TJX Companies Inc (TJX) 2010 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the TJX Companies first-quarter fiscal 2010 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, May 19, 2009.

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.

Good morning. Before we begin Sherry Lang has a few 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 31, 2009.

Further, these comments and the Q&A that follows are copyrighted today by The TJX Companies. Any recording, retransmission, reproduction, or other use of this name for profit or otherwise without prior consent of TJX is prohibited and a violation of the United States copyright and other laws. Additionally, while we have approved the publishing of a transcript of this call by a third party, we take no responsibility for inaccuracies that may appear in that transcript.

Please note that we have detailed the impact of foreign exchange on our consolidated results and our International division in today's press release and the Investor Information section of our website, www.TJX.com. As a reminder the comparable store sales numbers that we talked about today are on a constant currency basis.

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

Joining me on the call today with Sherry are Jeff Naylor and Ernie Herrman. We are going to start this call by having Jeff take you through our first-quarter results. Then I will share with you my thoughts on our first-quarter performance, our outlook for the second quarter, and our long-term view.

Big picture, I am very pleased with our performance in these difficult times and the additional opportunities we are seeing as a result of the downturn from which we believe we will benefit in the long term. However, times are still uncertain and you are going to hear that we are remaining extremely deliberate in our approach and cautious about our near-term outlook.

We will get into more details about the second quarter, but in addition to continuing the challenging environment our comparisons to last year do not become easier until later in the year. We believe the right thing to do is to plan and run the business with conservative assumptions as we did this past quarter and drive to beat our plan. First, here is Jeff to recap the numbers for the first quarter.

Thanks, Carol. Good morning, everybody. So I will be recapping the first-quarter results on a continuing operation basis. In the first quarter net sales were $4.35 billion; that was up 1% over last year. Our consolidated comp store sales were up 2% and that was on top of a 2% increase last year and it was also significantly above our plan.

Diluted earnings per share for the quarter was $0.49. That is up 11% over the $0.44 we reported last year. I should point out, however, that last year's results included a $0.02 per share benefit from FIN 48 tax adjustments. So excluding this benefit from last year's EPS our numbers were up 17% over the adjusted $0.42 last year.

The 17% adjusted EPS growth was achieved despite several items that impact the comparability of results and adversely impacted first quarter this year. First of all, foreign currency translation negatively impacted this year's results by $0.02 per share, which was about $0.01 more than we had planned. Second, marking our inventory-related hedges to market at the end of the quarter reduced EPS this year by $0.02 per share compared to a $0.01 per share reduction in EPS last year. Finally, results this year were adversely impacted by about $0.01 per share due to one-time costs related to our expense reduction initiatives.

Consolidated pretax profit margin on a reported basis was 7.8%; that is up 90 basis points over last year due to strong merchandise margins and solid expense control, but partially offset by the restructuring costs and the mark-to-market hedge adjustment. I will provide some further detail on how this breaks out later in the call.

Pretax profit margins increased significantly in all divisions with the exception of Winners, whose merchandise margins were adversely impacted by sourcing over half its merchandise in more expensive US dollars. You will recall that we discussed this on our February call and I will also provide more detail on Winners later today.

The gross profit margin was up 90 basis points during the quarter. Merchandise margins were up 110 basis points over prior year, which was better than we expected, but it was partially off-set by the mark-to-market adjustment I just mentioned.

SG&A costs were flat versus last year as a percentage of sales and SG&A dollars spending was slightly favorable to plan despite the above planned sales. And that was due to our cost reduction efforts.

In terms of inventories, at the end of the first quarter consolidated inventories on a per store basis were down 4%. We are entering the second quarter with fewer dollars committed forward than at this time last year on a per store basis. This includes the warehouses, the stores, and the merchandise that we have on order.

So now let me turn the call back to Carol and I will recap our second-quarter guidance at the end of the call.

Thanks, Jeff. It's great to be able to report such a strong first quarter, especially in such extraordinary tough times. The overarching message that I would like you to take away from today's call is that our strategies for a conservative approach in 2009 are working well. By planning conservative comps, keeping inventories lean, and reducing costs all with an extreme focus on execution we delivered above plan results in a very difficult retail environment.

We will continue to stick to our knitting and proceed with the same strategies that just delivered strong results for the first quarter. On our year-end call we outlined the three major strategies of our conservative approach to the business for weathering the difficult environment. Today I am going to tell you how those major strategies led to our strong first-quarter results.

First, planning comp sales conservatively truly worked well. We planned our business around an assumption of a two to four consolidated comps sales decrease. And by significantly exceeding this plan drove excellent flow-through to the bottom line, achieving an adjusted EPS growth of 17% despite adverse currency impact and one-time restructuring costs. Second, by running the business with very lean inventories in order to turn faster and increase merchandise margin we topped our expectations by increasing merchandise margin by 110 basis points.

Third, we are continuing with our aggressive cost-cutting initiative of $150 million for the year. At the end of the first quarter we are on track with our plans and we are also seeing expense savings flowing through to the bottom line.

With great values and merchandise initiatives customer traffic in the first quarter was up more than it was in the first quarter at virtually all of our brands as we continue to gain market share. Clearly, our value proposition is attracting and resonating with our customers. I have said it before and I will say it again, we believe that value is key whether the economy is weak or strong and our job is to deliver value beyond compare every day to our customers.

I would like to highlight some of the first-quarter results. Marmaxx had the most profitable quarter. Not its most profitable first quarter, but its most profitable quarter in its history with segment profit up 19% driven by very strong merchandise margins and terrific expense control. HomeGoods profits grew 75% and they delivered a strong segment margin of 4%, up significantly over the prior year.

