TJX Companies Inc (TJX) 2008 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the TJX Companies third-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, November 13, 2007. I would like to turn the conference call over to Ms. Carol Meyrowitz, President and CEO for the TJX Companies. Please go ahead.

Good morning. Before we begin, Sherry Lang has some comments before we start.

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 and Form 10-Q filed August 24, 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 the United States copyright laws.

Additionally, while we have approved the publishing of a transcript of this call by a third party, we take no responsibility for inaccuracies that may appear in that transcript. Thank you. And now I will turn it over to Carol.

Good morning again. Joining me on the call today are Jeff Naylor, Ernie Herrman, Trip Tripathy and Sherry Lang. Jeff Naylor will be handling the financial questions today and Trip will be answering those questions on our year-end call.

Let me begin by saying that our third-quarter performance is an excellent example of the power of our off-price model when all of the elements of the model are executed well. Despite the pressure on sales from unseasonably warm weather in many regions of the US, Canada and UK and concerns about a weak consumer, we delivered bottom-line results that were in line with our expected range.

Further, our 13% EPS increase was achieved over a 50% increase reported in EPS last year, demonstrated our continued ability to deliver sustained earnings growth even with difficult environments and tough comparisons.

There is so much concern out there about retail, so I want to be very clear. The story of our third quarter is simple and straightforward. It is about weather, it is about keeping inventory very clean and it is about keeping costs down. And I should say again, it is about a very tough comparison to last year. We were very disciplined in managing our open-to-buy, which allowed us to take advantage of the great market environment. Great deals generated improved merchandise margins even as we aggressively took markdowns to clear inventory and enter Q4 extremely clean. We also remained focused on managing costs, which helped mute the impact of the warm weather.

I should note that Marmaxx negative one comp leveraged well, resulting in only a 30 basis point hit to segment profit margin, which was less than you might expect. Further, other divisions, particularly HomeGoods and the international businesses, really kicked in with strong contributions to the bottom line.

Now to recap the consolidated numbers. Third-quarter consolidated net sales increased to $4.7 billion, 6% above last year. Consolidated comp store sales increased by 3% over a 6% increase last year. Foreign currency exchange rates benefited comp sales by two percentage points, which was slightly more than we had expected. Fully diluted earnings per share from continuing operations were $0.54, a 13% increase over $0.48 per share last year.

Overall, pretax margins were 8.5%, which was up 10 basis points on top of last year's 200 basis point increase. It is important to note that with two points of comps coming from currency generated pretax margin improvement on what was essentially a one comp increase.

Gross margin declined 20 basis points. [Respective] management of our inventories and open-to-buy merchandise margins increased 20 basis points in a challenging sales environment. This improvement was more than offset, however, by a mark-to-market adjustment on inventory-related foreign currency hedges, which will reverse in the fourth quarter. Jeff will provide more details on this later.

SG&A expense improved 20 basis points, the favorable impact of cost management partially offset by a planned increase in marketing spend.

In terms of inventories, at the end of the third quarter, consolidated inventories on a per store basis were down 1% and down 3% excluding the impact of foreign exchange. We are very happy with the liquidity in our inventory. We have fewer dollars committed forward than at this time last year on a per store basis including the warehouses, stores and merchandise on order. Again, we entered Q4 very clean and in a tremendously strong position to react to the marketplace, which is flush with very desirable product in all categories.

To recap the first nine months, which was above our plan, EPS from continuing operations for the first nine months was $1.00 on a reported basis, which includes $0.28 of charges related to the computer intrusion. Excluding this charge, EPS from continuing operations were $1.28 or up 14% over the prior year. Comp sales increased 3% in the first nine months over a 4% increase last year. So a strong profit margin gain on top of strong gains during the first nine months last year, which again demonstrates our ability to consistently deliver sustained earnings growth.

Now I will briefly recap divisional results for the third quarter. Marmaxx comp sales decreased 1% in the third quarter, which was below our plan. Despite being aggressive with markdowns, we maintained merchandise margins that were virtually flat on top of strong margins last year. Segment profit was $309 million and segment profit margin, which was planned flat to slightly down versus last year's very strong performance, was 10.3%, which was slightly below plan.

Two factors impacted Marmaxx result. First, as I mentioned, warm weather hurt apparel sales particularly of cold weather apparel like outerwear. Our cold weather categories, including outerwear, represented a large portion of our sales loss plan.

Second, home was soft, which was an execution issue. We are very focused on it and I can tell you that we are committed to fixing it. In addition to improving our mix, we have tested a new home prototype and are very excited with the results. We will start to roll out this new concept next year.

On the positive side, categories that are not as weather sensitive did very well, including dresses posted a 22% comp increase on top of double-digit comps last year. Accessories and shoes continue to be strong and our category initiative also performed very well, which I will talk about in a moment.

At Winners and HomeSense in Canada, we saw exceptional execution across the organization. Comp sales increased 15% in US dollars and in local currency, which we believe better reflects our operating performance, comps increased 5%, which was above our plan. Segment profit was $68 million in line with plan. Segment profit margin declined 40 basis points, but was adversely impacted by 210 basis points by the mark-to-market adjustment for hedges that I mentioned earlier. Excluding this adjustment, segment profit margin was up by a very strong 170 basis points, again reflecting strong merchandise margins and expense control.

The impact of weather was also obvious in Canada. Overall apparel sales trailed the chain, particularly outerwear. As was the case at Marmaxx, less weather sensitive categories like shoes, jewelry, accessories and dresses were exceptionally strong. Winners home categories were very positive and our HomeSense business continues to be exceptional and is making contributions higher than we ever thought possible for this business. To sum up on Canada, we are very confident in our Canadian businesses and they are very well-positioned for a strong fourth quarter.

