TJX Companies Inc (TJX) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to The TJX Companies' first-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 on Tuesday, May 13, 2008. I would like to turn the conference call over to Ms. Carol Meyrowitz, President and CEO for The TJX Companies, Inc. Please go ahead, ma'am.

Thank you, Melissa. Good morning and before we begin, Sherry Lang has some opening comments.

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 26, 2008. Further, these comments and the Q&A that follows are copyrighted today The TJX Companies. Any recording, retransmission, reproduction, or other use of the same for profit or otherwise without prior consent of TJX is prohibited and a violation of United States copyright and other laws.

Additionally, while we have approved the publishing of a transcript of this call by a third party, we take no responsibility for inaccuracies that may appear in that transcript.

With respect to the non-GAAP measures we discuss today, reconciliations to some GAAP measures are included in today's press release posted on our website, www.TJX.com. Thank you, and now I will turn it back to Carol.

Thanks, Sherry. Good morning. Joining me on the call today with Sherry are Trip Tripathy, Jeff Naylor, and Ernie Herrman.

Let me begin by saying we are very pleased with our performance in the first quarter. While the unfavorable weather in February and March hurt apparel sales, and the challenges of the consumer environment did not help, we achieved these results by sharply executing the key elements of our off-price business model and taking a strong strategic approach.

We maintained our inventory discipline, which allowed us to mitigate our markdown risks and put us in an excellent position to take advantage of great buying opportunities in the marketplace. When the weather turned seasonable in April, we were ready to do business. We had freshness and excitement in our stores and offered our customers great brands and great values.

While we believe that there was pent-up demand, our apparel business came back stronger than we had expected and we saw traffic increase during the quarter. As a reminder, we have always said that our business is weather sensitive, because we have a buy-now wear-now customer. That said, typically the weather evens out over a given year.

I want to focus for a moment on the fact that since late 2005, we have delivered quarter on top of quarter of strong performance. We're well beyond the phase of fixing what was not working in the business and have proven the staying power of our strategies.

While the numbers speak for themselves, I want to spend some time on this call sharing with you what is harder to see from the outside. As we have been delivering consistently strong performance, we have simultaneously been pursuing new growth opportunities and building and developing our organization to support that growth.

First, however, let's recap the consolidated numbers. Net sales for the first quarter increased to $4.4 billion, 6% above last year. Consolidated comp store sales increased 3% over last year, slightly below our plan. Foreign currency exchange rates benefited comp sales by 1.5 percentage points, which was about what we had expected.

Fully diluted earnings per share were $0.43 this quarter. This result includes a tax benefit of $0.02 per share which Trip will discuss in a moment. Last year's results include a $0.03 per share charge related to the Computer Intrusion. Excluding these items, our adjusted diluted earnings per share of $0.41 were 11% above last year and at the high end of our range, despite our slightly reduced comps.

Overall, pretax profits were 6.6%, just slightly below plan. Excluding the Intrusion charge taken in the first quarter last year, pretax profit margins were 30 basis points below prior year due to a slightly lower gross profit margin and reduced interest income versus last year.

Gross profit margin was 24%, which was 10 basis points below last year. Through solid execution of our off-price fundamentals, merchandise margins increased 30 basis points in a challenging retail environment and over strong increases last year. This would have been even stronger were it not for the increases in fuel costs.

In addition, investments in our European business and deleverage from buying and occupancy costs offset the merchandise margin gain. With all of this, we held segment profit margin flat to last year at 7.4% on what was essentially a 2% comp without currency. Trip will provide more details on this later.

SG&A expense was flat to last year, as we gained leverage on the 2% comp without currency due to effective expense management.

In terms of inventories, at the end of the first quarter, consolidated inventories on a per-store basis were down 3%. We exited the quarter with very clean inventories and more open-to-buy than at this time last year. We continue to be in an excellent position to capitalize upon a marketplace that is certainly full of opportunities.

Now to our divisional results. Let's begin with our domestic concepts. At The Marmaxx Group, our largest division, comp sales were up 1%; segment profit was $278 million, up 2% over prior year; and segment profit was 9.9, down 10 basis points from prior year. Marmaxx achieved its 9.9 segment profit despite a 1 comp increase, which speaks to its strong merchandise margins and expense control.

Merchandise margins increased 10 basis points and, were it not for increased fuel cost on freight, would have increased 20 basis points.

We attribute our strong merchandise margins to very solid execution by the Marmaxx organization. As much as the cold weather in February and March hurt apparel sales, the warm weather boosted business in April. We navigated through the volatility by maintaining lean inventories, remaining flexible, and taking advantage of buying opportunities. In this way, we mitigated our markdown risks and improved mark-on in a challenging retail environment.

