TJX Companies Inc (TJX) — Q2 2023 Earnings Call Transcript

Thanks, Sheila. 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 30, 2022. Further, these comments and the Q&A that follows are copyrighted today by The TJX Companies, Inc. Any recording, retransmission, reproduction or other use of the same for profit or otherwise without prior consent of TJX is prohibited and a violation of United States copyright and other laws. Additionally, while we have approved the publishing of a transcript of this call by a third party, we take no responsibility for inaccuracies that may appear in that transcript. We have detailed the impact of foreign exchange on our consolidated results and our international divisions in today’s press release and the Investors section of our website, tjx.com. Reconciliations of the non-GAAP measures we discuss today to GAAP measures are posted on our website, tjx.com, in the Investors section. Thank you. And now I’ll turn it back over to Ernie.

Good morning. Joining me and Deb on the call is Scott Goldenberg. I’ll start today by once again thanking each of our global associates for their hard work. I truly appreciate their commitment to bringing our customers excellent value every day. Now, to our results. I am very pleased with our second quarter pretax profit margin, which was above our plan and our earnings per share, which are at the high end of our plan. This is despite U.S. comp sales coming in lighter than we expected as we believe historically high inflation impacted consumer discretionary spending. We achieved the strong profitability through better-than-expected merchandise margin and disciplined expense management. I can’t emphasize enough how this quarter is a testament to how great our business model is. Our teams executed our off-price fundamentals extremely well, and our merchants did an excellent job buying the right merchandise in the right categories. Across the company, our talented associates all played a part in delivering great value to our customers every day and helped our company drive strong profitability in the quarter. As we enter the second half of the year, we see the flexibility of our business and our value proposition as key advantages in the current retail landscape. While we’re not immune to macro factors, over our 46-year history, the flexibility of our off-price model and our commitment to value have served us very well in different kinds of macro environments. We attract a wide range of customers, which we believe is a key advantage in today’s environment. Long term, we remain very confident in our plans to capture market share and improve the profitability profile of TJX. I’ll talk more about our opportunities for the remainder of 2022 and beyond in a moment. But before I continue, I’ll turn the call over to Scott to cover our second quarter financial results in more detail.

Thanks, Ernie, and good morning, everyone. I’d like to echo Ernie’s comments and thank all of our global associates for their continued dedication to TJX. I’ll start with some additional details on the second quarter. Second quarter consolidated pretax margin of 9.2% was above our plan. We are very pleased with our strong flow through, despite our softer sales. Our pretax margin outperformance was primarily driven by merchandise margin and effective expense management, which were both better than we planned. Pretax margin was down 150 basis points versus last year’s adjusted 10.7%. Merchandise margin had a significant benefit from a combination of strong mark-on and our pricing initiative, but was down due to 240 basis points of incremental freight pressure. Incremental wage costs were 80 basis points. Second quarter U.S. comp store sales decreased 5% over an outsized 21% open-only comp increase last year versus fiscal ‘20, which when summed together would be a 16% comp increase on a three-year stack basis. Moving on, we are very pleased that our comp sales in our overall apparel business at Marmaxx were slightly positive every month of the quarter. U.S. home comp sales were down low teens versus a 37% U.S. home open-only comp increase last year and were the primary driver of the U.S. softer sales trends we saw. For the second quarter, U.S. average basket was up, driven by a higher average ticket, and U.S. customer traffic was down. Lastly, earnings per share of $0.69 were at the high end of our plan. Now, to our divisional results. At Marmaxx, second quarter segment profit was 12.9%. Comp store sales decreased 2% versus an 18% open-only comp increase last year. Again, it was great to see their overall apparel comps slightly positive. While customer traffic was down, we saw an increase in Marmaxx’s average basket, driven by a higher average ticket. At HomeGoods, second quarter segment profit of 2.7% was hurt by nearly 800 basis points of incremental freight costs. Comp store sales decreased 13% versus a 36% open-only comp increase last year when we saw outsized spending in home-related categories. HomeGoods average basket increased significantly driven by a higher average ticket, and customer traffic decreased. We were very pleased with the improvement in profitability we saw at our international divisions. At TJX Canada, second quarter segment profit margin of 15.8% exceeded their pre-COVID Q2 fiscal ‘20 level. Overall sales increased 22% and benefited from having stores open all quarter this year. On a constant currency basis, TJX Canada sales were up 28% in the second quarter. At TJX International, second quarter segment margin of 7% was significantly higher than the first quarter and also exceeded their pre-COVID Q2 fiscal ‘20 level. Overall sales decreased 7%. This sales decline is entirely due to the impact of foreign exchange. On a constant currency basis, TJX International sales were up 6% in the second quarter. As to e-commerce, it remains a very small percentage of our overall sales. We continue to add new brands and categories to our sites so shoppers can see something new every time they visit. Moving to inventory. Our balance sheet inventory was up 39% versus the second quarter last year. On a per-store basis, inventory is up 35% on a constant currency basis. We are very comfortable with our balance sheet and store inventory levels. Importantly, overall store inventory turns are better than our pre-pandemic levels. I’ll finish with our liquidity and shareholder distributions. During the second quarter, we generated $641 million of operating cash flow and ended the quarter with $3.5 billion in cash. In the second quarter, we returned over $1 billion to shareholders through our buyback and dividend programs. Now, I will turn it back to Ernie.

