TJX Companies Inc (TJX) — Q3 2022 Earnings Call Transcript

Thanks, Missy. 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 United States copyright and other laws. Additionally, while we have approved the publishing of a transcript of this call by a third party, we take no responsibility for inaccuracies that may appear in that transcript. 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 once again thanking our global associates for their continued hard work and commitment to TJX. As I've said before, I want to give special recognition to those associates who have been physically coming into work in our stores and distribution centers throughout the pandemic. In recognition of their continued efforts, we have awarded a vast majority of them an appreciation bonus, which was the sixth appreciation bonus we have paid during the pandemic. Now to an overview of our third quarter results. I am extremely pleased with both our top and bottom line performance in the third quarter. Overall, open-only comp store sales when compared to fiscal 2020 or calendar year 2019 increased an outstanding 14%. Importantly, our open-only comp sales growth was just as strong at the end of the quarter as it was at the start of the quarter. Once again, we saw phenomenal comp growth in our home categories across each of our divisions as well as a mid-single-digit comp increase in our overall apparel businesses. Clearly, our great brands and amazing values continue to resonate with shoppers. Overall sales were $12.5 billion, which was over $2 billion more than the third quarter of fiscal 2020 and total segment profit increased by $285 million over the same period. Our strong results are a testament to our flexible off-price business model and our associates. I truly believe we have the best business model and the best people in retail. Throughout the third quarter, in the midst of uncertainty in the marketplace around supply chain delays and consumer behavior, our buying, planning and allocation, logistics and store operations teams all did an outstanding job. They ensured our stores had plenty of merchandise for our shoppers every time they visited. Our flexible model has been a tremendous advantage in this environment. We've been able to expand and contract categories and merchandise in our stores so that customers have full racks and shelves to shop when they visit. I am very happy with our third quarter pretax margin increase. Our excellent sales growth and strong merchandise margin increase more than offset the outsized expense headwinds that we have been facing. Our strategy to surgically raise retails on select items is well underway, and we believe it is working very effectively as shoppers continue to see outstanding value every day. Lastly, third quarter earnings per share increased an outstanding 24% to $0.84. As we look to the fourth quarter, overall open-only comp sales are off to a very strong start. We continue to see excellent availability of merchandise in the marketplace and are extremely happy with the mix of good, better and best brands that we are offering consumers. We are confident that we'll have plenty of great merchandise in our stores and online this holiday season, and we will be emphasizing this in our marketing. I'll talk more about the fourth quarter in a moment. But first, I'll turn it over to Scott to cover our third quarter financial results in more detail. Scott?