In the UK and Ireland, T.K. Maxx continues to stand out and deliver tremendous performance. Third-quarter comps increased 13% in US dollars. The local currency comp, which again we believe better reflects our operating performance, increased by a strong 6%, which was above our plan and over an 11% increase last year. Segment profit margin declined 70 basis points to 7%, primarily due to the impact of our new German business, which impacted T.K. Maxx by $5 million or 90 basis points. Excluding Germany, profit was up 22% and segment profit margin improved 20 basis points.

I was in Germany recently for the openings of our first stores there and I can tell you it was very exciting. It is still early, but we view Germany as having great growth potential for our business, which I will elaborate on in a moment and we will keep you posted on our progress.

Back in the US, HomeGoods had an outstanding quarter. This division continues to buck the trend of softness in the home industry, which really reinforces the resiliency of our off-rice model. Comp sales increased about 4% over last year's 5% increase. Segment profit was $25 million, up 43% over last year and segment profit margin improved 150 basis points, well above plan. Further, we are seeing broad-based strength for strong comps across most categories. We are very pleased with the continued momentum in HomeGoods as we head into the holidays.

At A.J. Wright, the warm weather really took its toll. A.J. Wright is heavily concentrated in the Northeast and Midwest and has a customer base that shops very close to need, more so than any other division. However, as the weather turned cool, A.J. Wright's sales dramatically gained momentum. Third-quarter comps were flat, which was below plan, however, with excellent expense control and execution of our off-price model, A.J. Wright achieved a 30 basis point improvement in merchandise margin and a flat segment profit on this flat comp.

I want to reiterate that we are very committed to A.J. Wright's concept. We still have more to do on execution, but I believe that we are moving in the right direction as we are seeing strong comps in categories in which we have focused. Importantly, we are also seeing strong new store performance.

Finally on our divisional performance, Bob's Stores' comp sales decreased 2% and bottom-line results were below plan and last year with its store base totally in the Northeast and a mix that is heavily tilted towards cold weather categories. We did see sales come back when the weather turned cooler and especially when the Red Sox won the World Series. As you have heard me say previously, we need to see Bob's Stores deliver positive comps on positive comps. Year-to-date comps are up 2% and the fourth quarter is off to a very strong start.

Before moving on, I would like to spend a moment on the concern over the consumer because I don't think we can say this enough times. Our value equation plays in all kinds of retail environments. While we are not immune to everything, macro consumer pressures have not typically impacted our business as they do other retailers. In weak consumer environments, upper end department store shoppers gravitate towards us and once they find us, they stay with us, even when times get better because they love our values.

If it is promotional out there, we navigate through plentiful buying opportunities. In full-price environments in which I have never seen a lack of product or opportunities, you may have to pay a little more, but we maintain our merchandise margins since we are operating in a less promotional environment. It is all about execution and our values.

When we execute well, the consistency of our performance is hard to find elsewhere in the industry. In our 30-year history, comp sales have declined in only one year and we have achieved comp sales increases during recessions. Make no mistake that we prefer a strong environment. The point is that, in weaker times, we hold up and tend to do better than most.

Now I would like to turn the discussion to our confidence in the TJX business model. I talked about this on the second-quarter call and there are several points I want to reiterate again today. As you know, over three years -- our three-year plan calls for 12% annual EPS growth. Of course, as a management team, we strive to surpass this and we have done a good job at this.

Let's talk about what gives us the confidence in our ability to continue to execute our growth model to drive profitable sales. I will begin by reviewing the reason for our confidence in driving comp sales as part of our growth strategy and relate that to the third quarter. First is the execution of our flexible off-price business model. Flexibility of our model allows us to buy opportunistically and make purchase decisions very close to need. This gives us a huge competitive advantage as we can constantly adjust to market trends and customer demand.

In the third quarter, I was happy with our flexibility and the goods that we had in our stores, but unfortunately the weather did not cooperate. But our flexibility allowed us to take aggressive markdowns, maintain merchandise margins and set us up for a strong fourth quarter.

Second reason for our confidence is our many merchandise initiatives, which continued to deliver strong performance in the third quarter. The results at The Cube, our junior store within a store, were exceptional in the third quarter and we plan to roll out 300 plus of these departments at Marshalls next year. Shoes were outstanding. We are on track to complete 200 plus shoe expansions at Marshalls this year and are planning another 200 next year. Accessories also outperformed and The Runway at T.J. Maxx continues to be strong. We have several new initiatives showing positive results, which we will expand in fiscal 2009.

The third piece of driving comps is our consistently improving marketing. We launched our Shop On campaign for Marshalls, which is resonating with the customers as our Maxx Moments campaign at T.J. Maxx.

At A.J. Wright, we have increased our investment in marketing and have several tests underway because I believe we still have a lot to learn in terms of reaching this customer.

Companywide, we have increased our marketing spend, which we are funding with cost reductions. We have become more sophisticated in analyzing what is working and what is not working. Also, we are now utilizing technology more effectively and getting smarter about which vehicles work best to reach our audience.

Now I would like to spend a moment on driving profitable growth through selling square footage expansion. I want to strongly emphasize this point. We are far from being a mature company. At our largest division, Marmaxx, we believe there is room to grow this change by an additional 400 stores, which is a bit more than we had previously believed. Beyond this, we have opportunities and relocations into larger footprints, particularly with the success of shoes in Marshalls.

