TJX Companies Inc (TJX) — Q4 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 the call today by expressing my gratitude to all of our global associates for their continued hard work and dedication to TJX. For the past two years, our associates have gone above and beyond to operate our business through unprecedented times while also adapting to the constantly changing retail environment. I want to give special recognition to those associates who have been physically coming into work in our stores and distribution centers. In recognition of their efforts, we awarded a vast majority of them a discretionary appreciation bonus again this quarter. Now to an overview of our fourth quarter and full year results. I want to emphasize that in the areas we directly control, like buying, store and distribution operations, our pricing strategy, and our initiatives to drive traffic and sales, our execution was excellent due to the monumental efforts of our associates across the company. Moving to the details. I am extremely pleased with our top-line performance in the fourth quarter. U.S. open-only comp store sales increased a very strong 13% when compared to fiscal 2020 or calendar year 2019. U.S. comp sales were trending higher than this before the surge in Omicron cases. This quarter represents the fourth consecutive quarter that U.S. open-only comp sales increased in the low teens or better. Comps at our U.S. home banners and in our home categories were excellent, and our Marmaxx apparel comp was up in the high single digits. Clearly, consumers continue to seek out our retail banners for exciting gifts and amazing values this holiday season. For the full year, U.S. open-only comp store sales increased an outstanding 17%. Overall, TJX sales of $48.5 billion were almost $7 billion more than in fiscal 2020. We are convinced that we captured significant market share, particularly in the U.S., where our stores were open the entire year, and we leveraged the strength and flexibility of our off-price business model. I want to highlight the excellent execution and collaboration of our buying, planning, distribution, logistics, and store operations teams. They worked together strategically to buy goods earlier than we typically do to ensure the consistent flow of exciting merchandise to our stores and online to support our outstanding sales throughout the year. As a result, we offer consumers a great selection of branded quality merchandise at excellent values all year long. Going forward, we are laser-focused on our sales and profitability initiatives and remain committed to corporate responsibility. Again, we feel great about the areas of our business that we directly control and will continue to look for ways to mitigate the expense pressures currently impacting our business. Further, in an inflationary environment, we believe more consumers will be seeking out our values. Importantly, I am as confident as ever in the medium- and long-term outlook for TJX. We are the off-price leader in every country we operate in and believe we are in an excellent position to capture additional market share in these regions for many years to come. Before I continue, I'll turn the call over to Scott to go over and cover our fourth-quarter and full-year results in more detail.

