The TJX Companies, Inc. (TJX) Q4 2022 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to The TJX Companies Fourth Quarter Fiscal 2022 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, this conference call is being recorded, February 23, 2022. I would like to turn the conference call over to Mr. Ernie Herrman, Chief Executive Officer and President of The TJX Companies, Inc. Please go ahead, sir.

Thanks, Missy. Before we begin, Deb has some opening comments.

Thank you, Ernie, and good morning. The forward-looking statements we make today about the company's results and plans are subject to risks and uncertainties that could cause the actual results and the implementation of the company's plans to vary materially. These risks are discussed in the company's SEC filings, including, without limitation, the Form 10-K filed March 31, 2021. Further, these comments and the Q&A that follows are copyrighted today by The TJX Companies, Inc. Any recording, retransmission, reproduction or other use of the same for profit or otherwise without prior consent of TJX is prohibited and a violation of United States copyright and other laws. Additionally, while we have approved the publishing of a transcript of this call by a third party, we take no responsibility for inaccuracies that may appear in that transcript. Thank you. And now I'll turn it back over to Ernie.

Good morning. Joining me and Deb on the call is Scott Goldenberg. I'd like to start the call today by expressing my gratitude to all of our global associates for their continued hard work and dedication to TJX. For the past 2 years, our associates have gone above and beyond to operate our business through unprecedented times while also adapting to the constantly changing retail environment. I want to give special recognition to those associates who have been physically coming into work in our stores and distribution centers. In recognition of their efforts, we awarded a vast majority of them a discretionary appreciation bonus again this quarter. Now to an overview of our fourth quarter and full year results. I want to emphasize that the areas we directly control, like buying, store and distribution operations, our pricing strategy and our initiatives to drive traffic and sales, our execution was excellent due to the monumental efforts of our associates across the company. Moving to the details. I am extremely pleased with our top line performance in the fourth quarter. U.S. open-only comp store sales increased a very strong 13% when compared to fiscal 2020 or calendar year 2019. U.S. comp sales were trending higher than this before the surge in Omicron cases. This quarter represents the fourth consecutive quarter that U.S. open-only comp sales increased low teens or better. Comps at our U.S. home banners and in our home categories were excellent, and our Marmaxx apparel comp was up high single digits. Clearly, consumers continue to seek out our retail banners for exciting gifts and amazing values this holiday season. For the full year, U.S. open-only comp store sales increased an outstanding 17%. Overall, TJX sales of $48.5 billion were almost $7 billion more than in fiscal 2020. We are convinced that we captured significant market share, particularly in the U.S. where our stores were open the entire year, and we leveraged the strength and flexibility of our off-price business model. I want to highlight the excellent execution and collaboration of our buying, planning, distribution, logistics and store operations teams. They work together strategically to strategically buy goods earlier than we typically do to ensure the consistent flow of exciting merchandise to our stores and online to support our outstanding sales throughout the year. As a result, we offer consumers a great selection of branded quality merchandise at excellent values all year long. Going forward, we are laser-focused on our sales and profitability initiatives and remain committed to corporate responsibility. Again, we feel great about the areas of our business that we directly control and we'll continue to look for ways to mitigate the expense pressures currently impacting our business. Further, in an inflationary environment, we believe more consumers will be seeking out our values. Importantly, I am as confident as ever in the medium- and long-term outlook for TJX. We are the off-price leader in every country we operate in and believe we are in an excellent position to capture additional market share in these regions for many years to come. Before I continue, I'll turn the call over to Scott to go over and cover our fourth quarter and full year results in more detail.

