The TJX Companies, Inc. (TJX) Q2 2016 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the TJX Companies’ Second Quarter Fiscal 2016 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, the conference call is being recorded on Tuesday, August 18, 2015. I would like to turn the conference call over to Ms. Carol Meyrowitz, Chairman and Chief Executive Officer of the TJX Companies, Inc. Please go ahead, ma’am.

Thank you, Melissa. And before I begin, Deb is back and we are happy to have her back if she has a few words.

Thank you, Carol. 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, 2015. Further, these comments and the Q&A that follows are copyrighted today by The TJX Companies. 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. Please note that the financial results and expectations we discuss today are on a continuing operations basis. Also, we have detailed the impact of foreign exchange on our consolidated results and our international divisions in today’s press release and the Investor Information section of our website, tjx.com. Reconciliations of the non-GAAP measures we discuss today to GAAP measures are included in today’s press release or otherwise posted on our website, tjx.com, in the Investor Information section. Thank you. And now I will turn it back over to Carol.

Joining me Deb on the call are Ernie Herrman and Scott Goldenberg. I will begin by saying that I am extremely pleased with our second quarter results and continued strong momentum. On an adjusted basis earnings per share increased 7% above last year which well exceeded our plan. Consolidated comp store sales grew 6% all well above our expectations and over a 3% increase last year. The comp was driven entirely by customer traffic. This marks the third consecutive quarter, the traffic was primary driver and the fifth consecutive quarter that we have seen a sequential improvement in customer traffic. At Marmaxx, we continued our strategy of adjusting our pricing and merchandise mix to offer consumers the best assortment and values in the marketplace. While this led to a lower average ticket, our strategy is clearly working as we saw enormous increases in traffic and units sold. Importantly, we were very pleased with the increase in Marmaxx’s merchandise margin despite the lower average ticket. We plan to continue the strategy in the back half and are convinced that this near-term decision will benefit our business in the medium and long-term by driving traffic and market gain shares. In terms of our other businesses, it was great to see HomeGoods and our International divisions making such significant contributions to our consolidated comp performance as we continue to expand both our U.S. and international presence. This bodes extremely well for our future growth. We are proud of our strong sales, traffic increases and merchandise margins, which are fundamental to being a successful retail business. We entered the back half of the year in an excellent inventory position with many new exciting opportunities. The third quarter is off to a solid start and our focus remains on continuing to drive customer traffic at all divisions. We are confident we will achieve our goals. And as always, we will strive to surpass them. Going forward, we see many opportunities to capitalize on our U.S. and international presence as we continue on the road to becoming a $40 billion plus global value retailer. So, before I continue, I will turn the call over to Scott to recap our second quarter.

Thanks, Carol and good morning everyone. As Carol mentioned, our second quarter consolidated comparable store sales increased 6% well above our plan. I would like to remind you that our comp sales exclude e-commerce. Again, we are very pleased that our comps were entirely driven by customer traffic and was up significantly at each of our divisions. It was also great to see a strong increase in our units sold. I want to note that the decrease in average ticket was as we had planned it and was essentially in line with the first quarter. To underscore Carol’s point, we are confident that our strategies are helping us to grow our customer base. Diluted earnings per share were $0.80 a 7% increase over last year’s adjusted $0.75 and well above our plan. Our second quarter EPS growth was negatively impacted by about 5% due to the combination of foreign currency, transactional foreign exchange, our wage initiative, incremental investments and pension costs. I should note that the negative impact from foreign exchange was less than we expected. Consolidated pre-tax profit margin was 12%, down 30 basis points versus the prior year’s adjusted margin and significantly better than we planned. Gross profit margin was 29.1%, up 50 basis points versus last year, primarily due to a strong buying and occupancy leverage on the 6% comp. Overall, merchandise margins were flat despite a negative impact from transactional foreign exchange at our international divisions and increased cost associated with moving more units through our supply chain. SG&A expense as a percentage of sales, was 16.9%, up 70 basis points versus last year’s ratio and better than we planned. This increase was primarily due to a combination of our wage initiative, incremental investments to support our growth and pension costs as we had anticipated, as well as a contribution to the TJX Foundation. At the end of the second quarter, consolidated inventories on a per store basis, including inventories held in warehouses, but excluding in-transit and e-commerce inventories were up 4% on a constant currency basis. We are set up extremely well to flow fresh goods to our stores throughout the back half of the year. In terms of share repurchases, during the second quarter, we bought back $440 million of TJX stock, retiring 6.6 million shares. For the first half of the year, we have retired 12.7 million shares, buying back $855 million of stock. We continue to anticipate buying back $1.8 million to $1.9 billion of TJX stock this year. Now, let me turn the call back to Carol and I will recap our third quarter and full year fiscal ‘16 guidance at the end of the call.