Thanks, Ernie, and good morning, everyone. I'd like to echo Ernie's comments and express our sincere gratitude to all of our global associates for their continued hard work and dedication to our business. I'll start today with some additional details of our third quarter results. As Ernie mentioned, overall open-only comp store sales increased 14% over fiscal '20 and overall sales increased 20% over the same period. This quarter marks the third straight quarter that overall comp sales increased mid-teens or better. I want to recognize the excellent execution on the part of our teams for managing through the supply chain issues facing all of retail and ensuring a consistent flow of exciting merchandise to our stores to support the outsized comp sales we've seen all year. In the third quarter, we saw consistent strength in our overall comp sales every month. Once again, we saw a very strong increase in our average basket across all divisions, driven by customers putting more items into their carts. Additionally, overall average ticket was flat and improved for the fourth consecutive quarter. Overall, customer traffic was up, driven by a mid-single-digit traffic increase in the United States. As Ernie mentioned, we believe our pricing initiative is working as we've rolled it out to very select items across categories. We're extremely pleased that sales, inventory turns and the markdown rates in the third quarter remained very strong, where we have selectively adjusted our retails. Across each of our divisions, third quarter open-only comp store sales increase was also excellent. At Marmaxx, open-only comp store sales increased a very strong 11%, and divisional profit dollars were up 21% versus fiscal '20. Marmaxx's home business continued its outstanding performance, posting a comp increase in line with home goods and apparel comp sales that were up mid-single digits. Further, Marmaxx's increase in customer traffic had a very strong average basket, and sales across all geographies were excellent. At HomeGoods, open-only comp store sales increased a phenomenal 34% with consistent strength across all major categories and geographic regions for both HomeGoods and HomeSense. HomeGoods saw outstanding increases in both customer traffic and average basket. We're also very pleased with HomeGoods' divisional profit dollars, which were up 52% versus fiscal '20. As a reminder, HomeGoods margin is disproportionately impacted by freight increases due to its product mix. When looking at Marmaxx and HomeGoods divisions combined versus fiscal '20, total open-only comp store sales for the U.S. increased 16% and profit dollars were up 26%. In Canada, open-only comp store sales were up 8%, and at TJX International, comp store sales were up 10%. Comp sales at both divisions were driven by strong increases in average basket. Further, similar to the U.S., home sales across all of our Canadian and European divisions were outstanding. Next, our overall pretax margin for TJX in the third quarter was 11%, up 30 basis points versus fiscal '20. Our pretax margin increase reflects strong expense leverage due to our excellent sales growth. We also saw a significant increase in our merchandise margin, driven by strong mark-on and lower markdowns despite 160 basis points of incremental freight expense. These increases more than offset substantial investments to expand our distribution capacity, higher incentive accruals and wage costs as well as 50 basis points of net COVID costs. Moving to the bottom line. Third quarter earnings per share of $0.84 were up an outstanding 24% versus $0.68 in fiscal '20. Our balance sheet inventory is up 4% on a constant currency basis versus the third quarter of fiscal '20. We were very pleased that our inventory levels on a per store basis improved in the third quarter versus both the first and second quarters. Again, and we can't emphasize this enough, the availability of quality branded merchandise is excellent, and we're confident that we have plenty of inventory in our stores and online for the holiday season. Moving on to our liquidity and shareholder distributions. During the third quarter, we generated $1 billion in operating cash flow and ended the quarter with $6.8 billion in cash. In the third quarter, we returned $1.1 billion to shareholders through our buyback and dividend programs. For the full year, we have increased our range of our buyback by $500 million and now expect to repurchase $1.75 billion to $2 billion of TJX stock. And now I will turn it back to Ernie.

