TJX Companies Inc (TJX) 2012 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to The TJX Companies second quarter 2011 financial results conference call. At this time, all participants are in a listen only mode. Later we will conduct a question and answer session. (Operator Instructions) As a reminder this conference call is being recorded Tuesday, August 16, 2011.

I would like to turn the conference call over to Ms. Carol Meyrowitz, Chief Executive Officer of the TJX Companies, Inc. Please go ahead, ma'am.

Thank you. Before we begin, Sherry has some opening statements.

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 30, 2011.

Further, these comments and the Q&A that follows are copyrighted today by The TJX Companies. Any recordings, retransmission, reproduction or other use of the same, for profit or otherwise, without prior consent of TJX is prohibited and in 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 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.

Reconciliations of the non-GAAP measures we discuss today to GAAP measures are included in today's press release and posted on our website, www.TJX.com, in the investor information section. In addition, that section of our website also includes reconciliations of guidance with respect to non-GAAP measures to guidance on a GAAP basis.

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

Good morning. Joining me and Sherry on the call are Ernie Herrman and Jeff Naylor.

Let me begin by saying that I'm very pleased with our second quarter results, as our 23% adjusted EPS growth significantly exceeded our original guidance. This also marks the sixth consecutive year of second quarter EPS increases of 20% or greater. Our 4% overall comp sales increase was also ahead of plan, representing the sixth consecutive year that comp stores sales have grown 3% or higher in the second quarter. It is very important to note that we continue to achieve these strong results year after year, in both good economic times and weak ones, which speaks to the consistency of our business model and our ability to sustain top and bottom line growth through all types of cycles. Customer traffic continued to be up over significant increases last year, which tells us that our value continues to be as important as ever to consumers.

Before I begin, let me turn the call over to Jeff to recap the second quarter results.

Thanks, Carol. Good morning, everyone. I'm just going to run through the numbers here. Net sales reached $5.5 billion for the quarter. That's an 8% increase over last year. And second quarter consolidated comp store sales were up 4%.

Diluted earnings per share were $0.90. That compares with last year's reported $0.74 per share. However, last year's results included a benefit of $0.01 per share from an item impacting comparability. So if we exclude that benefit, diluted EPS in the second quarter was up 23% over last year's adjusted $0.73. This year's results include a $0.03 benefit from foreign currency exchange rates, primarily due to mark-to-market adjustments on our inventory-related hedges. So excluding this impact, the underlying growth would be slightly lower than the numbers imply, but still very strong. As a reminder, our guidance contemplated this impact.

Consolidated pretax profit margin for the quarter was 10.2%. That's above our original guidance and up 60 basis points on an adjusted basis over the prior year. The increase was driven by improved gross profit margin, partially offset by very slight deleverage in SG&A expense, which had been expected. Currency contributed 10 basis points of the increase.

The gross profit margin improved 70 basis points versus last year, primarily due to buying and occupancy expense leverage, as well as the positive impact of mark-to-market adjustments on our inventory-related hedges. Merchandise margins were flat for the Company against large increases the past 3 years. But merchandise margins were actually up approximately 10 to 20 basis points in our North American business.

SG&A expense was up 10 basis points over prior year, which was better than we had guided on our first quarter call, with the increase entirely due to higher advertising expense. Now, you may recall that we expected SG&A to deleverage in the first half of the year, primarily due to the timing of certain expense items as we absorbed certain costs from AJWright into our other businesses, as well as deleverage from Europe. At the time we said that these factors would moderate as we moved through the year, which is exactly what we saw in the second quarter. We continue to expect SG&A rates to be up very slightly for the year on a 2% to 3% planned comp.

As to inventories, at the end of the second quarter consolidated inventories on a per store basis, including the warehouses, increased 16%, up 15% on a constant currency basis. And that's versus a 13% decrease last year. As we've discussed on prior calls, and really been talking about all spring, this increase is primarily due to our having selectively taken advantage of much larger quantities of end-of-season branded, pack-away product, compared with very low quantities in the prior year. And this pack-away product doesn't start flowing to the stores until the third quarter.

