumers responded favorably to our fresh merchandise mix. We also continue to receive very good feedback on our health and safety protocols from customers who have shopped in our stores. Our marketing organization works very closely with the store operations teams to develop clear and helpful signage to convey our commitment to a safe shopping experience to our customers. We believe our health and safety focus will be important to consumers as they decide where they are comfortable doing their in-store shopping this holiday season and beyond. Lastly, we generated very strong cash flow and further increased our liquidity during the third quarter. As we announced today, our current financial liquidity and flexibility gives us the confidence to reinstate our quarterly dividends, subject to Board approval. We expect the dividend to be at an increased level compared to the last dividend we paid in March. Scott, of course, will talk more about this and the tender offer we announced this morning in his financial update, in a moment. Moving to the fourth quarter and our opportunities for the holiday selling season. First, we are convinced that we will be a gifting destination again this holiday season. With our wide selections across various merchandise categories, we believe customers will find gifts for everyone on their list in our stores and online. And our treasure hunt shopping experience offers customers the element of discovery when they're looking for inspiration for what to buy for the people on their holiday list. Second, we plan to flow fresh products multiple times a week to our stores and online throughout the holidays so that shoppers can find new gift-giving assortments every time they shop with us. Next, we believe our holiday marketing campaigns, which started airing earlier this month, will help drive customer traffic. We are highlighting our terrific gift assortments and excellent values with messaging such as spend less, gift better, and big love small prices. In the U.S. and Canada, we will leverage the strengths of our retail brands together and multi-banner campaigns. In Europe, we are leveraging our campaigns across each of our European countries. As for e-commerce, we continue to add new categories and brands to our U.S. and UK online businesses. This holiday season, we are planning to offer an expanded assortment of gifts for those shoppers who prefer to shop online. We feel very good about what we have planned this holiday season. However, we continue to see significant COVID-related headwinds that we believe will make it difficult to achieve the level of sales that we would normally expect during this time of the year. First, is the recent resurgence of COVID cases and the consumer impact; in addition to leading to more temporary store closures, this also continues the uncertainty around shopping behavior. We see some consumers are still reluctant to shop in stores and others may make fewer shopping trips this holiday season. Again, we believe our health and safety measures will encourage consumers who are comfortable doing in-store shopping this year to return to our stores. Second, we anticipate some pressure during peak shopping times in some stores from occupancy limits and social distancing protocols. We have several initiatives planned to help mitigate some of this pressure and to improve traffic flow and speed of checkout. Lastly, we are seeing softer demand for certain product categories given the number of people continuing to spend more time at home. While we are emphasizing the high-demand categories of Home, Beauty, and Activewear, there is a limit to how much of our mix we would shift in the short-term to medium-term. Medium to long-term, while much of what I just discussed are macro headwinds that could persist until a vaccine is widely available and the environment normalizes, we feel very confident in the market share opportunities we see ahead. We are laser-focused