TJX Companies Inc (TJX) 2010 Q2 法說會逐字稿

Welcome to the TJX Companies second-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 is being recorded Tuesday, August 18, 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.

Thank you. Good morning, everyone. Before we begin Sherry has some comments to make.

Good morning. 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, rebroadcast, reproduction or other use of the same for profit or otherwise without prior consent of TJX is prohibited and a violation of the United States copyright laws.

Additionally, while we have approved the publishing of a transcript of this call by a third party, we take no responsibility for inaccuracies that may appear in that transcript. Please note that the financial results and expectations we discuss today are on a continuing operations basis. Also we have detailed the impact of foreign exchange on our consolidated results and our international divisions in today's press release and the investor information section of our website, www.tjx.com.

As a reminder, the comparable store sales numbers we talk 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'll turn it over to Carol.

Good morning, again. Joining me on the call today with Sherry are Jeff Naylor and Ernie Herrman. So let's begin by saying it is great report such strong results in such a difficult economy. We delivered EPS growth of 27% in the second quarter. I want to point out that this is on top of three consecutive years of very strong performance. Further, our first-half EPS has grown at a compound annual rate of 20% over the past four years which speaks to our ability to drive sustained profit growth.

Our strategies for 2009 are clearly working. Despite the environment we are seeing comp sales not that only remain positive but accelerate, which is very unusual for us during a recession. In addition, our customer traffic counts have reached extraordinary heights. Value is winning in this environment and we believe that it's here to stay. We think that the economic recovery is likely to be slow, that customers will remain under pressure to reduce household debt, and that a value-oriented customer mindset will prevail for a long time.

With our value proposition consisting of a combination of fashion, brand, quality and price we are in an excellent position to retain new customers that we are attracting today for the future. Further, we are employing the flexibility of our business model to take advantage of the opportunities that this environment is presenting.

Big picture, we believe that we are extremely well-positioned for today and for the future. I believe we have tremendous growth opportunities ahead of us which I will talk about later in the call. Before that I'll turn the call over to Jeff to recap our second-quarter and first-half financial results. Then I will review the highlights of our second-quarter performance, our vision for growth and our outlook for the full year. Now here's Jeff to recap the numbers.

Thanks, Carol. Good morning, everybody. So to recap second-quarter results -- our net sales were $4.7 billion, up 4% over last year. Consolidated comp store sales were up 4%, that was well above our plan and it was on top of three years of very, very strong comparisons.

As we noted in the release today, the diluted earnings per share was $0.61, that's up 27% over the $0.48 we earned last year. This growth was achieved despite a net $0.03 per share negative impact from foreign currency translation and from marking our inventory-related currency hedges to market. The mark to market adjustment was two pennies unfavorable to what we had anticipated when we set our guidance in early July.

In terms of the quality of earnings growth, pretax income was up 23% despite higher interest expense and despite $18 million of foreign exchange impact. The tax rate was essentially flat to last year so that did not contribute to year-over-year growth. Our share count was down 3%, a very small piece of our overall 27% EPS growth and in line with our strategy to buy back shares. There were no other significant items impacting comparability. So all in all we had a very high-quality earnings growth in the quarter.

In terms of consolidated pretax profit made margin, that was 8.7%, up 130 basis points over last year. Comparisons to prior year were adversely impacted 10 basis points by the mark to market adjustment and another 10 basis points by higher interest expense. The gross profit margin was up by a very strong 130 basis points over LY driven primarily by merchandise margins. SG&A expense was 10 basis points lower than last year as a percentage of sales.

As to inventories at the end of the second quarter, consolidated inventories on a per store basis including the warehouses were down 4%. At Marmaxx our total inventory commitments, including the warehouses, stores and merchandise on order, was also down versus last year on a per store basis. We ended the second quarter with very clean inventories and are very happy with their inventory liquidity as we head for the back half.

Now to briefly recap results for the first half. EPS for the six months were $1.09, so $1.09, up 18% over last year's $0.92 on a reported basis. Last year's EPS benefited $0.02 per share from FIN 48 tax adjustments. Excluding this benefit EPS was up 21% over the adjusted $0.90 per share.

As outlined in today's press release, foreign-exchange rates adversely impacted EPS for the first half of this year by $0.07 compared to a $0.01 adverse impact in the first half of last year. So the EPS increase would have been significantly higher were it not for these impacts. Cost sales increased 3% in the first half over a 3% increase last year. Now let me turn the call back to Carol and I will return later to recap our guidance at the end of the call.

Thanks, Jeff. The important points that I'd like to make on this call are as follows -- first, the strength and consistency of our results should be noted, both in terms of year-over-year and division-to-division performance as well as across economic cycles.

Second, we have great opportunities in the back half of this year given our strong trends and easier comps comparison.

Third, our growth vehicles, both domestically and abroad, are doing extremely well and hold tremendous potential for our company.

Fourth, our customer traffic count reached extraordinary high levels in the second quarter and the rate of increase accelerated from the first quarter. We continue to attract new customers with our value proposition and are building our customer base for the future.