Thanks, Scott. Now I'd like to highlight the opportunities that we see to drive sales in the fourth quarter. First and most importantly, we will deliver great gifts and value for the holidays. We are in a terrific position to flow fresh product multiple times a week to all of our stores and online this holiday season. Since reopening our stores last year, we have been buying with longer lead times from many of our approximately 21,000 vendors to compensate for supply chain delays. Further, our vast vendor universe is by far the largest in off-price and has always allowed us to have quality branded merchandise for our shoppers. Importantly, most of the inventory we need for the holiday season has already been delivered to us or is scheduled to arrive in stores and online in time for the holidays. This leads me to my second point, which is that we are set up extremely well as a gifting destination for consumers this holiday season. Our store shelves are full with great gifting selections today, and we expect them to continue to be that way throughout the holiday shopping season. We expect to have something for everyone on consumer shopping lists and to offer an exciting and inspiring treasure hunt shopping experience. We also believe that our great values will resonate with consumers as much as ever in an inflationary environment. Third, our store locations are convenient for shoppers. Our stores are generally in easy-to-access shopping centers and often near other high-traffic retailers like grocery stores that consumers visit multiple times throughout the season, making for an efficient shopping trip. Next, we believe our holiday marketing campaigns, which started earlier this month, will help drive new and existing customers to our banners. This year, each of our divisions will showcase our differentiated shopping experience by reinforcing our value leadership while also highlighting the fresh flow of merchandise throughout the holiday season with messaging such as endless selection, great prices, all season long. In the U.S. and in Canada, we will leverage the strength of our retail brands together in multi-banner campaigns. In Europe, we have a strong cross-channel marketing plan, which includes TV for the first time ever across all of our European markets. At e-commerce, we launched homegoods.com in September and are happy to offer consumers our exciting and eclectic selections 24/7. Looking ahead, we plan to bring more home categories to homegoods.com. On all of our e-commerce sites in the U.S. and in the U.K., we plan to offer exciting gift selections for the holidays that complement our in-store assortments. Like our stores, new merchandise will be arriving frequently on our sites, making for an exciting online shopping experience. Okay. Beyond this year, we believe we are set up extremely well to significantly grow our market share and improve our profitability. On the top line, we see tremendous opportunities with our sales and traffic-driving initiatives and our global store growth plans. We have gained significant market share this year, and we see excellent opportunities to keep attracting more consumers around the world. Giving us confidence is the appeal of our values, great brands and treasure hunt shopping experience. In all of the countries, we have brought our off-price concept around the world, too. It has resonated with consumers seeking great brands and fashions at great value. In terms of profitability, I want to reiterate that we remain highly focused on improving our pretax margin profile over the medium to long term. We believe our top line initiatives can lead to outsized sales which is our best opportunity to offset some of the persistent cost pressures we face. In addition, we're very optimistic about the margin opportunity from our strategy to surgically adjust retails while maintaining our value proposition for consumers. Turning to our ESG efforts. I'll start by saying that protecting the health and well-being of our associates and our customers remains a top priority, as it has throughout the pandemic. I also am pleased to share with you that our 2021 global corporate responsibility report was published this past quarter and is available on tjx.com. The report summarizes our fiscal 2021 initiatives and progress within our four areas of focus: workplace, communities, environmental sustainability, and responsible business. In addition to our report, we have published an appendix of relative ESG data and frameworks, including our first disclosure that is aligned to select metrics from the sustainability accounting standards book, or SASB. You can learn more about our efforts in our report, but I'd like to share a few highlights of our latest work with you now. I spoke on our last call about our commitment to inclusion and diversity and our work to help support a more inclusive and diverse organization. Since that time, we are well on our way to launching a variety of new programs for our associates, including new mentoring programs, associate-led inclusion advisory boards and expanded partnerships with community-based organizations to support our recruitment efforts. We also recently completed our global associate inclusion and diversity survey, which will help inform our longer-term priorities. Looking ahead, we expect to publish our 2020 EEO-1 data by the end of the year. In environmental sustainability, we made progress in our global science-based emissions reduction target. We are pleased to report a 32% reduction at the end of fiscal 2021 in greenhouse gas emissions from our direct operations against fiscal 2017. Our global approach to reducing our climate impact includes emissions reductions actions focused on reducing our energy consumption and expense, also investing in energy efficiency projects and sourcing low carbon and renewable energy sources for our direct operations. I look forward to continuing to update you on our progress in this important area. And as always, there is a lot more information on tjx.com. In closing, I want to again thank each of our associates around the globe who helped us achieve outstanding third quarter results. We feel terrific about our overall execution, a very strong start to the fourth quarter and our initiatives this holiday season. We are in an excellent inventory position to flow goods to our stores and are confident our associates are in place to meet the sales demand. I want to reiterate my comments in the future of TJX and our ability to grow our top line and profitability over the medium to long term. As an off-price leader in every country we operate in, we believe we are in an excellent position to capture additional market share for many years to come and to become a $60 billion-plus revenue company. Now I'll turn the call back to Scott for a few additional comments, and then we'll open it up for questions.

Thanks again, Ernie. Before we move to Q&A, I want to highlight a few points about the fourth quarter. We are pleased to report that our open-only comparable store sales growth at the beginning of the fourth quarter is up in the mid-teens. It's worth noting that in the fourth quarter of fiscal '20, we had a robust comp sales growth of 6%. Regarding our pretax margin for the fourth quarter, we are experiencing significant expense challenges. We currently expect additional freight costs to increase by about 80 to 90 basis points compared to the third quarter due to the higher market rates we are paying to ensure our stores have sufficient inventory. Additionally, we expect that the combination of investments to enhance our distribution capacity, along with higher wages and net COVID-related costs, will remain similar to the levels we saw in the third quarter. Looking ahead to next year, we are optimistic about sales and customer traffic opportunities, the buying environment, merchandise margins, and our ability to make precise adjustments to retail pricing. This year, we have benefited significantly from leveraging expenses due to our strong double-digit comp sales. While we are confident in our top line and margin prospects, it is still too early to predict comp sales or costs for next year. I want to reiterate our previous remarks from the second quarter call; despite ongoing expense pressures in the macro environment, we believe our pretax margin can approach double digits next year. We expect margin deleverage from our investments in distribution capacity and increased freight and wage costs to be higher than pre-COVID levels but lower than this year. In closing, we are confident in our execution and the strength of our business as we enter the fourth quarter. Our balance sheet is strong, and we are well positioned to leverage inventory opportunities, including packaway, that may arise due to supply chain disruptions while continuing to invest in business growth and returning significant cash to shareholders. Now, we're ready to take your questions. Thanks, and we'll open it up for questions.

