TJX Companies Inc (TJX) 2008 Q2 法說會逐字稿

Ladies gentlemen, welcome to The TJX Companies' second-quarter 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 Tuesday, August 14, 2007.

I would like to turn the conference call over to Ms. Carol Meyrowitz, President and CEO for The TJX Companies. Please go ahead, ma'am.

Good morning, everyone. Before we start, Sherry Lang has some comments to make.

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 28, 2007. Further, these comments and the Q&A that follows are copyrighted today by The TJX Companies. Any recording, rebroadcast, reproduction or other use of the same for profit or otherwise without prior consent of TJX is prohibited and a violation of United States copyright laws.

Thank you, and now I'll turn it over to Carol.

Thank you, Sherry. Good morning again. Joining me on the call today are Jeff Naylor, Ernie Herrman, Trip Tripathy and Sherry Lang. As you know, Trip joined TJX as EVP and CFO in June, and we are delighted to have him here. Since Trip has been with us such a short period of time, Jeff Naylor will be handling the financial questions today.

Let me begin by saying, on an operating basis, we just delivered the strongest second quarter in the Company's history. Our 31% increase in EPS from continuing operations, excluding the intrusion charge, was achieved on top of a very strong second quarter last year, and continues our trend of strong operating performance that began in late 2005. Importantly, virtually all of our divisions delivered significant top-line and bottom-line improvement that was in line or above plan.

Also, I'm particularly pleased with the consistency of the quarter, with comps for all three months coming in above plan. In addition to strong comps, we saw strong profits across virtually all of our businesses in the second quarter on top of last year's strong gain, and this continues to be a focus for us. It is a never-ending process, and our goal is to continually improve in this area.

I'm sure you have all seen in today's release that we have learned enough information that we are now able to estimate the computer intrusion-related liability and have taken a charge in this quarter. This charge represents costs incurred during the second quarter, as well as a reserve for our estimate of the total potential cash liability related to the intrusion. We also noted our expectations for future non-cash charges beyond the charge we are currently taking. Together, these cash and non-cash charges represent our best estimate of all of the losses we expect to incur as a result of the intrusion.

I would like to thank our customers and shareholders for their ongoing support through this period. We have worked diligently to further strengthen our computer security, and are committed to providing a secure shopping environment for our customers. I would like to point out that everything we can say about this charge is in our press release today, and there is really nothing more we can add to it on this call.

Now, to recap the consolidated numbers, second-quarter consolidated net sales increased to $4.3 billion or 9% above last year. Consolidated comp-store sales increased by a very strong 5%. Foreign currency exchange rates benefited comp sales by 1 percentage point, which is what we had expected. Fully-diluted earnings per share from continuing operations on a reported basis was $0.13, which includes the $0.25 per share after-tax charge related to the computer intrusion. Excluding this charge, second-quarter EPS from continuing operations was $0.38, again a 31% increase over the prior year.

Overall, pretax profit margins were 2.1%. Excluding the intrusion charge, pretax margins were 6.7%, a very strong 90 basis point increase versus last year and on top of last year's 80 basis point improvement. Gross margin was 24%, up 60 basis points, due to the improved merchandise margins as well as buying occupancy leverage.

SG&A expense improved 10 basis points over last year, due to our focus on cost reduction as well as leverage on the 5% comp, partially offset by our planned increase in marketing expense. Excluding the incremental marketing spend, SG&A improved 30 basis points over last year.

In terms of inventories, at the end of the second quarter, consolidated inventories on a per-store basis was up 2%, approximately half of which was due to foreign exchange, versus being down 4% at this time last year. We are very comfortable with our inventory position, with fewer dollars committed at this time last year on a total-inventory-per-store basis. This includes the warehouses, stores and merchandise on order.

To recap the first half, which was also above expectations, EPS from continuing operations for the first six months was $0.47 on a reported basis, which includes $0.27 of charges related to the computer intrusions. Excluding this charge, EPS from continuing operations was $0.74, up 17% over the prior year. Comp sales increased 4% in the first half over a 3% increase last year. We also saw strong profit margin gains on top of similar gains during the first six months last year, again demonstrating our ability to drive strong performance on top of strong performance.

Now, I will briefly recap divisional results for the second quarter. Marmaxx had an outstanding quarter. Comp sales increased 3% in the second quarter. Segment profit was $252 million, up 21% over the prior year, and segment profit was 9%, up 120 basis points over the prior year, both of which were well above our plan. I should emphasize that we achieved these strong results on comp sales that were in line with plan, the improvement in Marmaxx's profit margins being driven by merchandise margin coupled with cost containment and expense leverage.

At Winners and HomeSense in Canada, comp sales increased 12% in US dollars. In local currency, which we believe better reflects our operating performance, comps increased by a strong 7%, which is well above plan. Segment profit was $48 million or up 15% over the prior year, and segment profit margin was just slightly below last year's very strong results. Our Canadian businesses are executing very well and adding newness to their stores every day, and we believe our momentum will continue.

In the UK and Ireland, second-quarter comps at T.K. Maxx increased 15% in US dollars. The local-currency comp -- which, again, we believe better reflects our operating performance -- increased by a strong 7%, slightly above plan. Segment profit in the second quarter was $16 million in US$, and segment profit margin declined versus last year. Profitability was impacted by higher mark-downs on women's apparel, the result of a cold, wet summer, as well as lease termination charges as we have relocated stores into larger, higher-traffic locations.

That said, T.K. Maxx continues to deliver strong comp growth on top of difficult comparisons, and has become established as a well-known brand in the UK and Ireland. I have to say, having spent, a few weeks ago, a week in the UK, I never saw the sun shine, and that has been for several months. So I think we performed extremely well.