With a 12% comp sales increase at A.J. Wright they delivered $4 million in profit, more than it accumulatively made in its entire history. Winners significantly beat its plan. Excluding the mark-to-market adjustment, Winners off-set much of the negative currency impact on its merchandise margin with better buying and delivering even more expense savings than we had expected.

T.K. Maxx generated a strong 6% comp overall and in the UK and Ireland more than doubled its profits, dramatically improving the profitability of the overall European business. Including our investment in Germany and HomeSense, TJX Europe delivered an over 190 basis points increase in its segment profit over last year.

I also want to reiterate that while we have a short-term strategy in place to manage through these difficult times, we believe that our future growth opportunities are tremendous. The seeds we have planted are working and I am convinced that those seeds will only grow stronger in the future. I remain firm in my beliefs that with solid strategies and execution we will emerge from this recession as an even stronger company. We will not get ahead of ourselves, however, and as always we will be very methodical in our approach.

Now let me share with you some additional details of how our strategies are working in this environment. First, as I just mentioned, planning comps at lower levels enables us to drive more flow-through to the bottom line if we exceed our plan. Let me highlight just a few of the ways we are driving sales.

We are delivering extreme value to our stores every day, which is clearly being noticed by our customers. We are managing the business with much leaner inventories and buying very close to need. Fresh fashion at compelling prices are flowing through our stores faster than ever and this is also helping to drive traffic.

Through strong and weak times we see ourselves as a shopping destination for both moderate and high-end brands at low-end prices.

Our strategy to shift our purchase dollars to the right categories and initiatives in order to drive sales is also working. We continue to be pleased with the The CUBE, our junior department at Marshalls, and we are opening many new vendors in this category which is benefiting both T.J. Maxx and Marshalls. The performance of juniors at Marmaxx in the first quarter was phenomenal as we bring in younger customers for the future.

Another category callout is dresses, which continues to post outstanding comps throughout our divisions. Footwear also continued to outperform. We have also flexed more dollars into children's which typically does better in economic downturns and that has definitely been paying off. We are testing several new ideas which we believe will also help drive sales for the back of the year.

Lastly on sales drivers, I told you on our last call how excited I am about our new marketing campaign and by now I assume most of you have seen what I am talking about. For the first time ever we are advertising T.J. Maxx and Marshalls together in the same TV spot. Our intervention campaign positions both brands as the better way to shop for great fashions, great brands, and incredible value.

This new network campaign is hitting markets that have never seen our brand on TV before and we believe will attract even more new customers. Clearly, we are also getting more bang for our advertising buck with this dual branding. We have tested our dual-branding strategy with very positive results, but as always we will continue to solicit customer feedback, fine tune, and make our campaign even stronger.

We have done a lot of work over the last several years to differentiate the shopping experience at T.J. Maxx and Marshalls which has given the consumer plenty of reasons to shop both brands. This is a great time to attract new customers and gain share as the retail landscape is changing so dramatically.

Second, in addition to driving traffic our running the businesses with very lean inventory led to faster turns and stronger merchandise margins. We begin the first quarter with more inventory liquidity and greater open to buy than I can remember, which for our buyers means even sweatier palms as they chase goods and by even closer to need. Better buying and faster inventory turns, merchandise margins were significantly up for all divisions in the first quarter with the exception of Winners, which while down year-over-year was significantly above plan. And we will discuss this later in more detail.

Third, we are on track with our cost reduction plans and we are already seeing the bottom-line benefit. We continue to be confident in our ability to reduce expenses by $150 million in 2009.

Moving on I want to emphasize that while we are taking a cautious approach during this recession, our vision to grow TJX as a global off-price value retailer is unwavering. I truly believe that with the right strategies in place we will come out of the recession with even greater competitive edge. We are taking advantage of opportunities that this environment presents, and as I mentioned are continuing to plant seeds for the future.

First the consolidation in the retail sector offers great opportunities for our businesses. We continue to gain market share and are growing our customer base for the future through our great value. With customer traffic up and average basket down, even a slight increase in the consumer spend should be very meaningful to our business.

As we have discussed, we have found in the past recessions that once customers discover us they tend to stick with us when times improve because they love our value.

We have seen updated analyst estimates that bankruptcies and store closures to date across apparel and home fashion retailers will result in approximately 1,300 closed doors and nearly $11 billion market share opportunity in the US. While consumer demand has decreased meaningfully, fewer players in the retail landscape bodes well for TJX because we play in both higher and lower demographics.

We believe that this is also true for HomeGoods, which just delivered its strongest first-quarter performance ever. HomeGoods has regained its footing with a better mix and flow, sharper value, and improved in-store merchandising. In addition to better execution at HomeGoods, we believe that much of the consolidation in retail will happen in the home arena which should provide HomeGoods a stronger competitive position.

In terms of sourcing the tough environment continues to open more and more vendor doors to us growing our already vast vendor universe. We are still being asked if there will be enough product for us to buy when the department stores bring their inventories in line as we get into the holiday season. So once again, I will say it as plainly as I can, availability is never a concern for us.

Even when the marketplace becomes more disciplined, there is always more product available to us than we would want or could ever buy. To understand the magnitude of what we are talking about, in the first quarter alone we open more than 600 new vendor doors. And that was just at Marmaxx and HomeGoods alone.

We have tried many ways to explain this, but it's very important to understand that we have 500 buyers all over the world. We take a global, tactical approach sourcing from well over 10,000 vendors in 60 countries, moving and placing buyers in the most advantageous location as the dynamics of the markets change.

Also crucial to understand that once a vendor door is opened it typically stays open over time as we establish long-term, mutually beneficial relationships with our vendors.

As we indicated on our year-end call, one of the biggest opportunities for the future from this downturn is the real estate market. We continue to see very advantageous deals for opening new stores, renegotiating leases, and relocating stores to better locations. At the beginning of the year we said that we had 65 net store openings planned and we were keeping our capital powder dry for great deals as they came to us.

