TJX Companies Inc (TJX) — Q3 2023 Earnings Call Transcript

Thank you, Fran. Before we begin, Jeff 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 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.

Thanks, Jeff. Good morning. Joining me and Jeff on the call is Scott Goldenberg. As we announced today, John Klinger is being promoted to Chief Financial Officer at the beginning of our new fiscal year in late January. I wanted to take this opportunity to congratulate John on his broader role, and I look forward to working more closely with him as we move forward. Scott is remaining with the Company as Senior Executive Vice President, Finance. I would like to recognize his long and extremely successful tenure as CFO for which we are enormously grateful. I cannot emphasize enough how beneficial Scott has been to me personally. He has truly been a great partner. We are very pleased that TJX will continue to benefit from both, John and Scott's expertise and leadership. I'll start today by thanking all of our global associates for their hard work and commitment to TJX. We truly appreciate their collective efforts to deliver great merchandise and values to our shoppers every day. Now to our results. I am very pleased with our third quarter performance. Once again, we delivered strong profitability and a terrific merchandise margin. On the top line, our better-than-expected U.S. comp sales were driven by the excellent performance at Marmaxx, particularly its apparel business, where sales were strong. Our third quarter results once again highlight the outstanding execution of our flexible business model by our very talented associates. While our business is not immune to macro factors, I am convinced that the flexibility of our off-price retail model and the depth of our expertise and experience, especially within our merchant organization, will remain an important advantage for us. As we enter the fourth quarter, we're in a terrific position to take advantage of the tremendous buying environment and to flow fresh, exciting assortments to our stores and online this holiday season. We have many initiatives planned to drive sales and our value proposition remains very strong. Further, we are convinced that our great values will continue to resonate with consumers whose wallets remain stretched. Medium and longer term, we remain extremely confident that TJX is well-positioned to gain market share and become an even more profitable company. I'll talk more about our holiday plans and our opportunities beyond 2022 in a moment. Before I continue, though, I'll turn the call over to Scott to cover our third quarter financial results in more detail. Scott?

Thanks, Ernie, and good morning, everyone. I'll start with some additional details on the third quarter. Third quarter consolidated pretax margin of 11.2% was up 20 basis points versus last year. Third quarter pretax margin exceeded the high end of our guidance, largely due to the timing of some expenses. Our plans for the fourth quarter assume that most of this benefit will reverse out. Aside from the timing of expenses, the other components of our pretax margin were essentially in line with the high end of our plan. Merchandise margin was flat, despite 120 basis points of incremental freight pressure. Within merchandise margin, we saw a significant benefit from markon, mostly due to better buying. Incremental wage costs continued to be a headwind to pretax margin with a negative impact of 80 basis points this quarter. Third quarter U.S. comp store sales decreased 2% and exceeded our expectations. As a reminder, we were anniversarying an outsized 16% U.S. open-only comp increase last year, which was versus fiscal '20. When added together, our comp would represent a 14% increase on a 3-year stack basis. Further, U.S. comp sales improved each month of the quarter on that same 3-year stack basis. Excluding foreign exchange, third quarter total sales would have been at the high end of our guidance. For the third quarter, U.S. average basket was up. U.S. customer traffic was down, but strengthened as the quarter progressed and improved versus the second quarter. Lastly, adjusted earnings per share were $0.86. Again, this was above the high end of our guidance, largely due to a benefit from the timing of some expenses, and our plans for the fourth quarter assume that most of this benefit will reverse out. Now to our divisional results. At Marmaxx, third quarter segment profit margin was 13.5%. Comp store sales increased 3% versus an 11% open-only comp increase last year. Marmaxx's comp sales were positive each month and improved throughout the quarter. Again, it was great to see a strong comp increase in Marmaxx's apparel business. Once again, Marmaxx's average basket increased as it has throughout the year. While customer traffic was down, Marmaxx saw improvement each month of the quarter and versus the second quarter. At HomeGoods, third quarter segment profit margin was 8.9%. The segment profit margin improvement versus the first half of this year was mostly due to a significant moderation of the year-over-year impact of incremental freight costs. Comp store sales decreased 16% versus a 34% open-only comp increase last year when we saw outsized spending in home-related categories. HomeGoods' average basket increased slightly. At TJX Canada, we are pleased with their overall performance, particularly their strong profitability. Third quarter segment profit margin was 15.8%, exceeding their fiscal '20 margin. Overall sales on a constant currency basis were up 4% in the third quarter. Further, third quarter Canadian sales growth also improved each month of the quarter when compared to fiscal '20. At TJX International, third quarter segment profit margin was 6.7%, despite some deleverage from lower sales. Pretax margin was essentially in line versus fiscal '20 due to better buying and expense management, which mostly offset incremental freight wage and other expense pressures. Overall sales on a constant currency basis were down 1% from the third quarter. Moving to inventory. Our balance sheet inventory was up 26% versus the third quarter last year. This is higher than we expected due to early receipts of merchandise as the supply chain continued to improve. On a per-store basis, inventory was up 31% on a constant currency basis. We are very comfortable with our balance sheet and store inventory levels when compared to fiscal '20. Importantly, overall store inventory turns and markdowns are in line with our fiscal '20 levels. We still have plenty of liquidity and are in excellent position to take advantage of the great buying environment, including packaway opportunities. I'll finish with our liquidity and shareholder distributions. During the third quarter, we generated $1.1 billion of operating cash flow and ended the quarter with $3.4 billion in cash. In the third quarter, we returned $843 million to shareholders through our buyback and dividend programs. Now, I will turn it back to Ernie.