Thanks, Scott. I’d like to start by sharing the key traffic, sales and profitability opportunities we see for the remainder of the year. Starting with the top line. First, we are excited about our merchandising plans for the fall and holiday season. Again, this year, we will be flowing eclectic assortments to our stores and online multiple times a week. This is a strategy that has worked well for many years and sets us apart from other retailers during the busy holiday season as shoppers can see something new every time they visit us. We are confident that we can execute on our merchandising initiatives and manage our supply chain to keep our shelves fully stocked. Second, availability of merchandise across good, better, and best brands is exceptional. We have plenty of open-to-buy, and I have great confidence that our buying team of more than 1,200 buyers will bring the right brands, fashions and values to our consumers throughout the year. Next, we are laser-focused on driving traffic and sales with our marketing initiatives. This year, we have sharpened our messaging to reinforce our value leadership position. Each of our banners are communicating that we offer shoppers more for their money, and at the same time, deliver great brands and quality. In an environment where consumer wallets are stretched, we believe it is as important as ever to amplify our value messaging across television, digital and social media platforms. I also want to highlight that our customer satisfaction scores remain very strong. Further, we continue to attract a significant number of millennial and Gen Z shoppers, which we believe bodes well for the future. Moving to profitability. We are extremely pleased that we are able to increase our full year pretax margin guidance in this environment, giving us confidence of the merchandise margin opportunities we see. The buying environment is very attractive, and we believe we can continue to benefit from buying better. Further, our pricing initiative is working very well. Our teams have done an outstanding job implementing this initiative over the past year, and we are very pleased that our value perception scores remain very strong. Again, we are seeing extraordinary off-price buying opportunities in the marketplace and have no issues with overall availability. We are in a terrific inventory position, and we have plenty of open-to-buy to take advantage of the current environment. This allows us to offer even more exciting merchandise and value to our shoppers, which is our top priority every day. Lastly, we remain focused on managing expenses and continue to look at ways to operate our business more efficiently. Now, I’d like to remind you of the characteristics of our business that we believe strongly position us to continue our successful growth around the world over the medium and long term. First and foremost is the strong appeal of our great values, outstanding merchandise and differentiated treasure hunt shopping experience. Further, we believe the ability to touch and feel merchandise and take it home the same day is very important to consumers. Second, we see an excellent opportunity to grow our global store base by at least another 1,500 stores in our current geographies. We are extremely confident that there will be more than enough real estate locations and merchandise available to support our store growth plans. Again, being one of the most flexible retailers in the world is a tremendous advantage. The flexibility of our opportunistic buying, supply chain and store format enable us to change up our floor space to expand to hot categories and trends that shoppers are looking for. As to profitability beyond this year, we remain committed to returning to our pre-COVID pretax margin level of 10.6% within three years. We expect that across all of our divisions, our merchandise margin opportunities, the moderation of expense headwinds, particularly freight, and our focus on expense management will contribute to our improved profitability. As always, we believe driving outsized sales is our best opportunity to improve pretax margin over the long term. Turning to corporate responsibility. I’d like to update you on our commitment to building a more inclusive and diverse workplace. Last year, we completed our global associate inclusion and diversity survey. This was an important step, and we used the findings to help to find three global inclusion and diversity priorities for the company: increase the representation of diverse associates throughout all levels of our talent pipeline; equip leaders with the tools to support difference with awareness, fairness, sensitivity and transparency; and empower all associates to integrate inclusive behaviors, language and practices in how we work together and understand our role and responsibility in inclusion. We have a number of initiatives underway to help support these priorities. For example, we have introduced a new leadership competency and cultural factor focused on inclusion. In addition, associate resource groups similar to those we have in the U.S. have launched and are now active in both Canada and Europe. Also, teams throughout the organization have set up committees to better incorporate inclusion and diversity into our everyday work. In our communities, we continue to support a number of organizations that work with Black communities and other communities of color. In addition, we have deepened relationships with some nonprofit partners in the U.S. to expand our reach to diverse students for recruitment efforts. We appreciate that this is a work in progress, and we remain committed to our global priorities and helping associates feel welcome, valued and engaged. In closing, I want to emphasize my confidence in the future of TJX. We have a long track record of successfully operating through many different types of economic and retail environments. We believe value is as important as ever to consumers, and delivering great value has been our mission for over 45 years. We are very confident in the power of our off-price buying and pricing initiative while maintaining our value gap with other retailers, as always. We continue to invest in our stores and shopping experience, which we believe positions us strongly, and we remain committed to returning cash to shareholders. Further, we have a management team with decades of off-price expertise at TJX and a very deep bench of talent who have successfully navigated through the unprecedented COVID environment. I am convinced that we are set up well to grow our top and bottom lines over the medium and long term and am confident in our plans to grow TJX into an increasingly profitable $60 billion-plus revenue company. Now, I’ll turn the call back to Scott for some additional comments, and then we’ll open it up for questions.