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. I'll start today with some additional details on our fourth-quarter results. As Ernie mentioned, U.S. open-only comp store sales grew 13% over a strong 6% increase in the fourth quarter of fiscal '20. Overall, open-only comp store sales increased 10%, also over a 6% increase in the fourth quarter of fiscal '20. Open-only comp store sales growth was strongest in November and December. As COVID cases began to surge worldwide, we saw sales trends soften with the largest impact in January. The impact was greatest in our apparel business, which is consistent with what we have seen during previous COVID spikes. Additionally, sales were impacted by government-mandated shopping restrictions that were put in place internationally. Overall, TJX sales increased by more than $1.6 billion to $13.9 billion, a 14% increase versus the fourth quarter of fiscal '20. In the fourth quarter, we once again saw a very strong increase in our average basket across all our divisions, driven by customers putting more items into their carts. Overall, average ticket was up and improved for the fifth consecutive quarter. I also want to highlight that our U.S. customer traffic was up slightly. Fourth-quarter pretax margin was 9%, down 190 basis points versus fiscal '20. Similar to the third quarter, we saw extremely strong mark-on and significantly lower markdowns, which included the benefit from our retail pricing strategy. However, merchandise margin in the fourth quarter was down primarily due to the 280 basis points of incremental freight, which was slightly higher than anticipated. We had an 80 basis point negative impact from a full year true-up of shrink expense, which was significantly higher than we expected. Pretax margin includes strong buying and occupancy leverage on our excellent sales, which was more than offset by approximately 160 basis points from the combination of incremental investments to expand distribution capacity and higher wage costs. In addition, net COVID costs negatively impacted pretax margin by an additional 50 basis points similar to the third quarter. Finishing up on the fourth quarter, earnings per share were $0.78. Now to our full-year consolidated fiscal '22 results. U.S. open-only comp store sales grew 17% and overall open-only comp store sales increased 15% versus fiscal '20. Overall, TJX sales grew 16% compared to fiscal '20. Full-year fiscal '22 pretax margins were 9.1%. Excluding a 50 basis point negative impact from a debt extinguishment charge, adjusted pretax margin was 9.6%. Full-year pretax margin benefited from buying and occupancy leverage due to our outsized open-only comp store sales. We were very pleased that our full-year merchandise margin was up despite 200 basis points of incremental freight. Our merchandise margin increase was driven by strong mark-on and lower markdowns, which included the benefit from our retail pricing strategy. Full-year pretax margin was negatively impacted by approximately 140 basis points from the combination of incremental investments to expand distribution capacity and higher wages and 80 basis points of net COVID costs. Full-year GAAP earnings per share were $2.70, adjusted earnings per share were $2.85 which excludes a $0.15 debt extinguishment charge. Moving to inventory. Our balance sheet inventory was up 22% on a constant currency basis versus the fourth quarter of fiscal '20, primarily driven by higher in-transit inventory. We are very pleased with our per-store inventory levels as they once again improved sequentially and were up versus fiscal '20. The availability of inventory is excellent, and we are well positioned to flow fresh spring merchandise to our stores and online. I'll finish with our liquidity and shareholder distributions. For the full year, we generated $3.1 billion in operating cash flow, driven by record net income. We ended this year with $6.2 billion in cash. In fiscal '22, we returned $3.4 billion to shareholders through our buyback and dividend programs, which is the most we've returned to shareholders on an annual basis in our history. Now I will turn it back to Ernie.