At HomeGoods, we have a strengthened infrastructure and have seen consistent execution and performance, which gives us the confidence in our ability to add 300 stores over time. Also I have mentioned before that we are testing a larger footprint, 40,000 square foot box, which we believe may give us another avenue for potential growth.

Internationally, within the UK and Ireland, we are expanding the footprint of stores to approximately 30,000 square feet as we relocate them from older, smaller boxes. Also, next year, we are taking the HomeSense brand across the pond to the UK.

We also have more opportunities to grow in Canada through expanding our existing chains and through new concepts that would play on our strengths. Beyond this, we see international expansion as a big opportunity and while we make some -- while we will make some investment in the short term, we will invest in what we believe will be right for the long term.

Let me assure you that we are committed to building a strong foundation and infrastructure before we accelerate growth and we will test things before we roll them out. Ultimately, we believe that Germany, with its population of 82 million, will support 250 to 300 stores. We also see opportunities to expand into other European countries longer term.

Back in the US, we continue to view the A.J. Wright customer demographic as having tremendous growth potential for TJX. We believe that the US could ultimately support 1000 A.J. Wright stores, but if 500 stores is the right number to deliver strong returns for shareholders, we will do what is right for the Company. Again, we will grow prudently and we will reaccelerate growth only when we are confident that we have the right model and the right business traction.

Cost reduction is the next major piece of our strategy to achieve profitable growth and was a key part of our third-quarter results. As we have discussed on prior calls, we have an SEVP and a cross-divisional dedicated team focused on the big [rock], including non-merchandise procurement, store operating costs, supply-chain, markdown optimization and a store-ready project.

Some opportunities are short term. For example, non-merchandise procurement, which is an area where we have already made progress, as well as our efforts at the division as we plan around a lower expense structure. Other opportunities are medium and long-term efforts that will require some process reengineering.

Finally, on the reasons for our confidence in our growth strategy, we continue with our no wall organizational approach, which has led to many new ideas as we enter the fourth quarter. We continue to conduct global meetings and travel between divisions on a regular basis. Our knowledge sharing and open communication have led to new merchandise initiatives, leveraging of buys, as well as best practices and cost-cutting initiatives to name just a few of the tangible ways the businesses are benefiting.

Another great example of talent sharing across borders, we are currently relocating one of our head merchants from HomeSense in Canada to become the new head merchant of HomeSense in the UK.

Moving onto our financial strength, we continue to generate significant amounts of cash from our strong operations in the third quarter. We remain committed to our share buyback program as an excellent way to return value to shareholders and in the third quarter, we purchased 300 million of TJX stock, retiring 10.3 million shares. Year to date, we have spent a total of $650 million repurchased TJX stock, retiring 22.7 million shares. It remains our plan to repurchase $700 million of TJX stock -- excuse me -- $900 million of TJX stock in fiscal 2008, pardon me.

Now to guidance. Beginning with the fourth-quarter guidance, we now expect earnings per share from continuing operations in the range of $0.58 to $0.60, which represents a 14% to 18% increase over $0.51 per share in the prior year. Last year's fourth-quarter results included a $0.01 per share charge related to the unauthorized computer intrusion. Excluding this charge, our estimated range for Q4 represents a 12% to 15% increase over prior year's adjusted $0.52. This outlook is based on estimated consolidated comparable store sales growth of approximately 4% with approximately two points due to currency, so it is not as aggressive as it appears.

It is important to note that last year's fourth quarter was very strong with a 5% comp increase and we are being prudent as we plan against it. That said, I should note that the month of November is off to a very strong start with a solid lift in businesses as the weather has turned cooler.

Now to full-year guidance. We are now expecting fiscal year 2008 earnings per share from continuing operations in the range of $1.58 to $1.60. Excluding costs related to the intrusion reported in the first and second quarters of $0.28 per share, we expect earnings per share from continuing operations in the range of $1.86 to $1.88. This represents a 14% to 15% increase over the $1.63 per share from continuing operations in fiscal 2007. These estimates are based on an estimated comp store sales increase of approximately 4% for the full year. Jeff will provide more details on this guidance in a moment.

Summing up, let me recap the major reasons for our confidence in our strategy for growth. First, our value equation plays well in both weak and strong environments and our best defense and offense against macro trends. The beauty of our flexible off-price model is that it gives us so many tools to work with offensively to drive comps and defensively protect our bottom line.

Second, it is our confidence in our ability to drive comps through execution of our flexible off-price business model, our merchandising initiative and improving marketing. Third, we have opportunities to expand selling square footage in new stores, new concepts, new geographics, new geographies, excuse me, as well as larger footprints.

Fourth, cost reduction continues to be a major focus area and will be an ongoing process for us. Fifth, we see our no walls approach to the organization already benefiting us in many tangible ways and generating new ideas.

I will conclude by saying not only have we executed well thus far this year, but we are in a very strong position as we enter the fourth quarter. We have great inventory liquidity and I can tell you that the level and quality of goods out there is amazing. Our emphasis on giftgiving has served us well in recent years and we have notched it up considerably this year.

For one, we have new and more aggressive gift card programs, which we will be doing in every division for the first time this year. Our marketing strategy is positioned well to support our key initiatives and we are very excited. I believe we are set up and poised and ready to go. I look forward to updating you on our progress in the fourth quarter and beyond and now, I will turn it over to Jeff.

Thanks, Carol. Good morning, everybody. Before I get into the guidance, I thought I would provide some additional detail on the third quarter, particularly around currency. I think first regarding this mark-to-market adjustment that we talk about. It is a mark-to-market adjustment on hedges that relate to our inventories. These are routine hedges we enter into to lock in merchandise margin whenever Winners or T.K. Maxx purchase goods from US sources. We have been doing this really for as long as anyone can remember. When the hedges settle, there is a gain or a loss, but this gain or loss is offset in the cost of the merchandise, so the hedge just really protects our margin.