on the continued successful growth of TJX and see numerous opportunities to leverage our strengths. First, we are convinced that our great brands at great values concept is an enduring retail formula that we will continue to be a major draw for consumers. Our surveys tell us that our customers love our differentiated treasure hunt shopping experience, and we are convinced that this will continue to serve extremely well when more consumers are comfortable shopping in our stores. We believe our value proposition gives consumers a compelling reason to shop with us in this environment and will continue to attract shoppers over the long-term. Second, we believe our relationships with vendors will grow even stronger as other retailers close stores. We see the power of our global sourcing from a universe of over 21,000 vendors as a tremendous advantage. Next, is the flexibility of our buying, store formats, and distribution networks, which we see as a key strength in a rapidly evolving retail landscape. This flexibility allows us to offer consumers a broad mix of branded merchandise across a very wide consumer demographic. Fourth, we see a significant opportunity to continue our global store growth over the long-term. We are in an excellent position to take advantage of real estate availability to open new stores and relocate existing stores. Further, we plan to continue remodeling stores to further upgrade the shopping experience. As we look to capitalize on opportunities to attract more new customers in the future, we want them to have a positive shopping experience when they visit us to keep them coming back. Lastly, we see a great opportunity to capture additional share of the Home category, which has been strong for us for many years. In the short-term, we have been increasing our Home mix at all our banners to capture our piece of the incremental demand that is out there. Going forward, we believe the strength of our buying team, which numbers over 400 Home buyers, our global buying offices, and strong relationships with vendors around the world will allow us to capitalize on the best merchandise available in the marketplace and bring our shoppers exciting home fashions at terrific values. Today, I am excited to share with you that we plan to launch e-commerce on HomeGoods.com later next year. We believe HomeGoods e-commerce will allow us to leverage both our strength in the home category and the power of our global buying organization and sourcing universe. We believe this will allow us to satisfy our current customer base, which is expanding, and continue to attract new shoppers. The passion of our HomeGoods customers is terrific to see, and we are looking forward to bringing them our great brands and values 24 hours a day, 7 days a week. In closing, I want to reiterate that the entire management team is laser-focused on navigating through these times to ensure the stability of the business in the short-term. At the same time, our sights remain on our strategic vision for the medium- and long-term and capitalizing on the numerous opportunities we see for our business. We are prioritizing our investments in our associates, stores, supply chain and systems to strengthen our infrastructure in positioning to execute on our growth plans. We believe we are in excellent shape to build on our leadership positions in the U.S., Canada, Europe, and Australia over the long-term. TJX has successfully grown its business through many retail and economic cycles throughout our 43-year history, and I believe that we'll come out of this health crisis an even stronger company on the path to even greater success in the future. Again, and most importantly, I want to thank all of our associates worldwide who have shown an amazing commitment to TJX and have done outstanding work over these past eight months. Now, I'll turn the call over to Scott for a financial update. And then we'll open it up for questions.