We're making amazing deals and are very encouraged by the amount and the scope of product, from the high end to the moderate product.

Some quick highlights on categories. Dresses continued to be exceptional, with a double-digit comp increase over a huge increase last year, which bodes very well for the summer selling season. We also are very pleased with the continued strong performance of our Megashoe shop and customer response to The Cube at Marshalls. Accessory also continued to perform well above the chain during the quarter.

As to home fashions at Marmaxx, while comps were down 4%, we lowered our inventory levels and are identifying areas that are working. We're seeing faster turns and greatly improved gross margin. We're beginning to see positive comps in several areas and are strategically building inventory in those categories.

Now to HomeGoods. Comp sales at HomeGoods increased by 2% in the first quarter. Segment profit was $9 million, and segment profit margin was 2.4%, which was lower than last year and our plan. HomeGoods flowed in an exciting mix during the first quarter.

In April, we were pleased that HomeGoods did well, as they were up against one of their highest comp comparisons for the year. From a bottom-line perspective, HomeGoods really felt the negative effect of rising fuel costs to a greater extent than our other divisions, [due to] the higher freight cost for shipping home products. We have initiatives in place to mitigate the freight impact and expect improvement in the back half.

It's important to note that while the weak environment never helps, we do not attribute HomeGoods' shortfall in the first quarter to the weak home environment that other retailers are feeling.

We continue to offer customers an exciting treasure hunt for unique home decor at compelling values. As we begin the summer selling season, we like the freshness in our stores and the product in our pipeline, and we're seeing nice momentum in the business.

Moving to A.J. Wright, where we saw tremendous progress in the first quarter. Comp sales increased 6%, which was above our plan. On the bottom line, A.J. Wright was close to breaking even, which was significantly better than last year.

We were very encouraged by the quarter and the strong April sales at A.J. Wright, and we are feeling very good about this business for the following reasons. Customer traffic increased significantly as A.J. Wright builds its customer base and brand awareness. We have made key investments in order to operationally strengthen our infrastructure.

In terms of the organization, we are in a great place, with a team of A players on board. We continue to see good results in the categories where we have focused our attention. We feel much better about our marketing campaign and believe our new techniques are driving customer traffic.

We are also very encouraged by the improvement we saw in A.J.'s store contribution, which was up 200 basis points. As we have said before, improvement in this metric is key to accelerating our rollout of new stores.

In terms of store growth at A.J. Wright, in 2008 our plans call for netting five stores. We will continue to fill in existing markets, but as we believe this business is in a very good place, we are considering opening one or two of these stores in new markets. As we have said previously, we will proceed prudently as this business gains traction. Longer-term, we continue to view A.J. Wright as holding enormous growth potential for our Company.

Finally, on our domestic division, at Bob's Stores comp sales decreased 3% in the first quarter. In terms of bottom-line results, Bob's Stores segment loss was equal to last year. We believe their performance in the first quarter was completely a weather story. With the store base concentrated in the Northeast, Bob's Stores was disproportionately hurt by the unseasonable weather during the first part of the quarter. Here again, we were pleased to see sales increase dramatically when the weather warmed up in April.

Now to our international division, which continued to be exceptionally strong. Let's start with Canada, where first-quarter performance at Winners and HomeSense was truly outstanding. For the first quarter, comp sales in Canada increased 20% in US dollars and increased 4% in local currency, which we believe better reflects our operating performance. Segment profit was $41 million, which was well above plan; and segment profit margin increased 160 basis points to 8.4%.

Our Canadian division achieved these great results through excellent execution of our off-price fundamentals. The Winners organization did a tremendous job of maintaining flexibility in its inventory position, buying the right fashion at the right time, and flowing great brands at exciting prices to our stores.

Our HomeSense business continues to perform very well and is making strong top-line and bottom-line contributions. Winners and HomeSense both have great momentum going into the second quarter.

Moving to our European businesses, we are very excited with the progress we have made in the first quarter. Beginning with T.K. Maxx in the UK and Ireland, first-quarter comps increased 6% in US dollars and increased 5% in local currency, which again we believe better reflects our operating performance.

Segment profit in Europe in the first quarter decreased $1 million from $5 million last year. Excluding investment in our new European businesses, segment profit was $7 million, up by a strong 62%; and segment profit margin increased 50 basis points to 1.5%, both above our plan and over strong increases last year.

T.K. Maxx continued to achieve remarkable results over strong comparisons in the UK and Ireland in the face of a challenging retail environment in those markets. I will say it again, it is about execution. Flexibility and resiliency of our business model is hard to beat even when times get tough.