Thanks again, Ernie. I’ll start with the full year. We now expect full year U.S. comp sales to be down 2% to 3% versus an outsized 17% U.S. open-only comp increase last year. This guidance now reflects the flow-through of our second quarter U.S. comp sales and our expectations for the second half of the year, which assumes our three-year stacked U.S. comp continues at levels similar to recent trends. For the full year, we are now planning total TJX sales in the range of $49.6 billion to $49.9 billion. The lower sales guidance includes our lower-than-planned second quarter sales and our updated sales expectation for the second half of the year. Despite the reduction in our sales plan, we are pleased to be raising our guidance for the full year adjusted pretax margin to 9.7% to 9.9%. This is 10 basis points higher than our previous guidance due to our assumption for even stronger flow-through for the back half of the year. Our improved profitability outlook versus our prior guidelines is due to stronger merchandise margin, better expense management and less incremental freight and wage pressure expected in the second half of the year. For modeling purposes, we are now assuming 140 basis points of incremental freight expense and 70 basis points of incremental wage costs. For full year adjusted earnings per share, we are now planning a range of $3.05 to $3.13, which is up 7% to 10% over last year’s adjusted $2.85. This guidance now includes a $0.03 negative impact from FX that was not contemplated in our original full year plan. Excluding this impact, the high end of our earnings per share guidance would be the same as our original plan. For modeling purposes, for the full year, we are currently anticipating an adjusted tax rate of 25.5%, net interest expense of approximately $20 million and a weighted average share count of approximately 1.17 billion. We remain committed to returning cash to our shareholders through our dividend and stock repurchase programs. In fiscal ‘23, we continue to expect to buy back $2.25 billion to $2.5 billion of TJX stock. Now to our third quarter guidance. For the third quarter, we’re planning pretax margin in the range of 10.1% to 10.4%. This guidance assumes approximately 100 basis points of incremental freight expense and about 80 basis points of incremental wage costs. In the third quarter, we are planning U.S. comp store sales to be down 3% to 5% over an outsized 16% U.S. open-only comp store increase last year. Next, we are planning third quarter TJX sales in the range of $12.1 billion to $12.3 billion. For modeling purposes, in the third quarter, we’re currently anticipating a tax rate of 25.8%, net interest expense of approximately $2 million and a weighted average share count of 1.17 billion. As a result of these assumptions, we’re planning third quarter EPS of $0.77 to $0.81 per share. Our third quarter and full year guidance implies that for the fourth quarter, pretax margin will be in the range of 10.1% to 10.4%. U.S. comp stores will be in the range of flat to down 1%, and earnings per share will be in the range of $0.92 to $0.96. In closing, I want to reiterate that we are confident with our medium- and long-term growth and profitability plans. Further, we have a strong balance sheet and are in excellent financial position to navigate the current environment while simultaneously investing in the growth of our business and returning significant cash to our shareholders. Now, we are happy to take your questions. As we do every quarter, we’re going to ask that you please limit your questions to one per person and one part to each question to 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.