Thanks, Ernie, and good morning, everyone. I'd like to first echo Ernie's comments and thank all of our global associates for their hard work and commitment over these past eight months. Now, to Q3 results. As Ernie mentioned, open-only comp store sales were down 5%. We were very pleased that overall sales and sales across all of our divisions well exceeded our plans. Overall customer traffic was down but improved versus the second quarter. Average basket increased and was strong again as customers responded favorably to our fresh mix and put more items into their carts. Merchandise margin was up significantly this quarter, driven by stronger mark-on and lower markdowns which included a benefit due to the timing of markdowns between the second and third quarters. As to the cadence of sales, overall open-only comp store sales were sluggish in August and improved significantly for the remainder of the quarter, with September being the strongest month. While hard to quantify, we believe much of this improvement was due to a combination of a more seasonally appropriate merchandise mix and improved in-store inventory levels as the quarter progressed. Moving to the bottom line, third quarter earnings per share were $0.71, which was significantly better than we anticipated. Earnings per share included a $0.09 benefit from our lower tax rate versus last year, which was due to a true-up of our year-to-date tax rate as well as the shifting of income and loss positions across our operating jurisdictions. I want to also remind you that our EPS reflects significant cost headwinds related to COVID. Similar to the second quarter, in the third quarter, these costs primarily included incremental payroll in our stores for enhanced cleaning and to monitor occupancy, personal protective equipment for our associates, and incremental expense related to the third quarter associated appreciation bonus. In total, COVID costs accounted for approximately $270 million of incremental expense in the third quarter. As for our third quarter balance sheet, the decline in inventory was due to a combination of items. First, we intentionally planned lower in-store inventory levels to accommodate social distancing and to account for the planned decline in our year-over-year sales. Second, sales were stronger than we expected in the third quarter, so we were replenishing our inventory quicker than we planned. And lastly, we continued to experience merchandise delivery delays due to continued bottlenecks in the supply chain. While overall inventory was down, in-store inventory levels improved significantly compared to the second quarter and are close to where we want them to be in this environment. To be clear, availability of merchandise in the marketplace is excellent and is not a factor impacting inventory levels. Now, I'd like to walk through our third quarter cash flow and liquidity. During the quarter, we generated $4.1 billion of operating cash flow. This was primarily due to an increase in working capital and strong net income. We also benefited from lower capital spending and maintaining tight expense controls during the quarter. As a result, we ended the third quarter in a very strong liquidity position with $10.6 billion in cash. With such a strong liquidity position, we were very pleased to announce that we expect to reinstate our quarterly dividend in the fourth quarter, subject to Board approval at a rate of $0.26 per share. This would represent a 13% increase versus our previous dividend of $0.23 last paid in March of 2020. If approved by the Board in December, the dividend will be paid in March of 2021. Next, we announced this morning that we launched cash tender offers for up to $750 million aggregate principal amount for certain of the bonds we issued in April of this year. The goal of these tender offers and the financing I'll discuss shortly is to lower our borrowing costs by reducing the outstanding amount of our higher interest rate, longer-dated bonds and issuing lower interest rate bonds. While we cannot give specific guidance at this time, if any of the bonds are successfully tendered, we would incur a pre-tax cash charge in the fourth quarter related to the extinguishment of this debt. Keep in mind, if nobody tenders their bonds, the charge will be zero; if $750 million of bonds are tendered, the one-time pre-tax charge could be in excess of $225 million. We will disclose the results of the tender offers and the approximate size of the extinguishment charge when available. We also disclosed this morning that we plan to issue new bonds maturing in seven and 10 years. We plan to use the proceeds of this offering together with the cash on hand to finance the tender offers, which are conditional on our issuing the bonds. We may also use some of the offering proceeds for general corporate purposes. As we said in our release, we are not providing a financial outlook for the fourth quarter due to COVID and the increasing uncertainty around temporary store closures and the consumer shopping behavior in this environment. As a point of reference for the two weeks of the fourth quarter, overall open-only comp stores were down 7%, similar to the trend we saw in the last week of October. As a reminder, regardless of comp sales trends, overall sales for the fourth quarter will be negatively impacted due to temporary store closures. That said, I do want to highlight a couple of significant items that negatively impact our fourth quarter bottom line versus last year. First, we're expecting an increase in the amount of incremental COVID costs compared to what we saw in the third quarter. Second, there will be a negative impact due to the temporary store closings which are currently mostly in Europe. Lastly, we expect higher incremental freight costs in the fourth quarter due to capacity constraints and higher rates. I also want to mention from a sequential standpoint, merchandise margin in the fourth quarter will not get a benefit from a shift in markdowns like we had in the third quarter. And further, fourth quarter freight expense will be significantly higher than what was in the third quarter. Wrapping up, I want to reiterate the strength of our third quarter results while operating in a non-optimal environment. We believe that our third quarter sales, earnings, and cash flow demonstrate what TJX is capable of when nearly all of our stores are open for a full quarter. We believe we have been prudent in our financial approach to planning the business and management of our balance sheet, and we ended the quarter in a very strong liquidity position. We are confident in our ability to manage the areas we can control, like buying, merchandising, and store operations. We have a proven retail business model and we believe we are set up very well for continued success once this health crisis is behind us. Now, we are happy to take your questions. To keep the call on schedule, we're going to ask that you please limit your questions to one per person.