Thanks, Scott. Now, I'd like to highlight the opportunities we see to drive traffic and sales in the fourth quarter. First, in this inflationary environment, we believe it is important as ever to deliver shoppers excellent value throughout the store and online every time they visit. This is our top priority, and I am confident that our banners will be a destination for consumers seeking great value this holiday season. Second, as I've been saying all year long, the marketplace is absolutely loaded with quality branded merchandise across good, better, and best brands. Importantly, this has set us up very well to offer an excellent assortment of branded gifts this holiday season that we believe will excite and inspire our shoppers. Third, I want to highlight that we plan to flow fresh product to our stores and online multiple times a week, which is a key differentiator of our business compared to many other retailers. With the rapidly changing merchandise mix, I am confident that shoppers are going to be very satisfied with the gift assortments they see every time they visit. Our store teams are excellent at managing this flow and creating fresh organized shopping presentations throughout our stores. Next, we feel great about our holiday marketing campaigns that just launched. We believe these campaigns can help drive traffic from both new and existing shoppers across each of our banners. This year, each of our divisions will reinforce our value leadership and emphasize that shoppers can get more for their money when they visit. We are also highlighting the fresh flow of merchandise throughout the holiday season with messaging such as Spend Less, Get More, All Season Long. In the U.S. and Canada, we are leveraging the strengths of our retail brand portfolio and multi-banner campaigns, helping to drive efficiencies and building awareness. Further, for all our retail banners, we have strong comprehensive marketing plans in place to help us stand out. Lastly, the flexibility of our business model has allowed us to successfully operate our business against some level of retail promotion every year for the past 46 years. I really want to emphasize that we are extremely confident that we can manage through any type of promotional environment that we may see from other retailers in the fourth quarter and beyond. Looking beyond this year, we are convinced that we are set up very well to capitalize on the growth opportunities we see for our business in the medium and long term. On the top line, we believe we are well positioned to capture additional market share. We see many opportunities to drive sales and traffic as we attract a wide range of customers across many income demographics, which we believe is a key advantage of our business. Further, we have substantial store growth potential remaining in our current geographies around the world. In a retail environment where overall pricing has been reset higher, we believe our value proposition will be even more compelling and visible to consumers and that our treasure hunt shopping experience will hold tremendous appeal. I want to reiterate our continued confidence in product availability to support our long-term growth plans. Throughout our history, availability of quality-branded inventory has never been an issue for us. Our more than 1,200 buyers source from a universe of approximately 21,000 vendors and from over 100 countries. There has always been significantly more merchandise in the marketplace than we could buy, and we expect that to continue. As to our profitability outlook, we remain committed to returning to our fiscal 2020 pretax margin level. To be clear, that would be a 10.6% pretax margin by fiscal 2025. Over the next two years, our plans assume additional merchandise margin opportunities across all of our divisions. We also expect our overall expense headwinds to moderate and that freight will be a tailwind next year. Lastly, this outlook assumes that our overall comp store sales will return to a low single-digit increase in each of the next two years. Turning to corporate responsibility. I am pleased to share with you that our 2022 global corporate responsibility report was published this past quarter and is available on tjx.com. This report summarizes our fiscal 2022 initiatives and progress within our four areas of focus, which are workplace, communities, environmental sustainability, and responsible business. The report includes an appendix of ESG data and maps our work and disclosures to a variety of ESG standards and frameworks, including The Global Reporting Initiative, United Nations Sustainable Development Goals, and the Sustainability Accounting Standards Board. We're proud to continue to make progress in our programs and initiatives, and I'm grateful to our teams around the globe for the work they do to support our global priorities. As always, we invite you to visit tjx.com to read our full report, and we'll continue to update the site over the next year. In closing, I want to again thank all of our associates around the world for their hard work that led to our strong results in the third quarter. Our teams have put us in an excellent position this holiday season. I am convinced that we have some of the best talent in all of retail and across all areas of the business. Further, I believe their depth of off-price knowledge and expertise is unmatched and has driven our strong execution. I truly believe our associates will continue to be a major advantage for TJX going forward. I'm convinced that the flexibility of our off-price model and our commitment to value set us apart and have allowed us to successfully operate in many different economic, retail, and promotional environments. While we are impacted by macro factors, we have historically outperformed in both good and bad environments throughout our 45-plus-year history. We are confident that we can execute on our short- and long-term growth plans to build TJX into an increasingly profitable $60 billion plus revenue company. Now, I'll turn the call back to Scott to cover our full year and fourth quarter guidance. And then, we'll open it up for questions.