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

Thanks, Scott. I'll pick it up with our fourth quarter and full year divisional performance. At Marmaxx, fourth quarter open-only comp store sales increased a very strong 10%. For November and December combined, Marmaxx comp sales increased low teens. For the full year, Marmaxx delivered an outstanding 13 open-only comp store sales increase and segment profit dollars increased more than $340 million or 10% versus fiscal '20. For the year, Marmaxx's home business posted a comp increase in line with HomeGoods and apparel comps were up high single digits. Average basket was up significantly throughout the year and customer traffic was up as well. We are very pleased with the performance of our largest division, which delivered double-digit comp sales increases every quarter of the year and offer shoppers an excellent assortment of apparel and home merchandise throughout the year. At HomeGoods, open-only comp store sales increased a remarkable 22% in the fourth quarter and were up high teens or better every month of the quarter. For the full year, HomeGoods delivered a phenomenal 32% open-only comp store sales increase and segment profit dollars increased more than $225 million or 33% versus fiscal '20. During the year, we saw consistent strength across all major categories and geographic regions for both HomeGoods and HomeSense. Further, both customer traffic and average basket increases were outstanding throughout the year. We are convinced that we captured additional share of the home market in 2021 as our eclectic mix of merchandise and great values continue to resonate with consumers. In Canada, open-only comp store sales increased 1% in the fourth quarter and were up 8% for the full year. At TJX International, open-only comp sales were down 2% in the fourth quarter but up 6% for the year -- for the full year. Fourth quarter and full year sales and open-only comp sales at both divisions were negatively impacted by significant government-mandated shopping restrictions throughout the year. For the full year, similar to the U.S., TJX Canada and TJX International's home businesses outperformed apparel and both divisions saw strong increases in their average basket. We remain confident that our International divisions are well positioned to capture additional market share over the long term. As to our e-commerce businesses, we are very pleased with our overall sales growth in 2021. During the year, we added new categories and brands to each of our online banners and launched shopping on homegoods.com. While e-commerce only represents a very small percentage of our overall sales, we are very pleased to offer the U.S. and UK shoppers 24/7 access to our great brands and values. Now to some additional highlights from 2021. First, we took steps to improve our profitability and offset some of the persistent cost pressures we've been facing. Our primary initiative to raise retails on our merchandise is working very well. We are in the early stages of this initiative and believe there will be a multiyear opportunity for our business. Importantly, our customers tell us that our value proposition in the marketplace remains very strong and shoppers continue to see amazing values every time they visit. Second, we opened thousands of new vendors in 2021 and continue to source from a universe of approximately 21,000 vendors around the globe. Our global buying presence continues to be a tremendous advantage. Further, we have strengthened our relationships with many of our existing vendors. With many retailers continuing to close stores and ongoing congestion in the supply chain, we offer vendors an attractive solution to clear excess product. Importantly, and I can't emphasize this enough, availability of quality branded merchandise is excellent across good, better and best brands. Next, we are confident that our marketing continues to help drive new and existing customers into our stores and online. The team has done an excellent job allocating our advertising dollars to the right mix of media channels and a constantly changing digital environment. Further, our customer satisfaction is strong, and we continue to attract new shoppers of all ages, including a large number of Gen Z and millennial shoppers which we believe bodes very well for the future. In 2022, we are launching many new marketing campaigns across the globe that will continue to focus on our exceptional value and an inspirational shopping experience. Lastly, we made important investments to support the growth of the company. In 2021, we opened 117 new -- net new stores, relocated an additional 50 stores and remodeled over 300 stores. We also made necessary investments to expand our distribution capacity and productivity to support our rapidly growing top line and future growth. Our 2021 performance gives us great confidence in the outlook for our business, especially when we get back to a normalized environment. Once stores were open with no restrictions, each division saw very strong sales, attracted new shoppers and captured more spend per customer. Further, we see a path to improve profitability once the retail environment stabilizes and some of the expense headwinds begin to moderate. All of this tells us that we have an excellent opportunity to significantly grow our top and bottom lines over the medium and long term. I want to reiterate that we remain highly focused on improving our pretax margin profile. We continue to believe that our initiatives to drive sales are the best way to offset the current level of cost pressures we're facing. Further, we're very optimistic about our strategy to adjust retails while maintaining our value proposition to consumers. To be clear, our goal is to approach a double-digit pretax margin in the medium term and to return to our fiscal 2020 pretax margin level in the long term. Turning to corporate responsibility and ESG. I'll start by saying that the health and well-being of our associates and our customers remains a top priority as it has throughout the pandemic. I am so proud that while navigating the ongoing pandemic, our team hasn't skipped a beat in our other areas of corporate responsibility. Let me highlight a few initiatives from Q4. One of the many ways we support the thousands of communities where we operate is through contributions to organizations focused on emergency relief efforts. This past quarter, we supported an organizations providing relief for people impacted by the Colorado and British Columbia wildfires and the Kentucky tornado. These contributions are in addition to our annual donations to Save The Children and Red Cross disaster relief. In terms of inclusion and diversity, we launched our new mentoring program pilot and our new I&D advisory boards have begun meeting regularly. We also continued further our direct support to black communities. This includes making donations to organizations committed to providing professional development for diverse leaders. Finally, as we continue to pursue initiatives that are both environmentally responsible and smart for our business, we are excited to share that we are making progress with plans to pursue additional even more aggressive environmental goals in several of our priority areas. I plan to discuss these in more detail on our next call. As always, we have more information on corporate responsibility at tjx.com. In closing, I want to again thank each of our associates around the globe who helped us achieve our very strong results. I truly believe the depth of our off-price expertise and knowledge of our teams is unmatched. Going forward, we are excited about the sales and profitability opportunities we see for the business. We are confident in our plans for fiscal '23 and that our value proposition and the flexibility of our business will continue to be tremendous advantages. Our balance sheet is very strong, and we are in a great position to invest in the growth of our business and to take advantage of the excellent inventory in the marketplace and return significant cash to our shareholders. We feel great about our market share opportunities and our goal of becoming an increasingly profitable $60 billion plus revenue company. Now I'll turn the call back to Scott for a few additional comments, and then we'll open it up for questions. Scott?