And lastly, I say it all the time, we must continue to be totally focused on execution. So let me highlight some of the second-quarter results. Beginning in the US, Marmaxx's second profit margin of 11.4% was the best second-quarter performance ever in Marmaxx's industry. Segment profit was up 20% driven by a 4% comp, very strong merchandise margins and effective expense control.

HomeGoods delivered a 9% comp with double-digit increases in customer traffic. This division's profit margins improved dramatically to 5.9%, its best second-quarter performance ever and we believe its profit margin will hit all-time highs for the full year. I believe that HomeGoods still has tremendous untapped opportunities for the future.

At A.J.'s they had another profitable quarter with the strength of 5% comps on top of 6% increases in the past two years. A.J. Wright's store contribution model is now at a level we have been targeting which gives us the confidence to continue to roll out new stores.

In Canada while Winners and HomeSense segment profit was lower than last year, it was entirely due to the negative impact of currency. Profit was well above our plan as the business did a great job of mitigating the currency impact through better buying and excellent expense control. Our Canadian divisions remain our highest ROIC business.

TJX Europe continues to significantly outperform our expectations. After investing in our new European businesses segment profit grew approximately 80% and segment profitability improved by a very strong 230 basis points over last year. And T.K. Maxx put up 6 comps on top of comps that have ranged from 5% to 10% over the last three preceding years. With strong comp sales growth as well as leveraging its cost base across a broader European business, we now believe that T.K. Max in the UK will exceed our previously stated segment profit target of 8% this year.

Now I want to move to our vision for growth which is rooted in how we conduct ourselves as a company. On our year-end call we reiterated our vision and strategies to grow TJX as a global off-price value retailer; we told you that we were planting the seeds for the future.

We're encouraged by early reads and would grow when and where we're convinced it would produce solid returns to our shareholders. All of that still holds true today, except that we have seen even better results than we had expected and are taking advantage of the opportunity that this environment is presenting, which together gives us more confidence than ever that we can double the size of this company over the long term.

Our growth vehicles are all performing well domestically and abroad. In the US we now feel that A.J. Wright has a solid foundation. As I mentioned, its store contribution margins have gotten to where we needed to see them to give us the confidence to grow this business. In addition, the new market of Atlanta is outperforming our expectation. While we will not grow too quickly we could step out a bit next year. As we pointed out before, we have a very strong management team in place for the future.

Also in the US our test of our mega shoe shop by Marshalls although still early are performing very well and we believe may hold a good deal of growth potential in the future.

And Europe our T.K. Maxx stores in Germany continue to deliver powerful performance exceeding our plans and we are on track to open our first stores in Poland this fall. Putting all of this together with the results we are seeing and the real estate deals we are getting is very exciting. While we're definitely seizing the day, I went to say it again, we will only grow when and where we see terms that justify growth.

Now let's talk about how we are capitalizing on the opportunities in this environment. First we continue to attract new customers and are building our customer base for the future. Customer traffic continues to be up significantly and our average basket remains down which means that even a slight increase in consumer spending in our basket would be very meaningful to our business.

This would probably be a good place to say that we are thrilled with the results of our dual branding strategy of T.J. Maxx and Marshalls and are very pleased with the new campaign at HomeGoods. Additionally, we're very focused on making a shopping experience for our new customers a great one and have staffed our stores appropriately.

In addition to building our customer base we are taking advantage of this environment to build our vendor base. I can assure you that we are highly confident in the future of our supply chain. In terms of sourcing we have significantly expanded the breadth of our vendor base. Any one vendor is even less meaningful to us today than a few years ago. We continue to build our buying group and now have more coverage of the worldwide marketplace than ever before with over 600 people in our merchant organization.

Now to the real estate environment, which is presenting opportunities in the near term as well as for our long-term growth. Some very attractive locations are opening up to us for the first time. We now expect to net approximately 90 new stores this year, up slightly from what we said on the last call due to some opportunistic deals.

Keep in mind that while we are capitalizing upon opportunities we are still opening fewer stores than last year, so we are being very careful. And next year we anticipate opening up more stores than this year with our growth opportunity and the advantages of the global real estate environment.

I went to reiterate that the strategies for growth that we shared with you a year ago are all working today. What has changed this year is that our results are better than we expected and the environment us offering an excellent opportunities. We are more committed than ever to our vision for growth.

I can assure you that we will remain prudent, methodical in our approach. It's part of who we are. However, the advantages we have in the current environment bring even greater clarity to our vision to grow TJX well beyond the $20 billion company we are today.

Now let me move to our financial strengths. Returning excess cash to shareholders remains a priority that we are balancing with preserving our financial flexibility in this economy. Our strong operations generate substantial amounts of cash which allows us to reinvest in our businesses and be conservative with CapEx while we are simultaneously returning value to our shareholders through our share buyback and dividend programs.

In terms of share repurchase as we bought back approximately 194 million of the TJX stock during the second quarter retiring 6.4 million shares. It continues to be our plan to buy back a total of approximately $625 million at TJX stock in 2009. This consists of $250 million we originally planned and the additional approximately $375 million to buy back the shares that converted in the first quarter. However, we may adjust this up or down depending on the economic conditions.