In our T.K. Maxx stores in Germany, we are seeing inventory turns in our German stores that took us 14 years to reach in the UK. This gives us great confidence that the German consumer is really getting our concept. Since our last conference call, we opened one additional store in Germany and again saw exceptional turns. We now have a total of six stores in Germany and by year end plan to have a total of 10 stores in that country.

We are also excited about our launch of HomeSense in the UK. As we introduced the concept of off-price home fashions to that country, our first two openings were very strong and we plan to have a total of five HomeSense stores in the UK by year end. It is very early, but the early response was beyond what we had anticipated. I will speak more about the European expansion in a moment.

At the top of this call, I said I was going to talk to some important things that are happening at TJX that may not be so visible. While we're busy executing extremely well on a day-to-day basis and delivering strong results, there was a great deal going on at TJX to position us for the future. It is important for everyone to understand that we do not view ourselves as a mature company.

Our vision for TJX is simple -- maximize and expand our concept globally. In other words, to be a global off-price value company. We have plentiful opportunities to grow domestically and internationally, and we have solid strategies in place to achieve our goals.

Unlike most retailers, we have developed organizations in several European countries, including the UK, Germany, and Italy, which is a tremendous advantage in terms of future growth. Ultimately we believe we can grow to more than 4,300 stores with our current portfolio in the countries where we currently operate.

Let me share with you some key points. First is the flexibility of our business model, which allows us to change with the pace of the consumer. Our entrepreneurial spirit is strong, and we're taking intelligent risks and testing new ideas to change it up for our customers.

We're well positioned to attract a broad range of customers, from the high, medium, and lower income demographics. We have great potential to grow domestically and in Canada, including unit growth and expanding into larger footprints.

As we have discussed on our prior calls, we now believe we have the potential to grow our Marmaxx division by 400 additional stores. We are growing HomeGoods this year by 25 stores and believe the US can hold about 550 to 600 HomeGoods stores. Also as I mentioned earlier, we're feeling good about A.J. Wright and view this concept as a major growth vehicle for TJX in the US. In Canada, as we have discussed, we're starting a new concept later this year.

Now I want to talk about our European growth opportunities so that you really understand the potential that we see for our future. With a population close to that of the US, Europe can support thousands of stores and there is no competitors who can offer the value that we provide on the scale upon which we can provide it.

It's important to remember that we built very successful businesses in Canada, the UK, and Ireland, where other retailers have failed. And as I just mentioned, we are more pleased with the response from the German customers. We know how to do this.

There is another important point that I would like to make here, and that is that Marmaxx, our cash engine that is funding our growth. While Marmaxx may be generating low single digit comps, it consistently performs, has increased merchandise margins, and throws off enormous cash. Do not take our eyes off the core business for one moment. We will continue to execute at Marmaxx while we pursue what we see as tremendous growth opportunities internationally.

More specifically, we believe that Germany, with its population of 82 million, holds the potential for 250 to 300 T.K. Maxx stores. In the UK and Ireland, we believe we have the potential to grow HomeSense to 100 to 150 store chain. We also have opportunities to expand in the UK and Ireland with larger footprint T.K. Maxx stores.

Longer term in Europe, we see more opportunity for expansion into new markets.

To support our European growth, we have been doing a lot of strengthening up of our organization and infrastructure. We have dedicated significant resources to recruiting and then hiring the best of the best. We also have a new European shared service structure in order to support our new businesses as they grow. This new structure will allow us to leverage our business for the future across all of Europe.

Building the team and developing the organization is one of my favorite priorities. We're funding new talent at the corporate level and have added a new Senior Vice President Procurement Director since our last call. We have also added several new merchants, creating a great balance between new ideas and in-depth off-price knowledge.

We're also putting great emphasis on training future merchandise executives. I'm very excited about our newly enhanced training program for merchants. This is a world-class comprehensive program to support the development of people and talent for the future, and our focus is on both the short-term and the long-term.

Finally, I think it's important to share with you how we approach growth. Our strategy is to be very methodical. I view myself as a builder. We are evolutionary, not revolutionary.

We do a lot of testing, going step-by-step to build our businesses gradually. We ensure that our foundation is secure, the infrastructure is strong, and we have clear visibility into financial returns before we accelerate growth, while at the same time we make sure that we are not too risk-averse.

We believe that this is a measured approach to grow, combined with intelligent risk-taking, will continue to serve us well.

Now to our financial strength, which is the solid foundation that supports our plan for the future growth. Continue to generate significant amount of cash from our strong operations in the first quarter. We remain committed to our share buyback program as an excellent way to return value to shareholders. In the first quarter we repurchased $225 million of TJX stock, retiring 7 million shares. It remains our plan to repurchase at least $900 million of TJX stock in fiscal 2009.

Additionally, in April, we raised the dividend payment by 22% over the last dividend paid.