Thank you. Good morning. Can you just talk a little bit about your view of the U.S. consumer and how that changed over the course of the quarter? Are you seeing any pushback to the price increases you’ve taken? And are you seeing that trade-down customer shop your store a little bit more? Thank you.

Thank you, Lorraine. The U.S. customer trends this quarter have fluctuated somewhat. We experienced a significant increase in fuel prices mid-quarter, which directly affected our sales. Besides fuel, food prices are another area where inflation significantly influences consumer behavior. Recently, fuel prices have decreased, and I suspect there may be a slight delay in experiencing the benefits of that drop, which could positively impact us as the quarter progresses. To clarify your question about pricing pushback, we have none. We conduct qualitative studies and can measure sales, even down to the SKU level, as well as for entire categories, departments, and the overall store. In fact, we’re comparing our inventory turns and sales to pre-COVID times, specifically fiscal year 2020 and calendar year 2019. In many instances, our inventory turnover is actually faster now compared to those years, which were very successful for us. So overall, we have no concerns. There have been a couple of items we had to adjust quickly, but I would say our success rate is around 95%. Your question is excellent, as we monitor this every week, and it hasn’t been an issue. We felt it was wise to take a more conservative approach to sales in the second half, as it has been a bit volatile. We look at our sales in relation to the last fiscal year and have adjusted our outlook based on that recent trend. Our goal is always to exceed those figures. The management team across all divisions is focused on achieving that. While it’s too early to revise our numbers, we believe Q4 presents a significant opportunity for us. Last year, we lost momentum in several categories, but I feel optimistic about driving additional sales specifically in Q4. Thank you for the question.

So, it’s kind of a perfect set up for my question, Ernie. So, on the overall product availability, are there any inventory constraints by category that you still see remaining or on the very attractive buying environment and maybe some of the category opportunity you left on the table last year that you’ve cited? Do you see this translating now to an optimal fall and holiday assortment across apparel and home? And maybe just last, could you elaborate on the excitement you cited in the release for some of the back half initiatives to drive traffic?