Great, thanks. And congrats on the business improvement. So Ernie maybe where do we stand today with inventory replenishment and supply chain constraint relative to our conversation three months ago? And just given the industry disruption as a whole, what's your confidence in accelerating market share out of this pandemic? Maybe if you could just touch on some of the off-price industry barriers to entry that you think are important?

Sure, Matt. Let me hit a high point, first of all, to separate at a high level the short-term versus the longer-term. So the short-term environment is really addressing the big picture you're getting at, as what happened to stock price and to us, TJX, as we come out of this. The short-term environment right now, we would say is a little more volatile than it was at the beginning of the third quarter when you look at COVID cases rising, which were in multiple locations. So it's not just the U.S.; we're talking Europe, U.S., everywhere pretty much. As we mentioned, we have a number of stores, over 400 stores closed in Europe right now. So it's a little more volatile short-term; however, I'm going to give you a complete 180 and just say we are very bullish on the longer-term outlook because that feels significantly better than it did at the beginning of Q3 when we didn't know where all of this was heading. Certainly, the recent news of the vaccines and what that could do in terms of helping, as Scott mentioned, when customers get comfortable shopping stores in general, I think we are going to be positioned extremely well to come out of the box and gain more market share from brick and mortar across many categories, not just in the home area throughout the whole store. I think we're going to be positioned. So if you look at all the store closures that have happened, and I'm guessing you're kind of getting at that issue where this market share opportunity, but how is our inventory replenishment? I think you asked in the beginning about supply constraints, etc.; that we see getting incrementally better month by month as we move forward here. Certainly, there have been some, as you probably have heard industry-wide, there were some West Coast slowdowns that have impacted some categories, but not to the point, in our case, where it has really saddled or had a material effect on our flow because we are actually right now fairly happy or pleased with the amount of inventory we have in really all of our divisions, all of the brick and mortar specifically. Of course, in Europe, right now, it's being shut down for a few weeks doesn't matter with regard to inventory, but we're feeling really bullish medium-term. Long-term, inventory replenishment availability is pretty high. We've had to recently slow down all of our buying and most of the divisions and departments within the stores because the availability out there is just as you might expect, it's more than it was a number of months ago, and I think that just has to do with the cadence of the wholesalers now trying to get back on track and project where retailers are going to be and bring in more goods. So, hope that answers your question with regard to inventory replenishment and supply, where we think the short-term is versus the long term. Again, this is why you're seeing us be a little more cautious on the fourth quarter because of the volatility out there. But again, as we look into next year, feeling very good.

That's great. Maybe, Scott as a follow up, could you just help quantify the magnitude of merchandise margin expansion in the quarter, what drove the performance? And then with inventories lean exiting the quarter, what's the best way to think about merchandise margin opportunity in the fourth quarter?

Well, the last part I'll have Ernie just jump in right there because I think I'll just briefly and I'll get back after Ernie talks. But our merchandise margin was strong across the board, across all our divisions. The mark-on was extremely strong, and I think...

Significantly.

And I think that, in terms of the fourth quarter...

Markdowns were not surprising, as we maintained a lean position throughout much of the third quarter and continue to do so. Our sales decline of 5% was better than we anticipated considering the current environment and inventory levels. Additionally, our markdown rates improved compared to last year, with lower percentages indicating a healthy trend. While our inventory levels are lean, if you visited our stores now, you would find the inventory appropriate for social distancing and current shopping behaviors, which have changed since three months ago. Inventory levels in stores are lower than what they were at this time last year. Therefore, if you see a decline, the stores might seem more sparse, but overall, they feel well-stocked when you visit. We are satisfied with the current inventory levels and the turnover rates, which are balanced—neither too high nor too low. We continue to monitor safety protocols and social distancing to create the best shopping experience while maintaining our sales.

Yes, I'll elaborate on the rest of the merchandise margin. The timing of the markdowns was significant, contributing approximately 50 basis points to our benefit in the third quarter. That said, we did see a substantial increase in markdowns, particularly driven by HomeGoods in Canada. This was expected given the comparison with the inventory levels we had, resulting in fewer markdowns at HomeGoods than at any other time. Additionally, Canada showed strong markdown performance. In our gross profit, we realized savings in areas like travel and other expenses, along with some government credits that contributed to those savings. Furthermore, there was a notable benefit of 30 basis points from hedges during the quarter. All things considered, we achieved an extremely strong merchandise margin for the quarter.

Best of luck.

Thanks, good morning. I appreciate all the information. I wanted to ask a follow-up about your confidence in the long-term market share opportunity. Considering the shift of consumers to online shopping during the pandemic, is your confidence influenced by the possibility of consumers returning to stores? I understand that traffic hasn’t fully recovered. If you have any data on that, especially with the HomeGoods e-commerce announcement, do you feel more certain about achieving greater penetration in digital channels and gaining market share that way, or is it a combination of both? Thank you.