We have these mark-to-market adjustments every quarter, but in the past, they have never been close to the magnitude they have been this quarter due to the surge in the Canadian dollar at the end of October. As Carol mentioned, this adjustment reverses in the fourth quarter and will positively impact the fourth quarter and we've reflected that in the guidance.

In terms of overall currency impact on the third quarter, it was negative. Foreign exchange rates positively impacted the translation of Winners and T.K. earnings into dollars by about $0.01, however, that was -- the negative impact of the mark-to-market adjustment was about $0.015. So that offset the favorability we had from translation.

We also picked up about 75% of $0.01of in tax rate favorability, so between currency and the tax rate, the overall impact on earnings and earnings per share from these nonoperating items was essentially neutral.

Let me now turn to the guidance. For the fourth quarter of fiscal 2008, as Carol mentioned, we raised our expected range for earnings per share from continuing operations to $0.58 to $0.60 and that represents a 14% to 18% increase over the $0.51 per share that we reported in the prior year. The increase in guidance primarily reflects the positive impact of reversing this mark-to-market adjustment, which I described earlier, so it's currency-related.

Prior year's results included a $0.01 per share charge related to the computer intrusion. Excluding that charge, so on a comparable basis, our guidance represents a 12% to 15% increase over last year's adjusted $0.52.

In terms of some of the underlying mechanics, we are assuming a fourth-quarter top line of approximately $5.5 billion with a comp sales increase of about 4% on a consolidated basis, which includes roughly 2% benefit from foreign currency and also contemplates a 2% comp sales increase at Marmaxx.

As to monthly comps on a consolidated basis, we expect comp sales increases of approximately 5% in November, 3% to 4% in December and about 4% in January. For Marmaxx, we are planning on comp sale increases in the range of 2% to 3% in November, approximately 2% in December and about 2% in January.

Pretax profit margins are planned in the 7.8% to 8% range. That is up 20 to 40 basis points over the prior year excluding the intrusion charge that we took last year, so again on a comparable basis. Our fourth-quarter pretax margin guidance I should also note reflects a 10 basis point hit attributable to the T.K. Maxx Germany business.

Pretax income is planned in the range of $428 million to $442 million. That is up 11% to 15% over prior year, again excluding the intrusion charge from the prior year results. We are anticipating fourth-quarter gross margin in the range of 23.2% to 23.3%. That is up 20 to 30 basis points over LY and SG&A as a percentage of sales to be about 15.3% to 15.4%, which is 10 to 20 basis points favorable to LY.

For modeling purposes, we're planning a tax rate of 38.4% and weighted average outstanding shares of 459 million. I should note that the tax rate is negatively impacting EPS growth by approximately four percentage points because last year's rate included some favorable nonrecurring adjustments. And this tax rate negative impact basically offsets the favorable benefit we are expecting from currency in the quarter. So again the nonoperating items essentially net each other out in the fourth quarter guidance.

To keep the call on schedule, we ask that you please limit your questions to one per person. Thank you and we will now open it up for questions.

(OPERATOR INSTRUCTIONS). Kimberly Greenberger.

Great. Thank you, good morning.

Hi, Kimberly.

Hi, Kimberly.

Very nice way to manage through the third quarter.

Thank you.

I wanted to ask, Carol, if you could comment on traffic versus ticket that you are seeing out there and if it is varied by brand that would be helpful and what your view is on those metrics as we go through the fourth quarter?

Okay. Our traffic was slightly down and our average basket was slightly up, but again I will tell you that when we did see a change in the weather pattern, the traffic started to increase. And we hope to see that continue into the fourth quarter.

So is there any way you could attribute a percent or two of your traffic to sort of weather or have you done that kind of analysis on it?

We don't analyze it by weather, but I can tell you that, as I said in the speech, that a very large portion of the A.J. Wright business and the Marmaxx business was attributed to the cold weather categories being a big chunk of the sales mix.

And lastly on Bob's, it has had one good quarter this year, two sort of mediocre quarters, can you just talk about what kind of leash Bob's is on at this point?

Well, I said that at the end of the year, we would talk to Bob's and again, we are looking for comp over comp. Again, business really opened up to them in the beginning of the fourth quarter as we saw the weather change, but we are going to definitely get back to everybody probably at the end of the year.

Great. Good luck to you for holiday.

Thank you.

Randy Konik.

Good morning. Just a couple -- just a question on the cost side of the equation. You talked about the third-quarter costs were reined in. Can you just talk about what costs were most reined in in the quarter and then if you think about your costs -- your cost reduction programs across the Corporation and by division, just let us know how far along are we from an inning perspective in each division and then finally, can we just get a little clarity on what is driving the variability in the general corporate expense? Thanks.

I will start and then I am going to hand it over to Jeff. Obviously, our merchandise margins were pretty strong, but in terms of the total cost reduction, we are not -- the innings continue. It is a long process. It is probably a three-year process of which we are seeing some benefit already. Part of that benefit is baked into our plan. Part of it isn't. It has also helped us pay for some of the additional advertising costs, which we think absolutely drive our business. So again, it is an ongoing, long-term process.

The short-term piece is more on the non-merchandise procurement side, which we will see benefits earlier. Supply chain and some of the other things I mentioned we will see a little bit longer term and Jeff, do you want to comment on the --?