Sure. That's a great question, and it builds on what we discussed earlier. In terms of constraints, I can tell you the only ones we're facing are those we’ve imposed on ourselves to prevent merchants from buying too much too quickly. This is something we've done intentionally because my senior team’s primary focus right now is to manage merchant purchases carefully. As mentioned in our release, many of you are aware of the significant amount of goods available in the market. While I hesitate to call it unprecedented, it is certainly at a higher level than we've seen before across all our product tiers. For example, we've faced challenges in our home category, similar to other retailers, as indicated by HomeGoods sales. However, they, along with Marmaxx, have worked hard to maintain clean inventories and have taken aggressive markdowns, ensuring we enter the latter half of the year with no liabilities. This positions us to deliver fresh excitement by pursuing trending items. HomeGoods, in particular, while slightly behind on our three-year growth expectations, is now in a strong inventory position thanks to their efforts. We've created a significant open-to-buy situation, and normally we don’t share figures like this, but I can tell you that we plan to acquire 4 million units in HomeGoods in the next few weeks, all destined for sale in September. Given the current market conditions and availability, we are able to target the strong categories in home and make better purchases than ever. This approach will certainly help drive sales since we will be offering fresh and high-quality goods, allowing us to be selective in our choices due to ample availability. Additionally, Marmaxx is also in an excellent inventory position. As we look towards the fourth quarter, which is critical for gift giving, I’m excited about the brand opportunities available. We’re seeing substantial open-to-buy and a variety of options across our different categories, including some new vendors that we didn’t have last year. I receive weekly updates on key vendor purchases, and the last two weeks have brought in meaningful quantities from vendors we didn’t have access to before. While it's tough to quantify and incorporate this into our sales forecasts right now, I am genuinely excited about the potential upside. I apologize for the lengthy answer, but you’re addressing some of the most exciting aspects of our model that I believe will differentiate us in the market. Thank you.

Ernie and Scott, you guys have been talking about getting back to this sort of 10%-plus pretax margin in the back half. And I mean, in a year when so many retailers are struggling with margin visibility, you guys look to be sort of solidly on track to hit those targets. I wanted to know if you could sort of step back and talk about margin, not specific targets necessarily for 2023 or 2024, but just what are the puts and takes as we head into next year and the following? What are the puts and takes on margin? And do you see opportunity to sort of claw back even more of the margin here over the next couple of years that we saw under some pressure through COVID? Thanks.

Yes. Kimberly, I’ll let Scott discuss some of the key aspects of this. I want to emphasize one point I mentioned earlier, which is that I’m really pleased with our progress. At the beginning of the year, we predicted we could reach approximately 10%. As we speak, we're seeing numbers around 9.7% to 9.9% this year. Looking ahead to the next three years, I believe Scott will elaborate on our confidence in returning to the pre-COVID margin of 10.6% for TJX. He will provide additional details on the factors affecting this. I also want to mention that we’re seeing a moderation in some expenses, including freight. We're aware of the direction of wages, which we haven't discussed in this call but feel comfortable forecasting. Currently, a significant factor in this environment, alongside what Scott will mention, is our merchandise margin. The opportunities we see arise from two main areas. We've discussed in our last two calls about improving our retailing approach, and one aspect we're seeing is our ability to lower costs on light goods due to their availability. Over the next couple of years, I envision that we will be successful in both retailing and reducing costs because our buyers are performing exceptionally well in the market. The current market across various categories and vendors presents some incredible opportunities. This situation is not temporary, influenced by industry trends like store closures and changes in online shopping patterns. We believe we can gain market share and enhance our margins as a result. Scott, I don’t know if you...