Moving to guidance for the second quarter and the full year. Beginning with the second quarter, we expect diluted earnings per share to be in the range of $0.40 to $0.42. This compares to $0.13 in diluted earnings per share in the prior year, which includes $0.25 per share Intrusions charge. Including this charge, our guidance represents a 5% to 11% increase over the adjusted $0.38 per share in the prior year.

This outlook is based upon estimated consolidated comparable store sales growth of approximately 3%.

While we believe these are prudent goals for the second quarter, I can tell you that we are motivated to surpass them and May has gotten off to a very good start.

For the full fiscal 2009 year, we are maintaining our diluted EPS range of $2.20 to $2.25, including the benefit of the 53rd week. This range represents a 33% to 36% increase over reported EPS of $1.66 in the prior year, which includes a $0.25 per share charge related to the previously announced Computer Intrusion. Excluding the 53rd week impact, and the prior year's Intrusion charge, our guidance is in the range of $2.11 to $2.16, a 10% to 13% increase over the adjusted $1.91 earned last year.

I should note that while the $0.02 tax benefit in the first quarter does flow to the full year, with only one quarter behind us we are not updating our fiscal year guidance at this time.

Summing up, let me recap the reasons for our confidence in our continued successful growth of TJX. First, our strong performance the past two years plus demonstrates our ability to drive consistent and sustained earnings growth. At the same time, we remain focused on reducing costs and are reinvesting for the future.

Second, we have one of the most flexible business models in the world and can respond and evolve along with our customers' changing pace.

Third, we have huge opportunities to grow both domestically and internationally. Our new European businesses are off to a truly terrific start.

Fourth, we have a strong management team in place that combines TJX experience with new talent, and we are developing a worldwide organization to support that growth. Thus we are building platforms step-by-step both structurally and organizationally to support our growth and at the same time taking intelligent risk.

Lastly, we continue to leverage our no-walls policy across divisions, where ideas, initiatives, and best practices are being shared. We continue with our mantra of execution, execution, execution, to drive profitable sales growth. We're very excited about our opportunities and we believe we have solid strategies to support our growth.

I would like to say that we are proud to have ranked number 132 in the most recent Fortune 500 ranking. Among all of the 500 companies listed, TJX ranked number 89 in total return to shareholders over the last 10 years, and number 44 in return on equity, and number 64 in return on assets.

I look forward to updating you on our progress in the second quarter, and now I would like to turn it over to Trip.

Thank you, Carol. Good morning, everyone. Before I outline our plans for the second quarter and full year, let me provide some detail on first-quarter earnings results.

First, a brief comment on the tax benefit of $12 million. This is a reduction in the tax reserves established under FASB Interpretation 48, Accounting for Uncertain Tax Positions, which we did not anticipate when we entered the first quarter and updated our guidance in April. The benefit to EPS rounded to $0.02.

Next, some additional color on our EPS results. We delivered solid EPS growth, despite a tough retail environment and increased cost pressures, notably fuel. Our operating businesses held a flat consolidated segment profit margin, despite a comp that ex-currency was 2% and increased fuel cost and investments in new businesses, which combined cost us about 25 basis points. These increased costs were offset by other improvements in our merchandise margin as well as expense control.

While pretax profit margin was down 30 basis points, it was just slightly below plan and on a segment basis is virtually all due to corporate expense and interest income. Corporate expense was up $8 million versus last year, primarily due to the timing of expenses last year.

If we look at fiscal years 2007 and 2006, this year's numbers are very much in line with those levels.

Interest income was down this year, due to unusually large cash balances last year, which as you will recall was due to suspension of the buyback. This year, we are buying back stock, have less cash, and therefore less interest income; but are seeing a significant EPS lift in the share count, which more than offset the lost interest income.

So once again, we are very pleased with these results.

Now, to guidance. For the second quarter of fiscal 2009, the Company expects earnings per share in the range of $0.40 to $0.42, which represents a 5% to 11% increase over the adjusted $0.38 per share in the prior year.

We're assuming a second-quarter top line of approximately $4.6 billion, with a comp sales increase of approximately 3% on a consolidated basis, which includes approximately 50 basis points due to foreign exchange, and a 2% comp sales increase at The Marmaxx Group.

For the months of May, June, and July, we are planning for consolidated comp sales increases in the range of 1% to 2% in May; 3% in June; and 3% in July.

For Marmaxx, we are planning on comp sales increases of flat to 1% in May; 2% in June; and 2% to 3% in July.

Pretax profit margins are planned in the 6.5% to 6.7% range, flat to down 20 basis points versus the prior year, primarily due to our investments in new European businesses, which we will begin to anniversary in the third quarter. Excluding these investments, we have planned the business down 10 to up 10 basis points on a 2% to 3% comp ex-currency.