Thanks, Ernie. Moving to guidance. First, in fiscal '23, we plan to report comp store sales growth versus fiscal '22 for our U.S. divisions only. As a reminder, we had temporary store closures and numerous shopping restrictions internationally during fiscal '22. Therefore, we do not have a reasonable baseline to report year-over-year comp store sales for our TJX Canada and TJX International divisions in fiscal '23. As for the first quarter, we are planning U.S. comp store sales to be up 1% to 3% over an outsized 17% U.S. open-only comp store sales increase last year. For the start of the first quarter, we are very pleased that our U.S. comp sales growth is strong as we are seeing excellent consumer demand for both our apparel and home categories. It's important to note that our guidance takes into account the acceleration of comp sales we saw during the first quarter last year. To start the first quarter, we are currently cycling U.S. open-only comp store sales increases of low to mid-single digits versus the 20% plus increase we'll soon be anniversarying for the March and April period combined. Next, we are planning total first quarter TJX sales in the range of $11.5 billion to $11.7 billion. In the first quarter, we're planning pretax margin in the range of 8.1% to 8.4%. We feel great about our merchandising margin opportunity and retail pricing strategy. However, we continue to expect elevated expense headwinds versus fiscal '22. We currently expect that level of incremental freight expense in fiscal '23 will be the highest in the first quarter at approximately 220 basis points. We're also expecting incremental wage costs to significantly impact our Q1 pretax margin. For modeling purposes in the first quarter, we're currently anticipating a tax rate of 25.4%, net interest expense of about $19 million and a weighted average share count of approximately 1.2 billion. As a result of these assumptions, we're planning first quarter EPS of $0.58 to $0.61 per share. As to the full year, we are planning a 3 to 4 U.S. comp sales increase over a 17% U.S. open-only comp increase last year. For the full year, we are planning total TJX sales in the range of $52.6 billion to $53.1 billion. In regards to full year pretax margin, we're currently planning it to be close to fiscal '22's adjusted 9.6% margin. I want to highlight that this estimate implies that pretax margin in the last 9 months of the year will be close to double digits. We feel great about our merchandise margin opportunity and retail pricing initiative. However, similar to other retailers, we continue to see cost increases from freight and wage. We now expect these costs to be higher than we had anticipated when we spoke to you last quarter. Currently, we are planning incremental freight expense of approximately 150 basis points and the incremental wage cost of about 100 basis points. That said, our retail strategy is working very well and now expect a bigger benefit this year than we had anticipated. Currently, we expect it to offset a majority of these incremental freight and wage costs in fiscal '23. Importantly, I want to reiterate what Ernie said a few minutes ago, that our goal is to approach a double-digit pretax margin in the medium term. Further, on an annual basis, we believe we can deliver flat to increase margins on a 3% to 4% comp once expenses moderate significantly from these elevated levels. Lastly, for modeling purposes for the full year, we're currently anticipating a tax rate of 25.8%, net interest expense of about $50 million and a weighted average share count of approximately 1.2 million -- billion. We are not providing EPS guidance for the full year at this time given the uncertainty around the expense sales, but hope the mix we are sharing will be helpful for modeling purposes. Moving on to our fiscal '23 capital plans. We expect capital expenditures to be in the range of $1.7 billion to $1.9 billion. These include opening new stores, remodels, relocations and investments in our distribution, network and infrastructure. For new stores, we plan to add about 170 new stores which would bring our year-end total to 4,850 stores. This would represent a store growth of about 3%. In the U.S., our plans call for -- to add about 55 stores at Marmaxx, 60 stores at HomeGoods, including 10 HomeSense stores and 20 Sierra stores. In Canada, we plan to add about 10 new stores. And at TJX International, we plan to open approximately 15 stores in Europe and approximately 10 stores in Australia. We continue to feel great about our opportunity to grow our global store base. Long term, we believe we can grow our store base to 6,275 stores, which is nearly 1,600 more stores than today with our current retail banners in our current geographies. Lastly, we plan to remodel 400-plus stores and relocate 50-plus stores in fiscal '23. As to our fiscal '23 cash distribution plans, we remain committed to returning cash to shareholders. As outlined in today's press release, we expect our Board of Directors will increase our current quarterly dividend by 13% to $0.295 per share. Additionally, in fiscal '23, we currently expect to buy that $2.25 billion to $2.5 billion of TJX stock. In closing, over the last 2 years, we have successfully navigated our business through an unprecedented retail landscape and an increasingly inflationary environment. We believe the actions we've taken and the initiatives we put in place set us up extremely well to drive both top and bottom line growth for many years to come. I want to emphasize that we are confident about the opportunities for our business going forward. We have a strong balance sheet and continue to generate a tremendous amount of cash flow. We are in a great position to continue to investing and to support the growth of our business while simultaneously returning significant cash to our shareholders. Now, we're going to -- we are happy to take your questions. As we do every quarter, we're going to ask that you please limit your questions to 1 per person and 1 part in each question to keep the call on schedule, so we can answer as many questions from as many analysts as we can. Thanks, and now we will open it up for questions.