I needed to hydrate a bit in the last few minutes. First, I’d like to mention that at the beginning of the year, we anticipated performance to be similar to last year's range of 9.5% to 9.6%. The fact that we have seen nearly a $2 billion decrease in sales from our initial guidance, excluding foreign exchange impacts, while our margins are increasing, reflects our business model and ability to navigate this challenging environment. We have noted that we are not immune to sales fluctuations, but we have successfully leveraged other aspects of our business, such as gross margins and expense management, particularly when scaling down operations. We have efficiently managed our markdowns, with slight increases more due to some home sales. Our markdowns have remained in line with expectations. As freight costs begin to stabilize, we had indicated that if freight conditions improved, it would enhance our margins, which is indeed occurring in the latter half of the year. We are optimistic that our freight rates will be more favorable next year, thanks to various strategies our teams are implementing, including securing longer-term contract rates and optimizing our shipping routes. We expect to see reductions in demurrage costs and other expenses, which are reflected in our current outlook and are anticipated to carry into next year. Starting from a stronger base next year, we aim to navigate a sluggish global economy effectively. Although the home segment has changed, apparel sales have increased by 5%, and we are maintaining our margins as we transition into the next year, approaching the levels of comparable sales we saw pre-COVID. Anticipating slight retail increases combined with this year’s performance, we believe we can enhance our profitability, provided that, as mentioned, there are no significant headwinds. Additionally, other retailers have commented on the inefficiencies of merchandise flow into our distribution centers globally, affecting expense efficiency and output per hour. We expect to improve these factors next year by enhancing our purchasing processes and reducing lead times, allowing us to buy closer to actual demand. Overall, we are set up well for continued progress toward normalized sales growth.

Hey Thanks, guys. Curious if you can talk a little bit about what you saw just throughout the quarter on a monthly basis, maybe changes in traffic patterns and the detail you might be able to provide by concept. And Ernie, usually, you say something about the quarter-to-date period. So, curious if you’re seeing comp trends in line with that third quarter comp guidance. Earlier, I think you made a comment about maybe there being a lag effect on the gas price reduction. Does that mean that you have not seen any sort of a pickup as gas prices have come down? Anything you could say on 3Q quarter-to-date? Thanks.

Yes. I'll let Scott speak next, but I'll address the quarter-to-date. Essentially, the guidance we provided is aligned with our current trends. To your point, I'm optimistic we might see some benefits as the fuel factor decreases. Another aspect we're uncertain about this quarter, which we haven't mentioned yet, is some weather-related variability we experienced. Specifically, it was extremely hot in certain areas of the country, which may have affected us slightly. This is why we want to be cautious with our future comp estimates and adopt a conservative approach. My goal, along with the team's, is to exceed those estimates, and I believe we have potential for upside. If you consider other challenges we've faced, I should mention that our flow has been somewhat below our expectations, although we are addressing that in stores now. I think this could provide a slight increase towards the end of August going into September since we were running a bit lighter than intended at the end of July. This impacted Q2 as well. That said, we are currently trending in line with the guidance we provided. I hope this offers some clarity.

Yes. To add to what Ernie mentioned, our sales forecasting and guidance have remained consistent from the start of the year through the first quarter and into now. We typically consider the most recent trend over a period of 4 to 6 weeks for our projections for the remainder of the year. As Ernie said, while we hope to perform better in the fourth quarter, we have maintained this trend based on our observations. Last year was particularly volatile, with second quarter comps at 21% and third quarter at 16%, moderating in the fourth but still above a typical year. Therefore, we felt this was the most prudent approach from a sales perspective. The adjustments primarily reflect more on HomeGoods than Marmaxx since HomeGoods sales have declined more than those at Marmaxx compared to previous trends, which will influence our future outlook. Regarding the first question from the call about inflation and gas prices, in the first quarter, we noticed that sales in our stores located in lower-income areas fell below those in higher-income areas for the first time in several years. This trend continued into the second quarter, although the change from the first to the second quarter was similar. Higher demographic stores are still performing better than lower ones, which marks a significant shift from the trends observed over the past five to seven years. Overall, it appears that spending impacts have remained consistent across different demographic levels, with minimal geographic variations within the United States.

Ernie, what drove that slower flow relative to what you would have liked at the end of the quarter there?