Back in the US, HomeGoods also had an outstanding quarter, with Q2 comp sales increasing by a strong 5%, which was above our plan. HomeGoods segment profit was $9 million, more than double last year, and segment profit margin improved 130 basis points, both of which were above plan. HomeGoods has been bucking the softness in the industry for quite a while, which we attribute to strong execution, including a constant flow of new and exciting merchandise.

A.J. Wright's second-quarter comp increased 6%, which was in line with plan. Bottom-line results at A.J. Wright improved over last year, and were at the high end of our plan. I believe we have the right team in place now at A.J. Wright, and our strategies are beginning to take hold. I would like to reiterate that we believe A.J. Wright can be a great growth vehicle for TJX.

Finally, at Bob's Stores, comp sales increased by an above-plan 10% over positive comps last year, and bottom-line results improved over last year.

Now, I would like to turn our focus to the TJX business model, which has been successful for 30 years, and why we have great confidence that it will continue to be successful. As you know, or three-year plan calls for 12% annual EPS growth, but I want you to know the goal in everything we do is to surpass this. I'm going to outline for you the major themes and reasons for our confidence in the business today and in the future.

First, our confidence is rooted in who we are, which is, simply stated, about value. Our value equation plays in all kinds of retail environments. When we execute well, the consistency of our performance is hard to find elsewhere in the industry. We have proven time and again that we can achieve top and bottom-line growth through both strong economic times and weaker ones. In our 30-year history, we have achieve comp sales increases in all but two years, including during recessions.

The performance of our home businesses in the second quarter really make this point. HomeGoods achieved a 5% comp increase over strong comps last year, and nearly doubled its segment profit margin. This was achieved despite a tough home environment. HomeSense and the home businesses at T.K. Maxx also did very well in the second quarter.

We're also hearing a lot of discussion about gas prices and the impact on the consumer. But our experience in the first and second quarters are examples of what we have seen throughout our history. Macro consumer pressures have not typically impacted our business. In weak environments, new customers tend to find us, and when times improve, they usually stick with us because they love our values. That said, made no mistake that we prefer a strong environment. The point is that in weaker times, we tend to hold our own and do better than most.

Second, our ability to drive comp sales gives us great confidence, because we have a solid strategy through which to do so. This includes execution of our flexible business model, our improved marketing strategy and our constant injection of new merchandise initiatives.

Now, let me elaborate. We have an amazingly flexible off-price business model that allows us to buy opportunistically and make purchase decisions very close to need. When we execute well, this gives us a huge competitive advantage, as we can constantly adjust the market trends and customer demand.

A great example of how we benefited from this flexibility in the second quarter is what we did with dresses -- entered the quarter with significantly more open-to-buy versus the prior year, which gave us the flexibility to shift some missy dollars at Marmaxx into dresses. The results -- dresses comped up 64% in the second quarter on top of 23% comp increase the year before. We had a decrease in missy apparel overall, but we planned it that way. This not only happened in Marmaxx but across all of our apparel divisions.

The next piece of our strategy to drive comps is our constantly improving marketing. We have increased our investments, which our cost reduction efforts are more than funding. We are also doing a much better job of being harder-hitting in our messaging and connecting our customer with our brands. They are loving our Maxx Moments campaign, and we're very excited about our new campaign for Marshalls, which is breaking in September. T.K. Maxx does an excellent job of branding, and is now an accepted premium brand in the UK and Ireland. We plan to make T.K. Maxx a European brand, and we will begin with our expansion into Germany, which I'll say more about in a moment. At A.J. Wright, we are looking forward to what we believe will be a breakthrough marketing campaign that you will see both on TV and outdoor billboards, and that's beginning this week. At Bob's, we continue to work on improving marketing, and have a new agency that we believe will help us do a better job of reaching that customer.

The last piece of our strategy to drive comps is merchandise initiatives, and we have many underway in various stages. There's always something in the pipeline, so that we're ready to roll with a new initiative when one before it begins to reach maturity. This is what we do. We're always testing new ideas. Some stick and some don't, but we learn from them all. I'll highlight just a few.

At Marshalls, we really like the results we are seeing at The Cube, our juniors shop. We will be adding 80 to 100 of these just in the first half of next year. One of the things that excites us most about this initiative is that we are building a loyal base for the future. The Cube really appeals to both the younger customer as well as the more contemporary 40-plus-year-old. I should say that I'm a big shopper of The Cube, and I am more than 40.

Footwear and accessories are also doing well at Marmaxx. Shoes comped up 11% in the second quarter, and we are on track to add over 200 expanded footwear departments at Marshalls this year. Shoes and accessories were exceptional at Winners in the second quarter, and we're adding more of both initiatives to this chain.

The Runway, our designer department at T.J. Maxx, continues to perform, and we are fine-tuning this concept before rolling it out to more stores. Also, we now have 14 Runway departments at Winners in Canada, and we are seeing very good results.

Another example of what we're doing with kids' departments throughout the Company -- hg kids is a success at HomeGoods. We're going to be testing Little Winners at Winners, and Kids Maxx is doing really well at T.K. Maxx.

The third major reason for our confidence in our ability to deliver growth is our emphasis and progress on cost reduction. We continue to build cost structures around conservatively planned comps to position us to drive more to the bottom line if we beat the comp plan. We also have a senior executive dedicated to the cost reduction, leading a cross-divisional team that is drilling into the big rocks. Some examples are non-merchandise procurement, store operating costs, supply chain, markdown optimization and a store-ready project. While some of these efforts will deliver in the shorter term, others are medium-term efforts that will require some re-engineering of existing processes.

