TJX Companies Inc (TJX) — Q1 2022 Earnings Call Transcript

Thank you, Ivy. 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 31, 2021. 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. As we’ve done throughout the pandemic, I’d like to start our call today by saying how truly grateful I am for the hard work and dedication of our global associates and their continued commitment to our health and safety protocols. I want to give special recognition to our store, distribution center, and fulfillment center associates who continue to physically come into work. In recognition of their continued efforts, we awarded a vast majority of them an appreciation bonus, which was the fourth appreciation bonus that we have paid during the pandemic. While the health crisis is beginning to improve in some parts of the world, there are many areas that are still facing challenges or have become worse. Our hearts go out to everyone whose lives have been impacted by this virus. We are hopeful that more people around the world will have access to the vaccine in the coming months and that we can move past this health crisis soon. Moving to our business operations, during the first quarter, we were very pleased that our U.S. stores were able to stay open. However, we continue to have a significant number of our stores in Europe and Canada that were temporarily closed at certain times throughout the quarter due to government mandates. Currently, approximately 300 stores remain temporarily closed, all of which are in either Canada or Europe. Around the world, we continue to prioritize the health and well-being of our associates and customers and our stores, our distribution centers and our offices. Now, I will recap our first quarter results. First, I am extremely pleased that our overall open only comp store sales when compared to fiscal 2020 increased 16%, which well exceeded our plans. We believe we saw a benefit from consumers feeling more comfortable leaving their homes, visiting our stores and being happy with the brands and values they found. Our home businesses across all of our divisions continued their phenomenal sales trends. Further, we saw strong open only comp increases in many other categories and positive open only comp store sales in overall apparel. Open only comp sales were also outstanding across each of our divisions, which indicates to us that our value proposition continues to resonate in all of our geographies. I’ll talk more about our divisional performance in a moment. Next, overall sales of $10.1 billion were a first quarter sales record, despite the temporary closing of our stores for approximately 14% of the quarter. We are extremely pleased that we are seeing our most loyal customers return to our stores in the U.S. and that new shoppers are discovering our great values and exciting treasure hunt shopping experience. All of this gives us great confidence that we are set up extremely well to continue driving sales and gain additional market share over the medium- to long-term. Third, merchandise margin remains healthy. The buying environment is excellent with the marketplace loaded with a great selection of merchandise across good, better, and best brands and trending categories. Our buyers are doing a tremendous job sourcing quality branded merchandise to keep up with the strong consumer demand that we have been seeing. Lastly, first quarter earnings per share of $0.44 were also well above our plans, despite a larger than expected sales loss, as our non-U.S. stores were temporarily closed more than we had anticipated. Now to our divisional performance, which is again compared to fiscal 2020, beginning with Marmaxx. Marmaxx’s open only comp store sales increased to an outstanding 12% and overall sales increased 14% versus the first quarter of fiscal 2020. Marmaxx’s home business continued its excellent performance with a comp increase similar to the HomeGoods as shoppers continued to spend on their homes. We were also very pleased to see a comp sales increase in our overall apparel business, which is driven by strong demand in select categories. We believe our apparel sales benefited from wardrobe refreshing as more consumers began resuming more normal activities. We feel very good about Marmaxx’s sales momentum and our ability to flex the merchandise mix to the category shoppers want. At HomeGoods, open only comp store sales increased a phenomenal 40%. During the quarter HomeGoods and Homesense sales were remarkable across all major categories and geographic regions, as their eclectic mix of home fashions from around the world continue to resonate with consumers. Similar to Homesense sales at Marmaxx, we believe HomeGoods sales continue to benefit from consumers spending more time in their homes during the health crisis. We have been aggressively investing in the growth of our home division for many years and are convinced we are set up very well to build upon our market leadership position in the United States. While Canada continues to face challenges with store closures, we are very encouraged with the sales trends we have seen when our stores are open. TJX Canada’s open only comp store sales increased 9%. Open only comp sales at our Homesense banner and home sales at Winners and Marshalls were also in line with the increase we saw with our HomeGoods division. Shoppers love our great values in Canada and we are very confident that this division is well-positioned to return to and exceed their pre-pandemic sales levels once we are beyond this health crisis. Now, The TJX International, like Canada, Europe faced continued store closures and we expect them to continue into the second quarter as well. However, during the limited time our stores were permitted to be open, customer excitement was very high and response for our values was fantastic. We were very pleased with TJX International’s 11% open only comp store sales increase. Given the length of time our stores were closed in Europe, we saw significant pent-up demand when we reopened later in the quarter. As the only major brick-and-mortar off-price retailer of significant size in Europe, we see an opportunity to scale our business and capture a bigger piece of the European retail market over the long-term. In Australia, where our stores were generally open for the entire quarter, comp store sales were extremely strong for both our apparel and home categories. As to e-commerce overall, we saw terrific