Great question, Omar. I definitely believe it's a combination of both. I see a significantly greater impact on our stores capturing the market share opportunity. I'm particularly excited about the HomeGoods online business because I believe it complements our efforts. HomeGoods customers are some of our most passionate, and a lot of home-related purchases are happening online. There's a vast market share we can still capture. However, I also think a large portion of customers prefer shopping in our stores, as evidenced by HomeGoods' recent comparable sales performance. As customers feel more comfortable returning to stores, we're seeing strong sales revenue numbers in areas where conditions have normalized. While store closures have affected brick-and-mortar locations, there remains a segment of customers who still want to shop in person, especially for items like apparel and home furnishings where they want to feel the product. As things normalize, I believe we will gain market share, particularly due to the store closures that have occurred. So, it's a bit of both, but I see store pickup as being especially strong. I believe HomeGoods will be one of the healthiest divisions as we move into next year, particularly in the medium term. In the long term, as businesses open up and vaccination rates increase, people may spend less time at home, but I think a significant number of employees will continue working from home, which should support the HomeGoods business for several years.

Yes, hi, thanks very much for taking my question. Ernie you sound obviously very bullish on HomeGoods market share opportunities, can you just speak to maybe how you're evaluating longer-term store count especially within that division? It seems like certainly you feel pretty optimistic about some of the opportunities out there? And then just as Home becomes a bigger piece of the mix, what are some of the margin implications we should consider just given higher freight typically associated with that category? Thanks very much.

Sure, Kate. I'll begin and then pass it over to Scott. Regarding the store comps, we initially slowed down when COVID first hit, but that pause only lasted for a few months. Looking ahead to fiscal '23 and calendar '22, we are still planning to open stores next year, and in the following year, we have started to increase those plans because we are optimistic about the opportunities available. There's a great real estate market out there, as we have discussed. This applies to relocations in Marmaxx or new stores, and our Home business, particularly HomeGoods, is performing well across the board. We are becoming more aggressive with openings in FY '23. Scott, would you like to add anything?

Yes, I believe it applies to all areas. We've experienced a significant slowdown over the past two quarters. Many of our store openings this year, even those that were signed for fiscal '21, have been shifted to fiscal '22 or calendar '21. This year, we plan to open around 50 stores. For next year, we already have plans for over 100 openings, and the pipeline is strong, though we are not disclosing specific plans yet. As Ernie mentioned, we are signing new stores in all our divisions and anticipate a return to at least a 3% growth rate in store openings. There are numerous opportunities, as Ernie highlighted, not only in new openings but also in relocating stores, which we aim to do across all divisions, especially in Marmaxx. We are actively renegotiating leases, which presents further opportunities in real estate. While it's too early to provide specific numbers for next year and beyond, I can confirm that we will be well above 100 openings and expect significant growth.

I'll just mention that while we're discussing total HomeGoods, we're also making some adjustments and will be opening additional stores in response to strong trends with HomeSense, alongside our existing HomeGoods locations. If we find the right real estate deals near HomeGoods, we plan to take advantage of that by adding more HomeSense stores. Our experience shows that opening a HomeSense near a HomeGoods has had little to no negative impact; in fact, we've observed a slight increase in HomeGoods sales due to the differentiation. This is another aspect of our business that we haven't highlighted as much, but it has been performing well over the last six months.

Thanks, good morning. I wanted to ask about SG&A, you spoke about the $270 million of incremental cost this quarter. Clearly, you sound some offsets, so I was just wondering what those were and if there will be ongoing savings? And then secondly, will the entirety of the $270 million COVID costs go away post vaccine?

So I'll jump in just to start on that and then I think what Ernie was alluding to in terms of the encouraging news on the vaccine is that over time stuff like the COVID costs will slowly get better. But right now, it's too early to say when our COVID costs are going to be decreased in-store.

Right, my focus on that statement was more about the sales there. It was really about, Lorraine, the benefit we're going to see over time, all it needs is a few-point swing in consumer comfort, the consumer feeling more comfortable to shop brick and mortar and that literally translates into a few-point increased trend in our sales. So that's really what I was referring to.