Thanks again, Ernie. I'll start with the full year. We have updated our outlook for full year U.S. comparable sales and now expect them to decline by 1% to 2%, compared to our earlier forecast of a decline of 2% to 3%. This update reflects the stronger-than-expected sales in the third quarter and our increased expectations for the fourth quarter. For the full year, we now project total TJX sales between $49.3 billion and $49.5 billion. This revision is influenced by our prediction that unfavorable foreign exchange rates will have a negative effect on our reported sales for the fourth quarter. For adjusted pretax margins for the full year, we anticipate a range of 9.8% to 9.9%, which keeps us at the higher end of our full year margin guidance. Regarding adjusted earnings per share for the full year, we now expect a range of $3.07 to $3.11 million, which represents an increase of 8% to 9% from last year's adjusted figure of $2.85. The upward adjustment at the higher end of our forecast is attributable to an additional $0.02 negative impact from unfavorable foreign exchange rates. Excluding this foreign exchange impact, the high end of our adjusted EPS guidance would remain unchanged. For modeling, we currently foresee approximately 130 basis points of additional freight costs and 70 basis points of extra wage expenses for the full year. We also anticipate an adjusted tax rate of 25.3%, net interest expense of around $10 million, and a weighted average share count of roughly 1.18 billion shares. We are dedicated to returning cash to our shareholders through dividends and stock buybacks. In fiscal '23, we still plan to repurchase between 2.25 and 2.50 billion dollars' worth of TJX stock. Now regarding the fourth quarter, we are raising our expectations for U.S. comparable store sales to be flat to up 1% over a significant 13% increase in U.S. open-only comparable store sales last year. Our total fourth quarter TJX sales are now expected to be in the range of $13.9 billion to $14.1 billion. For the fourth quarter, we are adjusting our pretax margin expectation to be between 9.5% and 9.8%. This projection assumes that the benefits from third quarter expenses will largely reverse in the fourth quarter. In terms of modeling for the fourth quarter, we expect a headwind from increased wage costs, while freight costs are anticipated to remain stable. Additionally, we expect a tax rate of 24.9%, net interest income of about $19 million, and a weighted average share count of approximately 1.17 billion. Based on all these assumptions, we plan for fourth quarter earnings per share to fall between $0.85 and $0.89. This outlook considers that most of the expense benefits from the third quarter will be reversed in the fourth quarter and reflects an expected adverse impact from foreign exchange rates. In closing, I want to emphasize that we are in a strong position both operationally and financially to expand our business. Our balance sheet is robust and we continue to generate significant cash flow. Furthermore, we are well-positioned to make important investments to support our business growth while simultaneously returning substantial cash to our shareholders. Now, we invite your questions. As a reminder, please limit your questions to one per person to help us manage the call’s schedule and accommodate as many analysts as possible. Thank you. Now, let’s open the floor for questions.