growth over first quarter fiscal 2020 sales levels in both the U.S. and U.K. We are still on track to launch homegoods.com later this year and are looking forward to offering consumers even more exciting home fashion items at great value online. Moving on, while the health crisis persists, we are confident that the core strengths of our off-price business model will continue to help us navigate through the current environment, while setting us up very well to succeed in a more normalized environment. Let me take a moment to highlight these strengths. First, is our relentless focus on value, we believe our value proposition, which is a combination of brand, fashion, price, and quality, is as important as ever to consumers. Second, is our world-class global buying organization of more than 1,100 buyers. These buyers are located in 12 countries across four continents and sourced from a vast network of approximately 21,000 vendors. We see our global buying offices and reach as a tremendous advantage, particularly in an environment where travel remains limited. Consumer demand across our home businesses has been especially strong. So, our ability to successfully leverage our global buying has been a great benefit. We believe our 500-plus homebuyers around the world allow us to offer consumers a truly global differentiated merchandise mix versus other large retailers. We strengthened our relationships with many of our vendors and have added thousands of new vendors for apparel and home product over the past year. All of this allows us to offer a fresh and exciting mix of quality-branded merchandise to our shoppers every time they visit. Next, the flexibility of our buying, store format, and distribution network allows us to take advantage of consumer trends and hot categories as consumer demand changes. We also reach a very wide customer demographic in urban, ex-urban, suburban, and rural markets. With our fast-growing inventories, our customers can discover something new in-store and online every time they visit. Lastly, is our global presence, with nearly 45 years of operating expertise in the U.S., 30-plus years in Canada, and more than 25 years in Europe, we are an off-price leader in every country we operate in. Even in Australia, a country we have entered more recently, we are an off-price leader. We have spent decades establishing relationships with vendors and landlords and building out our global buying offices, distribution networks, systems, and infrastructure. Further, we have expansive country-specific knowledge of consumer shopping habits and have earned customer loyalty. We believe our well-established global off-price retail model and level of international expertise is a tremendous advantage, and our size and scale would be very difficult to replicate. Now, I’d like to walk through the reasons why we are confident that we can drive sales and traffic growth in a normalized environment and why we continue to see a significant opportunity to increase our market share across each of our divisions. First, we believe the appeal of our entertaining treasure hunt shopping experience gives consumers a compelling reason to shop with us. Based on what we’ve seen for decades, including the past year, in-store shopping is not going away. We see our stores as a desirable destination for consumers seeking some stress relief or, quote, me time, unquote, and also a great place to shop when they are seeking inspiration and looking to discover new things, which is difficult to replicate online. Second, we see a significant opportunity to grow our global store base in each of our divisions. In total, we believe we can open more than 1,600 additional stores to grow to about 6,275 stores in the long term, just with our current countries. Availability of real estate is terrific, and we see plenty of opportunities to open new stores or relocate existing stores. Further, we believe our strategy of locating stores in convenient, highly accessible locations makes it very easy for shoppers to find and visit us. We are anticipating incremental traffic once consumers return to their workplaces and go out more, as they will be passing by our stores much more frequently. Next is our focus on marketing to attract new shoppers while staying top of mind with our existing customers. This year, we have already launched new campaigns across television, digital, and social media platforms for a number of our banners. These campaigns continue to reinforce our value leadership while also highlighting discovery, fashion, and quality. I hope you have seen them; the creative is excellent. Let me take a moment to highlight a couple of them. First, we took a unique approach for Mother’s Day and created a multi-brand music video in the U.S. that was highly successful and was viewed more than 17 million times on YouTube over a two-week period. We also did an integration with the NBC prime show, The Voice, where each of the top 20 contestants were styled head-to-toe with products from Marshalls and performed a powerful segment lasting over two minutes. This work continues to reflect our leadership in fashion and value and helps us show that our stores can be for everyone. Further, we continue to see strong overall customer satisfaction scores where we are open, including on our ongoing health and safety protocol measurements. Lastly, our research tells us that overall, we continue to attract new shoppers of all ages into our stores, including a significant amount of Gen Z and millennial shoppers, which we believe bodes well for today and in the future. Fourth, we see a great opportunity to capture a bigger share of the consumer’s wallet due to other retailers closing stores. We also believe that these store closures may lead to even better product and real estate availability and more favorable lease terms. Lastly, we are investing in new stores and remodels in our distribution network and systems to ensure we have the infrastructure in place to support our global growth plans. In closing, I want to again recognize the exceptional talent that we have across this entire company. With outsized open-only comps in the first quarter, our organization really stepped up from buyers who successfully chased the goods in the marketplace to our associates in planning and allocation, distribution centers, logistics, and store operations. Each of these groups has a vital role to play to ensure our merchandise flow and keep up with the consumer demand we have been seeing. It’s the collective efforts of all of our associates and their dedication to TJX that brings our business to life for our customers every day in all kinds of retail environments. Our outstanding first quarter results tell us that consumers are seeking out our branded quality merchandise and great values. Clearly, they are enjoying our entertaining treasure hunt shopping experience. Overall, open-only comp store sales trends for the start of the second quarter remained similar to the first quarter. Looking ahead, I am convinced that TJX is very well-positioned to emerge from this health crisis in a position of great strength. We see numerous opportunities to continue our global growth and are excited about the runway for growth that we see ahead for TJX. 