Thanks, Scott. I will provide an update on our fourth-quarter and full-year divisional performance. At Marmaxx, fourth-quarter open-only comparable store sales grew by a strong 10%. For November and December combined, Marmaxx's comparable sales increased in the low teens. Over the full year, Marmaxx achieved an impressive 13% open-only comparable store sales increase and segment profit dollars rose by more than $340 million or 10% compared to fiscal year 2020. This year, Marmaxx's home business saw comparable sales growth in line with HomeGoods, while apparel comps increased in the high single digits. The average basket size increased significantly throughout the year, and customer traffic also improved. We are very satisfied with the performance of our largest division, which consistently delivered double-digit comparable sales increases each quarter and provided a great assortment of apparel and home goods throughout the year. At HomeGoods, open-only comparable store sales surged by an impressive 22% in the fourth quarter and showed high teens growth or better every month of the quarter. For the full year, HomeGoods achieved a remarkable 32% increase in open-only comparable store sales, with segment profit dollars rising by over $225 million or 33% compared to fiscal 2020. We observed consistent strength across all major categories and geographic regions for both HomeGoods and HomeSense. Moreover, both customer traffic and average basket increases were outstanding throughout the year, and we believe we gained additional share in the home market in 2021, as our unique mix of merchandise and excellent values resonated well with consumers. In Canada, open-only comparable store sales rose by 1% in the fourth quarter and increased by 8% for the full year. At TJX International, open-only comparable sales were down by 2% in the fourth quarter but rose by 6% for the full year. Sales and open-only comparable store sales at both divisions were negatively affected by significant government-mandated shopping restrictions throughout the year. For the full year, like the U.S., TJX Canada's and TJX International's home businesses outperformed apparel, and both divisions saw robust increases in their average basket size. We remain confident that our International divisions are well positioned to capture additional market share in the long run. Regarding our e-commerce businesses, we are very pleased with our overall sales growth in 2021. During the year, we introduced new categories and brands to our online platforms and launched shopping on homegoods.com. Although e-commerce accounts for only a small percentage of our total sales, we are happy to provide U.S. and UK shoppers with 24/7 access to our fantastic brands and values. Moving on to additional highlights from 2021, we made strides to improve profitability and counter some ongoing cost pressures. Our main initiative to raise retail prices on our merchandise has been very successful. We are in the early stages of this effort and believe it presents a multiyear opportunity for our business. Crucially, customers indicate that our value proposition remains strong, and they continue to find exceptional values every time they shop with us. Additionally, we onboarded thousands of new vendors in 2021 and continued to source from a network of around 21,000 vendors globally. Our strong global buying presence remains a key advantage. We have also enhanced our relationships with many existing vendors. As retailers close stores and supply chain congestion persists, we provide vendors with an attractive outlet to clear excess inventory. Importantly, the availability of quality branded merchandise across various brands is robust. We believe our marketing efforts are effectively driving both new and returning customers into our stores and online. The team has excelled in allocating our advertising budget to the right media channels in a constantly evolving digital landscape. Our customer satisfaction remains high, and we continue to attract a diverse range of shoppers, including many Gen Z and millennial customers, which we find promising for the future. In 2022, we will launch multiple new marketing campaigns globally that will emphasize our exceptional value and create an inspiring shopping experience. Lastly, we made significant investments to support the company's growth. In 2021, we opened 117 new stores, relocated 50 stores, and remodeled over 300 stores. We also made critical investments to enhance our distribution capacity and productivity to support our rapidly growing top line and future growth. Our 2021 results give us strong confidence in our business outlook, particularly as we transition back to a normalized environment. When stores were allowed to operate without restrictions, each division saw very strong sales, attracted new customers, and increased spend per transaction. Furthermore, we see pathways to enhance profitability once the retail environment stabilizes and some cost pressures moderate. All of this suggests we have a great opportunity to significantly grow both our top and bottom lines over the medium to long term. I want to emphasize our commitment to improving our pretax margin profile. We believe our sales-driving initiatives are the best way to address the current cost pressures we're facing. Additionally, we are optimistic about our strategy to adjust retail prices while maintaining a strong value proposition for consumers. Our goal is to approach a double-digit pretax margin in the medium term and return to pre-pandemic pretax margin levels in the long term. On the topic of corporate responsibility and ESG, I want to reiterate that the health and well-being of our associates and customers remains our top priority, as it has throughout the pandemic. I am proud that while managing through the ongoing pandemic, our team has effectively continued our corporate responsibility efforts. In Q4, we supported numerous communities through contributions to organizations focused on emergency relief efforts, including initiatives for victims of Colorado and British Columbia wildfires and the Kentucky tornado, in addition to our annual donations to Save The Children and Red Cross disaster relief. In the realm of inclusion and diversity, we rolled out a new mentoring program pilot, and our diversity advisory boards have begun meeting regularly. We have also continued our direct support for black communities, which includes donations aimed at professional development for diverse leaders. As we pursue initiatives that are both environmentally responsible and beneficial for our business, we are excited to share that we are making progress on plans to adopt even more ambitious environmental goals in several key areas, which I will discuss in more detail during our next call. More information on our corporate responsibility efforts is available at tjx.com. In closing, I want to express my gratitude to all our associates worldwide who contributed to our strong results. I firmly believe that our unmatched expertise in off-price retail and the knowledge of our teams set us apart. Looking ahead, we are excited about the sales and profitability opportunities ahead of us. We are confident in our plans for fiscal year 2023, and we believe our value proposition and the flexibility of our business will continue to provide significant advantages. Our balance sheet is robust, and we are well-positioned to invest in business growth, take advantage of excellent inventory opportunities, and return substantial cash to our shareholders. We are optimistic about our potential for market share growth and our goal of becoming a more profitable enterprise with revenues exceeding $60 billion. Now I will turn the call back to Scott for some final remarks, after which we will open the floor for questions.