To update you on where we are with store openings we now expect to open between 80 and 85 stores this year net of closings; 15 to 20 more than we had initially planned. The additional stores are primarily in Europe as well as Marmaxx and allow us to take advantage of terrific real estate opportunities.

Now moving to our growth vehicles who continue to perform well despite the weak retail climate. The strong performance of our newer and younger prospects is very promising to long-term growth potential of our company. In the US A.J. Wright delivered outstanding performance in the first quarter. A.J. Wright is executing extremely well as the concept continues to gain traction. Store contribution levels continue to move up, which gives us confidence in this division's ability to achieve its long-term segment profit target.

Our store openings in Atlanta, our new A.J. market, were strong. We are very encouraged by A.J. Wright and continue to believe that the US could ultimately support 500 or more A.J. Wright stores.

Our test of Shoe Mega-Shop by Marshalls in the US and StyleSense in Canada, our stand-alone shoe and accessory concept, continues to generate excellent customer response. We had a strong opening for an additional Shoe Mega-Shop by Marshalls during the quarter. If these concepts continue to be successful, we will have a real long-term growth opportunity here in the US as well as in Canada.

In Europe our younger concept continues to significantly outperform our expectations in a difficult retail environment, just as they did throughout 2008. In Germany our T.K. Maxx stores are achieving sales productivity levels that are comparable to the average of our existing stores in the UK. And virtually all German stores are exceeding our expectations.

We are also seeing strong year-over-year results in stores that have been open for more than a year. With these strong results, as I have just mentioned, we are increasing our store growth for the year. We now expect to net 15 stores in Germany this year, five more than the original plan. We believe our business in Germany will achieve profitability towards the end of calendar 2010.

We also plan on opening three stores in Poland in the back half of this year. After a tremendous amount of research we believe that a merchandise mix that combines what we have in Germany and the UK will resonate extremely well for the customers in Poland. We are taking a regional approach to expansion in Europe as the stores that we are opening in Poland are very close to several of our stores in Germany.

We believe the demand for great value as well as the advantageous real estate deals in Poland provide a really solid platform upon which to grow further in Europe. We will start slowly, as we always do, and continue to evaluate as we go forward.

We are also very pleased with our new HomeSense business in the UK. With the ongoing consolidation in the retail sector in the UK we are seeing excellent real estate opportunities which are allowing us to open HomeSense stores in very good locations with extremely good terms.

Both T.K. Maxx in Germany and HomeSense in the UK have improved their bottom line and exceeded our expectations. Long-term we see T.K. Maxx growing to 250 to 300 stores in Germany and HomeSense growing to 100 to 150 stores in the UK.

I believe that we have significant growth potential in our US concepts and international expansion. There is no question in my mind that TJX is benefiting from being an international company and will continue to do so in the long term. We are very pleased with what we are seeing in our European businesses, but I reiterate that we will continue to proceed very carefully and methodically with growth.

Now let me move to our financial strength, which continues to be critically important in today's world. We will continue to manage our strong balance sheet and cash position to preserve our flexibility. Cash continues to be a big part of our story. We entered the first quarter with a balance of $1 billion. This includes $375 million we borrowed to refinance our convertible notes, which we plan to use to buy back the shares that were issued to the convertible note holders earlier in May. Returning excess cash to shareholders remains a priority that we are balancing with preserving cash liquidity in these economic times.

In terms of share repurchases, we bought back approximately $43 million of TJX stock during the first quarter or retiring 1.6 million shares. It continues to be our plan to buy back approximately $250 million of TJX stock in 2009 in addition to the $375 million to buy back the shares that converted for approximately $625 million in total.

As we have said before, we may adjust the amount up or down depending on the environment. In addition, we increased the per-share dividend by 9%, which is the 13th consecutive year of a dividend increase.

I want to take a moment to mention that our strong financials continue to stack up well against our peers. The recent Fortune 500 rankings TJX ranked 131, one place higher than last year. In terms of financial ratios among all Fortune 500 companies, we ranked number 34 in return on assets, number 28 in return on equity, and 94 for 10-year EPS compounded annual growth rate.

Moving to our outlook for the second quarter. Although off to a good start in May, we believe it's prudent to remain cautious as the economic environment continues to be challenging and uncertain. We also want to remind you of the tough comparisons we have to last year's second quarter. First, it is our strongest quarter of the last year in terms of sales and earnings growth and we are up against three consecutive years of strong second-quarter comps. We also have difficult year-over-year hurdles in terms of the impact of foreign exchange, which will ease up late in the third quarter.

We will continue to plan conservatively while at the same time we will certainly take actions to drive sales and profitability beyond our planned levels. We are planning EPS from continuing operations to be in the range of $0.43 to $0.49 compared with $0.48 per share last year. We are planning comp sales to be flat to down two on a consolidated basis and at the Marmaxx Group. Jeff will provide more details in a moment.

So in closing, let me say again that I am very pleased with our first-quarter performance. I believe that our prudent approach to 2009 is working and helping us do what we said we would do, which is to protect the bottom line. We will continue to plan comps conservatively, run with extremely tight inventories, and significantly reduce costs.

We will also continue to take actions to drive sales beyond our conservative expectations, which to the extent we are successful will drive more profitability as we did in the first quarter. It remains our financial strategy to manage our substantial cash flow and liquidity and to maintain our flexibility.

We will balance our financial strength with the opportunities that we have in today's environment. We will pursue opportunities with paramount focus on return on investment that takes full advantage of today's environment for the future. In other words, seize the day.

Even more exciting, our growth vehicles are working in the face of challenging times and I believe that growing this company in the US and internationally has great advantages. We believe that TJX, a nearly $20 billion company today, when carefully and intelligently executed has tremendous growth opportunities for the future. I am confident that the strategies that we have in place are the right ones and that with keen focus on solid execution we are in excellent position to be even stronger competitively when times improve.