Let me now move to our outlook for the full year. We are now planning EPS to be in the range of $2.26 to $2.38 compared with a $2.08 per share last year on a reported basis. Last year's results included a $0.09 per share benefit from the 53rd week as well as certain other items impacting comparability which are detailed in a table in today's press release. Excluding these items our full year EPS outlook of $2.26 to $2.38 represents an 18% to 24% increase over last year's adjusted $1.92. I should also point out that this guidance includes an estimate of $0.03 per share negative impact from foreign currency for the full year.

Our outlook assumes a comparable store sales increase of 2% to 4% in both the third and the fourth quarter. Although we are up against easier compares in the back half, we believe it makes sense to continue to plan our business conservatively. Its strategies allowed us to generate significant leverage on incremental sales in the first half so it's working and we will continue with this approach to the business.

However, I'm pleased with our current momentum entering the back-to-school period. Jeff will provide more details in a moment. So in closing, let me say that we believe we have more opportunities in front of us than ever before. We are seizing the day to take full advantage of the terrific opportunities this environment presents.

Our strategies to remain flexible and conservative are working and we are going to stick with them. We know that we must execute sharply and we will. Our approach is has always been and will continue to be that when things are going well we get more demanding of the entire organization not less. Complacency is not in our DNA.

While we significantly surpassed our expectations for the first half and reach many all-time highs, I want everyone to hear me say that we are far from maximizing our growth opportunity. To hear the discussion out there about whether our growth is sustainable. So I want to be crystal clear on this point, despite all that we have achieved we strongly believe that there is even greater growth ahead of us.

As we enter the back half we have great opportunities in our existing businesses and several new growth initiatives that we will be testing as we are constantly planting new seeds for future growth. Further, a very important piece of our growth story that I want to make sure is understood is the scope of our value proposition. We span the customer income demographic from the low end through the middle and to the high end. We believe that our customer appeal is broader than any other apparel or home retailer out there.

Just think about how much more growth we can achieve on a global level with this broad customer appeal. I have great confidence that we will emerge from the recession in a stronger position and grow beyond the $20 billion business we are today with a stable consistent and strong growth. Now I'll turn the call back to Jeff to go to further details on the second quarter and our guidance. And then we'll open it up for questions.

Thanks. Obviously we now believe we have enough visibility into the balance of the year to provide guidance for the full year. What we'll give you today is detailed guidance for the third quarter. We're also providing you with our outlook for comparable store sales growth and EPS for the fourth quarter and the full year. And -- but, and I want to emphasize this, we are not providing detailed guidance or models for these periods at this time.

So we will give you very detailed guidance for the third quarter, we'll give you ranges of comp and EPS for the fourth quarter and the full year, but no detailed models or guidance for the fourth quarter or the full year.

Now let me turn to the details on third-quarter guidance. For the third quarter we expect earnings per share to be in the range of $0.62 to $0.68 over the $0.58 per share we reported last year. There are several items impacting comparability here. Last year the mark to market adjustment for our inventory-related hedges benefited EPS by $0.05 per share while this year it's estimated to only have a $0.02 per share benefit which is essentially the reversal of the Q2 quarter end mark to market adjustment that we booked in Q2.

Additionally, we expect Q3 this year to be unfavorably impacted by $0.01 per share due to the impact of foreign exchange translation. And finally, last year's Q3 earnings per-share benefited from an adjustment to our computer intrusion reserve of about $0.01. So when you adjust for these factors the third-quarter guidance represents a 17% to 29% increase over prior year. We're assuming a third-quarter top line of $5.0 billion to $5.1 billion with comp sales planned up 2% to 4% on both a consolidated basis and at the Marmaxx group.

As to monthly comps both on a consolidated basis and at the Marmaxx Group, we expect comp sales in the range of 2% to 4% in August, 1% to 3% in September and 2% to 4% in October. Pretax profit margins are planned in the 8.7% to 9.4% range which on a reported basis are down 10 to a 60 basis points over the prior year. However, these year-over-year comparisons are significantly impacted by mark to market adjustments which negatively impact our year-over-year pretax margin comparisons by 40 basis points.

Last year also benefited by 10 basis points from the favorable intrusion reserve adjustment that I mentioned earlier. So adjusting for these items the pretax margin would actually be up 40 to 110 basis points. I should also note that higher interest expense year over year, in part due to pre-funding year-end debt maturities adversely impacts pretax margin comparisons by approximately 10 to 20 basis points.

Staying with the third quarter, we're anticipating a gross profit margin in Q3 to be 25.9% to 26.4% compared with 25.7% last year. Again, gross profit margin comparisons are adversely impacted by 40 basis points due to the mark to market adjustments I just described. So the underlying year-over-year increase is greater than the guidance would indicate. We expect SG&A in the third quarter as a percentage of sales to be about 16.7% to 16.9% compared to 17.0% last year.

For modeling purposes we're assuming and anticipating a tax rate of 38.1%, net interest expense in the $12 million to $14 million range, and a weighted average share count of approximately 430 million.