Thank you, Ernie. Moving to guidance, we plan to report comparable store sales growth for our U.S. divisions in fiscal '23 compared to fiscal '22. It's important to remember that we had temporary store closures and shopping restrictions internationally during fiscal '22, which means we don't have a reliable baseline for year-over-year comparisons for TJX Canada and TJX International divisions in fiscal '23. For the first quarter, we expect U.S. comparable store sales to rise by 1% to 3%, following a significant 17% increase in U.S. open-only comparable store sales last year. We're pleased with our strong U.S. comparable sales growth so far this quarter, driven by excellent consumer demand in our apparel and home categories. It's essential to note that our guidance reflects the sales growth acceleration we experienced during the first quarter last year. At the beginning of the first quarter, we're comparing against low to mid-single-digit increases in U.S. open-only comparable store sales versus the more than 20% increase we will soon anniversary for March and April combined. We anticipate total first-quarter TJX sales will be between $11.5 billion and $11.7 billion, with a pretax margin expected to range from 8.1% to 8.4%. We're optimistic about opportunities in our merchandising margin and retail pricing strategy, but we also expect elevated expense pressures compared to fiscal '22. We believe that incremental freight expenses will peak in the first quarter at around 220 basis points and that increased wage costs will significantly affect our Q1 pretax margin. For the first quarter, we estimate a tax rate of 25.4%, net interest expenses of about $19 million, and an average share count of approximately 1.2 billion. Based on these expectations, we're forecasting first-quarter EPS of $0.58 to $0.61 per share. For the full year, we anticipate a 3% to 4% increase in U.S. comparable sales over last year's 17% increase, and total TJX sales are expected to be between $52.6 billion and $53.1 billion. Regarding full-year pretax margins, we are currently aiming for levels close to the adjusted 9.6% margin from fiscal '22. This estimate suggests that the pretax margin for the last nine months of the year will be close to double digits. We remain confident about our merchandising margin opportunities and retail pricing initiatives, but like other retailers, we are facing rising freight and wage costs that will exceed our previous expectations. We now predict incremental freight expenses to be around 150 basis points and wage costs to add another 100 basis points. Nonetheless, our retail strategy is performing well, and we now expect to gain larger benefits this year than anticipated, which we think will help offset a significant portion of these extra costs in fiscal '23. I want to reiterate that our goal, as Ernie mentioned, is to achieve a double-digit pretax margin in the medium term. Additionally, we believe we can maintain or increase margins while achieving 3% to 4% comparable sales once expenses return to lower levels. For the full year, we are currently estimating a tax rate of 25.8%, net interest expenses of about $50 million, and a weighted average share count of approximately 1.2 billion. At this time, we are not providing full-year EPS guidance due to the uncertainties surrounding expenses and sales, but we hope this information will aid in your modeling. Regarding our fiscal '23 capital plans, we expect capital expenditures to range from $1.7 billion to $1.9 billion to support new store openings, remodels, relocations, and improvements to our distribution network. We plan to open about 170 new stores, bringing our total to 4,850 stores, representing about 3% growth. In the U.S., we're looking to add around 55 stores at Marmaxx, 60 at HomeGoods, which will include 10 HomeSense and 20 Sierra stores. In Canada, we aim to add about 10 new stores, and at TJX International, we plan approximately 15 new stores in Europe and 10 in Australia. We are optimistic about our prospects to grow our global store footprint. Over the long term, we believe we can expand our store count to 6,275, nearly 1,600 more than we have today across our current retail banners in existing markets. Furthermore, we plan to remodel over 400 stores and relocate more than 50 in fiscal '23. Regarding our cash distribution plans for fiscal '23, we remain committed to returning cash to shareholders. As stated in today's press release, we expect our Board of Directors to approve a 13% increase in our quarterly dividend to $0.295 per share. Additionally, we plan to repurchase between $2.25 billion and $2.5 billion of TJX stock this fiscal year. In conclusion, over the past two years, we have effectively adapted to an unprecedented retail environment and rising inflation. We believe the strategies we have implemented position us strongly for future top and bottom line growth. We remain confident in our business opportunities ahead. Our balance sheet is robust, and we're generating substantial cash flow, enabling us to continue investing in our growth while returning significant cash to shareholders. Now we will open it up for questions, and we ask that you please limit your questions to one per person and one part in each question to keep the call on schedule, allowing us to address as many inquiries as possible from analysts. Thank you, and we look forward to your questions.