Thanks, Scott. Before moving to our growth strategy, I will share some additional color on our second quarter performance by division. In the U.S., Marmaxx comps grew by strong 4% and it was terrific to see that this increase was entirely driven by customer traffic, while segment profit margin was down 40 basis points, margins were negatively impacted by our investments in our associates, as well as the lower average ticket and higher supply chain costs as we had anticipated. Importantly, we were very pleased with our increase in merchandise margins. To reiterate, we are convinced that adjusting our pricing and mix is the right thing to do for our business and our substantial increases in traffic and units tell us that our strategies are working. I should also note that by next year we expect the impact of the lower average ticket to be largely behind us. To be clear, maintaining our value gap is what we always aim to do in our business. Unlike many other retailers, our ability to change our mix as well as the values we offer to suit our customers’ needs highlights the flexibility and beauty of our model. We can do this around the world. Marmaxx’s apparel business performed well in the second quarter and Home also continued its excellent performance. We are excited about the comp and traffic momentum at our largest divisions and have many initiatives planned to keep it going. HomeGoods delivered another outstanding quarter. Comps were up 9% for the second quarter in a row, over 5% increase last year. Segment profit margin increased 30 basis points. HomeGoods continues to deliver consistently strong comp results across all geographies, which bodes well for our growth plans. We are thrilled about the long-term potential of this chain. Consumers love HomeGoods. Now, moving to our international division, TJX Canada delivered another exceptional comp, posting a 12% increase this quarter. All three of our Canadian chains had stellar comp performance. Adjusted segment profit margin excluding foreign currency was up 10 basis points. Again this quarter, TJX’s profit margin was negatively impacted by the year-over-year decline in the Canadian dollar and the effect on this division’s merchandise margins. Once again, our Canadian organization did an outstanding job mitigating this currency impact even more than we had hoped as they truly leveraged our global organization. TJX Europe comp grew up a strong 5% over a 6% increase last year. Adjusted segment profit margin excluding foreign currency was up 30 basis points. We are pleased with the initial performance of our first two stores in Austria and are on track to open our first two stores in the Netherlands this fall. We are excited to enter our sixth European country and bring our great values to even more shoppers as we expand our global footprint. As to e-commerce, we continue to be very pleased with our online strategy. We plan to keep adding new categories and vendors to each of our e-com sites and offer our online shoppers a greater selection of fashions and brands at great value. Although tjmaxx.com is still a young business and a small part of TJX, we are very happy with our early metric. Importantly, the site is bringing in new customers. We are very excited about the future of e-commerce. In addition, we look forward to opening our first Sierra Trading store on the East Coast in the back half. Now I want to briefly recap our four pillars for growth which gives us confidence that we will sustain profitable growth for many years to come. Starting with driving customer traffic and comp sales, we are delighted that our strategies to increase customer transactions continue to take hold. We remain focused on continuing to grow our customer base and capturing more U.S. and international market share. To reach even more consumers, we are leveraging our global marketing capabilities. I am very excited about the fall and holiday campaigns we have planned for the back half of the year at all positions and I am confident we will attract new shoppers to our stores. To encourage more frequent visits and cross shopping, we continue to grow our loyalty programs in the U.S., Canada and UK. Further, we strive to keep improving the shopping experience and increase customer satisfaction every day. Our second pillar is our enormous brick-and-mortar global potential. With over 3,450 stores today, we see the opportunity to grow to 5,475 stores long-term with just our existing chains in our existing countries and the Netherlands. This includes 1,500 additional stores in North America and another 500 plus stores in Europe. Last month, we were excited to announce our plan to enter our next continent, Australia which I will talk about in a moment. Our next pillar is e-commerce expansion. Again, we are very pleased with our progress and excited about the future. We are making additional investments in our e-commerce supply chain and organization to support this important growth vehicle and our plan to eventually roll out e-commerce for other retail brands. As you have heard me say before, we are being very deliberate in our approach so that our online sales are incremental to our successful brick-and-mortar business. I truly believe we are leaders in innovation, which is our fourth pillar. We are constantly testing ideas and new seeds across each of our divisions that can lead to new categories or initiatives that could fuel future growth. Innovation is in our DNA and we will never be complacent. To support our growth goals and build upon our leadership position, we will continue to invest in our business. Our approach is to invest ahead of growth in the right areas of our business and to establish a strong foundation to support future needs. Now, to why we are so excited about our plans to acquire Trade Secret and expand into our ninth country, Australia. Our planned acquisition of Trade Secret fits right into our clear vision for continued global growth. We look forward to closing the transaction by the end of the calendar year and growing this business in the future. Trade Secret is the only off-price retailer of significant size in Australia. And it gives us immediate scale and first mover advantage in our third continent. With our Australian buying office in its fifth year, we are familiar with the market and see it very attractive for off-price. With consumer demographics similar to Canada, we see the potential to grow in Australia in a similar way to acquiring winners as a five-store chain in 1990 and growing it into a leading retailer in Canada. There is a strong middle class in Australia and consumers hungry for brands who have very few options for value. Trade Secret business is closely aligned with ours and we view it as a great cultural fit with TJX. We see the potential to further develop Trade Secret by leveraging our global buying scale, vendor universe, marketing, supply chain and other capabilities. Also, with Australia’s season being opposite to the Northern Hemisphere, this presents us with a nice packaway opportunity, an ability to test new ideas. Our planned expansion into Australia is the newest example of our global reach. But before I sum up, I want to spend a moment on why we see our ability to capitalize on our global presence as such a key advantage. TJX is the only major international off-price apparel and home fashion company in the world. Over the last 38 years, we have built a global off-price powerhouse that we are sure would take decades for others to replicate. We are one of the few major U.S. retailers to have expanded successfully internationally. We have developed a highly integrated organization and infrastructure to support our off-price model. Our four large divisions and seven retail chains are highly synergistic. They all operate with our off-price business model and are centered on our value mission and same TJX culture. We function as one TJX. This is true across our worldwide buying organization, supply chain network and global operating teams including marketing, training and procurement. Further, we measure our success across our chains on the same metric. Being as highly integrated and synergistic as we are we share talent, ideas and initiatives across our chains. All of this gives us tremendous confidence in our ability to continue growing successfully as a global value retailer. In summing up, we are thrilled with our above-plan results and continued track momentum. As our core is off to a solid start, we are confident in our plan for the back half of the year. And as always, we are motivated to surpass them. We have many initiatives planned to keep our momentum going, attract more shoppers to our stores and gain market share. We will continue to offer customers amazing values on a differentiated mix of apparel and home fashion. Every year, we up our game in gift-giving and this year is no exception. We have many initiatives planned and I believe our stores will be more exciting than ever across the board. We are delighted about our plan to enter Australia and expand our global presence even further. Most importantly, as a nearly $30 billion retailer we have a clear vision and strategy for growth. We are a differentiated apparel and home fashion business with a laser-focused management team. We have built a world-class organization and I am proud of our team and very strong corporate culture. We are confident that we have the talent and infrastructure in place to grow TJX to a $40 billion company and beyond. And now, I will turn it over to Scott to go through guidance and then we will open it up for questions.