For the full year we expect earnings per share to be in the range of $2.26 to $2.38 compared with $2.08 per share last year on a reported basis. Excluding certain items impacting the comparability of results year over year, which Carol described earlier and which are outlined in today's press release, this guidance represents an 18% to 24% increase over last year's adjusted $1.92.

The full-year guidance implies fourth-quarter EPS in the range of $0.55 to $0.61 compared with $0.58 last year. Like third quarter there are several factors impacting the comparability of results, the major one being the additional week last year. These are also detailed in today's press release.

We'll now open it up for questions. We ask that you please limit your questions to one per person and I'd just say with our last call running long not everyone had time to ask a question. So we are going to enforce our one question limit on this call and would appreciate your corporation. Thank you and we'll now open it up for questions. Milan?

(Operator Instructions). Kimberly Greenberger.

Great, thank you, good morning and congratulations on a great quarter. Jeff, I was hoping you could help us understand the magnitude of the items impacting your gross margin in the second quarter, the 130 basis points improvement between for example merchandise margin, occupancy, etc., thanks?

Yes, in terms of the gross margin, Kimberly, that was primarily driven by merchandise margin. We had a little bit of buying and occupancy leverage, but primarily merchandise margin related.

Thanks.

The one other point I'd make out is mark to market adjustment had a 10 basis points adverse impact on the gross profit margin. So that 130 basis point improvement would have been 140 basis points were it not for that mark to market hit.

Brian Tunick.

Thanks. Congrats as well. I guess our question is on the Marmaxx segment margins, it looked like you got a lot more leverage in Q1 on a one comp than you did I guess in the second quarter on a four comp. So we're just trying to understand what's the difference between the two quarters from a leverage perspective and how should we think about the leverage point going into the back half?

Brian, first of all, we are leveraging SG&A very well. There are probably 20 to 30 basis points predominantly due to our incentive program which does go very deep in the organization. As you know, we have thousands of exempt associates, including our store managers.

So with this very strong performance, it is significantly higher than planned. We have a bit in the 401(k) and probably for the back-half a slight uptick in marketing. Jeff, do you want to add to that?

Yes. I think just when you look at the difference on Marmaxx, it is really being driven by SG&A which, as Carol mentioned, is impacting the entire quarter. So if you look at SG&A, Brian, you see we reported 10 basis points of leverage today. If you actually calculate it, by the way, it is closer to 20 basis points. There is some rounding going on. The underlying leverage is actually significantly higher than that 20 basis points.

As Carol mentioned, we've got an incentive plan, incentive programs that are tied to financial performance that go very deep into our organization. We have store managers and thousands of exempt associates participating. And these associates are going to receive payoffs that are well above plan.

The strength of performance with EPS up 21% year-to-date in a very difficult economy with the majority of retailers struggling, this is leading to higher expenses, higher incentive expenses associated with these broad-based incentive plans.

So, as Carol mentioned, the expense is meaningful. It is worth about 20 to 30 basis points in terms of a G&A hit in the second quarter. It's impacting the majority of our operating divisions because they are all performing terrifically. And we are going to see this impact carry over into the back-half as well.

That said, if you look at Q3, we are calling for SG&A leverage of 10 to 30 basis points despite this impact, which really tells you we're getting the cost savings that we planned. Probably a bit more than you asked for there, Brian, but it naturally led into a conversation about SG&A.

Yes, always appreciate it.

Jeff Black.

Thanks a lot and nice quarter as well. Carol, you mentioned you broadened the vendor base. Now just to get at what's really a [main] knock on the story I guess, do we see at this point in time some of the bigger brands less availability and that's why you're broadening out things? And is that a break from historical practice when we were coming out of recessions and we might have saw the supply chain tighten up? Could you just add some color around that for us? Thanks.

Yes. I would say to you the answer to that in terms of the big brands is absolutely not. We put a strategy in place many years ago when we looked at the whole extension of being a global company and purposefully put a lot of dollars into sourcing and expanding to be very, very unique. I think today we probably have the most exciting stores that I've ever seen and the breadth of assortment, which is what we strive for, a little of everything versus being narrow and deep in any one place makes for probably one of the most exciting mixes.

And I think that's what's driving the customer back into our store and I think that's what's driving our traffic. So that will continue. So there's no change in our philosophy, we're just broadening, which I think is very exciting.

Great, good luck. Thanks.

Todd Slater.

Thanks very much and congrats. I'm always shocked by the market reaction to probably some of the strongest fundamentals in retail. But anyway.

Yes, we can't comment on [the air].

But I'm interested in your guidance. I mean, you come up against much easier back half comps, I know you've talked a little bit about this and I'm wondering why your guidance is using the midpoint of your comp guidance -- assumes a pretty decent deceleration in the two-year average comp.

So you did a 4% comp in the third quarter on 3% last year, it's like a 3.5% two year average, and if you look at your third and fourth quarter, even at the fourth quarter you're calling for if you take the midpoint of that two to four you're calling for a deceleration to like 0.4% on a two-year basis. I'm just wondering what are the things that are contributing to that type of conservative guidance?