[Operator Instructions]. Our first question comes from Lorraine Hutchinson.

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

Great question, Lorraine. Yes, first of all, what's happened around us, as you can see, even in some of the media that outwardly reported many of the retailers adjusting their prices across the board. I won't name them, but you probably read about certain retailers taking blanket approaches to raising their retails. So ironically, like anything in this business, I'm looking at this inflationary price increase as a major opportunity for us at TJX to get even more aggressive about adjusting our retails than we've been. So when we started off, as you know, we were taking a very -- the word I was using was surgically and then selectively adjusting retails, but we've had such strong success. And in fact, if you look at the fourth quarter merchandise margin, we had really healthy margins all the way through the back half of the year, really driven by a large part by the pricing strategy. So now, Lorraine, to your question, we are feeling like there's just major -- more significant room for improvement as we go over the next year or 2. And it's a multiyear strategy, by the way, as we said in the script. We're always monitoring the value about how we stack up against everybody else. But the one thing that's happening is everyone is getting here with the same cost pressures. So our merchants are diligent. They're diligent about looking at the -- where we -- where our out-the-door retail is relative to the promotional retail and other retailers. And we have just a high degree of confidence in the ability to do a significant amount this coming year to offset a really the lion's share, I think, of these cost pressures. So feeling great about that. Don't like, again, the freight and wage pressures that we're dealing with. They're pretty significant, as Scott talked about. Having said that, this pricing strategy is one of the biggest things in TJX that I think we can do to mitigate it, and we're very confident in it.

Our next question comes from Matthew Boss.

So Ernie, can you speak to market share trends and product availability that you're seeing in the U.S. across with apparel and home? Do you think you exit this pandemic as a stronger model? And then maybe just, Scott, near term, on the positive 1 to 3 comp guide for the quarter -- for the first quarter, is it fair to say you've seen February reaccelerate back to November's mid-teens comp or just anything that provides you confidence as we head into the 20% plus March, April on near term, I think, would be helpful.