The fourth major reason for our confidence is everything we're doing to drive growth in selling square footage at attractive financial returns across the Company. We have opportunities to expand into new countries and new concepts. We have proved that our value equation plays well in four countries and Puerto Rico, and we plan to capitalize upon that by opening our first stores in Germany. Our T.K. Maxx team is very excited, and we are on track for our first five openings this fall. International expansion is something that we continue to look very seriously and believe is in our future.

Larger footprints are another growth opportunity. We are testing our first 40,000-square-foot box at HomeGoods. Also, we have been very aggressive with relocations into larger footprints at T.K. Maxx, which have had great ROIs, and we are also looking to do this at Marmaxx. We are also looking at testing a separate home business in the UK. Interestingly enough, the UK business was up -- the home business was up 25% over last year's very strong 18%.

Lastly, in our reason for being confident, I truly believe that our no-walls approach is and will continue to be key to our success. This is about exceptional talent, sharing new ideas and best practices. Having no walls in our stores has always benefited us by allowing us to be opportunistic and flexible. We have taken this no-walls idea to an organizational level, and have knocked down many of the walls between divisions in order to increase knowledge sharing, communication and talent. Divisional teams are visiting with each other's divisional teams.

I can already see, in tangible ways, how the Company is benefiting. I also feel great about the management team we have in place, who really embraces this openness and intelligent risk-taking.

A recent example of the benefit of our no-walls approach is how we worked together to fix our soft home business. We have had companywide meetings on this. The results have been exceptional, and we are seeing big lifts in soft home in most of our divisions. Another important example is or dedicated cost reduction team, which consists of a leader from each of our businesses, and best ideas are being shared throughout the Company.

Now, I would like to move onto our financial strength. We expect to continue to generate significant amounts of cash from our strong operations, plan to continue to put our cash to use in increasing shareholder value through buying back our stock, which should account for about 3% to 4% of our annual EPS growth. In the second quarter, we repurchased $345 million of TJX stock, retiring 12.2 million shares. We continue to expect to repurchase a total of $900 million of TJX stock in fiscal 2008.

Now to guidance. Beginning with third-quarter guidance, we expect earnings per share from continuing operations in the range of $0.53 to $0.55, which represents a 10% to 15% increase over $0.48 per share in the prior year. This outlook is based upon estimated consolidated comparable store sales growth of approximately 3% to 4%. It's important to note that last year's third quarter was exceptionally strong, with a 6% comp increase and over 50% growth in EPS over the prior year, and we're being prudent as we plan against this.

Now, to the full year. We are now expecting fiscal year 2008 earnings per share from continuing operations in the range of $1.57 to $1.61. Excluding costs related to the intrusions of $0.27 recorded in the first and second quarters, we expect earnings per share from continuing operations in the range of $1.84 to $1.88. These estimates are based on an estimated comp-store sales increase of approximately 3% to 4% for the full year, and assumes fourth-quarter EPS in the range of $0.57 to $0.59. Excluding the intrusion charge, this represents a 13% to 15% increase over the $1.63 per share from continuing operations in fiscal 2007. Jeff will provide more detail on this guidance in a moment.

Summing up, let me recap the major points and reasons for our confidence. First, our value equation plays well in all kinds of environments, and we have a proven history of consistency through both strong economies and weaker ones.

Second is our confidence in our three-pronged strategy to drive comps through solid execution of our flexible off-price business model, improving marketing and merchandise initiatives.

Third, our emphasis and progress on cost reduction gives us great confidence. Cost reduction is going to be a continuous process, and we see it is a focus for the next several years.

Fourth, we have growth opportunities not only in unit growth but also concept growth and square footage growth.

Fifth, our no-walls approach to the business is an exceptional strength to the Company and is already benefiting us in many tangible ways. I have said it in the past, but I think it's important to note that our senior group gets together every single Monday and talks about the business. So this is all part of our breaking all our walls down.

I'll conclude by saying that I am very excited about our business today, and I am even more excited about the future. I look forward to updating you and our progress in the third quarter.

Now, I like to turn it over to Jeff.

Thanks, Carol. Good morning, everyone. Let me take a few moments to cover the third-quarter guidance.

For the third quarter of this year, the Company expects earnings per share from continuing operations in the range of $0.53 to $0.55, which represents a 10% to 15% increase over the $0.48 per share that we earned last year.

In terms of some of the components, we're assuming a third-quarter top line of approximately $4.8 billion. So that's $4.8 billion in sales, with a comp sales increase in the 3% to 4% range on a consolidated basis. I think it's worth pointing out that in that 3% to 4% comp guidance, that includes roughly a 1 point benefit from foreign currency. It also assumes a 1% to 2% comp sales increase at the Marmaxx Group, and obviously assumes no additional intrusion charges.

As to monthly comps on a consolidated basis, we expect comp-sales increases in the range of 3% to 4% in August, 2% to 3% in September and about 4% in October. So that's for TJX on a consolidated basis. For Marmaxx, we're planning on comp-sales increases in the range of 1% to 2% for August, flat to 1% for September and 2% to 3% for October.

Pretax profit margins are planned in the 8.4% to 8.6% range, which is flat to 20 basis points up over the prior year. A little color on that -- I think it's important to note that we had extremely strong merchandise margins last year relative to our history. As Carol mentioned, we're planning this component prudently.

The other thing I would point out is that our third-quarter pretax margin guidance also reflects a 10 basis point reduction which is attributable to the launch of the T.K. Maxx business in Germany. As Carol mentioned, we're on track to have that five stores open in October.