Yes. I think the way we looked at it is we really took the first half and basically said fairly equal on this second half, yes, planning conservatively. And I think part of it is we obviously -- with the volatility of the economic environment, we never know. Having said that my intention is obviously to beat it. And we are conservative in our plans and I think wisely so at this point.

I mean I think it's benefited us a year to date (multiple speakers).

Right.

(multiple speakers) called that out in your comments, it's really benefited us the year to date in that we've set our inventory and our cost plans around comps that are reasonable but conservative. And that's the way we're going to continue to plan the business.

And we certainly will leverage our business a lot better by planning it that way.

And do you expect in the fourth quarter the consumer to be, or the trends to get any worse than they were in the first half, or do you expect them to be the same or a little better?

I really can't answer that. I can only tell you that we'll go after a bigger piece of the pie.

Fair enough. Best of luck.

John Morris.

Thanks. Good morning, everyone, congratulations as well. Carol, can you talk a little bit about the success and the learnings of your advertising strategy, what's been different there both in terms of spend or shifting dollars into national TV? What kind of results are you getting and what are your plans there going forward strategically?

Okay, well I won't to give you all our secrets, that's for sure. I can tell you that I think it's out there that we've done this dual advertising in terms of Marmaxx, which we think we're just at the beginning of this venture and we're pretty excited about what we're seeing. It's really allowed us to hit probably between 30% and 40% of the market that never have seen us really on TV let alone on a consistent basis.

So our plans are to be fairly aggressive in the fact half and to continue this and we have a few new goodies and surprises for the future. And we're testing some other possibilities that will be very intriguing corporately going forward. So that's really all the comments I can make. I can tell you our spend will be less but our penetration will be greater.

Is this strategy a little bit different in the sense that you had been advertising more on the basis of price and now it's more brands? Can you comment on that? More of a brand strategy?

We have both. We really have a layer cake. Because when you incorporate TV, direct mail and every other vehicle that we have we still layer in value as a big chunk of it and branding as the other piece.

Thanks. Good luck for the back half.

Paul Lejuez.

Thanks. If we forget about anything that happened last year for a second, I'm just wondering why fourth-quarter wouldn't be a larger EPS quarter than 3Q. Just trying to understand the guidance a little bit. And then you layer on to that easier sales comparisons and more help from FX, I'm just trying to figure out how you come up with that fourth-quarter guidance. Maybe part of that is if you could share your currency assumptions, Jeff.

Well, yes, I think when we forecast currency, Paul, we forecast it at the current rate. And right now we would anticipate about $0.02 pickup and we have that baked into the numbers. If you back out currency, if you back out mark to market, the 53rd week, some of the one-time items that we've had and that we detailed in the press release you'd see the midpoint of EPS range is up 10%. I think if you look at it without the translation benefit, because frankly there's no guarantee what currency rates are going to do, it would be up 14%. That's on a two to four comp.

And I think the biggest factor impacting fourth quarter is given that we're trying to project out a decent amount of time in an economy that's relatively uncertain, we took the tact here of being relatively prudent in the way that we set the guidance. So to build on the question Todd asked earlier, year to date we have a three comp on top of a three last year. Our guidance for the fourth quarter is to do for on top of A-2. So clearly there is a deceleration baked in there; if that doesn't happen then there's upside. But we just felt it made sense to plan our cost structure and our inventory prudently around that level of comp growth.

In terms of the pretax margin if you do the reverse matter we're about flat to up to 70 basis points. The mark to market and the 53rd week impacts in the fourth quarter basically cancel each other out. On a two to four flat to 70 basis points. We have that bonus impact that we talked about earlier which dampened those year-over-year pretax margin increases. So, but I think we are clearly being prudent given the length of time between now and the fourth quarter and I think what remains a reasonable amount of economic uncertainty.

So, Paul, I'd say that having said that I certainly hope we beat those numbers.

Me too.

Jeffrey Stein.

You guys have clearly seen a nice turn in your home business and I'm wondering, Carol, if you could possibly talk a little bit about some of the categories where you're seeing the most upside? And in turn, some of the categories where you're still seeing weakness and also if you can just talk about -- you did allude to the fact that your basket was solid, was it up in the second quarter?

Okay. First of all, in terms of the basket, our basket is slightly down. Our traffic is way up, very, very strong and our average ticket is down in the single digits. So that's -- what's really driving it is truly the traffic.

In terms of the home businesses, Jeff, it is really strong across the board. What I'm very happy about and gives me a tremendous positive feeling going forward is that not only are the fashion pieces working but the basic pieces are working. So when our sheets and towel business and our soft home and our basics are strong that's a tremendous sign.

So I think our values are extraordinary, I think the execution is just absolutely terrific and we are testing a lot of new ideas and new categories. So I just think it's going to get more exciting. So I think we're in a great place in terms of all of our home businesses across the board.

Thank you.

Adrianne Shapira.

Good morning, thank you. Hi, Carol, congratulations. Just following up on the traffic, it sounds like clearly that has been a phenomenal success. Maybe give us a sense of the sequential improvement you're seeing and then if you can give us any sort of breakdown, new customers, existing customers coming more frequently, where two you think the traffic lift is coming from? Thanks.