Thanks Carol. Now to fiscal ‘16 guidance beginning with Q3, we expect earnings per share to be in the range of $0.80 to $0.82 versus last year’s $0.85 per share. This guidance assumes an expected negative impact to EPS growth of about 8% due to foreign currency and transactional foreign exchange, which has doubled what we originally planned due to the continued decline in the Canadian dollar. Our plans also continue to reflect the 5% negative impact to EPS due to our wage initiative, incremental investments to support our growth and pension cost. I want to note this guidance also reflects our plans for a lower average ticket at Marmaxx as Carol mentioned, as well as the related costs associated with moving additional units to our supply chain that were not contemplated in our original plans. We are modeling third quarter consolidated sales in the $7.6 billion to $7.7 billion range. This guidance assumes a 3% negative impact to reported revenue due to translational FX. With our strong momentum in the first half of the year, we are raising our comp store sales growth guidance for the third quarter. We are now assuming comp growth in the 2% to 3% range both on a consolidated basis and at Marmaxx versus our original plan of 1% to 2% growth. Third quarter pre-tax profit margin is planned an 11.4% to 11.6% range versus 13.0% last year. We are anticipating third quarter gross profit margin to be in the range of 28.5% to 28.7% versus 29.4% last year. This assumes foreign currency pressure and additional supply chain costs. Despite these headwinds, we expect underlying merchandise margins to remain healthy. We are expecting SG&A as a percent of sales to be in the 16.9% to 17.0% range versus 16.2% last year, primarily due to our wage initiative, as well as our incremental investments. For modeling purposes, we are anticipating a tax rate of 37.5% and net interest expense of about $12 million. We anticipate a weighted average share count of approximately $680 million. Now, moving on to full year guidance, as we noted in our press release today, we are raising our full year diluted earnings per share guidance by $0.01 on the high end. We now expect fiscal ‘16 earnings per share to be in the range of $3.24 to $3.28 over $3.15 in fiscal ‘15. Excluding last year’s debt extinguishment charge, fiscal ‘16 expected EPS would be in the 3% to 4% over the prior year’s adjusted $3.16. This EPS raise reflects the incremental benefit from our strong second quarter and our raised assumption for second half comp growth. This is being largely offset by expected additional foreign exchange headwinds and higher supply chain costs for the back half of the year. As a reminder, our plans reflect the impact of several items detailed in our press release that we are assuming will negatively impact our fiscal ‘16 EPS growth by about 9%. We are also increasing our full year comp store sales guidance to reflect our strong second quarter results and raise expectations for the back half. We now expect a comp increase of 3% to 4% on a consolidated basis and a comp increase of 3% at Marmaxx. For the year, we expect pre-tax profit margin to be 11.7% versus last year’s adjusted 12.3% in fiscal ‘15. We are anticipating gross profit margin to be approximately 28.5%, which would be flat versus fiscal ‘15. We are planning for a slight increase in merchandise margins. We expect SG&A as a percent of sales to be approximately 16.7% versus 16.1% last year. Our full year guidance implies fourth quarter EPS of $0.96 to $0.98 compared to $0.93 last year. This guidance also reflects our raised assumption for fourth quarter consolidated comp sales growth of 2% to 3%. We will provide detailed fourth quarter guidance on our third quarter conference call. Finally, it’s important to remember our guidance for the remainder of this year assumes that currency exchange rates will remain unchanged from the levels at the beginning of the third quarter. Now, we are happy to take your questions. To keep the call on schedule, we are going to ask you to please limit your questions to one per person. Thanks. And now, we will open it up for questions.