I wanted to follow up on your comments about the pricing strategy. Does your plan assume acceleration of the initial efforts that you made in the back half? And how quickly do you think these pricing actions can offset the freight and wage pressures?

Great question, Lorraine. First of all, we've seen many retailers adjusting their prices recently. While I won't name them, you may have read about some taking broad approaches to increase their prices. Interestingly, I view this inflationary price increase as a major opportunity for us at TJX to become even more aggressive in adjusting our prices. Initially, we were making very targeted adjustments, but we've seen strong success in doing so. If you look at our fourth-quarter merchandise margin, we maintained healthy margins throughout the latter half of the year, largely driven by our pricing strategy. To address your question, we believe there is significant room for improvement in the next year or two. This is part of a multiyear strategy. We continuously monitor how we compare to others in the market, and everyone is facing similar cost pressures. Our merchants are carefully assessing our retail prices relative to promotional prices from other retailers. We have a high level of confidence in our ability to make substantial adjustments this coming year to mitigate these cost pressures. While we face significant challenges from freight and wage pressures, which Scott mentioned, we believe our pricing strategy is one of the most effective measures we can take to address these issues, and we are very confident in it.

Ernie, can you discuss the trends in market share and product availability in the U.S. for apparel and home? Do you believe you will emerge from this pandemic with a stronger business model? Additionally, Scott, regarding the positive comp guidance for the first quarter, is it accurate to say that February has surged back to the mid-teens comp level seen in November, or is there anything else that gives you confidence as we approach the 20% plus figures for March and April?

Sure, Matt. We've observed an increase in product availability over the past few weeks, particularly across various quality levels. Internationally, despite some constraints in Europe, we are noticing a significant increase in better quality goods that merchants are leveraging. As we start to reopen, we are confident in our ability to gain market share and enhance branded product availability. Our market share growth has been steady, and our U.S. market comparisons show strong performance. We're addressing wage and freight costs more effectively than anticipated, and we have several strategies in place to optimize product availability and pricing. An important point I didn't cover in the script is our branded differentiation; we are becoming increasingly vital to our vendor partners, especially given recent store closures and challenges faced by online competitors. While some vendors have improved from their low sales levels, they are still not at their peak volume. Our strong partnership approach with vendors is contributing to our growing importance as we emerge from these challenges. Additionally, our eclectic mix of brands positions us well in today's inflationary environment, making us a preferred shopping choice. The ongoing political and inflationary situations present an opportunity for our business model to thrive. It will be interesting to see developments in the coming weeks, but generally, such conditions tend to benefit us. Scott?

Yes. To answer your question, we can't provide specifics, but the key point is that we are currently comparing against low to mid-single-digit U.S. comps, which then accelerates to a strong plus 20 in the MARPOL period. We've provided guidance of 1% to 3%, and our two-year stack for our start gives us confidence in this overall guidance. As Omicron starts to lessen, apparel has reemerged strongly compared to its impact in January. We've experienced strong basket sizes and positive U.S. customer traffic thus far. When we consider everything together, we anticipate a 1% to 3% U.S. comp over an outsized 17% comp. The international divisions were closed for significant portions of last year, which is why our guidance of $11.5 billion to $11.7 billion reflects a 14% to 16% increase. Additionally, we're starting to see some restrictions in Europe being lifted, which we hope will allow for further improvement there as well.

Ernie, in your prepared remarks, you mentioned some of the expenses you're currently facing, which you described as temporary headwinds. You expressed confidence that once these pass, your pretax margins will improve. Could you elaborate on the headwinds in the profit and loss statement and clarify which expense items you believe are temporary and could potentially recover in future quarters or years? Additionally, what do you view as more of a permanent headwind to your expense structure?