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 continued commitment to our business. I’ll start today with some additional details on our first quarter results. As Ernie mentioned, overall open-only comp stores increased an outstanding 16%. As you described in the press release, our first quarter open-only comp store sales compare fiscal 2022 sales to fiscal 2020 sales. In the first quarter, we continued to see a very strong increase in our average basket as consumers put more items into their carts. In the U.S., where we were opened the entire quarter, customer traffic compared to fiscal 2020 increased for the first time since the start of the pandemic. At Marmaxx, we saw a significant improvement in customer traffic in the fourth quarter, and at HomeGoods customer traffic remained outstanding. Overall sales for the first quarter increased 129% over fiscal 2021, as stores were closed for approximately 50% of the first quarter last year. More importantly, when comparing to fiscal 2020, first quarter sales increased a very strong 9%, despite the negative impact of approximately $1.1 billion to $1.2 billion of lost sales due to the temporary closings of our stores across TJX for about 14% of the quarter. These closures were primarily in Europe, which was closed for about 76% of the quarter, including essentially all of February and March, and in Canada, which was closed for approximately 25% of the quarter. Pre-tax margin for the first quarter was 7.2%, and merchandise margin was up slightly compared to fiscal 2020. During the quarter, we were very pleased with our strong mark-on and lower markdowns. However, these were mostly offset by significantly higher freight costs, which we expect to persist for the remainder of the year. Moving to the bottom line, first quarter earnings per share were $0.44. As detailed in our press release this morning, we believe the temporary store closures in Europe and Canada during the first quarter resulted in a significant loss of profit dollars, with an estimated negative impact to earnings per share of approximately $0.21 to $0.24. Additionally, I want to remind you that our first quarter pre-tax margin and earnings per share reflect some significant expense headwinds compared to the first quarter of fiscal 2020. These include approximately $200 million of net costs related to COVID, approximately 40 basis points of additional interest expense, and incremental costs from freight, supply chain, and wage pressures. As for inventory, it was up 3% last year, and store levels are where we want them to be. Our buyers are doing a great job sourcing merchandise and have been able to chase the goods we need to satisfy consumer demand. To reiterate, the availability of merchandise is excellent. Moving on to our cash flow and liquidity, we ended the quarter in a very strong liquidity position with $8.8 billion in cash. With our strong liquidity, we took several proactive actions to deleverage our balance sheet and reduce our annual interest expense. First in April, we paid down the $750 million note that was due to mature this coming June at par. Secondly, this morning, we announced make-whole calls for our $1.25 billion principal outstanding 3.5% notes maturing in 2025 and our $750 million outstanding 3.75% notes maturing in 2027, both of which were issued last April. As a result of this action, we are expecting a pre-tax debt extinguishment charge of approximately $250 million in the second quarter. We expect the net results of both of these actions to be a $2.7 billion reduction in our outstanding debt and over $90 million of annualized interest expense savings. Further, after these actions and including the tender refinancing this past November, we expect the average interest rate on our outstanding debt to be about 2.5%, which is in line with our pre-COVID level. Lastly, we declared a dividend of $0.26 per share in the first quarter. In the second quarter of fiscal 2022, we’re planning to declare a dividend at the same rate, subject to Board approval. Now to the second quarter, as a point of reference for the start of the second quarter, overall open-only comp store sales trends remain similar to the first quarter. For overall sales, we currently have approximately 300 stores that are temporarily closed. Based on what we know today, overall, we expect stores to be closed for approximately 3% of the second quarter, which includes Canada being closed for an estimated 17% of the quarter and Europe being closed for about 7% of the quarter. We are planning a $275 million to $325 million negative impact to our overall second-quarter sales due to the store closures. These expectations could be negatively impacted further if current mandates are extended or new ones are put in place as they were last quarter. At this time, we are not planning any significant store closures in the back half of the year. In closing, we feel great about our first quarter results and the momentum of our business. We believe that a growing top line and a strong merchandise margin are excellent indicators of a healthy retailer. Additionally, we have a very strong balance sheet and are in an excellent financial position to invest in our business to support our growth plans. Now we’re happy to take your questions. As we do every quarter, we’re going to ask you that you please limit your questions to one per person and one part to each question. We respectfully ask that everyone stick with this request to both keep the call on schedule and so that we can answer questions from as many analysts as we can. Thanks, and now we will open it up for questions.