Sure, Matt. Yes. So, oh my gosh, the availability, I would say we're seeing over the last few weeks, specifically a ramp-up in availability. Again, as I mentioned on the script, across good, better and best. And internationally, by the way, we're seeing -- even though it's been -- as you know, we've been fairly restrained over in Europe, for example. We are specifically seeing more better goods there than we have seen in a long time that the merchants are taking advantage of there. So as we open up, we're highly confident, and we have been gaining market share, but we're highly confident once we can open up that normal environment levels that we will see significant branded availability and market share gain there. The market share gain that we clearly have been achieving here has been consistent. So if you look at these open-only comps in the U.S., I mean, there's a extremely healthy comps, as you know. We're just getting here with these -- with wage and freight beyond what we had thought about before. But in terms of availability, product, the pricing strategy, I think we have all of these levers working for us. And then I'll give you -- the biggest thing I didn't get to touch on the script, and this is where the Q&A is good. And you and I have talked about this in the past, is our branded differentiation now. So I think you alluded in the question, we are going to be more important to vendors, and I think that's what you were getting at with part of your question there. We're going to be more important to the branded vendor community than ever before because of what's happened with a lot of the store closures and the complexion of the online guys that tend to be either vertical label-driven or their businesses have not been that great at the department store level. If you really look at the amount of business they're doing. Of course, they're getting better relative to their low volume levels of a couple of years ago, but they're still not doing the volume. And so what's happening is we're becoming, I think, even more important and as well as our buyers are just great at the way they really partner and deal with these vendors. We're becoming more important as we come out of this. So another reason with the branded differentiation for us, being an eclectic branded mix, to continue our treasure hunt format, we feel really good about in this inflationary environment is us becoming more and more a place of choice to shop. And then you have all the -- by the way, you have all the political situations going on out there in inflation and in fuel. Anytime there's uneasiness, I would say, it's just a great opportunity for our model to accelerate a little bit more. So it will be interesting to see what happens over the next coming weeks. But generally, though strangely enough, those environments are good for us. Scott?

Yes. So Matt, to answer your question, we can't give you specific, but I think the most important thing is that -- is what I said in the script, that we're currently comping against low to mid-single-digit U.S. comps where then, again, it accelerates to that strong plus 20 in the [MARPOL] period. But what -- we've given guidance of 1% to 3%. And what we're seeing on the -- our 2-year stack for our start is why we're -- overall, we're confident in our 1% to 3% overall guidance. Having said that, we're -- we certainly have -- as we've -- Omicron starts to lessen, we've seen apparel has reemerged to being strong again versus the impact that it had in January. We've had a strong basket and positive U.S. customer traffic thus far. So all leading us to when we put it together to that 1% to 3% U.S. comp over and outsized 17% comp. Obviously, the international divisions are not -- they were closed for large chunks of last year. So that's why our guidance of the $11.5 billion to $11.7 billion is -- in rough terms, is 14% to 16% increase because as our -- and the other thing is we are starting to see some of the restrictions in Europe be lessened and hopefully, that will give us some room for improvement there as well.

Our next question comes from Kimberly Greenberger.

Okay. Great. Ernie, in your prepared remarks, you talked about some sort of -- some of the expenses you're currently encountering or what you characterized as temporary headwinds. And once these pass that you feel confident in improving your pretax margins. I'm wondering if you can reflect just on the headwinds in the P&L and help us understand which expense items that you're seeing coming through do you think are temporary and transitory such that perhaps in future quarters or future years, you could get those back? And when -- what do you think is more of a permanent headwind to the expense structure?

Sure. Yes, yes, yes. I'll let Scott jump in, but let me answer right away with the -- the one that we are hoping is transient is the freight. And I would say the one that is not would be wage. So wage, I believe, and I believe this would be the case for most businesses within the country is -- will be built into the base, and I think it's hard to reverse that. Freight, and I think Scott had it in his prepared remarks, we are hoping that, that should start to moderate. And that's what I had referred to -- was referring to in my opening remarks. I have to tell you. So we -- you can kind of get at what those 2 mean because they're the biggest chunks, by the way, of what we were talking about in expense pressures. There's others, but those are really the 2 headlines. As witnessed by what happened with our margin in the last fourth quarter and Scott talked about, we were able to offset, oh my gosh, so much with our pricing strategy and our sales and markdowns and our turn rates that I believe when we go to a normalized environment when the virus, we don't have anything, if that just becomes totally normal, and we have our international divisions opened. And we continue to buy and ship the right values at the different retails that we're talking about in significant categories of goods, I think we're going to offset the lion's share of those expense headwinds in the fairly short term here, which is as in this coming year, which is why I think we get to approach double digits on our operating margin. So -- and then I think it's a multi -- I think we have more retail because everyone's going to be getting -- so wage and freight hits most retailers and wage hits everybody and it's sitting in the whole country. So I just think we have an advantage in our model to continue to raise retails for multiple years because everybody else will have to. So I hope that gives color. Scott?