Thanks for taking my question. Great job in the quarter. Ernie, if you take a look at the consumer, a macro lens for your business, maybe you could talk a little bit about whether you're still seeing any resistance to the pricing that you put for your business and to the products? And also any trade-down effects showing up whether inside your business or you're pulling consumers in some other more premium channels? Thanks.

Thanks, Omar. Well, on the macro lens, with regard to the pricing, we are seeing very, very little resistance. And I would say our hit rate is in the 90-plus percent in terms of success on measuring it. In fact, at one point, I think, Scott and his script talked about how our turns are essentially where they were in FY20, which is always a barometer. So, we look at pre-COVID, and we get all the way down to a SKU level. So, we look at categories, we look at departments and then we go to SKU level. And obviously, we zero in on where we've adjusted the retail. And because of what's happened around us where the retails have gone up so significantly, we have really been so effective at it and hit extremely low resistance. So, a lot more, I guess, opportunity as we move forward to keep doing because we've spotted it, as you can imagine, we're also spotting places where we've gone up for retail and we can go up again. So you have that dynamic, which is a little unusual because sometimes we do an intermediate price point raise, and the goods, whether it's apparel or hard lines, have gone up a couple of price points because remember, some of the inflationary hits have been more than just 2% or 3%. So, there are some items that have gone up 10% or 20%, and we've only gone up the first price point. So, all in all, Omar, definitely more opportunity there, if anything, in terms of pricing stance. Scott?

Yes. Hi Omar. Scott. The other thing, and we said this last quarter, I'll use Marmaxx as the example, in terms of our sales, and obviously, we had some outperformance at Marmaxx. It's the consistency. So asking on the trade down, not necessarily saw that we saw any. But it was just a consistency across regions, across age of stores, across locations, urban, suburban, rural, across volume. Almost any way you look at it, we saw that same level of consistency. Most of our departments improved versus the second quarter, as you would expect, as the overall numbers went up. And I think it goes back to what Ernie has been saying just the strong execution of our buying and planning and our allocation teams.

The interesting point we want to highlight is one of our major strengths, which we may not emphasize enough. We trade widely across various brands—good, better, and best. This broader strategy complicates the ability to gauge whether there is a trade down since we're not targeting a specific demographic. Instead, we aim to appeal to diverse demographics across different income and age levels. We're not focused on just one category of goods. This makes it challenging to determine if we're seeing movement from one trade down area because we have attractive offerings at the good level. In some cases, we might be gaining from the good category without necessarily taking customers from other retailers. Ultimately, having such a diverse range of good, better, and best products will continue to benefit us in capturing market share.

I wanted to dig in on inventory a little bit further. Are there any pockets of excess inventory, particularly in home? And then what does your packaway capacity look like? If you were to purchase a large volume of spring product, does that preclude you from taking advantage of some of the great deals you're seeing during holiday?

I'll actually prompt Ernie to actually talk first about the markdowns and overall how that's been.

Yes, Lorraine, that’s a excellent question. One of the things we do that sets us apart from others, not just in off-price but across the board, is that we take timely markdowns throughout the year. Even if we find ourselves with inventory challenges, we address those situations quickly. We turn our home inventories very rapidly and maintain high standards for aggressive markdowns, probably as much as, if not more than, anyone else. This approach allows us to seize other market opportunities because we are always tackling any issues with our stores or inventory promptly. It really helps us avoid excess inventory, whether online or in-store. This strategy applies to all our brands, including HomeGoods, Marmaxx, Winners in Canada, and HomeSense in Europe. It’s a great question because if we managed it differently, which some others with a similar business model do, it doesn't mean they execute it as effectively or take markdowns as aggressively as we do. I believe this gives us a significant advantage.

Yes. Discussing markdowns this year, our markdown rate has been better throughout the year compared to fiscal 2020. While our markdowns have been slightly higher than we expected, we factored them into each forecast we provided, and they ended up aligning with our predictions. No surprises there. To reiterate, the majority of our inventory increase has resulted from receiving goods earlier than anticipated due to an improved supply chain. We still expect our inventory levels to stabilize by the end of the year. We've adjusted all our open-to-buys and will have fewer receipts this year than in last year's fourth quarter. This approach will help us manage our inventory effectively and maintain strong cash flow in the fourth quarter compared to both last year and fiscal 2020.