In terms of the P&L, we're anticipating third-quarter gross margin in the range of 25.4% to 25.5% and SG&A as a percent of sales to be about 16.7% to 16.8%. For modeling purposes, we're planning a tax rate of 38.5%, and also for modeling purposes we plan the weighted-average outstanding shares at 465 million for the quarter.

To keep to call on schedule, we would ask that you please limit your questions to one per person. I think, with that, we'll open it up for questions now.

(OPERATOR INSTRUCTIONS). Michelle Clark.

Can you first talk about availability of product in the current environment, how it compares to the same time last year, and speak specifically about the impact of continued weakness of the converted May Company doors?

Then if you can just touch upon The Runway, how many stores is this in currently, and what margin impact did it have in the second quarter?

First of all, as far as availability, we are seeing -- and Ernie is here with us today, and he'll comment. But the market is very plentiful. Obviously, there is a lot of confusion out there, especially in the apparel world, which tends to work out pretty well for us.

So I think we are feeling very positive about going forward. In addition to that, we have more open to buy than we had a year ago. We don't state the exact numbers, but I think we're in a great position today.

In terms of The Runway, again, we don't usually give margins in terms of our initiative, but we are seeing a lift in our stores. We have taken The Runway to Winners. As I said, we have 14 stores there, and we continue to work on it. I think the biggest benefit to The Runway, honestly, has been that we have opened new vendors and we have been able to spread some of these even higher-level brands to all of our stores. So we are pretty excited about that, so we get a win-win.

I would just jump in on the availability of the goods. At the last call, I think I talked about this a little. Our biggest challenge in Marmaxx right now is really keeping that open to buy and making sure in the market all the time, because there's really an availability that's so great out there, we're having to really manage how quickly we spend. So availability is a non-issue.

Brian Tunick.

Congrats in a tough environment. We have two questions. One's pretty much for the sector, and it has to do with the Supreme Court decision that we keep hearing about. How does that affect you guys relative to the decision that it give the brands the potential to enforce the lowest price at which their products could be sold. Is that something we need to worry about?

Secondly, from a T.J. Maxx perspective, your new loyalty card and private-label credit card -- can you just talk about maybe some opportunities there for the back half, and if you're seeing any early results? So two questions for you.

In terms of the pricing, it doesn't really affect off-price. First of all, I don't think it's really going to go through and affect the industry. But secondly, the off-price sector really is not going to be involved in it. So I don't see that as an issue going forward for us at all.

In terms of our private-label card, we are planning in this fall time period our in-store launch, which we are pretty excited about. Our soft launch has been pretty productive, and we are just beginning that. We have the opportunity, we believe, in the future to have several million customers join us. So again, we think that's going to be a benefit, but probably starting to hit us more towards the fourth quarter versus the third quarter.

Jeffrey Black.

Let me add my congrats on the nice quarter. I have a two-pronged question on the SG&A front. I just wanted to understand, I guess, maybe from Jeff, is the amount of spend that's going to hit the back half -- does that still keep the hurdle rate to get some leverage in that 2% to 3% range on the comp?

Then, for Carol, on the spending itself, what are you doing differently, in terms of the programs you're implementing on the marketing front, specifically? Is it driving traffic? Are there any differences you can tell? Are we getting better results, in other words?

I'll start with your second question and then I'll hand it over to Jeff. Obviously, our cost initiative involves all the divisions, and it more than leverages the marketing. Our marketing spend for the second quarter was about 20% up or, I think, about 15 basis points.

Yes, 15 basis points.

Yes. So obviously, that's self-funding. Our traffic was slightly up, and our average basket is up, so we think it is really benefiting us. So our plan going forward for third quarter is a slight increase, slightly above sales, and the same thing for our fourth quarter. So we're seeing pretty positive results. Obviously, it's momentum, and we think that we will reap the benefits as we continue with a very aggressive program.

Yes, we look at the third quarter -- and the fourth quarter would line up this way, too -- we are looking at 10 to 20 basis points of leverage at a 3% to 4% comp.

I'd point out two things there. That's also including 10 basis points of advertising deleverage as we continue to invest in advertising, some of the cost savings that we're realizing. So if I were to adjust that out, it would be 20 to 30 basis points of SG&A leverage at a 3% to 4%. So I think we feel comfortable that the leverage point, through continued cost reduction, that we are taking that below 3%. As you know, our plan with Marmaxx calls for 2.5% comp being the breakeven point, which would begin to lever SG&A.

Is there a chance to take that lower? I think, clearly, you look at the second-quarter performance, and at Marmaxx we've got 40 basis points of -- we actually haven't broken this out for you. Maybe it's worth just quickly covering.

In the second quarter at Marmaxx, there was 120 basis points in their segment profit. 90 of that was merchandise margin. 40 of that was expenses. That was on a 3% comp, and then we had 10 basis points of advertising going the other way. So as you look at the second quarter, we had 40 basis points of leverage at a 3% comp.

So clearly, there's a lot going on in the cost reduction area that is helping us drive flow-through here to the bottom line, and we would expect that to continue.

We've baked a certain amount in our plan, but obviously we hope to beat that.

Great. Good luck. It's encouraging.

Paul Lejuez.

Lease termination charges at T.K. -- can you quantify that?

Second, I believe at A.J., you have picked a few categories that you are really focusing on. Can you just remind us what those were, how they performed once you gave them your focus, and what are the next targets at A.J.?

Okay, in terms of T.K., it's worth about 70 basis points. Obviously, the repositioning -- we're going to continue with that, moving into larger stores, as it's really beneficial to us. Jeff, do you want to comment on that?