Thank you. [Operator Instructions] Our first question comes from Matt Boss. Your line is open.

So, despite the FX and some of the wage pressures that the underlying margins are going through today, I mean, we are seeing stability, merchandise margins remain positive excluding the FX. So, if multiyear same-store sales were to remain in this 2% to 3% range or maybe even better, are there any structural headwinds to prevent your margins from exceeding last year’s peak once some of these headwinds normalize on a multiyear basis?

Yes, our merchandise margins, again, if you are just talking straight merchandise margins, Matt, you have to be a little bit clearer, because obviously, FX change...

I was talking about your overall EBIT margins, if once the FX and the wage pressures subside, how to think about on the multiyear basis, is there any structural headwind from exceeding prior peaks if you are able to continue to put up two to three type same-store sales?

Yes. I mean, we have said, every year, we try to increase our margins, but we are not going to sit here and say years from now, our margin is going to go up X percent. We run our business very well. Obviously, the future is without FX hitting us, pension, other elements should be positive. Our average retail is starting to flatten out as of next year. So, we see some of those negative things obviously turning into a positive, but we run our business everyday on the best value we can give the consumer and we always strive to increase our margins and leverage our business.

Great. And then just one quick follow-up, as we think about Europe, can you just talk to some learnings and customer reception as you expand into some of these new countries? Are you seeing any new brand relationships and then just the best way to think about square footage expansion opportunities in the coming years?

Well, I mean, we go into countries and we build brands and we are constantly increasing our number of vendors in every single country. I think what we have learned prior to going into Germany is to really investigate country for a long period of time before we go in. So, you tread lightly, you are camping, you really understand the mix of the customer, and every single country is very, very different. So, you have to take a long time to study each country before you go in. So, we have lots of learnings. And now we have obviously expanded into many new countries a little bit quicker, but we did a lot of homework before.

That’s great. Best of luck.

Thank you.

The next question you have comes from Michael Binetti. Your line is open.

Good morning, guys. Congrats on a great quarter. If I could just ask on the comment that you expect lower – the impact of lower average ticket to be behind you, I think those as of next year, maybe just a little more color on that, what you are thinking there if it take its plan to be flat or up? And it looks like right now, every point of revenue or comp upside you are getting to is coming with quite a bit of additional supply chain cost. So if I try to put a few of those pieces together, it’s likely because it’s coming from the composition of growth being from units while pricing is lower. Can we assume that the leverage point next year has a little less headwind if the ticket declines a bit?

Yes, you can absolutely assume that.

Okay.

Yes, I mean, we are constantly moving on mix, I mean, that’s the beauty of the model that we look at every single category. It’s within the category that we will look. It’s looking at where we want to put our dollars. So every year, we look at where we can improve and how we can give the best value to the customer. I think we are just very, very excited about the increase in traffic. And that continues over many, many quarters. So, we feel like we are really – this is the right strategy for us.

Right. So, if I could just add one quick follow-up, given all the headwinds that we know about investments, the minimum wages and the FX and then adding in some of the comments you just made there, what is the flow-through rate on a point of comp now and did those headwinds – how do those headwinds kind of hand off into 2016, it’s another year of EPS growth below the 11% to 12% we saw the last two years?

Well, once you have set your plans like right now of just when we gave guidance for the second quarter, we built in the average ticket. I mean, we hit the cost that we had for the average ticket, the supply chain costs we are right on. For the third and fourth quarter, now that we have built that incremental cost on for every additional comp that we would get. Per quarter, it’s approximately $0.02 and we would get a flow-through of about 20 basis points to the pre-tax margin on that. And that’s generally been there. So, once you have absorbed these – put these costs in, we will still get the benefit. The average ticket was because you had to put it across all of the units on an incremental basis, we would flow through close to what we would always have flown through. In terms of the wage and all that, again, all the incremental investments have come in both for the first half of the year as we had planned and we have no fundamental changes on incremental investments. And the only thing we are aware of right now going forward is the wage initiative, the wage costs. Other than that, as Carol mentioned, FX is too early to make a call whether it will have a positive or negative impact on next year.

Thanks, guys. Great quarter.

Thank you.

Thank you. The next question comes from Kimberly Greenberger. Your line is open.

Great, thank you. Really excellent results today. Congratulations on that. Carol, it sounds like at Marmaxx, you have done a little bit of some sort of a strategic analysis of the marketplace. And I am wondering if you can just give us a little bit more background on what it was that you were seeing in your business that caused you to look at the pricing and the mix within Marmaxx division in order to drive those changes, what were the observations that you had about the marketplace in general and maybe just take us through the decision process to take down the AUR and how did that change the buying process internally? Thanks so much.