Congrats on a nice quarter and a tough backdrop.

Thank you.

So Ernie, could you speak to drivers of comp improvement as the quarter progressed? And notably, I think you cited sequential acceleration in traffic. Maybe how you see Marmaxx positioned to take share in holiday? And then Scott, merchandise margin, if you exclude freight, remains materially above 2019 levels. I guess, maybe if you could just help walk through what are the structural improvements in the model that you see relative to pre-pandemic?

All right. Yes, Matt, I'll address the first few points, and then Scott can elaborate on the margin aspects. We did see an acceleration in total sales during the quarter. You're highlighting that in certain categories, especially our apparel, which performed very well within Marmaxx compared to the broader store. This is a strong indicator for us, as it suggests we will attract more traffic moving forward. Typically, our best market share gains happen when every section of the store is contributing. Last year, the home business was exceptionally strong across the board, but we are particularly pleased with our apparel performance at Marmaxx. So, to answer your question, yes, apparel has been a driving force, which may not be the case for other retailers, as they might report more mixed results in their apparel segments. The reason our apparel stands out is the branded content we offer across various levels: good, better, and best. We focus on branded products rather than private labels in our ladies', men's, and kids' categories. I believe this focus will be crucial for our future performance. Regarding Marmaxx, our open-to-buy positions are solid, especially in areas driving strong sales right now. We also have a clear view of our on-order situation as we begin purchasing and allocating goods accordingly. This approach applies not just to apparel but also to accessories, hardlines, and tech. We're seeing our branded content reach a new level, driven by current marketplace conditions that have resulted in higher-than-normal inventory levels across many brands. Now, I'll turn it over to Scott to discuss margins.

Yes. Well, I'm not the expert. I'm actually why we're buying better. So, I'll let Ernie say that.

I just want to emphasize that looking back at the beginning of the year, our retail prices have remained mostly stable, as we've mentioned over the last few quarters. We haven't adjusted our retail prices significantly; they've only risen slightly above our costs, which have also increased. What has improved in the past few quarters, leading to a change in our forecasts, is that we are making better purchasing decisions and the market is quite favorable. Our freight is arriving as expected, although there’s some timing between the third and fourth quarters. While markdowns have come in a bit higher, overall, we are managing our buying more effectively than anticipated without making significant retail price increases. We expect this trend to continue into the fourth quarter, maintaining strong merchandise margins and overall better returns. That's all I have to share about merchandise margins. Yes, I'll jump in. Scott is indicating that it's been a two-part approach focused on improving our purchasing and retailing. While retailing efforts are ongoing, the new information is that we are indeed buying more effectively based on the market conditions, even better than we had expected a few months ago. Additionally, reports about the availability are proving to be accurate, contributing to increased inventory for business models like ours to leverage.

Yes. And we've also been helped out as we thought it would because we saw the apparel getting better as we move through the back half of the year. And last year, it was all about having a significantly higher home contribution. We're kind of back to where we were from the apparel home contribution at the end of this third quarter where we were back in fiscal '20. So, it's almost been a 6%, 7% change in the apparel home contribution, which certainly has benefited us a bit on just from a mix point of view on the average retail.

Ernie, I wanted to follow up on a few of the high-level guardrails that you provided into next year and calendar 2024. As you contemplate that low single-digit comp sales increase that you've suggested next year, are there any puts and takes that we should be contemplating by major banner? And do you expect this to be led by a sequential increase in traffic, or will this be a balanced traffic and ticket driver as a result of ongoing pricing strategy and better branded availability in the stores?

Those are insightful high-level questions. Regarding the single-digit comp, it's difficult for us to determine today how much will come from traffic or ticket. We are being very cautious with our traffic expectations based on current circumstances, but I believe it will likely be a mix. However, it's still early for us to make a definitive statement on that. To address your first question about how much it varies by banner, our current view is that the differences are fairly minimal across banners. They are all expected to be planned quite similarly within a couple of points. This approach is consistent with what we did last year. The surrounding volatility makes it challenging for Scott, his team, and myself, along with the other SEVPs, to arrive at our best estimate. It's hard to predict certain developments we've experienced this year, where sales haven't met our expectations. Nonetheless, we've managed to execute differently and achieve some outcomes that I believe will benefit us in the long run. Our model's flexibility, alongside our team's effective execution, has been impressive. Thus, I have to remain somewhat vague since we're uncertain. The only thing I can affirm right now is that we think our banners will be planned in a fairly narrow range.