Yes, it's about GBP2 million to GBP2.5 million pounds, just to give you a sense of the hit. I think what's important to note here is that we're really talking about timing, because typically, when we relocate a store, we will get an inducement from that new landlord.

What happens is that, to get out of the existing lease, we take a hit. That hit impacts the current period, and the inducement to go into the new space gets spread out over the lease. So in most of these cases, we're actually getting money from the new landlord to cover the hit with the old landlord. But, because of the way we account for it, it results in a hit. Again, in this case, it was about a 70 basis points impact in T.K.

But the spaces we're moving into are -- generally, we're taking stores that are 16,000, 17,000, 18,000 square feet that were stores that we opened very early on T.K. Maxx's history, and are moving those into much larger, higher-traffic areas on the High Street that are, from a financial standpoint, very, very attractive. They help drive comp, a lot of incremental profit and terrific ROI.

So it's something we feel very, very good about, but it has this short-term profit impact because of the way the accounting works.

Could we see more of that in the second half?

We're going to continue to do this, but you might recall last year in the fourth quarter, we had a pretty significant impact on T.K.'s P&L from this kind of activity. So obviously, as we continue to do it, we are anniversarying numbers that -- where it's already included. So it shouldn't have as much an incremental impact as we get into next year as we might see this year. Again, it's all incorporated and was incorporated in the guidance that we gave at the beginning of the year.

In terms of A.J.'s, we're really happy because we have seen a lot of businesses turn around. Our footwear business, which was pretty weak, is exceptional in the second quarter; it's up almost 22%. The junior and the missy businesses is very strong. So we are really seeing the apparel businesses pick up. Dresses was exceptional, and men's and kids' continues to be strong.

I think the one area where we need -- where I'm really not happy with the execution is home. So, quite frankly, we are putting a focus group together and we are going to work on fixing this area. I think, obviously, when we focus on something, we do fix it. So we're pretty happy with what we're seeing at A.J.'s.

Kimberly Greenberger.

Congratulations on a great quarter. Carol, I'm hoping that you can talk to us about how you're thinking about advertising. Obviously, you're easing up the advertising budget as you were able to cut costs in other areas. Optimally, what's the end game here? Is there a target percent of revenues that you think you will be happy with?

Then, if I could just ask one question on Bob's, we got a 10% comp in Bob's this quarter, which was fantastic. But the operating loss was only cut by about $500,000. What do you think it takes to get that business full-year breakeven or profitability?

I'll start with Bob's, then I'll talk about advertising. We did put heavy emphasis on marketing Bob's, and we really wanted to see what kind of traffic it would drive. It certainly did drive traffic and comps. The positive is that we think that we can look at the marketing in a slightly different way and do a much better job in terms of the qualitative piece of it.

So we think that we can, in the future, reduce our advertising expense and have just as strong quality. We obviously funded this through merchandise margins, which again, I've said in the past that we have been able to leverage TJX, and we continue to. So I think we have picked up slightly under 200 basis points.

About 150.

Yes, 150 basis points in margin that really helped fund marketing. What's exciting is the traffic and the comps that we're seeing. Because if we can drive comp over comp, then obviously it becomes a much more interesting business to take forward. In terms of advertising globally, the back half -- we don't have as large an increase. But we are really focusing on the qualitative piece of it and building the brands, which we're really trying to make our campaigns exceptional.

We've seen that with T.K.'s, and we have seen it with Maxx Moment. We need to do the same thing with Marshall's. We think we're going to achieve it with A.J. Wright, and we do have a new campaign for Winners and HomeSense. Their business is pretty strong right now, but I think we can even take it up a bit.

So that's how we think of advertising, and it's really a combination of being harder-hitting but really brand-building along with that.

Thanks and good luck here in the second half.

Todd Slater.

Thank you, from Lazard. Kudos to the team and welcome, Trip. Two questions -- first, on ForEx, it helped the comp by 1%. Was there a benefit to the earnings, and does your second-half guidance incorporate any further ForEx benefit, comps and/or earnings?

Yes, (multiple speakers) $0.005 impact on earnings in the second quarter, so not a huge -- it tends to impact sales more than earnings, because the earnings impact is whatever the pretax margin is for that individual business. So, while it was a big impact on the comp line, it's about $0.005 on the bottom line.

In terms as we look out over the third and the fourth quarter, we would expect a similar kind of scenario to play out here, where it would be maybe $0.005 in each of those quarters. So it contributes, but not materially.

With regards to Germany, could you remind us what makes you so attracted to that market, where Wal-Mart and Gap couldn't succeed and pulled out?

I think we've learned from the past, in The Netherlands. I think we learned from watching other companies around us. But what we're doing differently in Germany is we are really doing it with a German team, with German brands, really understanding that customer. We took a lot of time and energy.

I actually met with 20 of our people that are going to be our German operators and merchants a few weeks ago. They really understand the customer. We are very, very excited about the value equation. We even understand the nuances of the difference in fashion between the UK and Germany. So it's very fine-tuned. There are 82 million people in Germany, and I guess we look at T.K.'s, which is 60-something million people, and we think there's a tremendous opportunity for a branded value equation entity.

Margaret Mager.

I just wanted to ask about the gross margins in the third quarter and into the fourth quarter. But third quarter in particular, given your comments about last year being so strong, we were modeling flat gross margin. Would you take that down? So are you expecting a down gross margin in the quarter? Then looking into fourth quarter, would you expect a similar setup? If you could get a little more specific, that would be great.

In terms of the third quarter, we're planning the gross profit margin flat to down 10 basis points, so that 25.4% to 25.5% we gave you was against 25.5% last year. So it's flat to down 10 basis points.