I truly believe that our great value equation plays well today, in the future, and in many countries across the globe. Now I will turn the call back to Jeff to go through further details on the first quarter and our plans for the second quarter. Then we will be happy to open it up for questions.

Thanks, Carol. Before moving to guidance I wanted to take a moment to run through some first quarter items. First, let me give you some detail on the impact of currency overall and how it impacted our Winners business.

Overall, currency translation and mark-to-market adjustments had a $0.04 per share negative impact on EPS in the first quarter this year, and that would compare to last year's $0.01 per share negative impact. So the take away here is that the Q1 17% EPS growth was achieved despite some pretty significant currency headwinds which we won't anniversary until late -- very late, actually, in the third quarter.

The mark-to-market adjustment on our inventory-related hedges also impact our pretax margin in the first quarter. So while we reported a 90 basis point improvement, it would have been 110 basis points excluding the mark to market.

Secondly, foreign currency translation in the mark-to-market adjustment significantly impacted the reported Canadian numbers. If you look at the segment tables that we have attached to the press release, you will see that we reported a decline of $21 million in Winners segment profit. This would have been only a $3 million decline if we exclude the impact of foreign currency translation and the mark-to-market adjustment. So when we look at it in local currency we are close to having flat profit year-over-year in our Canadian business.

Similarly we reported a 370 basis point decline in Winners segment profit margin, but this would have been down 130 basis points if we exclude these currency items. The profit declines in our Canadian business is much less than we had planned as the team at Winners is doing an excellent job of mitigating the cost of goods sold impact of the weaker Canadian dollar by buying better and generating above plan expense reductions.

I should note that we have provided a schedule detailing the impact of currency on TJX consolidated results, as well as the results of Winners and T.K. Maxx. That is out on our website and we would encourage you to look at it because we think it's helpful to understanding and interpreting the results.

The second item I wanted to cover is pretax margin and the components of the year-over-year change. Pretax margins for the first quarter were 7.8%, to 90 basis points over the prior year. This breaks down as follows. Merchandise margins were up 110 basis points, partially offset by the 20 basis point negative impact from the mark-to-market adjustment.

SG&A expense was flat, but it levered by 10 basis points on the 2% comp excluding the restructuring costs. And we actually got leverage on SG&A if you back out the one-time restructuring costs that we had in the quarter.

Finally, I wanted to briefly discuss the refinancing of the convertible bonds. In early April we completed a $375 million debt offering and exercised our option to redeem the convertible notes. Since then the debt, which had had an accretive value of approximately $365 million, was converted into 15.1 million shares of TJX stock. Now this doesn't impact EPS as these shares have always been included in our calculations.

We are now in the process of repurchasing these shares in the open market and will now use the $375 million of proceeds from the debt offering to do so. At current stock prices we would expect to buy back approximately 13.5 million of the 15.1 million shares that were issued. The deal should be approximately $0.02 to $0.03 accretive to EPS on an annualized basis, which was not included in our original plans for the year.

The benefit of the reduced share count more than offsets the approximately $19 million in incremental interest expense on the debt.

So now let me turn to second-quarter guidance. For the second quarter we expect earnings per share from continuing operations to be in the range of $0.43 to $0.49 versus $0.48 per share last year. You will see from our comp store sales guidance that we expect the economic and retail environment to continue to be difficult.

So the assumptions; we are assuming a second-quarter top line of $4.4 billion to $4.5 billion with comp sales planned flat to down 2% on both a consolidated basis and also at the Marmaxx Group. It's important to note that while the first quarter was up against an average comp increase of 1% over the past three years, the second quarter is up against an average 3% comp increase for the same period. So the comparisons get meaningfully more difficult in the second quarter.

For the month of May we are planning an increase of 3% to 4% on a consolidated basis and also at Marmaxx. We are anticipating a 3% to 5% decrease in June and a 1% to 3% decrease in July, both for TJX and for Marmaxx. It's important to note that we believe June will be our most difficult month as we are up against a very strong 5% consolidated comp last year and an average consolidated comp of o 4% over the past three years.

Pretax margins for the second quarter are planned in the 6.9% to 7.7% range. That is down 50 basis points to up 30 basis points over the prior year. We are anticipating second-quarter gross profit margin in the area of 24.3% to 24.8% compared to 24.3% last year and SG&A as a percent of sales to be about 17% to 17.2% compared to 16.8% last year.

We expect SG&A to delever in the second quarter due to the flat to negative 2% comps for sales we are planning, as well as the impact of the lower average ticket on cost ratios. It's important to note that we have taken actions to deliver the $150 million of cost savings and are on track to meet these expectations.

Finally, for modeling purposes we are anticipating a tax rate of 38.4% and net interest expense in the $7 million to $9 million range. So we will now turn the call back to Elan for questions and we would ask you -- to keep the call on schedule we would like you to limit your questions to one per person. So thank you and we will now open it up.

(Operator Instructions) Brian Tunick.

Congrats, everyone. I guess maybe for Jeff or Carole, Marmaxx was significantly better than we thought. Maybe if you could just break out how the 140 basis point margin improvement sort of broke out between merchandise margins or leverage and expense savings. Then maybe just, Carol, maybe update us on your intermediate opportunities for segment margins in the younger divisions. Thanks very much.

All right. Well, margins are very strong and it was really split between markdowns and markup. Jeff, do you want to go through some of the costs?

Yes. The bottom line is we had a comp up 1%. Ordinarily you would expect on a 1% comp increase to see deleverage and in fact you saw the merchandise margin was up significantly. It represents most of that 140 basis point increase, Brian.