I just want to go back to the markon benefit that you spoke about. You said that it helped in 3Q. I think it's been helping you. But maybe, Scott, can you frame the benefit that you saw in 3Q versus prior quarters? Also, how are you thinking about markon in 4Q relative to what you've been seeing? And then, also just curious about the expenses, just the nature of the expenses that shifted out of 3Q and into 4Q, what were those? If you could just give any detail there? Thanks.

We're not going into detail right now due to the timing of various factors, including inventory, flow, and related costs or expenses, as well as how they are capitalized from one quarter to another. Regarding the margin, if you examine it over a three-year period, it is primarily driven by strong markon, whether looked at over three years or two years. There's not much more I can add because there are tens of thousands of items involved. It's a mixture of retail improvements and better purchasing strategies, making it difficult to specify exactly what contributes to each. However, as we've discussed in the past several quarters, having a slightly higher average retail price positively impacts our expenses—whether in freight, stores, or distribution centers—and this has contributed significantly to the benefits we've been experiencing.

Got it. If I could just pivot one other the direction, Ernie. Just there's some concerns, just macro concerns out there over in Europe. I'm curious how you feel the business is positioned over there to take advantage of maybe consumers looking for value, maybe what you're seeing over there from a promotional perspective and competitive positioning of the business.

Yes, Paul, that's a great question. We discuss this frequently. The situation there is particularly challenging. The market declines among retailers are more severe compared to here. Our sales have not met our expectations in that region. However, we evaluate our performance against the retail market and we have been consistently outperforming the competition by around 500 to 1,000 basis points. While we are concerned about how the consumer is being impacted, we are gaining substantial market share. Our outlook for the next year or two is to continue increasing market share as conditions stabilize. We are maintaining strong liquidity and seeking similar healthy terms and execution as we do here. We need to be a bit patient regarding the environment, as we cannot control foot traffic. We can measure footfall into our stores, which has decreased, but conversion rates remain stable when customers are inside. The positive aspect is that when customers do enter our stores, they are pleased with the product selection and buying at rates similar to the past. The challenge lies in the reduced foot traffic, though it is less of a decline for us compared to our competitors. So, Scott...

Yes. The other thing is that the environment over there makes it even more challenging for most retailers. Ernie can add to this after me, but we are definitely adding as many new vendors as we have in the past and likely capturing our fair share of good, better, and probably even more better and best options in terms of branded quality.

Absolutely.

I think that's important to note. In the current environment, we continue to take advantage of relocation opportunities at favorable rates and also benefit from lower rates as our leases come up for renewal. We're effectively reducing some costs by leveraging these opportunities.

Yes, Paul, Scott made a valid point. In situations like this, we have a good, better, best approach. We have seen a significant amount of better and best products from some brands and substantial deals that we typically wouldn't have encountered or initiated recently with certain vendors. This all looks promising. It's truly our best method of marketing and a way to build long-term customer relationships. So, we plan to remain patient, stay the course, and execute as we always have. We'll address any margin fluctuations because we're maintaining the business effectively.

I guess, first for Scott, with respect to freight, just any further color on what you're seeing in terms of the inbound versus trends in domestic freight expenses, and how you're thinking about the recapture opportunity next year? And then Ernie, you've emphasized the gifting position quite a bit over the last few years. Can you talk about some of the learnings from recent years that you've incorporated into your holiday assortment and marketing plans this year that support your confidence? Thank you.

Sure. We are not providing specific guidance at this time, but there haven't been major changes to our expectations for the latter half of this year and next year. When we initially shared our long-range guidance for 2024 and 2025, which aimed for a 10.6% growth, we accounted for some benefits from freight over those two years. We still believe that factors such as reduced demurrage and ocean freight, as well as an increase in intermodal shipping, will positively impact us. However, we won't go into details until we provide more specific guidance in February. Overall, we believe these factors will create a positive impact over the next two years. Additionally, freight costs are expected to decrease significantly when comparing the third quarter of the previous year to the fourth quarter.