Great. Congrats on another strong quarter. So Ernie, I think you've made it crystal clear how you feel about the availability of product today and through holiday. So I won't touch on that. But my question is, your mid-teens stack comp implies a top line run rate exiting this crisis. It's nearly double your pre-pandemic trend. Is this new customers? Is this larger basket? Is it a combination of both? Scott, are you seeing any pushback at all on pricing? And how best to think about expansion of the AUR initiative from here?

Yes, Matt, that’s a good question. The current run rate is influenced by several factors, which is why we are seeing such strong comparisons. We are indeed gaining new market share and attracting new customers, as the data indicates, but we are also experiencing an increase in average basket size. Scott can elaborate on that, but it’s been a consistent trend. We’ve mentioned this in the script as well. There’s also an improvement in conversion rates; when customers come in, we believe we are converting them at a higher rate, meaning they are making purchases more frequently. There are times when customers visit but do not buy, so our success stems from having strong brands and offering great value. Additionally, the fact that we are carefully managing our retail presence is a positive sign for the future. We are attracting new customers and seeing an increase in visits; we also believe the frequency of visits is growing. If we view our customer base, some come around occasionally while others are more regular visitors, and we see an uptick in both groups. I would advise caution in assuming we will maintain a growth rate significantly higher than what we had before as we progress, but the market share we’re gaining now suggests that many of these customers are likely to stay with us. We are making them happy with their experiences, which is promising for retaining new customers moving forward. This all reflects well on our future prospects. Your second question was about margins or something related to average retail, right Matt?

Yes. So have you seen any pushback to pricing? And where does the AUR initiative go from here?

Yes, we haven't experienced pushback on pricing at all. In fact, we've had a higher success rate than we anticipated. We expected to encounter challenges with a few items, but that has not been the case. We've faced very few issues in adjusting retail prices. As we move forward, we will ensure that our product mix remains at a better retail level than our competitors with similar products. While we can't discuss price points for different products or the quality of brands we don't carry from other retailers, we believe there is significant opportunity for us to enhance our positioning in the department store brand segment over the next few years. We're feeling very optimistic about the upcoming year, and I hope that addresses your question.

It sounds like you're really pleased with your inventory position for holiday. But as you look into calendar '22, is there anything that you're seeing that concerns you around product availability for spring?

We have a lot of credit to give our teams for how they're managing things. With the volatility and uncertainties in the supply chain and the way our business is recovering, we’re starting to see a positive trend. The teams have made smart decisions by buying inventory earlier to better time our deliveries and anticipate supply chain challenges. While we're still facing high shipping costs, the teams have found ways to ensure we receive our goods. Merchants, buying teams, and logistics have all played a role in this planning and execution. I monitor our advance orders regularly, and I can say we are on a strong path for the first quarter of next year, particularly for February and March. There's no need for concern. Additionally, we are in a stronger position with our brand partners than we were before COVID, and we expect to continue leveraging these relationships effectively throughout 2022. I hope this addresses your question.

So understanding that it's too early to talk specifically about sales expectations for next year. Just wondering if you could speak more generally to where you see the incremental opportunity from a category perspective at both Marmaxx and HomeGoods as you cycle these big multiyear comps?