Kimberly, I can answer that by saying it’s really business as usual. Ernie, the team, we all look at why, what we can improve upon, look at the mix we shifted, I mean this is our model. So there is no great surprise here. This is how we do business. We look at the market and then we trend the business where we want to go after it. And we have one mission, give extreme value. So the team pulled together and I think we made some great decisions. But we always look at opportunities. We see more opportunities for next year, that’s how we look at our business.

So opportunities for next year to offer even more value, but that wouldn’t necessarily be through a lower AUR, Carol is that right?

Probably not, we will probably start to flatten out maybe a little bit into the first quarter and then flatten out.

Okay, great. And then just one clarification for Scott, Scott I think you said about the 70 basis points to 80 basis point headwind to SG&A in the third quarter guidance on increased wages and investments, I assume pensions in there as well, but is there a way for us to think about the 70 basis points to 80 basis points, is that sort of half of that is wages, the other half investments or is it kind of weighted towards one or the other?

I think you are – again, it’s approximately half of that. It would be the wages and the rest would be the incremental investments that we called out in the new country expansion, the incremental PCI costs. So yes, that’s exactly right in terms of the SG&A. So, no changes to the back half in the SG&A other than the change in the additional supply chain costs.

Great. Thanks so much.

Thank you. The next question comes from Omar Saad. Your line is open.

Thanks. Great quarter, my question is on the AUR and ticket as well, should we think about the change in the strategy, a little bit slight change in the strategy and the business model allowing flexibilities, is it more that you are procuring the same types of goods and being able to sell them at a lower price with a higher turn or are you trading down a little bit in terms of the brands or the premium price points the products you are selling or it’s – maybe it’s a little bit more clarity on how the mix is shifting and what the strategy is there and what’s working? Thank you.

So Omar, I mean Ernie, you want to talk about them?

Sure. Omar it’s kind a combination of multiple things, first a little bit of pockets where we did buy better on specific items, that’s just one piece though. We have had a shift of because some departments trend differently, so we have had a shift in department, I mean mix of departments within the total. And then really, the last part is the balancing the mix is within the departments, within the actual departments. So we could have changed from one vendor to another vendor, not necessarily bought it better. So I would tell you it’s not one issue at a time, it’s all of those things.

The other piece that we haven’t really talked about is the more we become global, our choices and our mix is from all over the world. So we are able to really leverage buying in Europe using the dollar appropriately where we need to, but we get much more eclectic and much more differentiated. So all of those elements are pulled together in our mix and we are very, very integrated as a total company today and every year we get better and better at that. And we get better and better leveraging it.

So that’s really helpful. And so I don’t understand, it’s not that you are selling for lack of a better word, lower brands or lower quality products at lower prices these other…?

Not at all, as a matter of fact we have some European goods that everybody was onboard with that are just spectacular. And we are going to be hopefully blowing everybody away with our gift-giving because we really have gift-giving from around the world. It’s an international offering this year that we are just so excited about, it’s a fine business.

Thank you. The next question is from Mike Baker. Your line is open.

Hi. Thanks. So department store inventories looked really high at the end of the second quarter, they are high at the end of the first quarter as well, but even higher now, how do you think that impacts your business going forward, does that put pressure on merchandise margins as they may get more promotional, does that play into your strategy you are discussing today or in some ways does it help you because there might be more products available in the marketplace, so I was just wondering what you have seen in the past where department store inventories are elevated?

Mike, I am going to answer this question in the way I always answer it and that is there is – we could never ever buy the quantity of goods that are out there and that every single week, we have to hold our people back. That has never changed and it never will change. Secondly, we will always keep our distance from where the departments are and our values. That is the beauty of the model. It’s the beauty of the business, the beauty of the flexibility. So it’s every year something happens whether they have more inventory, less inventory, it really doesn’t matter, we just have to give outrageous value.

So, is that in some ways play into the strategy you are talking about today to be a little bit choppier because you expect that department stores are going to need to get promotional in the back half?

Not really, we are just offering we think is absolute, it’s a combination of the mix, what we are offering the customer which is really absolutely wonderful and in some places that’s not it’s European, it’s special, it’s brands, it’s everything.

Mike, I would also jump in and say and Carol referred to this earlier, is the model kind of works this out for us and that if the market gets promotional or if things start to back up with inventories at the other stores, it leads us to automatically ending up at better value. It might be a delay of a few weeks, but pretty much we end up with better value, only because of the supply situation in the market. So I think when Carol said earlier, that that’s kind of just the way we work it, that’s kind of a plus for this as well.

Effectively by hundreds of millions of dollars every week, every single week.

Yes, thank you. I appreciate the color on the business model.

Thank you. The next question comes from Lorraine Hutchinson. Your line is open.

Thank you. Good morning, do you continue to see an opportunity of goods coming out of last year and early this year as ports slowdown. And has the composition of your packaway inventory changed at all versus this time last year?