It's important to note that the overall increase is purely a timing issue, as our forward purchase commitments for the back half are significantly lower than at this time last year. Additionally the increase in inventory is all in our distribution centers. Our store inventories remain down versus prior year and are turning more quickly. Therefore we feel like we're in an excellent position to capitalize on the opportunities we're currently seeing and believe we will continue to see in the marketplace.

In terms of shareholder distributions, we retired 5.9 million shares, buying back $311 million worth of TJX stock during the quarter. Year-to-date we've retired 13.1 million shares, buying back $673 million of stock. We continue to anticipate buying back approximately $1.2 billion worth of TJX stock this year.

Now let me turn the call back to Carol. I'll provide details about our third quarter guidance and recap our guidance for the full year at the end of the call.

Thanks, Jeff. So moving to the key points. There are two major themes that I want to highlight. First, our strong second quarter and our ability to post EPS gains of 20%-plus for 6 consecutive years reflects the consistency of TJX. And second, we have many exciting opportunities for the back half of 2011 and beyond. Beginning with consistency, our strong top and bottom line results in the second quarter are yet another example of how the flexibility of the TJX business model succeeds, regardless of the strength of the economy.

To recap our divisional results, in the US, we are very pleased with Marmaxx and HomeGoods continued excellent performance. Once again this quarter, both of these divisions had strong comps and bottom line performance on top of very challenging comparisons last year. And Marmaxx comp sales increased 5% over a 3% increase last year, and on top of a 4% increase the year before that. Segment profit margin was 13.1%, up 50 basis points over last year's very strong performance. Marmaxx continues to excel through great execution, continuing to show gains in customer traffic. We have great confidence in the ability of our largest division to continue to grow successfully. Importantly, we will continue to evaluate the potential number of Marmaxx stores given the strong performance of our new stores and our ability to trade across a wider income demographic.

At HomeGoods, comps increased 3% over last year's very strong 8% increase, and on top of a 9% increase 2 years ago. Segment profit increased 7%, with segment profit margins down slightly due to the increased advertising investment, as well as certain costs associated with the AJWright store conversion. At HomeGoods our success is also a testament to this division's sharp execution. If you've been in a HomeGoods lately, you know that the store looks terrific, with fresh and exciting assortments from around the globe.

TJX Canada's second quarter results were disappointing. Comps decreased 3% versus a 6% increase last year. Profits delevered on the negative comp, although much less than we would have expected due to the strong inventory management and expense control. We believe that we could have better execution, particularly in women's and the children's business, both of which performed poorly.

Importantly, our team in Canada is extremely focused on these issues, which we believe will be fixed in the back half. Further, our store inventories and forward commitments are well below last year's levels. While still early, we are very pleased with Marshalls in Canada. Customer response has been overwhelmingly good and the impact on nearby Winners stores has been much less than we had expected. We're especially pleased with how Marshalls' dominant footwear assortment is differentiating the Marshalls brand from Winners.

Moving to TJX Europe, we have done a significant amount of work in this business, and are where we expected to be in terms of our progress exiting the first half. For the quarter, comps were flat, which was in line with our expectations. And segment profit was $7 million, at the high end of our expectation, including a moderate currency benefit. Some merchandise categories are performing well and we continue to work on improving others. We feel good about our inventory turns and liquidity, which positions us very well to pursue the plentiful buying opportunities in the European marketplace. We're also pleased with both the quality and quantity of the merchandise and the brands that we're seeing there. As we exit the first half, our comparisons in Europe become much easier and we continue to expect greater improvement in the second half, which is when TJX Europe typically earns the majority of its profits.

We are also confident that we understand our missteps in Europe over the last year and have the plans in place to get this business back on track. By slowing store growth in Europe this year, we're giving our team time to refocus on the core off-price fundamentals that helped build TJX Europe into a successful business. Importantly, the team is more seasoned and is now a year smarter. And we are focused on buying more country-specific goods.

Fundamentally, we continue to have a very strong business model in Europe. Europeans love quality. They love fashion, and they certainly love value. The vendor marketplace is very receptive and full of opportunities. We're the only major off-price retailer in Europe. And long term the retail landscape there holds vast opportunities for our business.