Sure. I'll let Scott jump in, but let me answer right away by saying that the one we hope is temporary is freight, while wage is likely more persistent. I believe wage pressures are going to be built into the base for most businesses in the country, making it tough to reverse. As for freight, Scott mentioned in his remarks that we hope to see some moderation in that area. These two are the biggest contributors to our expense pressures, which is evident from the impact on our margin in the last fourth quarter. Fortunately, our pricing strategy, sales, markdowns, and turn rates allowed us to offset a significant amount of those pressures. I believe that when we return to a normalized environment, with the virus situation improving and our international divisions fully operational, we will be able to manage our buying and shipping efficiently across important categories. This should allow us to counter most of those expense challenges in the short term, possibly within this coming year, helping us aim for nearly double-digit operating margin. Additionally, I think our model gives us a competitive edge to continue raising prices for multiple years, since these wage and freight pressures affect most retailers. I hope that clarifies things. Scott?

There's a lot happening here, and we have better insight now. Starting with freight, as you've heard from other retailers, this situation will continue for much of the year. However, we expect that the first half will see the highest year-over-year increases in costs, which should ease in the latter half, particularly in the fourth quarter where costs peaked due to our actions. Our team has successfully secured freight, albeit at a higher cost. Other expenses like demurrage and extended timelines for getting goods to our ports and facilities also contributed to costs. We anticipate many of these issues will lessen next year. The ocean freight costs have increased throughout the year, reaching a peak, and we are currently renegotiating contracts as we progress. Freight will still be a significant challenge, but it will improve considerably in the following fiscal year, which Ernie was referencing. Wage costs are expected to peak this year but will remain a challenge, as Ernie mentioned, though they too will moderate next year. The supply chain issues this year have already started to ease; we hit our peak there. Many of the wage increases we are seeing now are due to annual adjustments in distribution wages, which will impact us more in the first half and less in the second, along with store wages. While the situation remains fluid, we believe it will improve. Overall, after this year, we expect the cumulative expense pressures to be significantly lower, although not back to pre-COVID levels. We will need to implement a notably smaller average retail increase to manage this compared to what we see this year. As Ernie mentioned, it's still very much uncertain, and we have not yet purchased goods for most of the upcoming year.

Curious on the 3% to 4% U.S. comp expectation for the year. How much of that is pricing versus unit volume? And any breakdown that you can provide between Marmaxx versus HomeGoods on that 3% to 4%? And I guess, related to that, I'm kind of curious where the increased confidence comes from in terms of being more aggressive on taking price. Is that all on the home side of the business? Or you're going to be moving apparel in lockstep with home prices moving both higher.

Good questions, Paul. Let me start with the pricing strategy. It's actually not as you might expect; we are seeing price increases across the board. Marmaxx is notable, and HomeGoods is also significant. Every division is involved, and we monitor each one consistently, nearly every week. Proportionately, the totals are substantial since we've been open in the States, leading to larger amounts in Marmaxx and HomeGoods. However, directionally, the pricing strategy is effective across all divisions. We gather feedback on the performance of the goods we've adjusted prices on, and it's proving to be very successful. The credit goes to our merchants for their strategic approach. We're considering the out-the-door retail for each item, whether it's for HomeGoods, Marmaxx, or as we expand in Canada and the UK. Sierra has similar opportunities, and they operate in a range from moderate to very high-end. Regarding the unit breakdown, I’ll let Scott provide additional insights. For the 3% to 4% comp, all divisions will have a role. We might see some average retail impacting Marmaxx, and while we could have a slight decrease in units, we're still able to drive our comp through ticket sizes, influenced by current market conditions and our product mix in the stores. Scott, would you like to add anything?

Yes, I don't have much more to add. As Ernie mentioned, this situation is quite different from what we've experienced over many years, where our average retails consistently declined over time. I might have Ernie elaborate on the fact that even though our average retail is increasing, we are still considerably below our overall unit base average retail compared to the past, right, Ernie?

Yes.

I believe that with the increase in your average retail prices and the possibility of fewer units being sold, we are managing to offset many of these costs, not just the markup, but also due to the reduced number of units.

Less processing cost.