But we also got a little bit of leverage from expenses, which speaks to the cost reduction efforts that we have in place. I think if you look overall and its being up 140 basis points, the lion's share of that is merchandise margin as Carol mentioned.

Brian, in terms of the other divisions, really across the board every one had a significant increase in merchandise margin and in pretax with the exception of Winners due to the currency issue. But if you look at the UK in terms of -- in addition to the investment, they were up 190 basis points. HomeGoods had a spectacular quarter and they were up pretax 153 basis points. And A.J., which is a very, very strong comp, tremendous again pretax; over 300% increase. So we are really -- across the board I am very, very pleased with the execution of all of the divisions.

Jeffrey Black.

Thanks and congrats again on the quarter as well. On the regional trends can you tell us what you are seeing in California these past couple of quarters and Florida, specifically, just what is happening there? If you could wrap in Texas as well.

Texas has been pretty good for a while, so we haven't seen -- we have seen a pretty positive trend there. Florida is definitely going to come back, so the trend last year was soft in Florida and we are starting to see some increases there. In California it is very slowly increasing. So the whole Southwest region is getting a little bit stronger, but we are definitely seeing some improvement. And that is over weaker comps.

Okay, thanks.

Paul Lejuez.

Thanks, guys. One question on the spread at Marmaxx, looks like it's a little bit larger than it has been in prior quarters. Is there anything that you can speak to there that might help explain that? And I am talking the spread between comps and total sales increase.

Then, second, Jeff, don't know if there is a way that you can give us a sense of the real estate deals that are getting presented to you today. Any way that you can frame that for us, maybe in terms of what you are seeing on a cost per foot versus what you saw in the previous years? Thanks.

In terms of the spread, I am going to have to look into that because when we look at Marmaxx's comp it was up 1%. And if I look at the square footage growth -- quickly finding that here -- if I look at the square footage growth for Marmaxx, it's up in that 2% to 3% range so I don't think there is anything really going on. The store growth that would be benefiting us this year from stores we opened last year was really no different.

I think, Jeff, we are going to have to take that one off-line and just pull the numbers apart a little bit because I am not seeing the same thing. Or Paul, I am sorry.

Sure. It just seems like the productivity number -- the new store productivity number would have to be really high to get to the spread that we are seeing in the first quarter.

Okay. Well, let us look into that. I don't have anything --

Yes, we will get back to you on that.

In the terms of real estate, you can see we have committed to opening more stores. We have got more in Europe than we have in the US because, frankly, we have seen rates come down more quickly in Europe than they have come down in the US. So that is where we are putting the incremental capital at this point.

I would tell you over the last couple of monthly real estate cycles we are beginning to see those rates come down in the US. But I would rather not get into specifics in terms of dollars per foot.

Paul, the real key here is the fact that we put our bucket aside and we will take advantage of best market, best prices.

Great. Thanks, guys. Good luck.

John Morris.

Thanks. My congratulations too really on a great quarter. Question, I think really first for Jeff, the $150 million of cost savings -- just so we are clear that you are on track to hit for the year, in SG&A would we expect to see total SG&A reported for the Company down by that amount on a year-over-year basis with most of the benefit coming in Q3 and Q4?

My follow-up really is with respect to total qualitative, looking back at our notes you talked about -- when you gave guidance before, I think it was back in April, it was really based on a 'deep recession continuing.' And I am just wondering, you have talked about it this morning, but would you characterize that kind of guidance to be using the same kind of language? Thanks.

Well, in terms of -- why don't I take SG&A? So in terms of SG&A, no, you can't just take the -- assume it would be down by $150 million because baseline costs are up and we are also seeing increases in pension expense, employee medical benefits, etc. So what we said in our guidance, John, was that we would expect expenses to be essentially flat year-over-year; the total SG&A.

But I was going to say actually down in Q3 and Q4?

No, I would not be planning it down in Q4. Right now I think the way to think about it is -- and we are not providing guidance for the full year -- but we said we thought the SG&A would be flat for the year. Remember that was based on a negative comp. So as we beat sales we actually spend more in SG&A in the stores because we have incremental people in the stores and so we have to fund that with payroll, with incremental transactions so you have the interchange fees, supplies, etc. So there will be some costs that will go up. SG&A will go up as we generate more sales; that is a good thing.

In the first quarter we had 10 basis points of leverage on a 2% comp with our cost savings partially in. I think as we looked at the second quarter and going forward we would expect to see -- continue to see leverage at a 2% comp. But we are not going to see a $150 million drop in our SG&A. A portion of that hits buying in occupancy, which is in gross profit, and obviously we have also cost increases across the whole constructure but particularly some significant increases in pension and benefits.

Okay, fair enough. Then they follow up on the --

The other thing that you have got to consider too is we are running with lower retail, so that does put more units through the system in terms of cost structure.

Deep recession; obviously our first quarter was stronger. We planned a down 2% to down 4% and obviously we beat that with an up 2%, which is a positive trend, which I can't say I am not excited about. We went into this year with a lot of questions, so I don't think we have the answer to the deep recession.

We are just going to take one quarter at a time. I think we are planning Q2 prudently and I think it's a very rational estimate. And I think we are going to take one quarter at a time and see what the back half yields.

Fair enough. Great job.

Jeff Stein.

Good. One quick one for Jeff and then for Carol. On foreign exchange, Jeff, can you tell us what your assumption is baked into that second-quarter guidance? And then for Carol, wondering if you could talk about some of the drivers that really have begun to accelerate the sales trend at A.J. Wright?

Yes, the guidance -- we are looking at it versus our plan for the year, Jeff. We set our plan based on currency rates that were in place when we began the year, which for the Canadian dollar was in the low 80s and the British pound was around $1.50. So those would be the rates that would be implied by the guidance.

On a cents per share basis, Jeff, for Q2?