Maybe I will broaden the question a little bit because we, as Carol mentioned, we had 20 basis points of SG&A improvement and we had a 20 basis point decline in our gross profit margin and that was on a three comp. I'd point out that two points of the comp came from currency. Typically, you don't leverage on currency because currency inflates the top line, but it also inflates your expenses. So in terms of thinking about the leverage in the model, you would really think of it as more of a one comp.

Now if I break those elements down, so SG&A, we had 20 basis points of leverage on a one comp, which we are very pleased with. That is actually even stronger when you look at advertising. Advertising delevered by 10 basis points, so we basically had 30 basis points of SG&A leverage on a one comp and we took 10 of that and we reinvested it in advertising. So that would explain the SG&A.

In terms of our gross profit margin, we had a 20 basis point improvement in merchandise margin. This hedge that I talked about, the mark-to-market, hit us about 30 basis points and then we had slight deleverage on our buying and occupancy costs of about 10 basis points. So that is sort of peeling back the onion underneath the gross profit margin.

So in terms of individual categories, I would say it is really spread out across those -- a lot of categories. We are seeing some particular savings in insurance, we have seen some nice savings there. We have seen some savings, as Carol mentioned, in non-merchandise procurement. We are starting to see some of that flow through the P&L and we are seeing good solid cost management from our divisions as the COOs and directors of stores in those organizations have really focused on costs and made it a priority. So that has led to a lot of small savings across a lot of different categories. So it is really across the board and pretty widespread in where we are getting the benefit.

In terms of corporate, the variability year over year. Last year, we had a contribution to the TJX Foundation of approximately $10 million, so that drives some favorability year over year. I would tell you that this year we have had a number of items similar to that that would in essence sort of neutralize the impact that has on the comparability. In particular, we have made some investments in computer security that have added costs this year that weren't in the base last year, which have more or less -- those combined with some other items have more or less offset the benefit we are getting from not having the contribution repeat this year if that is clear.

So just two follow-ups then. I mean would you expect the general corporate expense to remain about flattish going forward to model it and then would you expect to just continue to leverage SG&A on a 1% comp going into the future into '08?

I think right now we feel comfortable that SG&A levers -- that the leverage point for Marmaxx is 2.5% and we feel comfortable overall for the Company in that 2.5% range is where we can leverage. Now obviously, as Carol mentioned, we are doing everything we can to drive a higher level of cost reduction to drive even -- lower the leverage point even further and build margin at that 2.5 point. But I think right now that is based on everything we know and there is a lot we don't, but based on everything, that is where we feel comfortable.

In terms of the corporate expense, our guidance in the fourth quarter would -- let me just quickly look at that. Yes, the guidance in the fourth quarter, it is about flat year-over-year, slightly up. I'd think of that as kind of an inflationary increase year over year as you model it out.

Okay, great. Thanks.

Jeff Black.

Hey, Jeff.

Hey, how's it going, Carol? I guess I had a question for you on A.J. Wright. It is the first time we have heard you talk about 500 stores versus 1000. I don't know if that is a goal that's set in concrete, but what gives you -- what should we look for there? I mean we haven't seen profit. When do you think we would see an operating profit out of this business and when do you think we start to grow this and can you talk about the new stores? You said those are performing better? Just what overall gives you confidence that we get this A.J. Wright division on better footing as a growth vehicle longer term? Thanks.

So, Jeff, I guess I am going to say stay tuned to the fourth quarter. We have been working really hard at A.J. Wright and we have had many customer focus groups. We have been testing a lot of marketing ideas. We did actually in the third quarter put additional money into marketing I think to the tune of about $800,000, right, and we have a lot of tests underway and we are really starting to see progress in the categories that we are focusing on, be it shoes, kids business. We saw a fairly substantial change in home the last three weeks after we did our focus groups and started to work on these initiatives and change them.

The new stores are performing pretty well, which gives us a lot of positive feelings about going forward and understanding where these stores need to be. As I said, highly ethnic areas, highly mixed. We are very, very focused. When we have our campaign, the Real Deal, this is a very price sensitive customer and very close to need. So I think we are getting our arms around this business. I think, again, in the beginning of last quarter, I started to talk to that and I think we are seeing better results now and I think we will start to see very positive results going forward.

Any thoughts on what kind of margin this business can deliver if the new stores worked in the areas you are talking about?

Well, long term, we are looking at about an 8% business.

Okay. Good luck. We will stay tuned.

Dana Cohen.

Hey, Dana.

Hi, guys. A couple of questions. Jeff, you went through so many numbers, just a clarification. You said something about marketing offsetting some of the SG&A and then something about a contribution, a charity contribution last year. Could you just clarify that quickly?

Yes, I will go through it slowly. So we had a 10 basis point improvement in our pretax margin. Let me just walk through some elements. In terms of the gross profit margin, a component of that, we had merchandise margins improved 20 basis points year over year. We had a 30 basis point negative impact from the mark-to-market adjustment on the hedge that I described. And we had 10 basis points of deleverage on buying and occupancy, again on a comp [X] currency of 1%, levered by 20 basis points. That was -- we had a 10 basis point increase in advertising expense that gets baked in there. So if you back that out, everything else was up -- was 30 basis points better if you will in the SG&A line. So 20 basis points of improvement in SG&A, 10 from --.

Despite advertising.

From advertising. And then interest and corporate expense between them were worth 10.

Okay. And then what was the impact to T.K. specifically for the hedge?

Well T.K. -- there was actually no impact at T.K. It was really primarily an issue with Winners because of the run-up in the Canadian dollar. In the last two weeks, the Canadian dollar sent from mid 90s to almost -- (technical difficulty). And as that ran up, two things happened. One is our hedges -- we have losses in the underlying hedges. But we also have cheaper goods that we are buying because they are using higher value Canadian dollars to pay for US goods. So it all offsets itself in the inventory.