All right, in terms of the lift I think it's coming from both and we don't have the specific numbers yet. But our early information definitely tells us it's coming from both. Q1, and again, we won't quote specific numbers, but I can tell you that there has definitely been an acceleration that seems to be continuing, and it is across the board.

So the traffic improvement across all channels?

Yes.

Great, thank you. Best of luck.

Patrick McKeever.

Good morning, everyone. Just wanted to see if you might give us an update on some of the in-store merchandising initiatives and where you stand with the roll out of let's say the runway at Maxx or the cube at Marshalls, those kinds of things and if those had any material impact in the quarter and what the outlook is going forward? Thanks.

Okay, Ernie, do you want to talk to the runway and cube?

Yes, Patrick, and I think this came up at a call earlier -- on the runway we've added another few stores because our results there continue to be strong, we like what we see. I think it does speak a little bit to the whole conversation of getting new customers in the door; a different customer speaks to what Carol said earlier about a broader range of customers. So again, we're pretty content with the runway and have added a few stores recently actually in this quarter here that we're just finishing.

The junior Cube initiative continues to expand. We are at a little over 400 stores at this point and, again, the results we are very happy with. So, and what we're trying to do there is obviously capitalize on a different customer that we haven't in the past, a younger customer, again going back to the comment about trading broader. Demographics wise here I think we're trading to not only a different demographic but a different age group. So that I think is planting a strong seed to the future and those are two good initiatives actually to talk about because I think it does speak to the future.

What's interesting, Patrick, is that typically your mean age sort of starts to age and ours isn't. We've actually gone slightly down a few years which means that when we talk about the increase in traffic it absolutely means that we're capturing both a younger customer and keeping our customers. So that's a pretty exciting statistic.

So does that shape some of the broad comments that you made earlier about pleased with back-to-school, early back-to-school, that kind of thing? Is it just being better positioned from a merchandising standpoint with juniors and some other categories?

Yes, absolutely.

Okay, thanks very much.

Daniel Hofkin.

Good morning, everyone. Just a quick question about A.J. Wright, the profit margin trend obviously up considerably year-to-year, but relative to the first quarter down a little bit. Was that primarily markdowns earlier in the quarter or was there some -- what should we be expecting going to forward there? Thank you.

Yes, Patrick, we definitely did do a clean out in A.J.'s. We got hit with the cooler weather, we took some -- we made a decision to take some early markdowns and clean out all summer very early. So we did take a bigger hit in July than we had in plan. Having said that, we entered August strong, in great shape, and I feel very, very good about it going forward. This is a very short moment in time.

Okay, thank you.

Richard Jaffe.

Thanks very much, guys. Just a quick question about your thoughts regarding the debt coming due and what the ideal balance sheet will look like and, presumably with more capital, your intention to perhaps accelerate share repurchases?

Jeff?

Do you want me to go ahead and take this?

Go ahead.

Sure, okay. Clearly we have $1.4 billion on our balance sheet, we also have almost $150 million in cash that we can't classify as such because it's invested in marketable securities that are a little bit over 90 days. So we're sitting here with about $1.5 billion. Our intent right now is to retire the debt, so of that $1.5 billion, $400 million of it is for debt retirement.

We've actually paid down the Canadian debt which is approximately $200 million. The rate of interest that we were paying on that was very comparable to the rate of interest we were earning on the money, so it just made sense to pay it down. And then we have the bonds to repay in December. So that $1.5 billion, really $400 million of that is earmarked for debt repayment. So that would leave us with $1.1 billion.

Clearly, Richard, it's not our goal to run with that level of cash. If you look historically we've typically run $400 million or $500 million of cash on our balance sheet. However, I would say in this environment we're going to want to maintain some excess liquidity, it's probably not a bad thing, and continue to be conservative.

And so our plans are currently to execute the buyback plan as we've laid it out, the $625 million, although there is a chance that at certain stock prices that we might go in a little heavier on the buyback and we reserve the right to do that and we clearly have the financial flexibility to do that.

But ultimately that cash will be distributed to shareholders, that's been our practice, our long-standing practice now for as far back as I can go. So we're going to continue that practice. But I think for the short term don't be surprised to see us run a little bit heavier levels of cash given the environment.

And then the opportunity to leverage up further?

We're pretty happy with the level of debt we have now. Essentially this year all of our transactions have replaced existing debt, so we really have an impact to our leverage ratio. I think over time as EBITDA grows you have the ability to take on more leverage and we'll consider that. But as of right now there are no plans to do so.

Thank you.

Dana Telsey.

Good morning, everyone, and congratulations. Can you review a little bit the operating margins in the second quarter by division and what your outlook is for the third quarter by division? And Carol, you mention a lot of times new category opportunities. When do you think we'd hear about some things like that? Thank you.

We'll go through the model (multiple speakers) think I'm not going to answer your second question.