Yes, Mark, that’s a great question. Continuing on, our home category has been positively impacted by the behavioral changes brought on by COVID, with many people now working in hybrid or virtual environments. Additionally, there's been an increase in outdoor activities, which is influencing the types of apparel being sold, including ours. I anticipate that all related categories will continue to grow at a significant rate for our business, and we are excited about that. Before COVID, our home business was already performing strongly, but now it is exceeding expectations. I believe this growth will stabilize, but even if it levels off at a 30% increase, it still indicates a very positive trend for the home segment going forward. Our apparel business is also recovering, with some healthy growth in the high single digits. As consumers remain value-driven, I believe we will capture more market share in apparel. The active-inspired apparel segment will also be a focus for us, along with certain accessory categories where we expect to outperform. Overall, I see a lot of opportunities ahead. Great question.

Ernie, wondering if you could talk about the sourcing of inventory, just maybe how it's different in the current environment relative to a more normal period. Maybe talk in terms of direct source versus in-season versus packaway; maybe the types of vendors you're working with, how that's evolved; and maybe even just frequency and size of buys amongst your different vendors.

Yes, that was good, Paul. You were able to navigate Scott's rules effectively, right? We typically have a five-part approach, but I appreciate your perspective on the same topic. The sourcing strategies are quite relevant given the current circumstances. To start, our closeout-driven approach means that we primarily buy in-season, on an opportunistic basis. We continue to operate this way, and all indicators suggest that many key brands are performing well, as reflected in the strong retail results. This environment allows public company brands that operate as wholesalers to pursue their regular price accounts more aggressively. Consequently, they feel confident knowing that we will be there to absorb excess inventory. As we look forward to next year, I expect to see wholesalers becoming more optimistic about their upfront orders for retailers, recognizing that they have TJX to rely on for later inventory needs. This situation presents us with significant opportunities moving ahead due to this dynamic. In terms of direct sourcing, we engage in that, although it's typically selective and based on any gaps we may identify. Regarding packaways, we could see an influx of them once the holiday season ends, especially considering the supply chain challenges other retailers might face. If some retailers experience late deliveries that miss the Christmas window due to planning issues, this could create a substantial opportunity for us to secure additional packaways for next fall, which we would be acquiring in January and February. I anticipate this could be a significant advantage for us. Now, I believe I might be missing something regarding the fourth aspect.

The frequency and size of buys...

The challenge we've faced is that we're purchasing very frequently, and the sizes of the purchases vary significantly among vendors. It's interesting because we have some amazing brands that, at times, have a large quantity of goods. They might be trying to move their inventory a bit early, possibly anticipating difficulties later on. Meanwhile, other brands have less stock and aren't performing as well as those of comparable size. Overall, we've had to slow our purchasing as we approach this time period, as there's still more inventory available than we can handle. This situation is somewhat reminiscent of pre-COVID times, where brands often claimed they would reduce their participation in the discount off-price channel, but that narrative has persisted for years. Typically, they announce this for a few months, only to subsequently find themselves overstocked. As a result, we may do less business with a particular brand for a time, but we'll increase our dealings with another brand during that same period, and the cycle continues. We're monitoring these situations closely because, post-COVID, we hold a more significant position in the market. Some vendors who assert they will decrease their discount offerings may, in fact, end up placing more orders in advance to ensure they have stock ready for popular retailers, which should lead to increased availability down the line. I hope that clarifies things. It's a great question.

Scott, can you just dive into the offsets you expect to see in the fourth quarter to help offset the incremental 80 to 90 basis points of supply chain pressures? And then any color specific on where you think pretax margins can land in 4Q specifically?

Yes, you might be disappointed with my answer. I believe it's similar to what Ernie has mentioned. We are optimistic about our top line initiatives aimed at boosting sales, and regarding merchandise margins, the significant factor we've highlighted is the additional freight costs for the fourth quarter, which we expect to be around 75 to 100 basis points, possibly 90 basis points more. A lot will depend on the level of comparable sales we achieve. The other costs are consistent with what we observed in the last quarter, so there's not much more to add about where we will end up. Ultimately, our outcome will heavily rely on the level of comps we can reach.