It's just a timing issue?

It's just a timing issue and it will reverse in the fourth quarter. And there is no impact to T.K. It is very modest. In the case of Winners, it is about a 210 basis point impact.

Okay. So the impact on T.K. was really the 90 from Germany?

Yes, with T.K., we had 90 from Germany. Excluding that, it was a 20 basis point improvement.

Okay. And then, Carol, on the environment, there is always a lot of goods. So on a scale of one to 10, where are we right now in terms of availability?

I will have Ernie answer that.

Thanks, Carol. That's good, Dana. I'm just going to measure it.

It is just I had never heard you guys say there are no good, so on a relative scale.

Right. I would say given the whole weather pattern that most of the country experienced, it is on the higher end of availability. How's that? Without putting a number on it? So more than we typically see and I think Carol has even mentioned before how one of my biggest challenges is controlling the liquidity situation so we were able to do that through the third quarter, just realizing what we were up against with this weather and there just continues to be just a lot of goods and to answer your question, more than in the past.

Okay, perfect. Thanks so much.

Dana, more importantly, Ernie really strategically ramps his inventories down at the end of the third quarter to really take advantage of it. So I think they have done a fabulous job in managing that and again, I said they are really quite poised to go for the fourth quarter.

So you are taking a -- we are waiting because there is probably going to be more tomorrow than there is today?

Oh, yes.

That is correct.

Okay, perfect. Thank you.

Todd Slater.

How are you, Todd?

Thanks very much. Good, great, thanks. You guys are really knocking the cover off the ball domestically. It sounds great.

Thanks.

As you invest in your German platform, can you just talk a little bit about product sourcing for Europe? You're going to have I am sure accelerated product needs as you continue to grow that store base. Just give a sense of what the market challenges and opportunities are there and how that compares to the US in terms of sourcing product for those businesses and even as you expand the home business across the pond as you said?

Okay. Germany has presently driven a large percentage of German product and we believe that we are more than able to get our hands on 200 to 300 stores worth in the future. So we are seeing a very, very positive response to this product that is specifically bought out of Germany.

Product categories like home tend to be -- the UK product is doing very well and the product from the States is doing well, so it really does differ by category. But we are feeling very positive about being able to source what we need for the German customer predominantly out of Germany and again, we have had such a terrific response and we are seeing some things. Apparel is very, very strong. The shoe business is very, very strong. The outerwear business is a much higher percent than it is in the UK. So we are clearly seeing some signals and some real clarity in terms of the category. But we feel pretty good about the sourcing and we have got several people on the ground. We have a buying office in Germany, so I think we are in a really good position there.

Okay and Carol, you talked about the new merchandising ideas for the fourth quarter. Are these new relative to what we already know about? Are you surprised? Care to share anything there on what those might be?

You will see some new categories, just shop our stores. We have elevated our giftgiving to a more luxury level. So we have -- I'd say we have really raised the bar. Our shoe initiative is just phenomenal and the guys have really strategized how to flow that through the fourth quarter. Last year, we did not flow shoes that dramatically in December and we will this year.

Our gift card program, we have ramped up and if you walk in our stores this holiday, I think you'll be really surprised at some of the things that you are going to see. So we are pretty excited. So you will see a lot of new things and you will see a lot of ramping up of some of the things that we have already tested and are working.

So the availability of product you are seeing out there has also included or increasingly included the luxury category?

Yes.

Okay, great. Thank you.

Brian Tunick.

Hi, Brian.

Hey, Carol, how are you doing?

Good.

All right. It is hard to pick at anything, but we were just curious about your views of why HomeGoods is doing so well and why home at Marmaxx continues to be weak? How long do you think we start to see some of your changes happen there? And then our just second question on how we should think about the marketing budget plans for next year versus this year and sort of talk a little about how the loyalty credit card launch has gone so far. Thanks.

I am going to start with the marketing and the loyalty and then I will get back to HomeGoods. I think marketing, in the fourth quarter, we are probably going to again plan the business equal to sales between that 9% and 10% range. I think for next year, as we had -- I think I have mentioned John Gilbert has been on board for a while. I think we are understanding some places where we probably didn't need to spend money and places where we can do a better job and be more focused. But I really don't think our marketing budgets will be -- will have the kind of increase that they have this year. They will probably be slightly, up but again I think we can do a better job with that next year. So we are learning a lot. We are pretty excited about that.

In terms of our credit program, our private label program, we have a soft launch going on right now. We are offering the in-store credit, instant credit in stores in a test mode. We are very happy with the results that we are seeing and I'm going to talk more to that probably at year-end and give you a real view of what that can mean to us because I think it can mean a lot to next year. So we are in test mode right now.

And as far as HomeGoods goes, we just -- it is, again, it is what we are all about. I can say it 100 times. It is execution, it is slow, it's excitement. It is not having last year fever; it is about risk taking and they have done a terrific job.

Marmaxx we believe is a fix. It is very fixable. I am going to have Ernie talk to that in a moment, but I think it just comes right back to execution and we know that when we focus on something, we know how to fix it.

Yes, I would say, Brian, that the focus in Marmaxx home right now is on, and Carol alluded to it a little there, is on lack of newness. So what we didn't have and I won't get into the specifics on the categories, but in numerous categories, we looked too much like last year or like we did three to six months prior to that and it is just not the way we like to run our home business. So HomeGoods I think did a much better job on that end and it really is what Carol is saying, execution on our part. I think if you look a few months out, I think you would ask when do you think it is going to be better. I would say 60, 90 days I think we are going to see some turnaround here, but affecting that business is a little different because some of that business is a little further out. Newness is really what we are going to attack and I think that is where we stubbed our toe on execution.