I'm sure you're all curious as to how the recent unrest in the UK has impacted our business. We did have a few days of business interruption, but I'm relieved to say that we're back on track and operating normally since this past weekend.

Now, to our opportunities for the back half of the year. First let me say that while our comparisons become easier, we continue to plan conservatively, especially in the current environment, as Jeff will detail in a moment. At the same time, we are always motivated to surpass our goal. Here are some of the many opportunities that do get us excited.

First, I feel very good about our inventories entering the back half. While inventories are up again, it's a timing issue due to high-quality branded pack-aways we've been carrying all spring. Our forward commitments for the fall selling season are significantly lower than at this time last year. This puts us in a great position to chase buying opportunities in a marketplace that is quite plentiful right now. I believe that our best brand penetration gets even stronger every year, and we will be offering both brands and fashion at tremendous value.

Second, I have never been more excited about our back half marketing. I love our marketing plans and ideas and am confident that these efforts will continue to drive customer traffic. While we are increasing our advertising spend slightly this year, we are gaining much higher penetration. We're deploying what we would have been AJWright ad dollars to other divisions, and also doing a much better job of leveraging our spending across the Company. I believe our marketing campaigns are stronger than ever and you will be seeing a lot of us in the back half including on television in Europe.

Third, our investments to upgrade the shopping experience continue to pay dividends. We're seeing sales lifts in our newly-remodeled stores comparable to when we began the program. We're on track to complete about 370 store remodels across the Company this year. In terms of Marmaxx, by year-end, we expect we will have upgraded two-thirds of its stores since we began the program 3 years ago. We believe that the enhanced marketing, combined with our improved shopping environment and [its spend] experience, will help us increase our customer base and our market penetration. We still have tremendous opportunities in front of us. While we improve each year, our data tells us that there are still 75% of US shoppers who have not visited a TJ Maxx or a Marshalls in the past 12 months.

Fourth, in terms of the macro environment, we see the economic volatility and confusion around cost and sourcing as a positive for our business. Historically, uncertainty in the marketplace has benefited us as it creates very favorable off price buying opportunities. Value continues to be more important than ever and the key for us is maintaining our pricing distance from traditional retailers. We have enormous flexibility in terms of merchandise categories, zigging and zagging in many ways. We're very good at shifting categories and I believe that we can respond faster to pricing and fashion trends than just about any other retailer. So regardless of whether other retailers raise their prices or absorb rising costs, our flexibility should allow us to buy into current trends, take advantage of the opportunity, and drive merchandise margin.

We are planning our average ticket to be slightly up in the back half, which should only enhance the value we are offering compared to other retailers, whom we believe have generally planned price increases. As always, we will remain focused on maintaining our value gap with traditional retailers.

It's interesting to note that our average basket has been trending up, primarily due to the number of items customers are buying per basket. If this continues, it bodes well for the fall selling season and beyond. Tremendous value is our mission and we believe that we are in a great position to keep bringing consumers through our doors and keep them coming back.

Finally, we have many category initiatives underway across the Company for the back half. As usual, we'll be extremely gift focused for the holidays, and believe our customers will be very happy and more wowed than ever this year.

Before closing, I want to cover a couple of other key points. First, while still very early, the economics of our converted AJWright stores are essentially in line with our expectations and we remain confident in the short and long-term economic benefits to our business. Additionally, the cost to close and consolidate this division was much less than we had originally estimated.

The important thing to remember here is that consolidating AJWright has given us the opportunity to grow the Marmaxx base more than we had believed we could in the past. We are learning more about the customer demographics and really are just getting started to scratch the surface in terms of what Marmaxx can do in a more moderate demographic market.

Second, our continued cost reduction initiatives are another reason for our confidence in our margin sustainability, short and long term. We remain on track with our plans to reduce costs by approximately $50 million to $75 million in 2011, which should help protect our profit margin and offset other cost increases.

Third, we continue to make significant investment to support the growth of our businesses. We remain focused on hiring and developing the best talent, which is key to growing our business, investing in infrastructure, both the supply chain and systems, and building an e-commerce team for the future.