Yes. It's -- there's a lot of moving pieces here. I think we have better visibility. I'll start with the freight into that. I do think, as you've heard on other retailers report, that this will persist for much of the year, but we do believe that the first half is -- has the higher year-over-year increases or incremental costs and it will moderate as we move to the back and particularly in the fourth quarter where everything peaked due to some of the actions we did. I think our teams did a great job of securing the freight, bringing it in. We did have to pay more cost to do that. There were other things like demerge and other costs that due to the longer times that it took to get the goods into our -- at the port and into our buildings. But I think a lot of that we would believe will be lessened as we go against it next year. And the ocean freight and all that was really just more -- it increased every quarter over the year, peaking. We're renegotiating contracts and other things as we move through -- as we start right now move through the year. So I think the freight will still be, as we called out in my earlier remarks, a big headwind, but moderating significantly when you get to the following fiscal year, which I think what was Ernie was alluding to. The wage will, I think, peak this year, but will still be a headwind, as Ernie alluded to, but it will moderate next year. And supply chain, frankly, this year has already moderated, we peaked on that. A lot of the wage increases that we're seeing are the annualization of a lot of the distribution wages that we had several increases that will be impacting us more in the first half of the year, a little less in the second and then the store wages. I think it's still a fluid situation, but we do believe it will decrease. So overall, we would expect when you get past this year, that the sum of all of the expense pressures will be significantly less, not back to our pre-COVID levels but with a level -- we would need a significantly less average retail increase to be able to cover that compared to what we're seeing this year. But I think, as Ernie said, that's still very much a moving target, and we haven't bought the goods for the vast majority of the year at this point.

Our next question comes from Paul Lejuez.

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

Good questions, Paul. So let me start with the increase -- let me start with the pricing strategy first. No, it's actually not -- even though we would all -- at a high level, you would expect since in the home product area, some of it's more unique or a little bit more blind per se that you'd have more there, we are getting the price increases across the board. Marmaxx, very significant. Yes, HomeGoods significant. But every division, and as you can imagine, we monitor what's going on with each division consistently, pretty much weekly actually, and every division is participating in it. Proportionately, as you can imagine, the dollars are big because we've been open in the States. So your dollars are bigger in Marmaxx and HomeGoods, but I would say every division, we can see directionally, the pricing strategy is working. Again, we also get feedback on what's happening. So we monitor how are we doing with the goods that we've adjusted price on, and that's across every division. And it's extremely successful, no problems at all. And again, I give my -- the merchants a lot of credit because they are the ones that do all the work of really making sure when we do it, we're doing it strategically. We're looking at with the out-the-door retail is at the item whether it's HomeGoods or Marmaxx, Canada and UK as we're opening up, we're going to be more and more doing that. Sierra, who is -- by the way, our Sierra business has those same opportunities and they tend to trade from a moderate to very high end. So they can find pockets of it. As far as the unit breakdown, I'll let Scott jump in here a little as well. But on the 3% to 4% comp, it's going to -- everyone participates a little on that. We could have some -- we could have some average retail driving that really in the Marmaxx, for example, and we could actually be down slightly in units but drive our comp with ticket based on what's going on in the environment and the mix of goods within the store that we're going into. Scott, I don't know if you want...

Yes, I don't have much more to say on that. I think and as Ernie said, is that by having -- this is really opposite of what we've seen for many, many years where our average retails were going down over a multiyear period. And I may have Ernie jump back in that even though with our average retail going up, we're still in an overall unit base -- average retail significantly below what we were, right, Ernie? A couple of years ago.

Yes.

So -- but I think -- so I think the piece of -- with your average retail is going up, and as Ernie alluded to, potentially less units, that's what's driving us to be offsetting a lot of these costs, not just the mark-on, but by having less units...

Less processing cost.

Less processing costs in stores and distribution centers and all that, I think that's a significant benefit versus prior years when it was going the other direction. The other thing that, again, Ernie alluded to on the value equation, which is obviously important to us, we do a lot of marketing and other surveys and our customers are telling us they're highly satisfied with the overall store experience, which is great, continues to go up. But they're also -- we're not seeing any degradation at all in our value perception at all. So I think we obviously stay on it important, all the metrics, but also we try to get as much indicators from talking to our customers as much as possible.