Brian, in addition to that, we have tested a new home prototype that we have in a few stores and we are seeing very positive results. So Ernie has given me a plan that looks very impressive on rolling that out for next year. So we are pretty excited about that and the turns are a lot faster than they are in the other stores. So that says a lot also.

All right. Thanks. Good luck.

John Morris.

Thanks. Hi, guys. Also, I guess a little bit more color on the marketing. Carol, you talked about marketing at A.J. Wright, so I'm curious to know a little bit more color there. And what -- I guess if you step back and you look at it, you started to allude to it in your previous response, but what have you learned so far by the marketing that you have seen that you're going to change for next year? In other words, you talked about John Gilbert and team probably looking to spend more efficiently or a little bit different places. So if you can kind of elaborate there. Thanks.

John, I will try to answer that, but I really don't like to talk about our marketing strategy. So I really can't go into detail. But when I talk about what works and what doesn't work, there are places where we have spent a fair amount of money on direct mail where today we realize we may not be getting the response. There are other things that we have focused on in terms of our initiatives that are working very well, so that gives you a little bit of places where we see some shift.

We also have a couple of things up our sleeve that I really don't want to talk about, but they are very, very exciting in terms of interaction between the customers and [blogs], so we are quietly experimenting on some things that could be really exciting going forward.

In terms of A.J. Wright, we just started really some tests at the end of October and we are reading those results and we are seeing some very positive things from it. The Real Deal is our concept at A.J. Wright and it is definitely resonating with the consumer and this customer, so we sort of have our arms around a key focus and now we are going to build on that campaign and this is really -- we understand -- again, I will come back to how important price is and time of need and this campaign is going to be based around that for that customer.

That's great. Thanks very much.

Richard Jaffe.

Thanks very much, guys and my congratulations as well. Very strong -- pulling out a strong quarter out of a tough environment. If you could just comment on cost savings, what you've achieved this quarter and its sustainability, how much of it is in response to a tough market and it's really a one quarter sort of savings and how much of it could we look forward to it continuing through fourth quarter and through 2008?

Well, Richard, in terms of our cost reductions -- again, this is a pretty big, long-term project, so it is not just going to be a quarter and as I said, we are just starting our non-merchandise procurement. We will actually be looking for a chief procurement officer. Today, we are a bit siloed in how we spend our dollars, so we see a fairly substantial opportunity there to leverage across all of the divisions. And as I said to you, some of the other projects we're working on are a little bit more long term, but what is happening is the divisions are meeting together and all the operators -- they are working on things such as even just store cleaning, very simple things, but big savings. So this is going to be an ongoing process and it is really under an SEVP and that is how important it is to our business. Jeff, do you want to comment?

Well, I was just going to say, year to date, we have driven 20 basis points of improvement on a 3% comp, so we are encouraged by that and then last year, we also had a 20 basis point improvement. As we look forward, Richard, we have planned Marmaxx flat on a 2.5% comp for them to really hold the margins. When I say flat, their segment margins. For them to hold that margin flat on a 2.5% comp, they really have got to generate $25 million, $30 million bucks in cost savings.

So there is some cost savings already implied in our model and what we hope to do with all the projects, the cost savings projects that we discuss, as well as the focus of the people at the divisions, which frankly is where we are getting a lot of the savings today, we would hope to be able to do better than what we have in the model. But 20 basis points two years ago, 20 basis points this year and our hope is that we can continue to keep it going. But going forward, it gets harder because we do have to identify -- go after -- a ways to go after some of the more structural costs. There are fewer sort of quick hits and low-hanging fruit.

Got it. That's very helpful. Thanks, Jeff.

Jeff Stein.

Carol, wondering if you could differentiate for us the difference between the customer at HomeGoods and the home customer at Marmaxx? And I am wondering kind of with your kind of no walls approach, don't these divisions talk to each other a little bit and I would think that by now perhaps they could share some of the benefits with the successes you are seeing at HomeGoods and maybe see the results a little bit sooner rather than later?

Jeff, right on. Actually, we have made quite a few changes in home and Marmaxx and they are basically living together right now. The HomeGoods group and the Marmaxx group, as well as HomeSense. So talk about leveraging. Winners and HomeSense are helping Marmaxx with home and Marmaxx is really helping Winners with mens. So they are spending a lot of time together, so I do think that we will see the benefit of this fairly quickly. Winners has also I think done a very good job of differentiating HomeSense from Winners home and I think again Marmaxx will leverage that knowledge. So it is a great question and the answer is yes and it is presently being done.

Okay. Thank you.

Patrick McKeever.

Hi, everyone. A question about the overall apparel industry right now and that is is there any concern that it is just so bad out there in the apparel space and there is so much inventory and whatnot that the promotional environment could be very intense over the holidays and maybe offset some of the incremental buying opportunities that you are seeing?

Ernie, do you want to talk to that?

Patrick, good question. I think it is why we strategic -- very strategically and consciously wait later and later each year and in this environment, we specifically went back into October and September and knowing that there was going to be more goods, we have been holding off later and later so that we buy the goods accordingly and that we keep our gap in terms of value between us and the other stores out there because that is really the critical issue. The customer has no reason to come to us unless we show a significant value relative to the other retailers out there. So great question. We are staying very cognizant of that situation and we are buying later because of it.

How late can you buy merchandise for the holidays?