Currently, it's premature to conclude that we will be decreasing our COVID-related costs. We will know when that time comes, but we won't make changes until our customers feel comfortable shopping in our stores. For the fourth quarter, we anticipate maintaining the full level of COVID costs. Concerning offsets from the third to fourth quarter, we have been receiving government relief, especially in Canada and Europe during the third quarter, which has helped mitigate costs. Unfortunately, that support will decrease in the fourth quarter, leading to a slight increase in our net costs. Additionally, we're increasing our operational hours, which will elevate our COVID-related expenses. However, we've managed to achieve some savings in the third quarter from advertising, travel, and payroll-related expenses, partly due to the temporary closure of fitting rooms. As we resume normal operations and invest in marketing, these savings will diminish, resulting in an expected rise in net COVID costs for the fourth quarter. Overall, the increase in COVID costs contributed to a 160 basis point deleveraging in SG&A during the third quarter, as we did not save enough to fully counterbalance those expenses.

If I could add something, Lorraine. One aspect we are aware of that we believe will benefit us moving forward is the last part of this situation. We want to emphasize that the COVID-related costs are providing us with a lot of consumer confidence due to the safety measures we've implemented for both our customers and associates. We continually survey different stores across the country and are receiving high scores, which is a key reason for our strong performance. We think our sales wouldn't be as robust if the customers willing to shop in person weren't feeling safe as they come into our stores. According to our surveys, customers report feeling secure and that their experience is safe and organized. While we recognize the expenses involved in ensuring safety, we see this spending as not just a necessary expense for our customers and associates, but also as an indirect marketing investment. We believe this will foster customer loyalty moving forward. Therefore, to Scott's earlier point, we are not rushing to reduce our COVID-related costs because we feel they are contributing positively to our revenue growth.

That makes sense. Thank you.

Hey guys, thanks. A couple of quick ones. Ernie, you mentioned you signed up hundreds of new vendors this year. I think you do that every year, so I'm curious if you've seen any difference in the vendors that are coming on board with you haven't come categorize them versus what you would see in a normal year? And Scott, payables, inventory relationship looks a little out of whack, just curious if that's something that'll go back into normal, if so when and where there was something that has changed as a result of this environment and that will continue to benefit you in future quarters? Just those two items. Thanks.

Sure, Paul. The first question is a very good one. Yes, there is a different dynamic with the new vendors because they are typically not the large, well-known vendors. Instead, we've been working with more niche vendors that enhance our offerings. Historically, these smaller vendors may not have had a large assortment of products, but they bring a unique excitement to our mix. It's been quite interesting for us. I regularly receive updates from the divisions, and it shows that we've recently opened relationships with several vendors we didn't expect to find. We thought we had already engaged with all the major vendors, but these niche vendors have contributed significantly to our new vendor numbers in the last quarter. Unlike before, when we primarily opened accounts with mainstream vendors, we've now established relationships with some unique smaller vendors. They may not always provide huge quantities, but it's promising because it feels like we've begun relationships that will be advantageous for us in the coming years. It’s a valuable approach because, as you pointed out, it’s not just about the numbers; it’s also about the quality of the vendors we’re bringing on board.

Yes, regarding overall inventory levels, we are approaching the desired levels in our stores. However, store inventories will likely remain lower than last year due to social distancing and our reduced planning efforts. This trend is expected to stay relatively steady as we continue to focus on quality. Consequently, distribution center inventories will also be lower at the end of the year compared to last year. It’s likely that these inventories will decrease slightly as we implement strategies to lessen the impact of supply chain challenges. Just to clarify, compared to the previous two years, we experienced notable inventory increases, some of which occurred in the distribution center. When examining data over the past two to three years, the differences are not as pronounced, but we will definitely have less inventory in the distribution center than usual. While freight conditions are improving, issues with capacity and other freight challenges persist. We are effectively managing costs to ensure our inventory reaches our locations this year.

Scott, I was also asking about the payable relationship, inventory niche you've seen something change there on a more permanent basis or if that degradation that ratio might go back to something more normal?

That will be what we've seen is we had increase some of our payable terms across the board. We have decreased them but still at levels higher than what we normally would have pre-COVID that would be, to be determined, as we go through the next year. So obviously a lot as I in the prepared remarks said, a lot of our benefit had to do with A, lower inventory levels but also significantly higher payables balance. That should start to normalize, and some of that will flip as we move into next year. So it'll still be a bit higher in terms of the terms, but it is going down.