For modeling purposes, we are planning a tax rate of approximately 38.7%, and weighted average outstanding shares of 447 million; and interest expense of $3 million this year, versus income of $1 million last year, a 10 basis point increase.

For the full fiscal 2009 year, as Carol discussed, we're maintaining our EPS range of $2.20 to $2.25, including the benefit of the 53rd week. Excluding the 53rd week impact and the prior year's Intrusion charge, our guidance is in the range of $2.11 to $2.16, a 10% to 13% increase over the adjusted $1.91 earned last year.

Again, while the $0.02 tax benefit in the first quarter does flow to the full year, with only one quarter behind us we're not updating our fiscal year guidance at this time.

We're confident in our ability to achieve 10% to 13% EPS growth. Again, we have set prudent goals for the second quarter. It is also important to note that again in the third quarter we will begin to anniversary the investments in our European businesses, which is contemplated in our guidance. And as Carol said, May is off to a good start.

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

(OPERATOR INSTRUCTIONS) Brian Tunick.

Good morning, it's Evren Kopelman for Brian. Our question is about comp growth at Marmaxx. Looking at the past three quarters, it has been relatively weak. Your guidance for the second quarter at 2% is better than Q1 and the past three quarters despite tougher comparisons.

So if you could talk a little bit about maybe the challenges for comp growth, aside from weather, that you've seen over the past three quarters; and maybe your confidence about the second-quarter comps, that would be great. Thank you.

Okay. Well, first of all, Marmaxx, their merchandise margins have been very, very strong and their segment profit has been very strong. We have basically been keeping Marmaxx between planning them at 2 comp for the year, leveraging bottom-line pretty strong. I will have Ernie talk a little bit to it, but we are feeling pretty good about Marmaxx.

I think -- you know, we had a decent fourth quarter, I think, where the sales are kind of in line with the second-quarter guidance here. I think what happens is part of this weather issue that we went into in first quarter, we anticipate that that kind of comes out of the equation. I think Carol mentioned before that over the course of the year, that always evens out.

I think in second quarter, we anticipate that a lot of the exciting deals that also I think Carol mentioned and the release here are going to take place. So that is one reason we are feeling like it is still a prudent guidance, even though we are up against a decent number last year.

But I think we are pretty optimistic given a lot of the buys that we have made recently.

I think we're positioned very well. As you could see in April when the weather broke, Marmaxx had a huge comp and very strong apparel sales.

Dana Telsey with Telsey Advisory Group.

Good morning, everybody. Can you talk a little bit about the levers of merchandise margin improvement? How are you seeing it? How does it vary by division?

Also the strength in Europe, Carol, what are you seeing there in terms of traffic and just the assortment there versus what you have here? How are you looking at it? Thank you.

Okay, well, in terms of margin actually we had margin improvement pretty much across the board. Some pretty staggering results in Winners, Marmaxx being very strong, T.K. I mean we can give you -- Trip can give you that specific number sort of off-line.

But really, very, very strong across the board. So, we are as you can see very open to buy, very liquid, and truly taking advantage out there. So we're positioned extremely well.

I'm very happy to say that our traffic for the quarter was up, which bodes very well for the future, as well as our transactions being up, traffic being up, and our average basket being slightly up.

We have also introduced our TJX credit card, which seems to be stimulating additional traffic, which again is going to be very strong for the future. So we are feeling pretty positive about that.

Dana, what was your second question? I apologize.

The international business, the assortment there, perhaps even Germany and the UK, how it differs from the US and the buys there?

Yes. First of all, Germany is off to an amazing start. I mean, if I say that we're turning the German business as fast as the UK business and it took us many, many, years to be able to achieve those kinds of turns.

We have a very solid team. We have over 14 people established in Germany that are buying predominantly German product. In addition, that German product is working very well in the UK. So, it is really helping both businesses.

The UK buyers, buy for Germany and the German buyers buy for the UK. They really take the best of the best vendors. So it has opened many, many doors for us.

The other piece that is pretty exciting is the vendor community is very, very open to us and excited about us entering that market. So we haven't had any barriers there.

Thank you.

Todd Slater with Lazard Capital Markets.

Thank you very much. Hello everybody. My one question is on A.J. Wright. Since it has such potential to really move the needle and you had a positive $4 million profit swing there, and you have done a lot to enhance the management team, a lot of like A-level merchants, and you targeted a number of areas.

I'm just wondering if you could talk about what those targeted investments are yielding. What has to happen next for you to consider this more aggressive rollout? Thanks.

As I said before, this is really the first time that we are sort of opening the door to looking at some additional markets. As we said, our performance, our four-wall performance has increased dramatically, over 200%. So we are starting to look at that right now.