Mark, the good, better, best content has existed prior to the recent increase in availability. I believe it will remain at the current level, which is an unusually flooded market that exceeds what we can purchase. It's challenging to have long-term visibility. However, as I mentioned earlier, for over 40 years, we have consistently had more availability than we can buy, and I don't expect that to change. Additionally, even if availability decreases slightly, one significant change during COVID is that we have become more critical to our merchants and vendors than ever before. We believe we are their first call, and from a different perspective, we have established ourselves as increasingly important to the branded market. We've become essential for them to liquidate their goods, and they recognize that if they implement aggressive cuts, which mostly involve imports, we will be there to support them. Our relationships are stronger now than ever.

And Michael, the packaway, were you asking about the level of packaway?

I'm just wondering if you know that you have good stock for goods that can be used in the fall season next year, especially with the content and the amount of branded products that you're excited about today. You currently have visibility in stock that allows you to have those goods available before next fall.

Yes. We're currently at a lower level of packaway than usual. We're probably at about the same level or slightly below what we would typically expect. So, it’s more about what we anticipate we will be able to purchase for the remainder of the year.

Yes, I'll address that. What can occur due to availability is that typically, we are currently in mid-November. During this time, you are using the goods, so you wait until you have gone through a lot of the current inventory. As we approach December, you start to notice what goods from that vendor are still available. At that point, you might consider packing some of those items away. I believe there will be more packaways this year compared to last year. As Scott mentioned, we don't currently see a high level of packaway, but I would anticipate that more items will be packed away after this Christmas for next fall than we did last year.

Congrats on a good quarter. Typically, consumers trade down during these tough economic times, but that's clearly not the case for you yet. And I guess, I'm curious why you think that's different today? And I guess, when you look ahead, when do you think you may start to see that? Walmart has called it out, the dollar stores have started to call it out, but you and your peers have not. So just curious if you think it's on the come? And I guess, if you have any sense of when you think it might start to see it based on history in the business?

Yes, Chuck, it's difficult for us to determine if the trends we are seeing are due to customers trading down or if they are widespread across all segments. What we have indicated previously is that we cannot clearly identify trade-down behavior. This is partly because we aim to serve various customer levels. As a result, our performance appears to be relatively consistent. Currently, we are gaining market share overall. I wouldn't say we aren't experiencing any trade-down, but it seems to be just one aspect of various shifts we are encountering. Additionally, as Scott pointed out, if you examine specific regions, even in areas where stores are closing that might typically lead to trading down, we aren't observing any significant changes by region. This suggests that our gains are happening uniformly across different areas. Scott?

Yes. If you look back at history, specifically 14 to 15 years ago during the last recession, the effects were more pronounced among higher income demographics due to the impact of the stock market. Overall, this trend was notably evident in those groups. As Ernie mentioned, the situation is consistent across the board, suggesting we are experiencing similar impacts across various segments, not just at the top end.

I think we have time for one more question.

Hi. Congratulations, John and Scott. Can you elaborate on the HomeGoods business and describe what you're observing there, as well as the anticipated path of improvement? Additionally, what can you tell us about the comparison between home and apparel? Ernie, you mentioned apparel in relation to the normalized index. What should we anticipate regarding home and margin opportunities moving forward? Thank you.

For sales and margin, Dana, your focus is on the future. Our outlook is cautious for next year, as we are facing large increases this year, similar to others in the industry. The good news is that while our home business is declining, it is not as significantly as some other retailers. We are monitoring this closely and hope to see home sales trends return to low single-digit increases. Margins may improve as freight costs ease, which has affected our home business more than others. I expect that our home business will align more closely with the overall business performance. Forecasting is challenging due to the current volatile environment, but this is our perspective for now. Our business model allows us to be flexible and responsive. We remain optimistic about our accessories and apparel segment, as we see consistent opportunities and new products that can drive impulse purchases, which are important for our business. Overall, we feel positive across all areas. Good question.

Thank you.

Thank you. And I think that was our last question for today. I'd like to thank you all for joining us today. We will be updating you again on our fourth quarter earnings call in February. So, thank you, everybody.