Thanks for taking my question. Good morning. Really great quarter. I would love to actually hear more on the traffic side of the equation. We know you guys do a great job once you get people in stores. Can you talk a little bit about the consumer’s willingness to come back to the stores? How that’s been building? Is it vaccine-related? Are you seeing that older customers come in as they get vaccinated and start to return to in-person shopping again? Thanks, Scott. Thanks, Ernie.

Yeah, great question, Omar. Traffic has been very strong. Scott will provide some insights on the trends, but there hasn’t been any notable change in age demographics. We have a very diverse age range among our customers, which makes significant shifts less likely for us. Scott, could you expand on the traffic trends?

It's challenging to pinpoint the exact reason for the age demographic. However, over the past few quarters, we've noticed that a significant number of our new customers are skewing younger, particularly at HomeGoods. Overall, once we finalize and assess the current results, it's likely that the average age of customers in both stores will be younger than it has been. This is a positive trend. After overcoming some weather-related issues mentioned in our previous call, the traffic patterns have remained robust. Specifically, the months of February and March have shown consistent strength, as mentioned by Ernie, with sales continuing at similar levels. This applies especially to Marmaxx and HomeGoods, despite the store closures we've experienced. Additionally, customers are adding more items to their baskets, and the overall traffic remains strong and steady.

Thanks.

Thank you.

Great and congrats on the improvement as well.

Thank you.

So, it’s kind of a two-part question, probably, more for Scott. I guess, first on merchandise margin. So the improvement this quarter relative to pre-pandemic despite the freight, I thought, was really impressive. I guess, so first, just sustainability or your ability to continue that trend in your opinion? But then second, at the EBIT margin level. So I think three months ago, Scott, you laid it out well, there’s a lot of moving parts. But I think you basically said at a three comp, you see 30 basis points to 40 basis points of underlying margin pressure, but then we needed to consider freight, supply chain, and COVID costs this year. So am I thinking about these pieces right and any factors or changes to these factors to think about now that we’re three months later?