That one question was a big question. You want me to go ahead and take it, Carol? Okay yes, fine. So, in the case of Marmaxx, Marmaxx's profit margin was up 130 basis points on a four comp in the second quarter. Now we have it up 100 to up 140 basis points on a two to four comp in the third quarter. In the case of -- I'll do the American -- the US divisions and then do international.

In the case of HomeGoods, in the first -- or in the second quarter -- excuse me -- we saw a 230 basis point -- excuse me -- 530 basis point improvement on a nine comp. Our guidance for the third quarter is a 220 to 330 basis point increase on a four to six comp. So again those line up. With A.J. Wright we saw a 130 basis point improvement on a five comp. As we look at the third quarter we actually on a three to five comp would project it up 160 to 250. So it's higher than we saw in the second quarter primarily because of the markdown issue that Carol mentioned that dampened the overall profit growth at A.J. Wright slightly.

In terms of our international businesses, unfortunately you get a lot of noise in here because of mark to market. In the case of a Winners, Winners was down 150 basis points in the second quarter, but only down 30 if you back out the impact of the mark to market which was it's very important they did a fabulous job at mitigating the impact of foreign currency on their cost of goods and a great job of managing expenses. So for them to be only down 30 basis points in the second quarter excluding the mark to market is a big deal.

We look for a similar level of decline in the third quarter, we right now have been down 20 to down 40, again excluding mark to market. And in the case of the T.K. Maxx, T.K. Maxx profit margin for -- or TJX Europe, they were up 230 basis points in the second quarter, there was really no impact from mark to market on them. And that was on a six comp and then in the third quarter we have them up 20 to up 120, again excluding mark to market on a 3% to 5% comp. So that's how it breaks out by business.

Thank you.

Stacey Pak.

Hi, guys, congrats again. So I guess the question just on the whole cost reduction effort. Are you still thinking 150 is the right number for '09? Can you -- you talk a little bit about what inning you're in, what cost reductions we might be able to see for 2010 and the potential improvement to gross margin in SG&A from those efforts, a multi-tier level, and maybe in that throw in your thoughts on operating margin goals by division now, especially given some of the changes we saw this quarter.

Stacy, was that one question? All right, just I'll throw it over to Jeff in a minute. In terms of the cost reduction we had a goal of $150 million, we're definitely going to reach that goal. We're looking obviously at next year and what that number can look at like, we are working on that today and we will update you obviously on that call in the beginning of the year and give you a full picture of that. And then on terms of multiyear and, Jeff, do you want to just --?

Well I think yes, the one other thing I'd call out on the $150 million is at the beginning of the year we said SG&A would be essentially flat on a constant currency basis and actually down in an actual dollar basis. And we're on track for that. I think what you have to call it is that our significantly above plan performance, it results in additional SG&A dollars for the first with sales significantly over planned there are variable costs like store payroll, the credit card interchange costs, etc. which path to increase the support sales.

Also we're planning to open 24 more stores than our original plan, so we've added 25 stores to the plan. And Carol talked earlier about some of the performance-related incentive costs that are higher due to our strong performance. So when we actually normalize -- and we have a little bit of additional marketing that we're spending behind the strength in the business in the backup of the year.

So if you normalize for that, we're seeing $150 million and we're seeing flat SG&A year over year, it's just that we since we put the plan together we've actually added G&A, so that is important to call out. The other called out on this year as we look at second and third quarter -- and I'm not commenting on the fourth quarter at this point -- but second and third quarter excluding the impact from the incentive comp we're seeing very, very significant SG&A leverage and that's being driven by this.

As with look forward I don't think we're prepared to put a model for next year at this point. And as I think as we look at our potential margins, the operating margin goals for each business, they're essentially in line with where we've been. We think HomeGoods is clearly a lot closer than they were. They had a peak margin two years ago, lost a lot last year, they've gained it all back and then some this year. TK we think can exceed their profit margin. Carol talked about that in the script, but beyond that Marmaxx is clearly pushing the high end. But I think beyond that we haven't revised any of those goals and really wouldn't comment on that until we get into putting a plan on the street for next year.

Just on the cost side, do you think that -- I mean, what inning are you in? If you don't want to comment I understand if you don't want to give numbers for '10 that's fine. But can you just give us a sense of what inning you're in and what sort of opportunities you may be looking at for 2010, anything qualitative?

As far as I'm concerned every single year we're going to go after cost reductions. I don't think we're in -- we're going to finish this year certainly reaching our goal and hopefully surpassing it. And then we're going to set the next goal for next year. So that to me is an ongoing process.

Okay, thanks.

David Mann.

Yes, thank you. Just to piggyback on the last couple of questions. Jeff, can you give the EBIT, segment EBIT goals for this year that are embedded within your full-year assumption?

No, really not -- I'd be happy to do that for third quarter, but I think as it relates to fourth and full quarter we, as we said earlier, we weren't going to put detailed models on the street at this point.

Okay. Then if I can ask a different question. You've talked a lot about inventory availability not being a problem. Can you just comment a little bit on whether you're seeing better pricing now? And in terms of contributing to merchandise margin and whether you believe that's sustainable?

I would say we're seeing both, David. But again, I'm going to go back to how we set up our sourcing and supply chain. Every single year we have increased our buying of off price. And we will continue that goal. So we just -- we see this continuing, the availability be it best brands or any country, I don't see that changing.