There are lower processing costs in our stores and distribution centers, which is a significant improvement compared to previous years when costs were increasing. Additionally, as Ernie mentioned regarding the value equation, our marketing and surveys indicate that customers are very satisfied with their overall store experience, which continues to improve. We are also not experiencing any decline in how our customers perceive our value. We focus on important metrics and strive to gather as much feedback from our customers as possible.

Paul mentioned that regarding the 3% to 4% comparable store sales growth, the company aims to plan carefully. Merchants always strive to exceed their targets, and the management team shares this ambition. However, considering the challenging comparison with last year's performance, they believe this is a prudent plan. The significant comparisons that will be faced start around mid-March through April, so they are monitoring the situation closely. Currently, they are performing well and hope to gather more information as the quarter progresses, which will provide a clearer perspective on trends by the next earnings call.

Ernie, I was hoping maybe you could talk about how we should think about cycling the stimulus. You mentioned mid-March, the comps get harder. I think that's kind of when stimulus drops off. Maybe remind us the sensitivity you saw from stimulus benefits during the pandemic and how we should think about that in our modeling process.

Omar, you've addressed the core issue directly. Reflecting on last year, we couldn't pinpoint precisely when we were starting to see an impact. We believe it was influenced by a mix of stimulus and pent-up demand, as people had been confined for a while. Our retail format is particularly engaging for those looking to unwind and shop after being cooped up. We think the stimulus checks contributed, but likely just a small part of it. The primary factor seems to be the pent-up demand, which has been evident in our ongoing trends. While the stimulus checks were present for a significant time, determining their exact impact on our impressive double-digit growth remains uncertain. We suspect it's a minor influence but still a factor. This reinforces our interest in analyzing data from mid-March to the end of April, where we expect to gain better insights. Currently, we’re performing well and have had a robust start to this quarter, aligning with our planned expectations. Unfortunately, I can't provide specific figures since we don't have them internally.

No, that's great color. Thanks, Ernie.

Thank you for all the insights shared during the call today; they were very beneficial. I have a couple of questions for you. It seems you are indicating that margins will return to fiscal 2020 levels in the long term, with the normalization of freight playing a significant role. However, your sales are currently 20% higher. You mentioned that improving sales is the best strategy to enhance margins and that you possess pricing power. Given this, I am curious why, in the long term, margins wouldn't exceed the levels of 2020 in such a situation. Additionally, Scott, I would like to gain some insight into your perspective. You mentioned expecting annual margins to be flat or to increase on a 3% to 4% comparable basis once expenses stabilize. This expectation seems somewhat higher than the flow-through rate you have previously discussed. Could you help us understand the cost assumptions you are considering in your long-term outlook?

Yes, it's positive. To provide some insight, while sales have significantly increased, the costs over the past several years have also risen by several billion dollars on a comparable basis. If these costs had not impacted us, our performance would have been much better than the 9.6% we reported; we would have seen several hundred basis points improvement. However, costs haven't necessarily decreased, so the situation remains unchanged. We're now focused on what the incremental costs are moving forward. Previously, our algorithm, which was in place before COVID and based on slightly lower comparable metrics, still showed a deleverage of 30 to 40 basis points. Now, with a 3% to 4% comparable sales growth, we expect to either break even or achieve leverage. As Ernie mentioned, much of this is tied to our pricing strategy, and if costs stabilize while we still have room for more pricing, the outcomes could be better than we initially anticipated. The pressure we used to see, which was around 30 to 40 basis points, is expected to ease but not to that level in the medium term. In the long run, if costs can be brought down to a range of 20 to 40 basis points with a reasonable retail initiative and a 3% to 4% comparable sales growth, we could likely perform even better. That's why I believe, as Ernie indicated, that we could return to or surpass the fiscal 2020 performance levels in the longer term.

Okay. Let me ask one more. You mentioned that even with the average retail going up, we're still at an average retail below where we were a few years ago. I know you guys watch the competitive environment very, very carefully. Do you have any competitive work you've done to inform you on where the mainland department stores are today versus their AURs a few years ago or where you stand on a relative spread basis today versus history?