I'd point out, within that, that we have got the merchandise margin planned down a little bit more than that, and it's being offset by some expense leverage on the buying and occupancy costs that we group with gross profit. The reminder there is, last year, we had an 80 basis point increase in our merchandise margins in the quarter, and they were the highest merchandise margins we had seen, really, throughout -- as far back as we could look for the third quarter. So we just felt it was prudent to plan them conservatively.

I think, that said, as Carol mentioned earlier, we come into the quarter with significantly more inventory dollars to place this year than we had at the same time last year. So we've got significant open to buy. With an attractive market, that gives us the ability to chase.

So we are not giving up on it. We think there's some opportunity there, but we've planted it a little bit conservatively, based on how last year came out.

I have to say, I'm very happy where we are, in terms of our open to buy.

Yes, that's clear. One quick question on the bigger picture, where you commented that your company hasn't experienced declines even during recessions, but there were two periods where you were down on your same-store sales. What were the circumstances around that, if you could remind us? Do you think the macroenvironment has shifted and is more challenging, and it will play to your strengths and advantages? Or what is your take on the macro?

I'm going to tell you that the two years that we did -- had negative comps, I'm going to tell you, was clearly an execution issue. I come back to that, and I can't say it any stronger, that when we execute well, we have positive comps. That's what our focus is.

Do you think the macro has shifted at all? Is that your take?

No, again, you'll have to elaborate on that, what you're --

Yes, in what way are you asking? What kinds of shifts are you talking about, I guess?

You are pointing out that you tend to do well in a more challenging environment.

We do well in a challenging environment, but I think, obviously, we want a healthy environment. But we tend to be a business that -- with great value, people will come down a level or, I should say, are looking for more value in tougher economic times. In good times, we still -- it's a very positive for us. We are really saying we are more recession-proof.

Agreed. Understood.

Mark Montagna.

When you talk about the buy environment being as good as it is, is there any way you can put it in perspective, as to when was the last time you saw the buying environment this good? Can you categorize have the home buying environment is versus, say, the apparel buying environment?

Let me talk to home. Obviously, home business out there is soft. So whenever it's soft, we tend to see a lot of goods. So we have a combination in our home business of a lot of new initiatives going on and plentiful goods out there, so, more than we can probably ever be hungry enough to be able to buy, so that it allows us to really raise the bar on the quality of our inventory.

In terms of the level of goods out there, we get asked this question again and again. I think I really have to state this very clearly, that we have more of a problem controlling our buyers. We have 440 buyers on the ground, and so we never have a shortage of goods. It's about focusing those buyers on the right goods at the right times, and that comes back to the execution.

So, Ernie, do you want to comment on --?

I'd go back to that point that Carol just said, as well as what we talked about earlier. The market in apparel, which I think was part of your question, the apparel markets really have a lot of goods. One reason we strategically wanted to get to this place on this [open-end] buy that we have, which is significantly more than last year, is we could feel the soft apparel business out there. We're kind of a barometer; we kind of keep a pulse on it. As Carol talked about, our buyers are out there all the time. So we, by design, wanted to be in this place, knowing that there was going to be so much goods. [I think that] (inaudible) is consistent.

Patrick McKeever.

Good morning, everyone. I have a question about your urban apparel business. What percent of -- even ballpark figure would be helpful -- of the business would you consider to be urban apparel at A.J. Wright? Then about what percent would it be at T.J. and Marshalls, and how did that business do for you in the quarter?

First of all, our urban business has been very strong. It's obviously a smaller percent in Marshalls than it is at A.J.'s. But we really don't like to discuss the specific percentage of our business. But it is a higher percentage of our A.J. Wright business versus Marmaxx.

Have you been adding merchandise in that area, just in urban, at the different divisions? Is there more today than a year ago?

It depends on specific areas. So in young men's and A.J.'s, we are. In kids', it's about -- when we have been doing, again, is trying to raise the bar on some of the vendors. So there are some A vendors in A.J. Wright that we really went after in urban, and they're doing extremely well. So obviously, we are feeding that in.

So, again, it depends on the category. But urban has been pretty strong generally.

Was the tax rate 38.5% in the quarter?

No. The tax -- hold on one second. Okay, Patrick, you stumped me.

I think it was low.

Yes, it was 38.5% in the quarter. (multiple speakers).

Dana Cohen.

I just wanted to go back on the SG&A in the quarter because, as I look back at Q1, you got 40 basis points on a 2% comp. Then you were planning SG&A, on a 3% to 4% comp, to be 17 to 17.4. That better comp in SG&A rate was at the high end of your guidance. So intuitively, you should have gotten more leverage. So what changed, inter-quarter?

Well, it's sort of hard to comment on the specifics there. I think we look at it, and we got 30 basis points of pickup, excluding advertising, on a 5% comp. About 100 basis points of that is generated by currency that you really don't get the full amount of leverage on. So I think that 30 basis points on that level of comp, I think we feel comfortable with that. Then, if I look at the actual rate itself, it was at the high end of our guidance.

Right, but your comp was better, so intuitively, you should have gotten more leverage. I'm just wondering, was there some sort of SG&A project that you elected to spend as you saw the comps come in, such that the spend was higher than you thought? Or is it all currency-related?

I think it's more currency-related. There's nothing that we would call out there. There's a little bit -- obviously, there's some spending that's going on relative to systems, as we have invested in to improve the security of our network. So you've got some of that [showing up]. That's going to have an impact, but not more than 10 basis points.

So as you look into the back half, though -- originally, coming into this year, I believe you said you could lever on a 2.5% comp. Is that correct?