Okay. Great. Glad to be able to see the momentum in the business. Ernie, I want to make sure I heard you correctly. I think you said the surgical price increase strategy is well underway. I'm assuming that means you started executing it here in the third quarter. It sounds like you've already got a reasonably good kind of level of feedback on how those price increases are being received by consumers with basically no price resistance. I just want to make sure I understand that correctly. And then, Scott, wanted to ask you about the benefit in gross margin. You talked about a nice expansion in the merchandise margin from higher IMU, maybe that's a piece of the pricing, and strong full price selling. But I'm trying to just sort of unpack the moving parts in that gross margin line to uncover or reveal just exactly how great that performance is in merchandise margins. So if you could just help us with some of the moving pieces in gross margin, specifically since you saw that nice boost versus 2019? That would be helpful.

So Kimberly, yes, what you interpreted from me is absolutely correct. We began this process relatively early as we transitioned from the second to the third quarter, approaching it in a focused but aggressive manner. We implemented changes very selectively, and we will continue to do so. The merchants are handling this with a high level of analysis, ensuring that our retail prices are considerably lower than others in the market. It's important to remember that the current situation in the country, with both wage increases and supply chain costs rising simultaneously, is compelling retailers to either promote less or elevate their prices. This creates a unique opportunity for us, and I see no reason for the wage situation to change. Our teams began these adjustments back then, and we have seen notable success during the third quarter.

Yes, I'd like to emphasize that we conduct numerous customer surveys with our marketing team, and one of the key findings is that our value perception remains as strong as ever. Whatever strategies we've employed in retail have proven effective, showing no negative impact from the customer viewpoint. As we've mentioned several times, we are closely monitoring the turnover, sales, and categories, and everything continues to show consistent strength, much like in the first and second quarters. We’ve noticed no adverse effects. Regarding merchandise margins, we’re seeing results similar to the second quarter, where half of our benefit comes from reduced markdowns due to strong sales, while the other half stems from increased mark-ons. Although we are experiencing some cost increases, we also have retail increases that are offsetting these. One advantage of seeing our average retail improve over the last couple of quarters is that it helps our cost structure and reduces the number of units we need to manage in our stores, distribution centers, and freight. Therefore, we’re realizing some benefits from that as well. To address your question, approximately half of our benefits come from mark-ons, and the other half from markdowns. Overall, even with the higher freight costs, our merchandise margin showed a slight increase this quarter compared to last quarter.

Congrats on the great results. Ernie, just your comment earlier about the importance of the upstairs brands. Are you seeing any difference in concentration of the top brands now versus historically? And then sorry if I missed it, did you guys say what percent of inventory was on hand versus in transit?

That’s an interesting question, Simeon. Regarding the concentration of vendors, it varies by business category. There has been some shifting as the market has changed. Some categories are performing significantly better, which includes certain brands. In these categories, we are seeing an increase in the number of brands represented. Overall, I would say we are seeing more casual brands in our stores, reflecting the current market trends. However, as apparel sales have picked up, there is still a presence of more traditional brands in some dressier segments, which have seen a slight rebound. Yet, the overall trend shows a shift towards casual brands making up a larger percentage of our offerings, indicating a behavioral change that is likely to persist for a while. In the home category, which comprises a larger portion of our business, we have more home labels currently performing better than they did a couple of years ago. Ultimately, regardless of the brand, our buyers prioritize ensuring we provide the right value. We do not predetermine which brands to emphasize solely based on brand reputation. Instead, our focus is on the value offered. I’ll let Scott address your second question.

Yes, Simeon, regarding the inventory, good question. The in-transit on order has increased by a little more than 5% as a part of our total inventory on the balance sheet, which is similar to where we were in the second quarter compared to fiscal 2020. So it remains in that 5% range as a percentage of the total inventory compared to two years ago. That said, our inventory levels, both in stores and distribution centers on a per store basis, have improved compared to 2020, especially at the end of the third quarter versus the second quarter, which itself improved over the first. Despite the increase in sales, we've been steadily enhancing our inventory position in both stores and distribution centers. With a significant amount of inventory expected to arrive soon, we anticipate a positive flow of new items as most of this inventory will come in over the next few weeks. We feel good about that fresh inventory flow. Ernie, do you have anything to add?