Lorraine, I would say that the port situation – how do I put this without getting specific, I mean there is always stragglers I would call it, of merchandise that were stuck in the ports. In terms of the magnitude relative to our business, I would say not that big, but certainly, there has been some buys that were basic on that even recently. And you’re your – your second question again could you ask that, was that about the packaways?

Right. The composition of your packaway inventory changed at all versus this time last year?

No, not really. And it’s just slightly up from where it was last year, but effectively the composition is very similar.

Thank you.

You are welcome.

Thank you. The next question comes from Howard Tubin. Your line is open.

Hi, yes. This is actually [indiscernible] calling for Howard. Could you please just elaborate a little bit on your marketing initiatives or plans for the upcoming fall season?

Yes. Well, I think I am not going to elaborate where our spend is slightly up. We have some new campaigns that are going to be very, very exciting. We have new social media. We are still hitting on all cylinders. So it’s going to be very exciting. And our tri-branding and our gift-giving is going to be pretty big this year. More importantly, we are really starting to leverage our marketing across, again across all of our countries so that we can really take the best of the best and leverage it. So we are pretty excited about the back half.

Great. Thank you.

The next question we have comes from Oliver Chen. Your line is open.

Hey, thanks. Congratulations and Debra welcome back. Carol, regarding the strategy, it sounds quite prudent about the ticket strategy in terms of gaining share. I am just curious in terms of your customers and shoppers do the shoppers kind of notice this change, like how is it being telegraphed? Clearly, it sounds like its working. And your comments on just the gifts sound really exciting, what’s the main takeaway in terms of year-over-year difference whether it be pricing or timing of the drops?

Okay. Well, Oliver, we don’t telegraph our pricing, the customer walks in and clearly they like it, because our units are up. That’s really the answer to that, that they are very excited about it. In terms of our gift giving, every single year, we strive to be better and I keep coming back to the word global, because when you have access to so many countries and you can see even food from different countries, it becomes very, very special. And every year, we look at what we did the year before and we look at how we can do that even better. And this is the continuation of building the foundation of the total corporation, years of training, years of working together. The communication between all the divisions is the strongest it’s ever been. And that really leads to a very, very exciting mix for all countries. And that’s how we just – every year, we raised the bar that way.

That sounds awesome. And just a quick follow-up on the modeling, Scott, you mentioned in your prepared remarks that the number of units whether previously in your original plans. Is that just related to your revised outlook on your comps or I was wondering about the context for that statement?

That was in the context that the supply chain impact was not reflected in the third and fourth quarter or back half in the gross margin and lesser extent in the SG&A. So, now it’s reflected. It was not reflected in the previous guidance. And talking about just previous guidance, I haven’t updated the full year guidance. So, I am just going to take a moment now to go through the full year updated guidance by division. Marmaxx comps are three, at the low and the high. The segment margin and all the numbers I am going to be going through right now, excluding FX impact, are 14.0% to 14.1% versus last year’s 14.6% on a sales volume of $19.7 billion to $19.8 billion. HomeGoods post – now the comp is 5% to 6%. Segment margin is 13.5% to 13.6% versus last year’s 13.6% on volume of $3.8 billion; Canada, 6% to 7% comp, 13% to 13.1%, again, this is ex-FX versus 13.5% last year and down 50 to down 40, so quite a bit of a change on both in increasing comp and improvement in the segment margin from the last time on Canada on $2.8 billion in sales; and Europe, 3% to 4%, 7.7% to 7.8% on segment margin, again, ex-FX against last year’s 8% down 30% to down 20%. And as we called out in the call, 40 basis points down ex-FX similar to our last guidance that we gave at the end of the last second quarter.

Thank you. That’s really helpful for our models. Appreciate it.

Thank you. The next question comes from Richard Jaffe. Your line is open.

Thanks very much and my compliments on the quarter. If you could just talk for a minute about e-commerce, the size or the volume that’s involved with e-commerce and how it’s broken up by country and possibly by brand? And then if you could just share with us the Sierra Trading location on the East Coast, that would be helpful?

So, Rich, I will answer your last question, because I am not going to answer your first one. Sierra Trading is going to be in Burlington, Vermont and we are pretty excited about it. Our e-commerce business, we haven’t broken it out, I can tell you that we are gaining new customers. We have still a lot of steps to look at, but we believe that the differentiation strategy is working well and we are very pleased with what we are seeing. And as you can see, our comps do not include e-commerce, but we believe slow and steady wins the raise and we continue to learn a lot, but we are very pleased.

Carol, if you could just clarify, are new customers new to TJX or new to your e-commerce site?

Yes.

New to TJX?

TJX, yes.

And the technology, credit card data etcetera to confirm that?

Yes.

Okay, thank you.

Thank you. The next question we have comes from Bob Drbul. Your line is open.

Hi, good morning. Congratulations.

Thank you.

Couple of questions. For the back half of the year, can you talk about how you are positioned on like boots and jackets and some of the colder weather categories and what you are seeing from that perspective, vendors?