We appreciate your question, Michael. We don't have a comprehensive view at the higher level because we can't fully assemble all the details from that perspective. However, our merchants at the department level have some insight into category movements. The general sentiment is that they have increased, although we cannot provide a precise average unit retail increase. Nonetheless, we can indicate that many areas of the store have indeed seen upward movement. There is also ongoing pressure in the market, as our costs match those of other retailers. This trend seems logical, and we are consistently checking these figures weekly, though I can't provide an exact number for the entire store.

Can you discuss pricing and the promotional environment? We are coming off a unique year in the industry with low inventories and very few promotions in 2021. While 2022 may not fully return to normal, there is hope for some improvement, and we expect to see an increase in promotions. At the same time, you are raising prices, and consumers are facing higher costs at home and seeking better value. How do you balance these factors and what is your approach to the anticipated increase in promotions this year? Are you observing any of that at all?

We are not experiencing any increase in promotions at this time. We are aware of discussions around it, but we remain cautious about promotional pressures. In fact, we have observed a different trend. Despite inventory levels, inflation is significantly affecting everyone, particularly due to rising wages and freight costs. Even with leaner inventories, retail prices must increase because inflation is impacting various cost factors. Additionally, we often overlook wage adjustments in distribution centers and e-commerce. Many companies have already announced required wage increases, and retail businesses are also raising wages at unprecedented rates. Given this environment, I believe that companies are somewhat constrained and unlikely to increase promotions. If they do, it may appear as if they are promoting more, but in reality, promotional prices may have also increased.

Yes, yes.

So we're simple with our buyers where we say you got to look at what is the out-the-door price and compare that out-the-door price to what our price is even though they could say they're on sale. So there could be some of that happening with some of the retailers that have a customer base that expect sales, right? We all know how that works. And they expect the high-low game. I think that could happen to a degree. But I just think on the actual retail that they sell from, it's going to be up from where it was, even though it could look like they're promoting more.

So even if it looks like they're promoting, your pricing will still be better anyway, and it shouldn't have an impact?

Absolutely. Internally, we operate simply. We have flexibility in many areas, but we do not extend that flexibility to our merchants. We remain firm on being competitive with the out-the-door prices of any other retailer.

I just wanted to touch on something you mentioned on good, better, best in terms of just sort of product availability. Is this an environment where you would actively adjust the sort of good, better, best? And I guess the second question that I have is around product availability; I think you mentioned seeing some stuff in the last few weeks. Is your expectation that as we get through this year, the environment would get even better from a product availability or what you're seeing and hearing from your vendor base?

Thank you, Bob. You asked two important questions that we consider regularly. We don't make specific adjustments to our good, better, best categories at the outset. However, based on market conditions, our merchants strategize because we purchase in various ways. If they notice an excess in one category, like good, while lacking in better and best, they will try to balance those categories. We don't aim for a strict balance, so it's fine if there are more appealing options in one area. For example, if we've become unbalanced in men's shirts across certain brands or styles leaning towards good, we would aim to create better balance because we strive to cater to a diverse customer base and don’t want to be limited to one price point or look in any category. It's a complex topic, and while we do make adjustments, they are not as stringent as those in a traditional store. Regarding your second question, could you remind me what it was?

It was just more on product availability. I think you mentioned you're seeing some better product the last few weeks. Do you foresee the next six months being materially better than you saw over the last 12 months? I'm just trying to understand when you look at the environment and the supply chain.

Yes, here's the positive aspect. As retail improves, the wholesale market, which primarily consists of imported products, tends to respond with increased purchasing. This usually leads to more excess inventory. In theory, we should expect greater availability in the coming months, especially if conditions normalize. Retailers may reduce their orders more significantly. Currently, there is a considerable amount of availability, particularly following the holiday season and moving into the first quarter. I believe this might increase even further as things settle down. You’ve raised a great question, and we consistently discuss these important topics. All right. Thank you all for joining us today. We enjoyed our discussions. We'll be updating you again on our first-quarter earnings call in May. And let me just say from the team here at TJX, we hope you all stay well and talk to you soon.