Yes, I agree with everything that Scott just mentioned. We are optimistic about our ability to manage flow and availability as we look ahead, as we addressed in the other question.

Congratulations on the nice progress. Two quick things. As you think about real estate, remodels, relocations, what are you seeing and how is that working for each of the banners? And you mentioned TV and marketing for Europe. How are you planning your marketing budget this holiday compared to last year?

All right. I'll let Scott talk on the real estate, and then I'll jump in on the marketing.

Yes, we are very optimistic about real estate based on what we've observed this year. In terms of new store openings, we have been performing exceptionally well, exceeding our projections across all divisions. We anticipate opening over 170 stores next year and aim to return to our historical growth rate of about 4%, where we used to open over 200 stores annually, with a few closings each year. We're excited about this. Regarding remodels, we are completing over 300 this year, and while we don't have a projection for next year, it will be significantly higher across all our divisions. Throughout this year, we’ve noticed that the condition of stores doesn’t significantly change whether they are 10, 20, or 30 years old. Therefore, we focus on keeping these stores looking fresh, which has positively impacted our comparable sales. Additionally, our teams have done an excellent job in renewing leases for hundreds of stores, securing lower rates than previously contracted. This trend has been consistent throughout the year and is beginning to translate into meaningful savings. We are also optimistic about site availability for the foreseeable future, especially considering the number of store closures that have occurred in the past two years.

Yes, and regarding marketing, that's a great question. We are significantly increasing our marketing budget for Q4 compared to FY '20 as we aim to continue gaining market share this holiday season. This increase will help us stay at the forefront of consumers' minds during this busy time. As you know, the marketing space becomes quite competitive, and we intend to stand out. Our campaigns are crafted to make an impact with our budget and effective execution. Notably, over half of our marketing funds will be directed towards digital advertising, which is where our consumers are present. We are heavily focused on capturing market share and driving customer traffic, emphasizing our competitive advantages such as value and unique selection. We aim to remind customers of the wide variety of categories we offer for gift-giving. Our goal is to win over customers during discovery shopping occasions, which make up about half of all shopping moments where people are looking for inspiration and experiencing our unique shopping environment. Additionally, we are utilizing the influence of brand advocates and providing multiple communication channels for engagement. This is how we are allocating our marketing budget, and we believe we are in a strong position with our store execution, merchandise, and marketing to drive customers into our stores.

Congratulations on a great quarter, everyone. Scott, I wanted to follow up on your comment about the pretax margin nearing double digits next year. Historically, before COVID, we tended to plan the business with a 2% to 3% comparable store sales growth. Should we be using that as a guideline related to your comments? I understand we'll adjust our models based on our own expectations for comparable sales. Is that a reasonable assumption? I'm also considering the various factors at play. You mentioned that the combination of investments and distribution capacity could lead to some deleveraging. Additionally, this year's COVID-related expenses were quite significant, and your store volumes should return to higher levels compared to 2019. I believe freight costs may be a net positive for the entire next year, although you mentioned in our last call that freight could worsen in the second half of this year but improve next year. Plus, some pricing adjustments are in place. I'm trying to navigate the various factors that might lead to a result below double digits next year as you assess the situation.

Yes. Again, too early to make the call. Again, as Ernie said, we feel great about the top line too. We haven't made a definitive call yet on what we think the comp sales will be over this year, but we...

I believe it's reasonable to expect growth slightly above 2% or 3%, Michael. Given the current momentum and the level of customer acquisition, we could exceed that figure.

So I guess that means 3% to 4%. In terms of the other costs, Michael, the one thing I'd say is that the combination of freight, although not going to be at the outsized delevers that we're seeing this year north of $150 million. We still expect, because of at least the visibility to the first half and to be determined the second, to have more than the normal amount of freight deleverage. So it's still going to be a lot less, but still more than what we would have seen pre-COVID.

Only in the first half. We're hoping in the second half, Michael, to your point, that we level off on that.