Q2 translation will have a $0.02 negative impact versus LY. These are all versus LY, Jeff, so translation is costing us $0.02. The mark to market which hit us in the first quarter we flip; it reverses. So we will end up with $0.02 of positive EPS from mark to market, so those two essentially cancel out.

I should also mention though in sort of calling those out, the interest and tax rate also cost us in the second quarter $0.01 apiece. So translation cost us $0.02, mark to market benefits us by $0.02, and interest and tax each cost us $0.01 in the second quarter if you think of it this year versus last year.

Okay. And the trends in A.J. Wright, Carol?

Well, I talked about it before. We have had some pretty positive trends for several quarters now, and I think the big takeaways here are that we are really understanding this customer. Obviously, we are building on a stronger year and we have a strong team in place that all -- our top-level team as well as the next tier down have really been in place now year-over-year.

We brought in a very strong head of stores, so we have a great team in place. We figured out how to market to this customer. We are running leaner inventories and the core is working, which we said we are focusing on basics and shoes, accessories, juniors and kids. And there are several other areas that we have opportunity in, but the transactions are very, very strong at A.J. Wright, and really they are continuing to execute extremely well.

Very good. Thank you.

Kimberly Greenberger.

Great, thank you. And I will add my congratulations as well. My question is on the balance sheet. Jeff, you have got $742 million in current debt. I know that you have indicated the contingent convertible was converted in early May so I am assuming that piece goes away by the end of the second quarter?

That is correct.

But the other two pieces, the $200 million note due in December and the Canadian $235 million credit facility due in January of 2010, is your intention to pay these off roll these over? Could you give us some sort of visibility into that?

So you have just laid out the three components of the current installments of long-term debt, Kimberly. It's the convertibles and the $200 million in bonds that matures in December, and then the $200 million, roughly, in Canadian debt that matures in January.

On those latter two maturities -- so we have already refinanced the convertible. Our intent would be to refinance those other two pieces of debt. We are managing our cash as if the markets will be closed to us. I think we will make judgments on that as we go through the year.

And in terms of what happens in the credit market and just how loose it is -- but our intent, while we have set ourselves up in our plan and given ourselves the amount of liquidity and financial flexibility to pay them down, we would intend to refinance them at this point.

Okay, great. Thanks, Jeff.

Todd Slater.

Thanks very much and congrats. With A.J. Wright performing better, I think it had its first profit in the first quarter, and obviously with the real estate opportunities, maybe unprecedented at the moment, when do you think you start to ratchet up the growth to get better scale there?

Then, secondly, the UK business, which is now more than $2 billion, if you look at the rest of Europe where you are going into Poland, what do you think the revenue opportunity there is for the entire continent outside of the UK? Do you think it's as big or bigger than the UK based on your analysis? Thank you.

First of all, A.J. Wright. We have a very -- I will say very pleasant situation today in that we have really all of our chains doing well. In terms of the real estate, Todd, we are balancing again the best deal and the best place. So although today A.J. Wright we are feeling great about and we are filling a great about them for the future, we have to balance the real estate opportunities there versus the UK versus Marmaxx.

So I think we are just taking one deal at a time and making the absolute best deal. Obviously, that is what we have set aside that capital for. So we don't have any plans to suddenly go an additional 50 stores that is for sure and I don't think that is the smart way to do it. We have done things like that in the past and we don't want to repeat them.

So we will be careful and we will be prudent, but again we are trying very hard to make the best deal and sit tight. The few times where we did that where if we made moves six months ago we would have regretted them and we are pretty happy with the results of them today. So there is no fast growth plan in place today to accelerate to a great degree.

So what would be the trigger point to augment growth?

Again, we have to balance the portfolio. We will probably next year increase our store count above the 85 mark, but to lay it out by division is probably not the right thing to do today. But we are out there very aggressively looking at deals.

In terms of the UK, the opportunity is huge. Germany alone, just the number of people, we have put out there -- it's up to 350 stores. We are testing Poland. It's three stores. We are not going to put numbers out there, but it's a population of 42 million. And, again, one step at a time but we think Europe has tremendous potential.

We are understanding more and we are understanding how to go into new countries so it is very, very exciting. We are leveraging the European structure that they have really put in place over a year ago. What is tremendous in terms of the structure is that now that group has been in place for a little bit over a year now, so we are starting to really leverage the skills.

Great. Well, continued success.

Adrianne Shapira.

Thank you, congratulations. Carol, a few questions as it relates to near-term comps. Appreciate the conservatism as you head into Q2; it sounds like May is off to a strong start. But have you ever quantified what the stimulus did for you last year and how we should think about lapping that?

We really haven't, Adrianne. We are really looking at the three-year trend from Q1 and we have taken the same trend into Q2 with a little bit of margin upside. But, no, we haven't.

Okay, because it does seem like the deterioration -- from May to June it would seem like part of that was the stimulus anniversary.

Well, June was a -- we had a 5% comp last June and we have had several years in a row of strong comps. So, again, we were just taking the trend and we were -- obviously we are into the second week of May and we understand May a little bit better.

Okay. Then just two questions, as it relates to inventory as you mentioned and made it very clear availability is not an issue. But I am just wondering, we are all hearing all the department stores ratcheting down inventory and being much cleaner.

Is there -- understanding that it's clearly, the availability of goods is out there but is there any change in strategy in terms of how much you are buying in season versus up front buying in light of the fact that it does seem to be much cleaner this year versus last year? Andy change in terms of how you plan your inventory?

No, not really. What we do plan and we are very strategic about is where our people are in terms of sourcing and looking at it by category. But we intend to be wide open, we feel very strong that there will be plenty of availability in the back half. Clean inventories are not bad for us because, again, it gives us a tremendous advantage in terms of our value against the rest of the world. So it's not a bad thing for us.