Got it. Thank you, guys. Good luck.

Thank you.

Thank you very much. Ernie, the long-term advantages in terms of the business positioning were very evident. In Q3, we clearly saw the resilience of the business, which makes a lot of sense. I wanted to inquire about two things. First, the operating margin this quarter remained strong despite the additional COVID costs. I realize, Scott, that there were a few different specific items that positively impacted gross margin, yet the operating margin in the third quarter was very much consistent with what you've achieved in the same quarter over the past two years. I'm curious if there have been any lessons learned throughout this COVID period or any efficiencies gained that might enable you to achieve higher margins after COVID compared to before.

Right. Yes, Kimberly, I understand your point. We're very pleased with the margin resulting from this situation. One of the factors helping to offset the COVID costs is the strong merchandise margin. The question remains whether this will continue to be the case after COVID. We're in a unique position, benefiting from the exit out of COVID, and this is still ongoing as we explore opportunities in the marketplace at the markup Scott mentioned, which has been quite advantageous. I believe there is still some future opportunity in this area because we will mean even more to many of these vendors now, especially since several brick and mortar retailers have closed, and we have a strong brand focus. If you're a key branded player looking to partner with a reliable retailer that isn’t overly exposed with the product and contributes to a treasure hunt shopping experience, I believe there will be ongoing benefits. However, I don't think we can sustain this level of margin for the long term. Nevertheless, I do think we've learned valuable lessons that will help us improve our purchasing strategies and work with certain vendors and inventory levels, which may enhance our markdown rates more than we anticipated. I believe our teams would agree. So, on the merchant side, which has played a significant role in enabling us to achieve our margins this quarter, we gained some useful insights. I just can't predict if we can replicate this margin level over the long term. In the coming years, I believe we will see some positive outcomes from what we have learned. Good question.

On the expense side, there are mixed results. The savings we achieved in the second and third quarters came from shutting down initiatives that wouldn't be beneficial for the long-term health of the business, such as certain advertising and capital expenditures, which we significantly reduced. While we've certainly gained from these cuts, there are areas where expenses will decrease, though it's unlikely to reach hundreds of millions in savings like travel. We have learned valuable lessons and will adopt different practices in some areas, including occupancy, which will support us in the long run. However, there are costs, such as wages in the distribution center and freight expenses, that remain uncertain regarding their future increases. Overall, it's still not clear how everything will unfold.

Especially on the expense side.

On the expense side.

Kimberly, whereas on the merchandise margin side, I think, yes, there is definitely some learnings and more tangible things we can look to the future and say we should be able to use some of that for the future. I think the expense items are a little.

Right. I do think given our cash position, and we'll have to see it's an uncertain environment, but we'll have to see how, where we end up at the end of the year going into the first quarter, but given the strength of our balance sheet at the moment, we certainly took on the COVID debt that we did in the early April timeframe that certainly we would look to as we're doing in the marketplace today, we would look longer term to try to delever the balance sheet as we move through next year and getting rid of some of those incremental interest costs that we had.

That's great. Thank you for that color. That was extremely, extremely helpful. And I just wanted to quickly follow-up Ernie on something you said in your prepared remarks, you said something about there are limits on how severely you would be willing to shift your mix of goods in the short term as more people stay at home. And I was just wondering if you could just add a little color to that, that'd be great.

We have been monitoring our category mix closely in the stores. Currently, just over half of our business is coming from the trending categories that were once boosted during the COVID environment. The reason we experienced a decline is that we cannot allow significant drops in other areas of the store. We aim for a balance in our offerings; for instance, we wouldn’t want a situation where two-thirds of the store is solely focused on home goods—that wouldn't be healthy for us. While I can't give specific numbers, over half of our business is indeed from those trending categories, and we reached that point quickly. We plan to maintain a watchful eye on this balance and continue promoting those hot categories over the next few months. Our purchasing is quite responsive to trends, and we anticipate that many of those popular categories will remain popular for at least the next six months, while home goods will sustain their appeal for even longer. Our team is doing well to enhance the non-trending areas, ensuring a blend of excitement and value. They are focusing on offering a range of product levels and brands to drive sales in these areas. We want to avoid making drastic shifts in our mix too quickly, as that could lead to challenges, which is something retailers sometimes experience.