So summing up, we're confident about our opportunities for the second half of 2011 and beyond. Our strong top and bottom line growth in the second quarter achieved on top of years of profitable growth clearly demonstrates the consistency of this business through both recessions and recoveries. We have excellent opportunities through the back half of the year, when our comparisons become easier and our marketing really kicks in.

At TJX Europe we are where we thought we would be at this point, and are beginning to see progress. And we are looking for greater improvement in the second half. We see the volatility in the macro environment and confusion around sourcing and pricing as playing to our strengths. And we will use our flexibility to take full advantage of the opportunities in the marketplace.

Our customer traffic increases clearly tell us that value remains the top priority in consumers' minds. And further, this business delivered superior financial returns. Our strong operations generate enormous amounts of cash. And after reinvesting in our business, our management team is focused on returning excess cash to shareholders.

And finally, the thing I love most about our business, is the flexibility of our model. At the end of the day, if we're on our execution game, I have every confidence that we will continue to grow and succeed.

So now I'll turn it back to Jeff, who will go through guidance before we open it up for Q&A.

Thanks. I'd like to cover 2 items before I get to guidance. First, I'd like to speak to the impact of currency on our Canadian and European divisions' second quarter results, which are available in tables we posted on our website, but that we wanted to call out on this call, given the pretty significant movement in currency rates during the quarter.

For TJX Canada, we reported $92 million US in segment profit compared with $82 million in the prior year and a 40 basis point improvement in segment profit margin. Now, if you exclude the benefit of currency, segment profit actually declined slightly, by about $3 million, and segment profit margin was down 70 basis points. That said, this is a very strong performance on a 3% comp store sales decline, and much better than we would have expected, and reflects very strong inventory and expense management.

For TJX Europe, we reported $7 million US in segment profit for the quarter compared with $2 million last year, and a segment profit margin improvement of 70 basis points. Now, if we exclude the benefit of currency, segment profit declined very slightly, by about $3 million to $5 million. So Europe was still profitable excluding the currency impacts. And segment profit margin declined 70 basis points on the flat comp. That said, we are encouraged that Europe posted a profit for the quarter given our efforts to improve the performance at this division. And, again, I would note that that was on a flat comp to the quarter.

The second item I wanted to cover before getting into guidance is to briefly recap the AJWright consolidation, which is now essentially complete. Through the end of the quarter, all 90 stores had been converted, 74 to Marmaxx and 16 to HomeGoods. It's important to note that these conversions began in mid March and ended in early June. So while it's still very early to assess their performance, thus far it's going as we expected.

In terms of the costs to close the AJ Wright division and convert the 90 stores, we came in significantly below our original estimates. First, to close the AJWright business, we had originally estimated the after-tax cost would be $150 million to $170 million, or $0.38 to $0.43 per share, of which $40 million to $50 million was cash. The actual after-tax cost came in at $117 million, or $0.29 per share, with an after-tax cash cost of approximately $20 million, well below our original estimates.

Second, the cost of converting the 90 stores to Marmaxx and HomeGoods banners, which represents costs incurred during the go-dark period, as well as the cost to grand reopen the stores, reduced EPS by $0.03 in the first quarter. And that was at the low end of our original $0.03 to $0.04 estimates.

Finally, in terms of the benefits, we remain confident that the converted stores will, on a run rate basis, generate $25 million to $35 million of after-tax profit, which is in line with our original estimates. Approximately $15 million to $20 million, or $0.04 to $0.05 per share, of this is incremental to what we were earning with AJWright. So the economics of this action are very positive. We continue to expect that approximately $0.02 to $0.03 per share of this benefit will be realized in the current year and this is reflected in the guidance.

It's also important to reiterate that it's still early. Generally, the economics we're seeing from the conversions are in line with our expectations. But, frankly, we need more time to properly read the impact. And of course, the larger benefit is going to come from the incremental profit of opening stores previously earmarked for the AJWright division as Marmaxx stores as we go forward. So that's a quick recap on AJWright.