Great, thank you. Great job.

David Glick.

Good morning. Just a follow up on HomeGoods. How much of your improvement, which was pretty spectacular for the quarter, was due to operational improvements and inventory management that you've been talking about for a long time, and how much was just better traffic and merchandising?

It's really all three. Our inventory levels are significantly down, which allows us to really flow in a lot of fresh, fantastic merchandise. And I think our execution is really where it should be this year. And I do think we skipped a few beats last year. And I think we are at a place today where the guys understand it, they know that going forward they know what they need to do and I think that some of it is up.

Great, thanks a lot for the color. Good luck in the second half.

(multiple speakers) very happy with the performance.

Thank you.

Marni Shapiro.

Hey, guys, congratulations. Great quarter. I have two tiny questions. You talked briefly about your basket being down and average ticket being down. I was curious if you could give us color if that was mix of product versus markdowns? And did HomeGoods -- I'm sorry, A.J. have an impact on that for the overall? And were there any segments that you saw rebound nicely and improve nicely in the second quarter that you're able to now flex up going into the back half?

Okay, in terms of our basket being down we said mid-single digits. A.J. really has no effect on that, Marni. It's really across the board. The qualitative piece is the qualitative piece. I mean, I just think we continue to give great values to the consumer and that's what our goal is. In terms of seeing a segment going forward, again, we have big initiatives for the back half, I really don't want to talk to those. And I think you will see them when you go into our stores in the back half. I would suggest you shop in our stores.

Not a problem. Talk to you guys soon, good luck.

Laura Champine.

Good morning. Just trying to reconcile your comment that HomeGoods is likely to have its best margin in its industry. Can you talk about what makes that business stand out from other home-related retailers other than the obvious because that's a great result. And then also, I think that implies a real reversal in margin trends at Marmaxx in Q4, is that right? And if so what should keep Marmaxx from having much better margins and Q4 on a year on year basis?

Okay, I'll take HomeGoods questions and the margin question, we just already did talk a bit about Marmaxx and exactly what is creating that. So if you want to reiterate that you can. In terms of HomeGoods, again I'm just going to come back to it's about execution and I think these guys are executing. And I think the model is a terrific model, it works and it works when you execute well and that's what they're doing.

So I think, again, I'll reiterate that I think they understand, I think we made some missteps a year ago and I think we're back on track and we're ready to accelerate.

Yes, I think the only color I'd give you around the fourth quarter is -- I'm not going to comment on Marmaxx specifically. But again, if you look at our Q4 overall pretax margin, we're saying flat to up 70 basis points, we're clearly running stronger than that year to date and have stronger guidance in the third quarter. And it really just comes down to a level of caution about the fourth quarter just given how far we are out from holiday and the level of disability we have.

So I would tell you, as we said earlier, that the assumptions we're making in our Q4 guidance lean towards the conservative side. But again, we think that's prudent in terms of how we position ourselves from a cost and an inventory perspective.

Thanks. Maybe I'm missing the share count. Can you comment on year-end share count?

We're just going to execute the buyback program that we have, we've got about $400 million to go, we're going to spend throughout the back half. I think you can make an assumption on share price and get to the share count.

Thank you.

Michelle Clark.

Good morning and congratulations. You had mentioned additional store openings next year relative to what we're going to see this year. Could you just detail on where the biggest growth is coming from and maybe domestically geographic penetration of where we should expect to see this store openings? Thank you.

Michelle, you really are going to see it across the board. And we are taking an opportunistic approach and the reason why we ended up with 26 more stores than the original plan this year was because of the opportunity. So just like everything else, we have cash, we have tremendous flexibility. So we will take advantage of every terrific real estate opportunity for next year and that's the way we're looking at it. So it's really not by any particular region, it's really by return on invested capital.

Okay, great. Good luck.

Randy Konik.

Great, thank you. Just regarding the merchandise margin, can you just give us a little bit of color of the IMU versus the mark down? And on IMU I guess you made a comment that you have plentiful inventory to buy out there. Has the costing side of it changed at all over the last few quarters on a sequential basis?

I think it's pretty much split, right, half and half?

Yes, it's pretty balanced between merchandise margin, merchandise margin growth rebounds between markup and markdown. And we're also getting some benefit from freight and fuel, freight is a result of some -- part of our cost reduction program, we are seeing some of that flow through. But it's primarily going to be markdowns and mark on it pretty balanced between the two, Randy.

Well, do you foresee any big changes in the IMU trend now that you are broadening out the inventory bias?

I think we've been seeing it year over year. And I think we'll, again, our sourcing just in terms of the total coverage this gives us an opportunity. So I think going forward again I don't know what basis points it is, but we're going to continue with our strategy and our sourcing and we continue to add to the merchandising group as we think it's very advantageous.

So lastly you just think the IMU should continue to move higher as we move into lapping these comparisons in the next 12 months, is that fair?

I hope so.

All right, thank you.

I want to thank everyone and we certainly look forward to our next call. Thank you.

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