Yes, Kimberly, I would like to add that we are making better purchases in both trending and non-trending areas. This might be unexpected, but it is happening, and the second point is...

Kimberly, you can see that Scott has been trying to get closer to the merchandising area of reason.

I'm not going to engage in that debate during the call, but I want to return to what Ernie mentioned about market share opportunities. As Ernie said, we are still actively involved in all of those non-trending categories. Once customers start returning, our average basket size has increased because they are adjusting their spending as they become more comfortable. This will lead to more shopping visits from our existing customers, as well as new ones. Customers who have been shopping are currently purchasing from other places, whether online or at mass merchants, and we expect to win back some of that business. We believe many of the benefits others are experiencing will shift to our stores, as customers seek the value we offer in those non-trending categories. Therefore, we anticipate regaining market share not only from closed stores but also from competitors.

Absolutely.

Who have benefited that once customers shop more in and want to and are comfortable going and doing multiple visits. We're going to get more than our fair share.

Excellent. Thank you, both.

Good morning, thanks for taking my question here. I had two questions, so one on HomeGoods, any thoughts at this stage on the potential for that online business as impacts as a percentage of the total and anything on the margin implications of that and given the cost of shipping some of that Home products? And then my second question which is a follow-up on this great discussions, Scott any thoughts at this stage on how much of the headwind that could be in the medium term as we go into next year or a little too early to talk about that?

I want to clarify my thoughts on HomeGoods. We are in the early stages of planning to launch HomeGoods.com in the second half of next year. At this point, we are not able to provide any specific business projections. Our hope is that the online platform will complement our physical stores. Our approach to HomeGoods.com will differ from that of other home retailers because we have numerous brick-and-mortar HomeGoods locations. We intend to encourage visits to our stores from online purchases, promoting not only returns but also potential in-store visits alongside straightforward HomeGoods purchases. As we're still about a year away from the launch, we do not have any concrete numbers to share regarding this. Additionally, I missed the second part of your question concerning margins or HomeGoods.

Yes, just the margin implications on HomeGoods specifically of building an online business given some of the ...

Yes, clearly it is not the same. It is a, I guess you would call it, a de-lever right, Scott to begin with without a doubt. Our mission here though is for the future. Again, it's more of a longer-term play to capture market share over the next five years. And there are so much, it's a bit of a tiger by the tail I would call with HomeGoods; anyone that knows HomeGoods customers and their passion for it knows we are, I think, going to do a decent amount of sales fairly quickly. We're also going to try to help with the profit though we're going to operate this differently. I can tell you this, we're going to set it up where it's being done as we would call it in conjunction with our HomeGoods business where we're going to take inventory that's been bought for HomeGoods and use that to funnel to our online business. So, we're going to be more efficient in the organization that we set up there from a cost perspective, different than most online businesses when you set it up as an entirely separate team. This will have only a small separate team where it's working in conjunction with our planning and our inventory HomeGoods and basically peeling the goods off from that. So that's going to be a really neat approach for us on it; so we're very excited about it.

Yes. I don't want to end on a negative note regarding costs, but you mentioned the issue. One major factor affecting us this quarter is the closure of 471 stores due to government mandates and current guidelines. These closures will likely impact our sales by about 3% to 4% through early December, which represents a substantial financial loss and is the most significant factor affecting our fourth quarter. Additionally, you pointed out the increase in freight costs. We are currently facing higher rates, though we hope these will decrease as we progress through next year. However, this may lead to an additional 30 to 40 basis points of incremental pressure in the fourth quarter. Still, our team has been doing an excellent job of getting products delivered to our distribution centers.

Thank you, Alex.

Great. Thank you for all the color.

Thank you, Alex. Okay. So I think we've reached the end of our call. I thank you all for joining us today. We will be updating you again on our fourth quarter earnings call in February. And from the team here at TJX, we hope you all stay well and we wish you good health. Take care everybody.