That is correct. Again, as we look at the back half, we have got -- in the third quarter, we've got 10 to 20 basis points. Hang on one second. Let me just pull up the guidance here. In the third quarter, we've got 10 to 20 basis points, with 10 points of investment in advertising. So we have 20 to 30 basis points on a 3% to 4% comp. So if you think 20 basis points of leverage at a 3% comp, we're leveraging there somewhere between a 2% and a 2.5% (multiple speakers).

And in Q4?

The other place you see that, by way, is in the Marmaxx guidance for the third quarter, where we've got -- we are planning Marmaxx (inaudible) 10.5 to 10.6, against 10.6 last year. So we've got it flat to down 10 basis points, and that's on a 1% to 2% comp. So, again, we feel pretty comfortable there.

The other thing I should mention -- the one other thing thing that was probably impacting the third quarter is that we have investments in Germany, as we look at both second and third quarter. So that may be what you're seeing there and why you're not seeing as much leverage (multiple speakers).

Do you know what the basis point impact of Germany was in Q2?

Yes, it's in that 5 to 10 basis point range.

And Q3 leverage?

On G&A? Or (multiple speakers).

Yes, SG&A leverage in Q4.

Well, Germany has a 10 basis point impact on the third quarter, as well.

I'm sorry, I wasn't clear. SG&A leverage in Q4?

We're really not providing guidance on fourth quarter at this point, other than to give you the EPS.

John Morris.

Carol, I think this is for you. A.J. Wright -- you did talk a little bit more about the categories and what you were happy with and what you want to work on there. But during the course of your prepared remarks, you did talk about the strategy taking hold.

So I'm just wondering if you can go a little bit deeper on that. What is it about the strategy -- maybe remind us or bring us back up to date -- that really seems to be working there, not so much in terms of the results by category but what's going on behind it. Maybe elaborate little bit more about the marketing campaign for A.J. Is it going to be brand-driven, the way that it is at T.J., or is it going to be more price-specific? But talk about the strategy there.

First of all, A.J.'s, we've really found, works in markets that have a significantly high ethnic mix. Our new stores are performing extremely well, which really -- again, we have the ability to understand where our stores need to be, which was a big focus in understanding where the future real estate would go.

It is a slightly higher urban mix that I discussed before, and we're finding that is working. We have initiatives -- kids' is very strong; special sizes is very strong. As I said before, the one place that I still feel we're not executing very well is the home business.

The campaign you are going to see is about expressing yourself. It's called The Real Deal. So it's a combination of the self-image of what that brand needs to be, along with brands in fashion. So we have gone after some real A brands, especially in urban and fashion. We found that A.J. Wright is really a combination of both.

In addition to those two elements, basics are very, very important. A customer wants to come in and they want to find their kids' underwear available. I suspect there will be things that we find in home the same way, and I think we will be able to focus the home a little bit more on some of the needs.

So I think we're really beginning to understand this customer. As I said, our comps have been improving. We are very happy with the apparel business. More importantly, I think we really have the right talent running that business, and I think they understand it. So we have a more seasoned team that's learning every day. So it gives me a lot of hope for A.J. for the future.

Carol, a quick follow-up on the advertising -- what is the difference between the campaign that's out there for T.J. versus what you're launching for Marshalls? How will you differentiate the message and the campaign?

Well, we want the message to resonate as strong as T.J. Maxx, and we did not have a campaign that did that. We believe that we will have a campaign this back half that will be just as strong. So we are pretty excited about it.

David Glick.

Congratulations to the team on a great quarter. I wanted to follow up on the missy and the accesory business. Clearly, missy is tough industrywide. Are you seeing any hope beyond dresses? Do dresses continue to be important in fall? Is there anything that gives you hope, that might give you the confidence to start planning that business up? Then in the accesory business, outside of footwear, you're still seeing strength and, for example, handbags is a key category for you?

Yes. Our accessory business is still very strong. We are seeing some trends in missy that we think is going to give us a lot of hope, and we are going after them, except that I'm not going to tell you what those are. But we do see a light there, and I think we're very, very focused on the back half.

I will tell you that, just in general, there's a more trouser/missy trend going on, which does very well for our customer, since our customer's average age is in the mid-40's, low to mid-40's. When there tends to be a very slim-fitting or very junior look in the market, it's great for the younger customer, but it isn't as great for the missy customer. That trend we see changing, so we are getting a lot more excited about the back half.

Ernie, do you have any comment you want to make?

I think we still see -- to your question, we see accessories overall being pretty strong, as we continue forward here, and it has been. I know you mentioned handbags. I think the shoe business -- again, we've continued, as we talked about, with shoe rollouts. The shoe business, we think, still offers pretty big opportunity in both T.J. Maxx and Marshalls -- not just in Marshalls, by the way. I think we've talked about that before.

In the ladies business, yes, it's tough around the board, I think, out there. But again, I go back -- the model we have also allows us, I think, some flexibility there. So even though we're not specifying some of the trend items, per se, as much, I think our model there will allow us in missy to react as we start shipping some of the fall goods. We can react in our model closer in to some of these trends. So we think we will work at that business and make it happen, because it is a bellwether business for us.

Finally, on Bob's, it sounds like you're a little more optimistic. Should we still expect kind of a go/no-go decision at the end of the year? Do you think that decision will extend into next fiscal year? Can you give us a sense of that?

I think we should have a better feeling about the business by the end of the year. I think if we have a strong back half, that's going to tell us a lot.

You had mentioned expense control obviously being a key element of the drivers of earnings growth going forward. In the past, you've talked about merchandise margin, non-store procurement expense and also markdown optimization as being some of the key drivers of that expense control. Is there priority in terms of which comes first and what you're doing in those areas and how they are progressing?