The areas that we focus on, accessories, shoes, juniors, young men's, and kids, are all very, very strong. Our customer count is way up. Our turns are better. So we are starting to feel pretty good about this business and are evaluating it, and are expanding and looking at some additional markets.

Again, we will be very opportunistic in terms of the real estate, which I think today is very interesting, because there are a lot of doors shutting which may give us some opportunities that we may not have had a year or two ago. So we are wide open for this.

Okay, thank you.

Kimberly Greenberger with KCIT.

Hi, good morning. It's Kimberly Greenberger from Citi Group. How are you?

I thought you were from Citi Group, Kimberly.

Fuel costs, you mentioned some initiatives to offset rising fuel costs. When do you expect this to kick in?

Secondarily, Trip, if you could give us a little bit more detail on the breakout on the gross margin -- how much did buying and occupancy delever? What was the deleverage due to the European investment? And then the fuel cost component. That would be great. Thanks.

Okay, sure.

Okay. First of all, Kimberly, we have really been able to mitigate the fuel as you can see. We have done a great job in terms of managing expenses.

We have -- we are looking at many areas in terms of fuel and our network -- how we deliver to the stores, the timing of the way we deliver to our stores. So I think we will see a little bit of -- we will have a little bit of an advantage in the second quarter in terms of mitigating it.

I think in the back half we will see a little bit more, especially in HomeGoods where there are very strong initiatives in place. And Trip will go through the numbers with you.

Yes, so Kimberly, you asked about gross profit and buying and occupancy deleverage, etc. So first of all, gross profit was down 10 basis points from last year as we mentioned.

Between buying and occupancy deleverage and investments in the new businesses, you're looking at about 25 basis points there. Along with some other expenses, which obviously drove it to almost 40 basis points.

But that was more than offset by 30 basis points in merchandise margin improvement. I would just point out that the merchandise margin number included the impact of fuel costs. So frankly, the merchandise margin performance was even better and helped to offset the fuel costs.

So overall, I think we are very pleased with the offset that we have been able to achieve on the cost lines, on gross profit in particular.

Then in addition, SG&A was flat to last year, which once again we are very pleased about. We talked earlier about segment profit being flat; once again very pleased about that.

Interest went the other way, once again, as we mentioned, about 10 basis points. So that helped us, although we were 30 basis points below last year; we were just slightly below plan. And overall that is the reason we are feeling good about the quarter.

Great, thanks and good luck here in the second quarter.

Dana Cohen.

Good morning guys. If you could just clarify a bit on the corporate expense, the timing issue, and how we should think about it as we move through the year.

Yes, if you go back to '06 and '07, as I mentioned, you would see we are about in the $30 million range on corporate expense. Then what happened in '08 was we had a number of things going on, some of it timing on some corporate expenses; and that is primarily the reason why we had about a $10 million swing in that year.

You will see they are back to -- I hate to call it a normal level, but we're certainly up to a more normal level this year at $31 million. And that is after making various investments in talent and training and other things that Carol had talked about.

Then you will see in our second-quarter guidance, we're really back to a year ago. So, I would just call it out as an anomaly, if you would, last year and a reduction, because of various factors. But I think we are just back to a more normal level right now.

Dana, in addition, we had several high-level openings that we again -- filling in on talent -- a director for Germany, two GMMs in HomeGoods, relocations, our Chief Procurement Officer. So we had a lot of that spread out through the year.

But of course, again we were able to find some terrific talent that really came in the first quarter. Those positions are filled, and that is also part of the corporate expense.

All right, thank you.

Just to talk to timing, if you look at full year last year, you will see we were about flat to the prior year.

Got it, okay.

(multiple speakers) timing issue in the first quarter of last year.

Jeff Black.

Thanks. Good afternoon, everybody. I guess just a couple of longer-term questions on Europe, since you called it out so much. On sales --

(multiple speakers) noticed that.

How much -- yes. On sales, how fast are we talking about ramping Europe up? What do we look like in terms of percent of sales contribution in 2010, 2011, for example?

On expenses, I know you just talked short-term, but is there going to be an impact longer-term as we look at ramping up that division?

Finally, on the operating margin, you know, is there anything structural over there that would lead us to a lower operating margin than we are used to at the Marmaxx division? Or do you think that sort of 10-ish rate is possible over in Europe over time? Thanks.

Okay. Well, first of all, with Europe -- and I'm going to say that we are surprised at the response in Germany and in HomeSense. We were not expecting that to happen quite as quickly.

We have put out there and we had thought in our model that we would start to break even or make money in year four. We probably see that happening earlier than that. We are obviously because of this going to sit down and strategically looking at it as we are building in a shared service structure that is going to answer number two, which we think is really going to leverage the combination of HomeSense, Germany, and the UK.