Bob, we don’t specifically talk about specific categories. Again, I am going to come back to the business model, because a lot of you have asked about even our average ticket. You have to come back to remembering how close to needs, we buy. So, when we laid out the second quarter and our average ticket, we are buying so close that you can’t plan everything. We are making assumptions, but that’s again the beauty of the model. So, we don’t specifically comment, because if a category isn’t hot, we are going to switch. And if it is, we are going to go for it, but we think we have a very good insight to what we think is going to drive the back half and we are excited about it.

Okay. And then couple other quick questions are there any regional comp callouts that you would make either in HomeGoods or in Marmaxx?

No, it’s pretty strong across the board. Puerto Rico was slightly weak.

And question for Scott, on the expense side, are you seeing anything in healthcare costs that are influencing you or concerns as we look forward?

Our costs per healthcare have been pretty much in line with our plans. So, we built whatever increases that we do that were legislative, but no very much in line.

Great, thank you very much.

The next question comes from Dana Telsey. Your line is open.

Good morning, everyone and congratulations. Can you talk a little bit about the remodeled store format? What you are seeing and any change in terms of size of box and availability? We keep hearing of more locations available, both urban and more suburban. Thank you.

So, Dana, we like what we see with our remodels. As far as real estate availability, what’s probably the most exciting is the number of countries that we have to choose from. So, we did, I mean, what was 182 stores…

182. Yes, roughly as we will come in this year.

Yes. And you see some opportunity in Europe.

Yes, we think Europe, especially, Dana given the other countries that we are going into as well as in the current – like in Germany we feel like there is more opportunity to do more stores over the next couple of years. So, we are pretty bullish there. We are filling domestically. We will continue to probably be about where we have been on the store count. And in terms of I think you also asked about size of box. We are not seeing any major change there. I think we take that location by location. So, we do adjust as we go into more stores, we do adjust based on the location the size of the box, but there is no current plan to really play with that in a major way. So, hopefully that answers that question.

Dana, what is interesting is I am sure some of you are out in the Hampton, so we have a HomeGoods there that’s 13,000 square feet, which is doing extremely well. So, we are finding smaller boxes and bigger boxes all work for us. We are still planning to continue our 4% to 5% store growth and take every opportunity. And now that obviously we are in more countries, we are going to take every deal that makes sense, but we have more to choose from, which is very exciting to us.

Thank you.

Thank you. The next question comes from Jeff Stein. Your line is open.

Question for Scott, general corporate expense was up almost $30 million in the second quarter and I am wondering Scott, if you can give us some guidance in terms of what we should expect for Q3 and Q4. Also perhaps, maybe drill down a little bit in terms of what accounted for the $30 million increase I assume that wages are not baked into that number and also perhaps how much your contribution was to The TJX Foundation? Thank you.

Approximately half was due to the contribution to the foundation, so that made up the largest component of it. And then the other components were some of them related to our incremental investment costs, systems, pension, we have had better than planned incentive accruals. And so that made – those were the large categories that made up the rest and then some normal growth in the base corporate expense that you would expect. No large increases planned for the back half of the year in terms of corporate expense for either the third or the fourth quarter.

So if we were to assume Scott, maybe a normal inflation increase in the back half of the year for general corporate, that would be in the ballpark?

That would be in the ballpark, yes.

Okay. Thank you very much.

Thank you. The next question comes from Daniel Hofkin. Your line is open.

Hi, good morning, congratulations on the results. I just had a question first on the wage expense, could you remind us are you still thinking about it as we look to next year for the overall impact to be greater year-over-year than it has been this year just given that you will have the full year effect of this year’s increase plus next year’s and then kind of looking beyond next year, what would we expect kind of a more normalized trajectory or flattening out?

Yes. So next year will definitely be up and the following year it will be less so and that’s how we are planning it. But obviously, as I said before have other hopefully opportunities between pension and foreign exchange and ticket flattening out.

Okay. And then Carol on merchandise margins, just obviously continuing to see underlying improvement, could you talk about whether some of the opportunities or whether some of the areas that can continue to drive that even though obviously inventory presumably is not going to be as big a driver it’s been in the last 7 years, 8 years, what are the things that you think can at least move it directionally higher over time from here?

I think it’s just a continuation of leveraging and doing the best job we can. I mean, we try to plan fairly flat and then we try to beat it. But it all comes down to giving great value to the customer. But in our plans, we tend to be fairly flat.

Okay, great. Best of luck. Thanks.

The next question is from Patrick McKeever. Your line is open.

Great. Thanks. Good morning everyone – good afternoon I guess. But on the – another question on the wage increase, I mean you did see a sequential acceleration at Marmaxx in the quarter against a little bit of a tougher comparison than the first quarter, so my question is I mean do you feel like the wage increase had any impact on your sales in the quarter. And just more broadly, how are you measuring employee performance post the wage impact, are you looking – I am sure you are looking at turnover, I am wondering if you might be able to give us some color there or perhaps other performance metrics?

We are seeing a slight positive in terms of turnover. I mean it’s early on and we will see what happens over time. But along with that is we just worked very, very hard on building our culture and being a company of choice. So it all comes together. We try to work very hard to train. As we have growth in the company, there is lots of opportunities for people and we try to make it an exciting place to work. So I can’t tell you if our turnover is better because of that, because of wage, but I think it’s a combination of everything. We just strive to do a better job every year.