Matt, I agree with you, much of that is for Scott. I’ll add my thoughts on the merchandise margin, which remains healthy. We're seeing positive alignment with our model, and I credit the teams for their efforts. We entered with adequate liquidity, enabling the teams to operate effectively across all divisions, particularly Marmaxx and HomeGoods, where they are buying in line with current trends. The buyers have been adept at making strategic purchases in the market, which has been beneficial. Strong sales have positively influenced our markdown rate and, in turn, our merchandise margin. As I mentioned earlier, we are making advantageous purchases across various vendor levels, particularly in trending categories. Certain categories are outpacing store performance, and the merchants have successfully bought into those at optimal costs and prices, which is crucial given our sensitivity to retail pricing. Nevertheless, I anticipate challenges in the upcoming third quarter as we face comparisons to an artificially inflated margin from the previous year due to the COVID shutdown. This may result in some difficulties with margins for a few months, but I believe we can outperform expectations despite these challenges. Now, I’ll pass it to Scott to discuss margins.

I just want to reiterate what Ernie mentioned about the merchandise margin in the latter half of the year. If we look back, especially in the second quarter, we feel optimistic about the overall merchandise margin, particularly when we exclude freight from the calculations compared to two years ago. Last year's third quarter, where Ernie made a comparison to 2021, is quite relevant regarding the mark-ons and markdowns. We also faced some technical challenges that led to accruals related to markdowns and shrink, which we reversed in the year's second half. These issues are not related to fiscal 2020, but when analyzing comparisons to last year, we recognize that there were benefits in the latter half that we won't see repeated.

That’s a good point, Scott. So just to clarify, Matt, what I was talking about on the challenge will be against in FY 2021, not against 2020 as much.

So, the other aspect regarding the two-year flow-through is difficult to isolate, especially when considering the quarter we just had, which includes COVID costs that are still significantly impacting us. I expect those costs to moderate, and Ernie can provide more details as we progress through the second quarter and the latter half of the year. At the moment, freight costs remain stubbornly high, and like everyone else, we are still assessing the situation. Compared to what we discussed three months ago, freight costs are likely to stay elevated due to ongoing driver shortages and rate increases that are anticipated to be higher than originally expected. This issue appears to persist. On a positive note, as Ernie mentioned, we have been successful in securing goods, although at a higher cost. Our inventories are well-managed, and our planning and allocation teams are effectively distributing those goods, as evidenced by our sales performance. However, wage costs have been under pressure, particularly in our distribution centers where we have had to raise wage rates. On a brighter side, despite facing challenges in certain areas, we have managed to staff our stores and distribution centers close to the levels required to meet demand, though there is some deleverage compared to the previous year. Therefore, it’s challenging to draw clear comparisons with lost sales in Europe and the COVID costs when determining the specific impacts on sales at this time.

Hey. Thanks, guys. I want to talk about Marmaxx, specifically. Sales were up about $800 million or like 14.5% versus the first quarter of 2019, or you call it 2020, but margins are down 130 basis points. So I’m just curious if you can talk specifically within that business, how the deleverage, where that’s coming from, and what sort of increases you might need to see versus 2019 for margins to stabilize, or is there some point in the year where you see the pressure points abating on that margin? Thanks.

Yeah.

I can definitely address the first quarter. Regarding the second quarter, we need to consider the impact of COVID costs and how those have decreased. We also need to evaluate other expenses, and Ernie can provide some insights into the connection between apparel sales and average retail expenses.

But COVID cost is a big reason for the deleverage, as well as others, but…

Yeah. The COVID costs alone to Ernie’s point in and of itself was more than the delta of the 130...

Right.

I don't want to be too direct about that. We clearly leveraged those sales. However, those two factors essentially balance each other out, and the remaining aspects could improve again in the latter half of the year. Our average retailer performance was down, but it did improve as we progressed through the quarter alongside an uptick in our apparel sales. Additionally, the rest of the decrease was attributed to costs associated with our distribution center and wages. Essentially, the primary difference that offset one another was the COVID costs and the leverage, while we still faced a reduction due to wage expenses in the distribution center.