So, are we going to hit a 10%? I don't think we will hit a 10%, but I can tell you that we are probably in the 8% range.

We are also seeing some interesting things happening on the rent side of the business, where we are seeing -- where we used to have caps, we're taking advantage of some situations in the UK now. And German real estate is less costly than the UK real estate, so we will probably look to get more aggressive in terms of adding stores.

We do see the profit, the bottom line probably accelerating faster than we had thought previously.

John Morris.

Thanks. Congratulations on a great quarter. Question relating to advertising, Carol, in terms of your marketing approach. You all have been doing some pretty creative things in the past. I'm wondering if you can update us on some of your marketing and advertising initiatives on a go-forward basis, and if there is a change year-over-year in spending there.

In dollars, we are slightly up. We think, again, we are using our dollars more wisely. Each division is a little bit different.

In A.J. Wright, we have dramatically changed. Last year, we were on television and this year we're not, but we found a great approach to get to our consumer and it is really working. I really cannot go into detail because these are really obviously trade secrets.

In Marmaxx, we have been testing, again targeting a little bit different; and we're pretty excited about it. We're going to be rolling out some things in the back half that we are finding are working in the first half. So we have taken a group of markets and we are experimenting. As I said before, with John Gilbert on board, he is really helping us to target a lot better.

So we have been pretty aggressive, but the first half and really the first quarter was about learning -- are these things going to work? We are finding some things that are working, and then we will start rolling it out in the back half.

Thanks.

Paul Lejuez.

Thanks. It's Tracy Kogan filling in for Paul. I was hoping you guys could give us a little more color on the SG&A line. How were you able to do better than plan this quarter?

If there are initiatives in place or continuing initiatives as the year progresses, if you could detail those, thanks.

Okay. Well, I'll have Trip talk to the SG&A, but we have many, many initiatives. You know, again, our Chief Procurement Officer is on board and we have probably seen nonmerchandise procurement as one of the earlier quick ways of us finding some low-hanging fruit.

Supply chain, in-store labor, and markdown optimization will probably be a little bit longer-term. But I think we will have some quick wins earlier on. Trip, the SG&A?

Yes, so SG&A first quarter as I mentioned was flat to last year; and we are sort of expecting that in the second quarter as well.

I would just say I think the divisions are doing a great job controlling expenses. It's a combination of short-term, tighten the belt stuff, but also as we have talked previously both short-term and long-term, more programmed initiatives like the nonmerchandise procurement piece, like store payroll, the longer-term initiatives around supply chain.

So I think what you are seeing is some of those programmed initiatives kicking in and helping to offset rising costs. But also short-term, as you would expect, tighten the belt stuff taking place at the divisions and corporate. And that is what generated the SG&A result.

David Glick.

Yes, good morning. Congratulations on the quarter. Carol, just a follow-up on Marmaxx, the home business, it seems like the turnaround of that business is really key to sustaining the momentum in that division. You've made some progress over the last couple months.

Can you give us a little more specifics on what is working, what is not working, the mix changes there? Does it help you or hurt you from a margin perspective in terms of the mix of those businesses? Because you can see some variation within the home store. Just some color on that would be helpful.

Okay, well David, I will have Ernie comment. Just overall, they have brought their inventories down as we strategized it, and the turns in our home are a lot stronger. They are very, very focused on bringing fresh new product. I think, if you walk the stores today it is a lot more exciting.

There are certainly places that we are seeing it working where we will start to strategically invest more inventory. We have also tested our new home prototype, and Ernie can talk a little bit more about that.

Yes, David, as Carol was saying, I think one of the keys has been we're a little more eclectic in the mix today than we were. We are more assorted. We're not -- really we don't have a lot of the looks that we had a year ago, and that was one of our problems with the execution.

So we are seeing better turns obviously on less inventories; and that is really the first sign of health we wanted to see.

I think as Carol also mentioned, we are surgically going in at certain categories and putting back some more inventory and buying more goods where we're having success. All right? So there are some categories there which I would not want to give you specifics on but that we are going to chase over the next quarter because we are getting some good reads.

As far as the new prototype goes, we have tried that in a few stores. A little early to read results. But that combined with the mix seems to be like it's a positive direction for us. So, I think we will continue on that path.

The first primary mission here is to make sure the mix is more exciting than it had been in the past, and we're feeling pretty good about it.

So what is a reasonable amount of time frame to get this business back to kind of breakeven, flat comp, and hopefully moving into positive territory?

Well, I would tell you, David, that actually what we are seeing now in this business, when you are seeing turns kick in the way it is, the customer is voting that they are liking now what they see out there. We have had less inventories, so I'm seeing right now the sign of heading already in the right direction.