And then on Canada, also a sequential acceleration against a tougher comparison, meaningfully tougher, so what do you think there is, is some of that related to targets, pullout exit from Canada and what do you – I mean what’s the expectation for the balance of the year?

I would say actually, less of that is about the target pulling out. It’s a little bit of execution, I would say. And in certain categories, we did a better job of executing. And then we have also had the benefit of the – in reverse the weaker dollar has really helped the cross-border situation, less consumers in Canada are obviously crossing back to the U.S. and you might have a little bit of vice versa from U.S. going more to Canada. So I think that’s been a piece that is actually helping our Canadian business. I would say the bulk of it though is better execution in terms of first of all they have done a great job on mitigating as much of the exchange situation as they can. I give our team up there a lot of credit for that. And secondly, they are going after really aggressively looking at the values of where they are versus all of the other retailers there. And that would have applied whether target was there are not. I think that team has done an outstanding job on that front. So I would say that is the bulk of the reason why the business has been so healthy there.

Great, good stuff. Thank you.

Thank you. The next question comes from Pam Quintiliano. Your line is open.

Great. Thanks so much for taking questions and congrats on the great quarter. So I just have a few quick ones. I am sorry if I missed this, but the Labor Day calendar shift has had an impact of some others, but can you just talk through with us any potential impact you saw there?

Not really. I mean we look at back-to-school, we just dip fresh merchandise everyday and we don’t get caught up on a specific day. So we don’t really see that having any impact.

Great. And then just two other quick ones, can you update us on the rewards access program and how that’s going. And also, you had mentioned a couple of times gaining a new customer. In the past you have updated us with some customer awareness figures, and I am just wondering if you have anything new on that front?

We don’t really have anything new. We just know that we are gaining customers and our rewards access program is definitely increasing.

And along with the rewards access program increasing, I am assuming the credit card base as well is improving?

Both are, yes.

Great. Thank you so much. Best of luck.

Thank you.

Thank you. And the next question is from Marni Shapiro. Your line is open.

Hi guys, just under wire. Thanks so much. Congrats. Can you talk a little bit more about Trade Secret, if you wouldn’t mind, they have about 30 plus stores, will you renovate them or do you like the footprint that they operate in today. And what does the footprint looks like relative to say a Marshalls or T.J. Maxx. And was the breakdown in the stores, is it close to what you see in your Marmaxx stores today or is it different?

Now, I am just going to give you like a quick overview and then I am going to hand it over to Ernie to see what’s just down there took that lovely trip. First of all, we are really excited about it. We are going to move slowly. So whenever we look at something, we say we are going to evaluate the name, we are going to evaluate, do we remodel. But the first priority is to make sure that we have a wonderful mix and we will do a lot of customer surveys and we will go slowly. So that’s going to be our primary goal here initially. So, Ernie, you want to – he is really excited when he came back which I was very happy about.

Yes. Marni, very exciting market for us, as you can imagine I think culturally it’s a pretty seamless entry for us. Carol mentioned earlier, by the way we have an Australian buying office that’s been there for about 5 years. And so we already had some knowledge going in. The organization that’s there with Trade Secret, the store format that you are asking about, we will definitely remodel some of them. I would tell you some of them don’t need much remodeling, so it’s a bit of a mix. So, it will vary location by location and a bit by the different markets that they are in. And two of the major ones are obviously Sydney and Melbourne. So, we are going to kind of look at those as a strategy by market. The sizing of the boxes are very – they are probably the appropriate size actually given the size of their business and how much volume they do out of each box. I think we are going to look, obviously, step-by-step like how is it at the branding of it, etcetera, how we fold it more into the way we do business. But the number one priority, again to reiterate what Carol said is the merchandise mix, because that’s still a place that we operate differently, more differently probably than they do currently, although they have done a very nice job on what they have done to-date. And so it’s been a great partnership already in terms of working together to see where we are going to take it from here and we are just excited about the opportunity.

Great. Will the founders stay involved? It sounds like him talking to some friends there that they have a kind of young, fun, spirit about them, it sounds like the customers like that, are they going to stay involved?

What we are going to do was for a time period. They will be a little involved in the current management, merchant team and operators are going to be involved on an ongoing basis, but really, over time, by the way, our intention is to keep it very, very young and vibrant. It’s a growth business, the young business. So, we feel like we are at the right time and they have been terrific.

Hey, Marni, we won’t tell people are running it.

Yes, we are not.

Actually, we have one of our top merchants from Canada going down, a team that Ernie is heading down there is spectacular, it’s going to report into our head of Europe, Michael MacMillan and there are some very young fabulous A players also going down and I think Ernie was very, very impressed with the team down there that was running the business. That is going to stay intact.

Yes, they’re great and again very exciting. We will keep you guys posted over time.

Great. Best of luck guys.

Thank you.

Well, thanks everybody and we look forward to coming back to you on third quarter. Thank you. Thanks, Melissa.