I mean we are buying as we speak, so we have been buying since all the way through and we can play -- with our DCs, we have a very flexible situation. We can also ship the goods the way we need to ship the goods. So I would say we are buying later than ever before. We will be buying into really the beginning -- late November, beginning of December.

Okay.

Note that we have done a week before Christmas and we have actually been able to get them in because we can feed it through very quickly at the end.

Are you buying any more merchandise these days, let's say this year versus last year, directly from the department stores and specialty retailers? Or does it --?

Pretty much the same I would say.

Same as usual?

Same, maybe a little bit more, same to a little bit more I would say. Kind of with everything else.

Well, thanks. Good luck.

William Keller.

Hi, William.

Yes, good morning, thank you. Most of my questions have been answered. A real quick one, coming back to the foreign exchange and looking at the impact on the cash flow statement. It seems to be more negative this quarter than previously. Is that related to the mark-to-market? Thank you.

Yes, on the cash flow statement, so I am not sure what line -- hold on one second, I have got to flip to that. I guess I am not really seeing -- William, are you still on the phone or have you dropped off?

No, I am here.

Can you maybe expand a little bit on that because I am not seeing -- not seeing it on the cash flow statement?

Cash flow from foreign exchange. I know it's a year-to-date number but -- (multiple speakers).

(Multiple speakers) -- exchange rates on cash was $2 million positive this year and it was $7 million positive last year, so it's not really a big swing year over year. The bigger thing as we look at the cash flow statement is that we have a strong increase in cash from operating activities that is a function largely of lower inventories year over year because we have done a great job. Inventories, last year, we had $470 million of net cash outflows. This year, it is $310 million in terms of the change in those inventory balances. So that has been a significant contributor to cash, the fact we have lower inventories. And we have taken that favorability or that higher cash, some of it has gone into CapEx and then, of course, in the cash flow statement, you can see we have a higher buyback than we did in the past and that was all planned, so I think an opportunity to buy our stock at prices that we consider to be pretty favorable.

Understood, and not to beat a dead horse, but understood that cash flow from foreign exchange is not that different year to date, but looking at the change from the end of the second order this year versus the end of the third quarter this year, that is the difference that I was referring to.

Yes, I don't know. We will have to look into that and get back to you. It should not be a significant item on our cash flow statement though relative to those larger components that I just discussed, so maybe we can just follow up with you off-line on that if that's all right.

Sure. Thank you.

We are going to take one more question.

Good afternoon, everyone and congratulations. Can you talk a little bit about Runway at Maxx, The Cube, some of the other departments that you have been working with lately and what you're seeing there? And then Jeff, can you just talk about your thoughts on operating margins by division in terms of this year, if they have changed at all in terms of what you are looking for? Thank you.

Dana, first of all, the results on The Cube very strong. I think we are probably going to be rolling out 300 plus next year. Runway, we love The Runway, but we love The Runway more because it is opening doors and we are tending to spread again that next level of specialness to our stores. Our plans are not to expand The Runway, our plans are to really continue buying for it and then spreading some of those categories. As we see fit, such as in Winners, we are expanding a few stores and T.K. is probably going to test a version of it going forward.

Shoes have been exceptional. We rolled out over 200 this year. We are going to continue next year to roll out another 200 and we have some other things up our sleeves for next year that again we will talk about as we get into the year-end and start talking about next year.

Dana, in terms of the operating margin, you are referring to the operating margin potential of the business?

The divisions because at the beginning of the year, you gave out your thoughts on what you thought the operating margin targets would be for this year. Any differences to that given that we are nine months through the year and also, yes, an operating margin target potential if there is any adjustments?

Okay, I will just give you -- so the bottom -- if you look at the trend, last year, operating -- the pretax margin improved 80 basis points from 6.4% to 7.2%. This year, Q4 implies full-year guidance of 7.5% to 7.6%. So we are looking to 30 to 40 basis points of improvement this year. A piece of that, a smaller piece is gross profit. Most of it we are getting in SG&A through some of the cost reduction focus and initiatives that we have.

As we look by business, Marmaxx we have at 9.5%. That is up 10 basis points over last year on a 1% comp, so we are seeing great expense controls at Marmaxx. We have always said Marmaxx we saw as a 9% to 10% potential business, but over the last several years, we have seen that margin improve. So I think as we plan it going forward, we are going to plan it at a 2.5% comp and a flat segment profit margin and then hope to beat that through either higher comp or through improvements in cost and cost reduction.

Winners, this year, we have at 10.5% against 10.4% last year, so we are seeing improvement at Winners. That business we see as a 10% to 11% business. That remains unchanged, Dana. T.K. this year, excluding Germany, we have got it at 6.1% to 6.2%. We continue to see T.K. as having the potential to deliver 8% as it gets closer to its full complement of stores.

HomeGoods, huge progress over the last year. Last year, we went from 2.5% to 4.5% segment margins. This year, we have it pegged at 5.2%, so we have seen a 70 basis point lift and again, HomeGoods is barely halfway to its full store potential, so with the leverage of additional units, we can see that business getting to 8%.

A.J., that business is just slightly below breakeven is where we have it currently forecast for the year. As Carol mentioned, that is a business that we could see getting as high as 8%. The key there is in the -- the key there is really two things. One is getting the store contribution margin up about 100 to 200 basis points over where they are now, which we think is very achievable with the right mix driving comp and then once we have got that model correct, then we will start rolling out stores, which is where we really start getting the leverage and moving towards that 8%. So that is just kind of a little snapshot business by business.

Thank you very much.

Thank you, everyone. We look forward to reporting our fourth quarter and year-end. We will see you soon.

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