We monitor the sales trends closely. In July, when we experienced a slight decline, we decided to reduce our shipping. This adjustment led to somewhat lower shipping volumes than we would have preferred. However, we adapted quickly and expect to be in a good position moving forward. Our method of staging goods in the warehouse gives us an advantage, allowing us to manage shipping based on sales patterns. If we notice a slowdown in sales, we can adjust our shipping accordingly. Sometimes, we face unexpected situations where we ship according to sales that later increase, and we realize we could have shipped more. This was one of those instances, and it was solely our execution that impacted the situation. The team responded well, and while we may have lost a bit of business for a couple of weeks, we anticipate getting back on track soon. It’s a complex process, especially with so many stores involved, but I commend the teams for their quick response. Generally, our judgment on shipping adjustments is correct most of the time; this was just an exception.

I would like to understand what factors are included in your guidance regarding competition from other off-price retailers like Nordstrom Rack, Burlington, or Ross. Given that your inventory availability seems to be strong, do you believe that other retailers might not be performing as well? Do you anticipate increased competition from them, and how do you think that would affect your business? Thank you.

Yes. We keep things straightforward with our teams. Our buyers and planning and allocation team are exceptional. The good news is they remain focused and I advise them not to be overly concerned about competitors because we are in a fortunate position. Our size and strong relationships with certain vendors set us apart. Some of these vendors do not compete directly with those you mentioned, while others do. From our perspective, there's plenty of inventory available in the off-price sector, and this is typically the case. Currently, we do not anticipate any issues arising from this. How competitors manage their inventory and purchasing strategies is up to them. Our approach to acquiring goods is to maintain liquidity and reduce the amount purchased further in advance than usual, not due to concern about competitors, but because we expect an abundance of goods across all branded areas. For Q4, I believe we will have some of the best branded offerings we’ve seen in a while, irrespective of competitors’ buying patterns. Our merchants do consider whether certain goods could end up with competitors based on their inventory levels and their importance to our strategy when making purchasing decisions. I commend them for managing this effectively in the current environment. Interestingly, we prefer this type of environment with its volatility, as it often presents market share opportunities for us to gain additional brick-and-mortar market share. Our model is flexible, enabling us to respond quickly to trending categories compared to most retailers. Thank you for your question.

Ernie, you’ve made some comments about the strong buying environment and the opportunity that that better buying can drive some of the margin improvement that is underpinning the improvement of 10.6% pretax margins. Can you discuss your view on the longevity of this benefit and perhaps the opportunity for this buying environment to persist even when we’ve heard about some order book cuts into the second half of this year and also a more promotional retail environment overall? Thank you.

Sure, Brooke. We often discuss these topics internally. We believe our strategy has several years of longevity. From what we’re observing, there seems to be even more opportunity in the retailing of goods, and it’s not solely merchant-driven. Some of the costs that Scott mentioned might follow a trend over a few years due to the sharp increase in some freight costs. We expect a slow correction, not a quick one. The way we buy goods and our retail approach is more important to the market and key vendors than ever. Regarding the promotional environment, we haven’t encountered an increase in promotions; if anything, inflation has made it less promotional. Many of these costs are factored in going forward. I anticipate that the promotional environment won't worsen for a few years, so we’re in a good position. Our mission remains to keep the difference between the out-the-door retail price consumers see and what we sell at our ticketed price. There's a lot to discuss on this topic, but many retailers continue to engage in frequent sales. Consumers today seek authenticity and an entertaining shopping experience. We're committed to providing that alongside value. In fact, we're enthusiastic about enhancing our store experience to align with the strong merchandise values we offer. We're aggressively returning to our remodeling program and are excited about a new prototype in our Marshalls business that we're rolling out. We aim to gain market share not only through our merchandise value but also through the shopping experience. This is a long-term strategy. Regarding buying and retailing, we see no reason to doubt that this will continue for several years. Thank you for the great question, Brooke.

Ernie, could you elaborate on your earlier comment about the availability of brands and your excitement, especially for the fourth quarter? Are you referring to designer brands, or is this more widespread across categories? Is it primarily focused on apparel or specific fashion areas? Additionally, regarding T.J. Maxx, we know that TJX is recognized for its flexibility at scale. Can you discuss your ability to adjust away-from-home categories if they remain soft for a while, considering consumers are dealing with inflation and you are cycling those significant gains from last year towards more reopening-type categories? Does the organization as a whole have the capacity to shift its merchandise assortment? Thank you.