Thank you. Scott, I wanted to discuss the international situation. Comparing the first quarter profit to two years ago, there has been a negative swing of about $250 million, moving from $28 million in operating income two years back to a $222 million loss this quarter. If we believe that international operations will return to pre-pandemic levels, it suggests that overall operating income in the first quarter would have increased by roughly 10% compared to two years ago, even accounting for COVID expenses, freight inflation, wages, and other factors. It seems that the primary impact on the Q1 profit and loss statement stems from international operations, as everything else appears to balance out and show decent profit growth when we remove that factor. This leads me to think that you might be managing to offset many of those cost pressures. Is that correct? Additionally, as we progress through the year and COVID costs start to diminish, could it mean that margins might return to, or even exceed, the levels seen in 2019? Thank you.

There are many hypotheticals to consider. I believe you were discussing the first quarter, where the main contributors to the challenges were the costs related to COVID and the losses from sales in Europe.

Europe and Canada.

Yeah. With Europe being the bigger piece of that. So that is correct. As you would expect, you would offset a good chunk of that on the high average comps that we did get. And then, again, but the reason why we still would go down is, you still have higher than normal cost increases both in the wage and…

The freight.

And the freight in DC, so...

So, Kimberly, at a high level, your perspective aligns with mine. If we had included Europe and Canada this quarter, we would have observed significant differences. As Scott mentioned, we exceeded our sales expectations, which means we would be considering a 16% increase in open-only comparable sales, especially with the rest of Europe. If we achieve those kinds of comparable sales, we would have a different situation, potentially bringing margins back to previous levels, but we would need to see those exceptional sales levels sustained. Regarding your other point, as Scott noted, we are examining the COVID costs closely, and as we progress each quarter and the environment stabilizes, we will implement improvements in that area, which will be beneficial. We believe there is potential for sales growth in all areas. Additionally, on the cost side, our average retail prices have been stabilizing. Even looking ahead into the second half of the year, it appears they will continue to moderate, as we are receiving more quality brand goods in our orders for the third quarter. This should positively impact our average ticket size and help reduce processing expenses. It's a complex situation, but it's a very good question.

Great color. Thanks.

Thank you.

Good morning. My congrats as well on the improvement. I wanted to dig in a bit more on the topline and maybe you can discuss a bit more of what you’re seeing in terms of category standouts, in particular, is there any sight of the strength in home decelerating? And I would love to hear more about your ability to really stay in stock and to what extent you’re really out needing to case product in the marketplace to keep up with this robust demand?

Our home business remains remarkably consistent, as highlighted earlier. We're achieving 40 comparable store sales similar to what we did in the first quarter across all divisions, including our full family stores in T.J. Maxx, Marshalls in Canada, and Homesense. There is broad consistency throughout our entire loan business, including big-ticket items like furniture, rugs, and decorative accessories, with no single category standing out. I credit our teams in planning and allocation; they’ve been effective in securing inventory, which brings me to your question about the deceleration in home sales. We haven't observed any significant decline, and while we don't expect to maintain the unusually high levels seen in the first quarter indefinitely, we believe there's potential to remain close to those levels in the next quarter. We're also managing our stock levels well, and on the apparel side, we're beginning to see improvements. You inquired about other standout categories, and we have several apparel segments performing well as we move into the second quarter. Typically, when the weather changes and apparel demand increases, home sales might dip, but our home business has held steady at those 40 comps, and apparel has gained traction. Our product availability and flow have been well-managed, thanks to our teams' strong execution, especially in logistics, allowing us to sustain a 16-comp growth. I appreciate your question because it's a unique time for us, and I want to acknowledge the efforts of all TJX associates working to make this happen. We’re entering the second quarter just as strong as we were in the first. I hope that provides the clarity you were looking for.

Yes. Well, kudos to the team. Thank you for the color and best of luck.

Thank you, Paul.

Hi, everyone. Congratulations. Scott, I have two questions regarding the cost structure and COVID-related expenses. You mentioned that the costs this quarter are $200 million, down from $270 million in the previous quarter. What are your expectations for those costs for the rest of the year? I assume they will decrease further due to the reopening and vaccinations, but I’m interested to hear your thoughts on that. Additionally, my rough calculations suggest that your SG&A per store, excluding COVID costs, is actually lower than it was two years ago. Are you implementing measures to operate stores more efficiently? Do you believe the cost reductions will be sustainable as we return to normal? I'm curious about your views on the cost structure on a per-store basis.