Paul, one other thing I'd point out on the 3% to -- as we say every year, and this is we believe we want to plan prudently, right? But you can imagine that the merchants in our business here, their goal is always to exceed their plans. So you can be sure that the management teams here would like to exceed those plans. But when you look at the stack that we're up against last year, as we talked about, we feel this is what we should plan. We don't really come up until the big -- the enormous comps we start coming up against are in pretty much mid-March, mid-March through April. So we're watching to see what happens there. So we are tracking strongly right now. We want some more information as we get to the middle of this quarter to the end of this quarter. And we'll probably have a little bit more clarity of our feel for the trend line on our next call.

Our next question comes from Omar Saad.

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

So Omar, you have gone right to the really, crux of the matter. When we look back at that last year, we could not read exactly when we were kicking in. We felt it was a combination of stimulus, pent-up demand because you have to remember, people have been cooped up. We are one of the more entertaining brick-and-mortar retailers to coming out of that, right? We're such an appealing format for people to distress and go shop from when they were a little cooped up. So we think -- and on the stimulus check, I think it might have been a little piece for sure. I think it was more of the other, of the pent-up demand, et cetera, because our trend line, as you know, from our results, continue for quite a while. Now the stimulus checks, it gets a little great. They were out there for quite a while. So yes, we believe that was a factor, but what percent of our huge double-digit comps was it, we, to this day, really don't know exactly. I think it's a small percent, but part of it. So all the more reason why, again, we want to see this mid-March through end of April, I think we're going to have a good read then. Having said that, we are tracking very healthy right now, and it has been a strong beginning to this quarter when you look at how we've planned it all and what our expectations are for the quarter. So sorry, I can't give you the exact on that. Again, we don't have it internally ourselves.

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

Our next question comes from Michael Binetti.

Thanks for all the detail on the call here today, very helpful. I have a couple for you. So I guess you're saying back to margins from fiscal '20 levels in the long term freight normalizing being the big help there, but your sales are 20% higher now. You called sales out is the best thing you can do to fight the margins. You have pricing power. So I'm wondering why longer-term margins wouldn't be set above '20 levels -- above 2020 levels in that scenario. And then Scott, I just wanted to try to get in your head a little bit. You said annual flat to increase margins on a 3% to 4% comp once expenses moderate. It's a little higher than the flow-through rate you've spoken to in the past. So maybe help us think about what kind of a cost algorithm you're baking in as you think about that longer term?

Yes. Again, it's good. So to give some color as -- although the sales are substantially higher there through the roof, the cost over the course of several years are several billion dollars higher on a like-for-like basis as well. So that's why if this had all flowed through, we would be a lot higher than the 9.6%. We printed we'd be hundreds of basis points higher, but we had this -- so the costs aren't necessarily wage and others going down. So that's -- they don't reset. You just start and now go forward, what's your incremental cost right now. I mean, our old algorithm pre-COVID with comps that were slightly less, but we still had a deleverage of 30 basis points, 40 basis points. Now we're saying on a 3% to 4% comp, we would expect to either be flat or leverage on our comp. And I think, again, as Ernie indicated, a lot of that has to do with the pricing initiative, which obviously, if costs moderate and there's still room for pricing more but will flow through than maybe we've anticipated. But the cost pressure, which used to be 30 basis points to 40 basis points of incremental pressure, we expect to moderate, but not down to that level at least over the midterm. Longer term, if they ever not moderated down to something close to 20 basis points to 40 basis points with even a moderate level of average retail initiative in a 3% to 4% comp, we would probably do better. And that's why I think over the longer term, Ernie indicated we get back to the fiscal '20 levels or better.

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

We can -- Michael, good question. We don't get it at a high because we wouldn't know how -- to put it all together from a high. But our merchants at a department level would have an idea of where categories have moved. And the feeling is that they have gone up, but we wouldn't be able to get on an exact average unit retail increase per se. But directionally, we can tell they moved up in many areas of the store. And the pressure -- again, the pressure continues there as well. They're getting here with the exact same cost everybody is in retail. So it would only make sense that that's happening, but we are verifying that really weekly, but I can't get an exact number across a whole store.

Our next question comes from Marni Shapiro.

Can you talk a little bit about -- on pricing and just the promotional environment, we're coming off what was a very unique industry year with low inventories, very low promotions in 2021 across the board. And not that 2022 is going to be back to normal, but there is some hope that we'll be a little bit more back to normal, and the expectation is we'll see a little bit more of promotional creep. At the same time, you guys are raising prices and the consumers being hit with costs at home and is looking for better value. Can you just talk a little bit about how you balance that and how you're paying attention to all of the promotional creep that's anticipated for this year? Or are you not seeing that at all?