And the off shoot to that in terms of cleaner inventory, are you seeing a much more rational pricing environment?

We have seen -- you know what, Adrianne, we had probably the most promotional environment in December and we weathered very well. So, again, it's that matter of the degree to where we are versus everyone else. And we think we can more than sustain that.

Okay. And then just a last question as it relates to HomeGoods, we are seeing clear improvement there and I think in part some of the consolidation opportunity, but give us a report card in terms of where you think we are in terms of the progress there? It seems as if there were some initiatives underway -- where we are, where you see continued opportunity in that division.

And maybe following on to that, the dual-branding you are seeing, the excess TJX and Marshalls in terms of the advertising together. Any thoughts perhaps over time adding HomeGoods to that? Thanks.

Okay. Well, HomeGoods -- I did speak on the last call that I did feel that a big part of the home business was the external environment but also a part of it was our execution. I think the guys there are doing just an absolute phenomenal job.

I think we have changed our way to approach the customer in terms of the store, in terms of the marketing. We are running with much leaner inventory. We have much more focused markets in terms of Florida and California and the Northeast, and most importantly, I think their values are tremendous. And I think that they are really understanding the way to drive the business.

So I think a big chunk of this is execution. So we are pretty excited about what is going on with HomeGoods and it's obviously showing in the numbers.

In terms of the dual branding, I am not planning on adding HomeGoods to the mix. But as always we look at something new that we are doing and we want to measure it over time, we want to see if it works, if it doesn't work, what it means to the consumer. I think we have differentiated Marshalls and Maxx extremely well, and they are two very big brands. So we have got a huge campaign to work on right now and then we will see what we want to do in terms of other strategies for the future.

Thank you.

Richard Jaffe.

Thanks very much, guys. I have seen your ads and I am encouraged to see your steps into the network realm. Wondering how much it's going to cost and how much we should expect both in terms of cost and in terms of I guess penetration over the next three quarters? Will it continue at the same rate we have seen and what kind of impact that will have to SG&A?

Well, we have a year strategy with it. We are covering about 35% of the market that never received TV before and we are doing a combination of dual branding and individual branding, which is laid out through the rest of the year.

We told you before that we would be leveraging the marketing costs, which we are. We did a lot of testing last year and I think the bottom line is we are just getting bigger bang for our buck. So we are not planning on accelerating our marketing budget. We are planning on pretty much staying on plan and we are very happy with what we are seeing. And we have laid out our back half numbers.

We said on the year-end call, Richard, that the advertising spending would be down year-over-year. But we are still spending at a rate greater than what it was three years ago and as Carol said we are obviously getting leverage given the way that we are approaching it.

Jeff, you wanted to go back to Paul's question?

Yes. I wanted to go back to Paul Lejuez's question. I have enough information here; I was able to do some calculations off line. So what Paul is referring to is we had a 5% increase in the sales at Marmaxx. Ordinarily you would have expected less than that on a 1% comp. Typically on a 1% comp with about 3% square footage growth, you would have expected 4% sales increase. We had 5% and the difference is all in layaway.

We adjust layaway sales out of our numbers. Clearly, we had a lower level of layaways this year than we had last year, so we were adjusting more dollars out last year than we are this year which is leading to about a point of incremental growth. So that is what is driving that delta.

So hopefully that will answer Paul's question and we don't have to take it off-line. I think we can go back to questions.

[Daniel Hopkins].

Good morning. Very nice quarter. I guess thinking back to the general framework that you provided on the year-end call for -- hypothetically, if you had a flat comp you could, I think, do earnings including FX of around $1.90 to $1.95. I am just wondering, obviously, given the first quarter upside relative to your plan, should we be thinking about the balance of the year similarly to how you would have thought about it a few months ago or would you be thinking about it at the higher level than you would have at that time?

I guess to that point also, can you update us on your current CapEx and free cash flow thoughts for all of '09 given the little bit of ramp up in store growth?

And I guess I just wanted a little more clarification on how you are defining merchandise margin. Is it strictly sales minus cost of sales and you are saying that that was up overall about 110 basis points? Or is that -- just want to make sure I am thinking about that the right way. Thank you.

Okay. Jeff?

Yes, so I will take them one at a time. On EPS, Daniel, we recorded -- I will kind of walk you through the quarter. We recorded $0.49 in the first quarter against $0.42 last year, so we would be up $0.07 through Q1, right? On Q2 we said -- if we did a flat comp in Q2 we would generate $0.49 because that is the high end of our guidance. I think flat EPS on a flat comp would give you $0.49 in the second quarter.

Then for the balance of the year if we have flat comps that generate flat EPS it would be $0.57 in the third quarter and $0.46 ex the 53rd week in the fourth quarter. So if we just look at the balance of the year Q2, Q3, Q4, if we run a flat comp we generate the numbers I just gave you and then we would be at $2.01.

We haven't updated -- we have provided updated guidance on Q2, so we are now saying at a flat comp we would generate a slight increase year-over-year; $0.49 versus $0.48 last year. But we are not at this point really prepared to say anything about the back half and probably won't until the second-quarter call. So hopefully that is clear.

And every comp point -- on a full-year basis every comp point continues to be worth $0.08, so that is the sensitivity that people can plug into their models.

In terms of CapEx, with the new stores we would expect -- and I am glad you asked -- we would expect CapEx to be $450 million to $475 million. Before we said $450 million, so we think that will be up slightly versus the prior guidance that we gave you.

In terms of the cash forecast with the higher CapEx we probably be closer to the lower end of the range. We said our range was to generate $500 million to $600 million before any debt retirement after the buyback and the dividend, so we would now expect to be closer to the -- nearer to the low end of that given the incremental CapEx.