Actually, what we have is five project teams, and each of those teams consists of a key person from each division. So we're simultaneously working on all five projects, and we are absolutely making headway. As I said before, we've baked some of it into our plans. I think you saw margins in terms of looking at the Marmaxx numbers, what they did in the second quarter -- a piece of that is seeing some of this. We've planned our back half conservatively against pretty aggressive numbers a year ago. But again, I'm hoping to beat those numbers and I'm hoping to see some additional cost reduction.

So there's tremendous focus. As I said in the prior call, we have an SEVP that is basically really running this project, and that's a key component of his job. So everyone is on board and very focused on this cost reduction project.

Marni Shapiro.

Congratulations. I hear your buyers are having a grand old time in the market. If you could just talk a little bit about --

(multiple speakers) on them right now.

If you could talk a little bit about the real estate strategy, just two questions. Are you on track with all your planned store openings for the full year, or have any shifted into or out of those plans? Then if you could just also talk about the relocation, resizing, refreshing at the Marmaxx division, I guess if you look at the overall base, how would you break it down between we're really thrilled with the way the stores are and we would love to, ideally, upgrade these stores percentagewise?

First of all, we are on plan in terms of store openings. We actually had a more aggressive first quarter. In second quarter, I think we had five. But we are basically on plan for the first half in terms of opening new stores.

Marmaxx -- again, we look at everything on an ROI basis. We're being a little more aggressive in the number of stores we are closing in Marmaxx, and we are obviously -- with all of the initiatives, and I call them with all of our tools in our tool box, we have better reason to be able to handle larger stores, and we think we can get better productivity out of it.

So it's really a real estate opportunistic situation. When we have the ability to move into a better market or a power center that's new and it makes sense on the ROI, we do it.

So we are being a little more aggressive in closing stores. On Marmaxx's base, it's a big base and it's not going to really move the needle dramatically.

Then on the refreshing of those stores, where you're in a good location but you can maybe add Runaway or things like that, are you being more aggressive that way as well?

We're being very aggressive. Ernie will talk to you about -- our shoe -- we have The Cube. Ernie, do you want to comment on that?

As we've talked about before, 200/200 shoe [megas]. I think you get a refreshed look in the store when we do that. I think we've talked about the [Q lines] as well, which you will have noticed that a fair amount of the stores have been converted to the Q lines. When we do that, I think we get a fresher look to the store.

Yes, I would agree.

Those have been pretty aggressive -- in addition to continuing on our remodel program, which we are always looking at. But again, I think that is the way you look in today's environment and convenience to the customer is all-important.

Thanks. Good luck with the fall season.

Jeff would like to just clarify something in regard to Dana Cohen's question.

I want to make some clarifying comments on the SG&A, because I don't think I answered that question very well to Dana. So as we're looking at the second-quarter SG&A, the question really was -- we have a 5% comp, and the question was, why do you only have 10 basis points of SG&A leverage on a 5%, comp with everything you've got going from a cost reduction standpoint, and particularly in light of some of the performance we saw in the first quarter?

So, while we reported 10 basis points of leverage, as I mentioned, advertising -- if you pull out the planned increase in advertising, we actually levered 30. The write-offs on T.K. that we've been talking about to reposition that real estate -- that's flowing through the SG&A line. That's costing us about 10 basis points corporately, and then Germany is costing us another 5 to 10. So if you actually adjust our SG&A for the planned investment in advertising, the one-time hit or the hit from some of the T.J. Maxx repositioning charges and the investment we're making in Germany, we're actually getting about 50 basis points of leverage on a 5% comp. We obviously feel very, very comfortable about it.

Now, as we look at the third quarter, I mentioned we had planned 10 to 20 basis points of G&A leverage. Again, that is with a planned investment in advertising which negatively impacts SG&A by about 10 basis points. So if we adjust for that, that would suggest 20 to 30 basis points of SG&A leverage.

I would also point out that we're going to continue to invest in Germany in the third quarter. So adjusting for advertising and the German investments, we would be expecting about 30 to 40 basis points of G&A leverage at a 3% to 4% comp.

So I just wanted -- threw a lot of basis points at you there. We're happy to go through it a little bit slower off-line. But I think it's important, because it underscores all the things that are going on within the Company in the area of expense management that I didn't want to get lost in this discussion today.

One other technical point -- Patrick McKeever asked was our tax rate 38.5%. It was, excluding the intrusion expense. With the intrusion expense, it was 35.9%, because there's a couple of items in there that are not deductible. That's all the clarifications I had to make.

We have time for one more question.

David Mann.

Congratulations on the computer intrusion at this point, in terms of getting passed the uncertainty. I just have one corollary question on that. Your results in the first half suggest you've had very little impact on traffic from all that publicity. But can you talk a little bit about what you've seen and heard in any of your customer research? Do you have any plans to reach out to your customers, now that you're at a point of understanding what the damage was, especially -- I guess you wrote in some of your filings you had 11 million folks you had some stolen information, and another 0.5 million where you had to communicate with them about some information as well.

In terms of traffic, I can only say that we have been pleased with the business and we have been pleased with the business in the Northeast has been pretty strong. So I hope that answers your question.

In terms of the customer, I really can't go into detail. I can only tell you that the customer and obviously our shareholders have been very, very important to us. We feel that we are doing the right thing by our customer. I really can't get into the detail of it.

Thanks, everyone, and I look forward to reporting third order. Thanks.

Ladies and gentlemen, this concludes your conference call for today. You may all disconnect. Thank you for participating.