Yes. Overall, for the year, we expect to see an increase. The combination of supply chain, wage, and freight costs is still higher than what we experienced before COVID, even with less COVID impact. As we approach the end of the year, we'll evaluate our retail strategies, purchasing, and the benefits of higher retail sales. We anticipate that margins will increase compared to this year. The key consideration is what we can offset to drive margins even higher. Looking long-term, we are optimistic about achieving some level of stabilization. If the challenges we face are similar to pre-COVID levels, with a 3% to 4% comparable sales growth, as Ernie mentioned, we would expect our business to be flat or to leverage it for growth by the end of next year.

I wanted to discuss the availability of luxury brands, as we've noticed a decline in their presence in stores. I understand it's challenging to assess a significant number of stores, but it seems there might be a shift happening in the closeout segment for true luxury. Am I observing a consistent trend across the chains, or is it more about your purchasing aligning with current trends that no longer favor luxury brands?

Laura, that's a great question. I believe it's a mix of both factors, and your observation is valid. In the traditional categories where we typically offered more luxury brands, we have a bit less availability at the moment. However, as I mentioned earlier, that's not where the current trends are leaning; the focus has shifted to more casual and active wear, which means we do have a decreased presence of luxury brands. I don't see this as a long-term issue. As we move into next year, I anticipate that the situation with the reduced luxury brands will improve. Additionally, as the apparel cycle trends back towards more traditional, slightly dressier styles, I believe we will see an increase in the luxury brands you're referring to. Your observation regarding total brands, or what we call 'best brands' by category, is accurate; we're doing quite well there. The presence of luxury brands is a bit diminished right now, but I don't expect it to be a long-term problem.

And if I could follow up on that. Obviously, it's not a material part of sales. And obviously, traffic is great right now. But is there any concern on your part that you might lose some of that treasure hunt customer traffic towards the holidays because that's not there on the luxury side?

No, I don't have any concerns about that. The luxury segment was always a small part of our business and is primarily driven by self-purchases rather than gifts. While there is some gift-giving in this category, we have a variety of gift-related items in stock. I'm not worried about the medium-term outlook because I believe this trend will shift as we move into next year. There are other departments where we currently have less inventory, and we're still performing well despite that. Our model allows us to adapt and focus on areas that offer exciting value. We remain committed to providing a compelling selection in stores, especially as we prepare for the gift-giving season. While we may encounter some gaps in certain brands or categories, we expect that these will not negatively affect our performance during the holiday season.

Did we lose you, Omar? Can you hear me?

Now we can hear you.

I wanted to follow up on the discussions regarding the pricing actions you've taken in the current inflationary environment. Specifically about the term surgical, does it refer to just a particular banner? Did you implement it across different banners? Did you attempt it internationally, or is it limited to certain products and categories? Additionally, are you approaching pricing differently now? Your merchants may traditionally have followed a cost-plus model, but are you shifting to a value-based approach, particularly in light of inflation? Understanding any philosophical changes in your pricing and value perspective would be helpful.

Yes, those are great questions, Omar. To address both of them: we did not limit our strategy to any specific banner or category. The selective retailing approach applies to all our divisions, including Maxx, Marshalls, HomeGoods, and our operations in Canada, Europe, and Australia. We have all our merchants engaged in this strategy. Regarding your second question, I'm pleased you brought it up because it’s important to clarify that we do not use a cost-plus approach, which is typical for traditional retailers. Our buyers first define the retail price, focusing on the value we want to offer, rather than being constrained by costs. We then evaluate what similar products are priced at in other retail environments to identify the necessary retail gap. This means our pricing is not based on our costs but on our value proposition. This philosophy is applied consistently across every division internationally. By conducting comparative shopping, we ensure our retail prices deliver excellent value relative to the market. We do not rely on a markup based on our costs, as that method typically leads to issues. Thank you for your insightful question, Omar. That was our final question, Missy. Thank you all for joining us, and we look forward to updating you on our fourth quarter earnings call in February. From everyone at TJX, we wish you good health and a happy Thanksgiving.