By the way, we talked about this last fall. We were hoping to get to this point; and I would say over the next six months-ish I think we will be getting better comps out of the area.

Great. Thanks very much. Good luck.

Richard Jaffe.

Thanks very much. A follow-on question, I guess, about Europe. In the past we've heard about what Europe has taught you, particularly the UK business and bringing in footwear into Marshalls, some other learnings.

Are there other things that we can -- that you guys have gleaned from Europe that will apply to the Marmaxx business to help that grow?

Are there other initiatives within the Marmaxx box, like Runway and Cube that we can look forward to in the current year?

Richard, I think we have quite a few initiatives in Marmaxx in place now. I think as far as initiatives go, they go both ways across the ocean.

You know, the UK is just getting into jewelry and their accessory business is huge. Marmaxx has many, many tests underway and are in-process of a new home prototype, the Cube, which is going to be over 300 and hasn't even launched yet, which we are seeing positive results.

There are many other categories that we are testing new things in. Ernie, you want to comment? Because I think there's a lot of new things going on in Marmaxx.

Yes, I think, within the business, we still feel very good obviously about our accessory business. I think that was mentioned earlier. So we're looking at different ways to accelerate that.

As far as some of the other little tests, you know I would hesitate to comment on any specifics at this point, because some of the results are too early to talk about, I think.

Certain ends of the fashion business, obviously, we're feeling pretty good about our men's business and there are certain pockets of opportunity there.

I think the shoe Mega rollout we will continue with aggressively. I think you guys are already aware of that.

So, as Carol would say, some marketing. I think one of the big takeaways -- I don't know if Carol touched on this a little earlier -- is one of the big attitudes or strategies we have in Marmaxx right now is looking at marketing where we actually get the results. John Gilbert, who is on board right now is really helping us with our finance area to determine where we get a payback.

You have to be a little careful on this front, because there is a bit of an art form involved in marketing. But that to us is an initiative in itself, which is taking the marketing spend that we already have in place and being more efficient and more productive with it.

So I think that could be a key changing of course for us really down the road here this year. I think we can get some big payback.

I think, Richard, the other piece is in terms of home, the divisions are all working very close together. That is really terrific shared knowledge, which I think is helping Marmaxx get back on track in home.

Winners business is very strong, and HomeGoods has a lot going on. So they are spending a lot more time together, which I think is helping all the businesses.

Great, thank you very much.

Michelle Clark.

It's actually Chi Lee calling. Two quick questions on Germany. The first is, can you quantify what the negative margin impact was from the German stores in the quarter?

Second, in order to break even in Germany, how many stores do you need? Thanks.

Germany was about 10 basis points impact on margin. For the second quarter we expect that to be about the same, a little more. What was your other question?

The second question was how many stores in Germany do you need to start to break even?

Oh, I see. Okay. Right now, all I can tell you is we have a three-year plan that projects -- with the addition of about five stores a year, projects a breakeven at the end of year three. That is the model we have out there. Obviously, we will do our best to outperform that.

Great, thank you.

David Mann.

Yes, thank you. In terms of gross margin, can you update your full-year guidance for gross margin; and also provide what you expect gross margin range to be for Q2?

Then in light of that, can you just also talk about the prospect for continuing merchandise margin growth as your compares get a little tougher in the rest of the year?

Well, the full-year guidance right now, which obviously we haven't changed, is still at 10 to 20 basis points above last year. So we've got a gross profit right now in the plan, which is a low of 24.6% to 24.7% versus 24.5% last year. So, since we're not changing our guidance, that is what the numbers are at this point in time.

As far as merchandise margin goes, we will just continue to be focused on driving that as we have been for many quarters, many quarters now.

Yes, David, some of the opportunities we still have. Obviously, now and in the back half and even coming up against a stronger second quarter, is we are much more liquid; we are very strategic seasonally and transitioning our businesses; and we see opportunities there.

In addition, we're getting better and better on the supply chain in terms of customization in what goes to what stores and how we transition each store. So we still see some pretty good opportunity on the merchandise margin side of the business.

And the second-quarter gross margin expectation?

Second-quarter gross margin? Right now, what we have got is a flat to minus-10. Keep in mind, the actual numbers are 23.9% to 24% versus 24% last year. I would just ask you to keep in mind that we're continuing to face to a greater degree in the second quarter than in the first the impact of fuel costs on the merchandise margin, as well as the investments in the new businesses, and buying and occupancy deleverage.

So I think at the high-end, a flat gross profit would be -- is what we are shooting for with all these comps to be offset.

And our goal is certainly to beat that.

Absolutely.

Thank you.

Thank you. That was our last question and that does conclude today's conference call. Please go ahead and disconnect at this time.

Thank you very much and we look forward to second-quarter call.