The in terms of merchandise margin, it's really a pure merchandise margin. We report gross profit on our P&L, which includes buying and occupancy costs. However, when we talk about merchandise margin on these calls and in our public filings that really represents mark on less markdowns less freight expense and less shrink. So it's pretty much a pure merchandise margin.

And that you are saying was largely -- that was the majority of the earning's upside relative to your original guidance range as opposed to just simply the expense or fixed cost leverage?

Yes. If you look versus -- well, I call it two things. One is that the overall gross profit margin was 90 basis points better. We said 110 basis points of that was merchandise margin. 20 basis points went the other way on mark-to-market so you can infer from that that for the buying and occupancy costs we are flat as a percentage of sales.

In terms of how we performed against -- we had $0.11 of EPS upside against the top end. We had $0.49 of EPS against $0.38 at the high end; about $0.06 of that came from sales, $0.06 came from margins, and $0.01 came from (technical difficulty). And then we gave back $0.02 to $0.03 pennies in the ForEx being a little bit higher than we planned it. So that is how you get the variance from what we reported to where we set the high end of the range.

Marni Shapiro.

Congratulations, amazing quarter. So this is actually very small question and it's a longer-term question, but if you are looking into going to Poland I have to believe you are looking at what is going on online with things like [Guild Group] and Rue La La and all those others smaller conversations out online and your CUBE is doing very well, which kind of leads me down that path. I am curious what your thought is about some of these businesses and possibly down year thinking or is Poland your bigger fish to fry?

Well, right now we think store growth is obviously the place to be with the advantageous real estate deals. We -- as always, we have a lot of initiatives, we have some tests. We are far from ready to talk about them but we are always looking at everything around us. But right now our big fish to fry is obviously stores.

All right, good luck to you guys. I will let you go on to the next caller.

[Stacey Pack].

Hi, guys. Several questions; sorry, Carol. Jeff, on the Winners margin can you address for us how that pressure may have lessened in Q1 and sort of what is embedded in Q2 guidance thinking about the segment margin? Kind of wondering how does Winners margin change here in Q2? You can address the other margins while you are at it.

On the cost reductions can you share with us kind of what the baseline cost reduction was in Q1 and what is embedded for Q2 and how we think about those growing for Q3 and Q4? Then, lastly, on the May comp your guidance of 3% to 4% implies another acceleration in three-year run rate and the guidance for the quarter suggests another slow down. So I am wondering, is there something in June and July that we should be thinking about because the stimulus last year I think was already happening in May? Thanks.

Jeff, could I get some help?

I would be more than happy to.

You know I love to --

Stacey, that was not one question.

Stacey, you are killing us. On Winners margin, I think if you go to the sheet we put out on the website you will see that whereas we had 4.7% profit margin TY versus 8.4% last year in Winners, when you adjust out the foreign currency stuff, safe is that that is an 8% this year versus a 9.3% last year. So if you block out mark-to-market -- if we are down, Winners would be down 130 basis points.

Basically, we have got merchandise margin decreases being partially offset by SG&A leverage. We are not going to get too specific on the amounts but that is -- you have got merchandise margin deleverages greater than that 130 basis point decline. And I think the Winners team has done a terrific job of mitigating the pressure that they are seeing on the merchandise margins from having to source goods at more expensive US dollars.

Does I get smaller going forward, Jeff? I mean, isn't that less of an issue as the other -- as the competitors adjust their retail?

It's going to depend on two things, if the Canadian -- there is two ways that the pressure lessens. One is the Canadian dollar goes back up. Increases will obviously help merchandise margins because the US dollar becomes less expensive, right, which drives down their costs. The Canadian dollar right now is up maybe a couple of pennies versus where we planned it, but not significantly. So I wouldn't call that out as a significant factor.

The other factor is that Canadian retailers raised prices. I think everybody is feeling the pressure, but I don't know -- Ernie, you haven't seen that right?

No, we haven't seen that yet, but there is a lag on that because they buy the goods six to nine months out. So, Stacey, we could see that more towards the summer and the third quarter. But, again, we are trying to be conservative on that front.

I do commend the Winners team, however, on really capitalizing on the market opportunities in this environment to mitigate that over roughly -- a little over half the goods up there are bought in US dollars. So I think they have done a nice job on buying better.

If you knock out the mark-to-market in the second quarter that $20 million in profit you know and adjust for that in translation you would see that is like $42 million. We were way above where we had planned the business and I think that speaks to what Ernie just mentioned about the Winners team.

The second item you asked about --

Well, first of all the segment margins. You were going to weave that in and then the cost reductions for Q1, Q2, and how to think about them for Q--.

Yes, so the cost reductions -- I think the way to think about the cost reductions is we had meaningful amounts in Q1. We are going to get -- most of the initiatives will be in place some point in time in Q2, which means we are going to get the majority of the dollars. And we are going to have all the savings in place by the third quarter.

You don't want to quantify for us how much in Q1 and Q2?

No, I really don't. I really don't. I think the point here is that we feel very confident about the $150 million. Everything that we had contemplated doing we have done or are very close to having completed, and we are getting the kinds of savings that we thought we would get.

In terms of the three-year comp -- in terms of May and comp store sales, we looked at this as we set the guidance on a three-year basis. I think if you take our guidance in the last two years you would see that the second quarter is up an -- it's an average growth of 2%. The first quarter was up 2%.

Now as you have correctly point out the three-year comp for May is up 3%, so clearly that is ahead of the 2%. But I don't think we want to be planning at the current May run rate as we think about June and July because we are up against some big comps. But more importantly, I think there is a lot of uncertainties in the environment so that is why we set the plan --.

Still look at the total quarter, Stacey. I mean, there can always be a shift from one month to the other depending on the weather patterns and everything else and I think this is a very good, logical plan for Q2.

I want to thank everyone and I am sorry we ran over. I look forward to reporting Q2 to you shortly. Thank you.

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