Yes, that’s a great question. Regarding COVID-related costs, we currently expect them to decrease slightly in the second quarter. However, as Ernie mentioned, we will assess the situation based on the environment, and we anticipate a more significant reduction in the third and fourth quarters.

In the third and fourth quarters, as the world stabilizes, we have focused on maintaining the safety of our associates and customers. We have implemented greeters at the entrances of our stores, which has incurred additional costs but has also improved customer service perception and safety. We believe these extra costs have enabled us to actively drive sales. We plan to gradually reduce these measures rather than making abrupt changes, as they have positively impacted our revenue. However, we recognize the need to moderate our approach, and we will carefully assess this as we approach the third and fourth quarters. I wanted to provide this information to clarify why we will not be making swift changes, given that it has been beneficial for our sales performance.

Regarding your question about SG&A, I will need to follow up with you. We are up around 4% on a per store basis compared to 2020. However, this quarter it's challenging to separate those figures because we still have significant expenses in Europe and Canada without the expected sales, along with outside sales in Marmaxx and HomeGoods. Overall, we saw an increase of about 4% compared to fiscal 2020.

Got it. Thank you, guys.

Hey, guys. Thanks for all the detail and taking my question here. I guess, Scott, just a simple question to try and help me boil all this down. Can you help us think what the SG&A dollars are for the year and what you think COVID costs are for the year in the budget? And then with all the noise and you laid out the closures, I think, as we take the inputs you gave us, you probably excluding the closures would have been about $2 billion higher on sales versus first quarter fiscal 2020. And then when we add back your $0.21 to $0.24 that you pointed to, which was, I think, only for the closures, you’d be at about a 9.9% to 10.4% margin in the quarter, compared to the 10.1% in first quarter two years ago? So with that as a starting point, I know you’ve been asked to go through margins in a bunch of different ways. But with that as a starting point from here, it sounds like the incremental puts and takes all get sequentially better going forward except for freight, which you said you now got visibility that it’ll be tough. But as you look at 2Q, 3Q, 4Q, you see the COVID costs coming down, international reopening, some of the AUR tailwinds, some of the mix moving back towards apparel. Am I thinking about that right, that if we kind of reorient to the first quarter last year that way that we should see sequential improvement in the underlying margin going forward through the model?

A lot of this will depend on our ongoing evaluation of COVID-related costs. We do not anticipate significant changes in cost savings, but expect a moderation in both dollar amounts and percentage impact on sales. As Ernie mentioned, a key factor will be the merchandise margin, which will influence our mark-on, markdown, and sales levels. If we see increased sales and can negotiate better purchasing prices, the biggest uncertainty will be freight costs in the latter half of the year. Additionally, while we are cycling through costs related to wages and distribution as we expand our facilities and opened several new processing locations last year, we do not anticipate significant changes in supply chain or wage costs at this time. The uncertainties mainly lie with the merchandise margin and freight, especially as COVID costs decrease. Therefore, our potential improvement in overall margins hinges on how much COVID-related expenses drop and our sales levels; maintaining high sales would lead us to expect a higher pre-tax margin.

Great. Thank you so much. Ernie, I think, in one of your answers to the questions, you mentioned something about sales upside, and I think in the press release, you mentioned that you’re seeing consumers begin to resume more normal activities. Can you just talk about whether the strength in the quarter that you’ve seen to date, how much do you think is still a tailwind from stimulus and how much is maybe just reopening consumers really just getting excited about going out and spending other things? And what the implication is for sales upside in Q2 and Q3 as you look out and the potential for sales growth rates to remain, to your point, unusually high?