So we are not seeing promotional creep yet. We are reading about it as you are. It's a great question. It's -- we're ultrasensitive to promotional creep, but we've been seeing things go the other way. So regardless of inventory levels, inflation is hitting everybody so dramatically, again, back to wage and freight, they can have leaner inventories, that won't matter because they're still going to have to raise their retails because of the inflationary pressures on too many of their cost lines. I'll give you another one. We don't talk about it. We're talking about wage in the stores or whatever. Most of these businesses, if it's in a DC, if it's an e-com business, those wage rates and their DCs, as you've probably seen what some of those online guys have even announced that they have to pay. If you go to the mass market merchants, what they've had to raise their wages to. If you go to central offices throughout all of retail, so all the corporate offices, just as we have here, and you take the study of what's going on, on merit increases across the country. Everybody is going up at a higher rate than ever before. So I just think no matter how lean their inventories are, I just think everyone's a little boxed in that they have to -- I can't picture them promoting more. If they promote more, there is the -- in a department -- what you can do is you can promote -- you can look like you're promoting more, but the promotional price is raised. Do you know what I mean?

Yes, yes.

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

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

Absolutely. We do not -- we're pretty simple internally here. We flex on many things. We do not flex our merchants. There was no flexibility on us being close to the out-the-door price of any other retailer.

And can I just follow up on that 1 listing? Are the price increases across the board? Or are there certain segments that are more amenable to those price increases?

More amenable, I like that. I might have to use that -- I'm going to use some of that language with some of my team. I would say, yes, there are -- absolutely, there are categories that are a little more sensitive where I think it's more dangerous for us to play it because we're already there. And up around us, say it's a certain branded category, and they're already be kind of a known commodity retail there, our merchant buyers have to kind of stay away from that. And there are a decent amount of those throughout the store. There's just -- what we have found in the last quarter or 2, there are more categories where we can really adjust retails on more product than we thought 6 months ago. So we are just feeling really good about it. And I get -- literally, every week, I can see on a report what's happening at a high level across all the divisions and that. So we're able to monitor all the senior teams all the way down to merchandise managers and buyers, in the planning organization. We can kind of keep our hands around this to also make sure that we're not swinging the pendulum as they say.

And our last question comes from [Bob].

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

Thank you, Bob. Two great questions directionally, types of things that we ask ourselves all the time. So we don't adjust -- we don't specifically adjust good, better, best going in. But I do have to say that based on what's out there, our merchants kind of strategize because we buy a lot of different ways. So if they see we're going to be overloaded and say good and not enough better and best, they will lean into trying to balance those areas. But we don't -- how do I put it? We don't get real definitive on that. So we don't mind if there's been more exciting buys in one of those areas, we don't have to have it be so exactly balanced. So if you had in the men's shirt area, if we were kind of imbalanced on certain brands and certain looks to good -- we would try to move it to be more balanced because we try to appeal to a broad customer base and we don't want to be just in one price point or one look in any category. So it's a great question. We could spend a couple of hours on this on how we do a mix. But we really, really -- we adjust, but we don't adjust to as much as a traditional store would, I'd say, to answer your question. And then the second question, can you remind me on the second question? It was...

It was just more on product availability. I think you mentioned you're seeing some better product the last few weeks. Do you foresee the next 6 months being materially better than you saw over the last 12 months? I'm just trying to understand when you look at the environment and supply chain.

Yes, the -- so here's what's good. As retail gets better, typically -- remember, the wholesale market is mainly imported products. So they tend to buy more aggressively when retail gets better, and there tends to be more excess. So I think in theory, there's going to be more availability over the next -- as everybody -- if things normalize, people will tend to cut goods a little more aggressively. There's just been some -- there's a lot of availability right now, particularly coming out of holiday going into first quarter. But I would assume that even ticks up some more as things normalize. So yes, great question. We talk -- again, we talk about those type of things consistently here. So you're touching on some of the big rocks for sure.

All right. Thank you all for joining us today. We enjoyed our discussions. We'll be updating you again on our first quarter earnings call in May. And let me just say from the team here at TJX, we hope you all stay well and talk to you soon.

Ladies and gentlemen, that concludes the conference for today. Thank you for participating.