No, Omar, we are focusing on two major areas. First, we are adjusting our assortment from home goods. We've consistently implemented this in Marmaxx and our international divisions, as well as across TJX, by reallocating funding away from home goods and into Marmaxx. Additionally, in Europe and Canada, we do the same by taking open-to-buy. Sometimes, we even move merchants from other areas to those that are trending and forecasted to perform well over the next 12 to 18 months. This flexibility has been a key strength of our business model, allowing us to quickly adapt. Because we purchase our inventory much closer to sale compared to traditional retailers, we avoid the large liabilities associated with excess home products that many retailers experience. You often hear about other retailers struggling with unsold inventory that impacts their profits, but we haven’t encountered that to the same extent. We’ve taken our markdowns and were able to shift more inventory. Regarding your first point, it’s worth noting that our brands are diverse and not limited to just designer or apparel. We are acquiring various brands, including in accessories and hardlines. If you visit our stores, especially in the hardlines section or the queue line area, you'll notice new vendors, as well as a more aggressive approach to certain categories. When we speak of different quality levels, it's not solely about high-end designer items; it can also include better quality hardline products. As we approach the Christmas season and gift-giving, these special hardline vendors provide fantastic gift options that go beyond apparel. Consumers today often give gifts that include tech items, which we prominently feature in our queue line. We are excited about the opportunities this presents, especially as we look toward Q4.

All right. Thanks for squeezing me in. Congrats on a nice quarter. Ernie, not to belabor the point, but just can you talk to the mark-on opportunity? You’ve talked about it in prior calls. It seems like you’re getting more conviction in the opportunity and the deals you’re getting from vendors. And then, maybe just elaborate on what this means for merch margin and gross margin as we go forward. Thanks.

Sure, John. We focused on the previous calls because there was new information to share regarding the retailing of our goods and how that strategy could help us manage costs. Most retailers around us have raised prices in certain categories, some broadly, but we have approached this carefully and selectively. In this current environment, our teams are also seeing improvements in mark-on from costs, which is why we're discussing this more now. It seems that the two aspects have balanced out, and our results indicate a positive outlook for our merchandise margin in the latter half of the year, and that confidence comes from both factors.

Yes. To reiterate what Ernie mentioned, our improved retail strategy and the enhancements compared to our previous guidance, particularly regarding merchandise margin, stem from better purchasing decisions. Our average retail has increased as we intended, and this improvement is evident across all divisions. We've seen a notable enhancement in our mark-on for the latter half of the year, resulting from improved buying. While costs are rising, retailers are seeing an increase that surpasses those costs.

John, the important point here is that even though we are focused on improving our strategy, we are not negatively impacting sales. In fact, the opposite is true; our values today are often even better compared to the past because retail prices have risen more significantly than our increases. This reflects in our inventory turnover, which is actually faster than it was in fiscal year 2020, suggesting that when customers are in the store, they are responding positively to our offerings. It's crucial to have both a solid buy and a strong retail presence to ensure customers recognize the value we are providing. I'm confident that in many cases, we are delivering more value than our competitors than ever before.

With the moderation in freight costs and improved buying, our merchandise margin for the second half of the year is expected to increase, compared to a decline in the first half of the year.

I don’t want to overemphasize the point, but what we experienced in the second quarter and the way we are guiding reflects a more conservative sales outlook yet a healthy profit trajectory. This truly exemplifies the effective utilization of our business model, which is only possible due to our dedicated teams. Our associates across merchandising, planning, marketing, and logistics are executing this strategy successfully. This situation clearly demonstrates our ability to adapt and capitalize on market opportunities.

Excellent. Thanks, guys.

Thank you, John. That was our last question. So, thank you all for joining us today, and we will be updating you again on our third quarter earnings call in November, and we look forward to it. Thank you, everybody.