Great question. When we evaluated the first quarter, it’s challenging to quantify all the specific data, but we believe that the stimulus checks played a role along with pent-up demand from people who had not been shopping. There’s also an aspect of "revenge shopping," where consumers are eager to go out and enjoy themselves again. However, we have to consider the impact of ongoing store closures. Therefore, while a portion of our sales has been influenced by the stimulus, we do not expect to enter the second quarter with the same trend. That's why we included a specific note in our release about how we are starting this quarter, emphasizing that the overall impact of stimulus checks is not the only factor at play, as there are also other challenges within our business model, like store closures. I believe our business model resonates even more now than it did before COVID, as consumers, especially after the stresses of the past year, value the "treasure hunt" experience, which I referred to as "me time." We've offered exciting merchandise, which aligns well with this period, and I believe this is the main reason behind our sales. This leads me to think there is potential for further sales growth as we look ahead.

Yeah. I’d…

You know what I mean, it’s not just from the different stimulus government packages that have taken place, where we wouldn’t be seeing what seems to be a pretty consistent trend.

I think it relates back to what Ernie mentioned earlier, where in the third, fourth, and first quarters, our home sales were a significant factor in our success. The home sales have remained strong, supported by an increase in apparel sales since the fourth quarter. This has been a considerable benefit as we continue to see positive results. The stimulus effect Ernie referred to seems to have been more relevant in March and April and is likely diminishing. Currently, the demand relates to consumers who didn’t purchase much apparel in the first and second quarters of last year, which I believe is contributing to our current strength.

To add one other point regarding our market share gains, as I look ahead through the remainder of the year, we continue to have significant advantages in our home business. We have learned to enhance our collaborations with merchants, many of whom are now operating virtually in a highly effective way. Our home division boasts over 500 buyers who are collaborating more intensively than before. Additionally, our overseas satellite offices are purchasing more merchandise for us than they did previously. This allows us to offer a more eclectic mix of home products, which is advantageous as consumers can buy items immediately, particularly furniture that they can try out. Given the various delivery issues that have arisen, this is definitely a plus. Alongside the apparel sector, which Scott mentioned, and other trending categories like beauty, I commend our team for their excellent collaboration across divisions. The experiences we have gained give us a slight edge compared to our pre-COVID performance and enhance our ability to leverage the knowledge of our various divisions. I realize this is a lengthy explanation, but it highlights an additional aspect that makes us optimistic about the future.

We mentioned that we are generally performing well, particularly at HomeGoods and Marmaxx, where we see consistent sales across different regions, as well as based on household income. Our stores, whether at HomeGoods or Marmaxx, with age ranges from over 10 years to even 20 and 30 years, are showing significant comparable sales. This broad base of sales is positive, and importantly, in HomeGoods and Marmaxx, over 90% of our stores are located in suburban, ex-urban, and rural areas, which all demonstrate strong performance. The only area that isn’t performing as well is our urban stores, but we have relatively few of them.

Got it. Thank you for all the detail.

Thank you.

Many congrats on managing through the quarter and congrats on the topline momentum. Scott…

Thank you.

Has the guidance for freight and supply chain costs worsened since the fourth quarter outlook? I believe it was previously estimated at a 50 to 60 basis point pressure relative to the fiscal 2020 year; has that changed? Additionally, regarding the leverage point in the model and the ongoing COVID-related costs coming out of SG&A, what do you consider the comp leverage point to be? Is it four to five in the model? How do we plan to return to the 10.6% operating margin from fiscal 2020?

We have been discussing for some time the various factors affecting our breakeven point in terms of returning to profitable margins. We expect our margins to improve in the latter half of the year and anticipate a significant increase next year. However, the exact level of our margins will depend on our sales performance in the second half and the impact of costs related to freight, supply chain, and wage pressures. We do believe that both the second half of this year and next year will show a considerable rise in our pre-tax margins. Regarding freight, while we are not finalized on specifics, we expect freight costs to remain higher than we initially predicted three months ago.

Got it. So worse than the 60 basis points to 70 basis points of pressure?

We should have given. I don’t remember giving the basis points, but we would be worse. It would just be worse than what we would have thought.

Got it. Thank you.

If you look, John, around the industry, it’s just the freight rates continue to escalate.

Understood.

Yeah. Okay. I believe that was our last call. I would like to thank you all for joining us today. We’ll be updating you again on our second quarter earnings call in August and from the team here at TJX, we hope you all stay well and we wish you good health. Take care.