Now on to guidance. As you can see from today's release, we have provided fiscal 2012 guidance on both a GAAP basis and an adjusted basis, which excludes the impact of the AJWright consolidation, as well as the impact of a non-operating item in fiscal 2011. Details of our adjusted guidance, along with the related reconciliations to GAAP financial information, can be found in a table in the investor section of our website. And I encourage you to refer to these at your leisure. And I'll speak to the adjusted numbers in my remarks today.

So, for the full year, we are raising our outlook for adjusted earnings per share to $3.89 to $3.97, which represents an 11% to 14% increase over the adjusted $3.49 in fiscal 2011. This guidance is now based on a 2% to 3% comp store sales increase and adjusted pre-tax margins in the 10.6% to 10.7% range, which is flat to up 10 basis points over the adjusted fiscal 2011 pre-tax margin of 10.6%.

The $0.04 increase at the high end of the guidance range is entirely due to the second quarter exceeding our original expectations. And we've left the back half guidance unchanged. As a reminder, for the back half, we continue to expect EPS of $2.22 to $2.30, up 13% to 17% over the adjusted $1.97 in the prior year. I should note that this guidance is based on comp store sales growth in the 1% to 2% range and pre-tax profit margins up 20 to 40 basis points over last year's adjusted 11.0%. So that's the full year and the back half.

For the third quarter, we expect earnings per share to be in the range of $1.03 to $1.07, a 12% to 16% increase over our diluted earnings per share of $0.92 last year. We are assuming third quarter sales of approximately $5.8 billion to $5.9 billion, with a comp sales increase of 2% to 3% on both a consolidated basis and at the Marmaxx Group.

As to monthly comps, for the month of August, which as a reminder was the strongest month of the third quarter last year, we're planning comps to increase 1% to 2% on a consolidated basis and approximately 2% to 3% at the Marmaxx Group. In each of September and October we expect comps to increase 2% to 3% on both a consolidated basis and at Marmaxx.

The pretax profit margin is planned in the range of 11.1% to 11.3%, which is up 30 to 50 basis points versus 10.8% last year. We are planning our third quarter gross profit margin in the range of 27.8% to 28.0%, up 30 to 50 basis points over prior year. We expect SG&A as a percentage of sales to be in the range of 16.5% to 16.6%, flat to up 10 basis points over last year. For modeling purposes we're planning a tax rate of 38.1%, up 50 basis points over last year, net interest expense in the $10 million range, and weighted average shares of approximately 385 million.

Our full year guidance implies fourth quarter EPS in the range of $1.19 to $1.23 compared with adjusted EPS of $1.05 last year. Once again, this excludes the AJWright segment from last year's results, which is again detailed on our website. This fourth quarter high level guidance we're providing today assumes a 1% to 2% comp sales increase in the quarter. We will provide detailed fourth quarter guidance on our third quarter conference call.

Finally, our guidance for the remainder of the year assumes that currency exchange rates will remain unchanged from current levels.

So we'll now open the call up for questions. We ask you please limit your questions to 1 per person. And to keep the call on schedule, we do appreciate your cooperation with that 1 question limit, which we hope you'll honor. So thanks, and, Alana, we'll turn it back to you for questions.

(Operator Instructions) Evren Kopelman.

I had an industry level question. What do you think is driving the larger quantities of the branded and the seasoned products out there? And is it more concentrated in certain categories and brands or is it more broad-based? Thanks.

First of all, I don't think today is that much different than any other day. There's plenty of goods out there and there always is. So we don't see a big difference. We're targeting the categories that we believe are really going to drive the business. There's always a plentiful marketplace and we are keeping our guys home and we do see a lot of opportunity. But I think it's going to be a strong back half but we're always seeing that. It's not a big change from the past.

Brian Tunick.

Congrats. Just a question on the gross margin. Just wanted to make sure we had it right. So did you say that merchandise margins were flat and the rest was occupancy leverage? And then just trying to understand, as you think about gross margins going forward, which divisions have the best opportunity to improve inventory turns and where you think that could go from here.

Brian, for the second quarter our gross margins were flat. In the America businesses, they were slightly up. In terms of going forward, in terms of opportunities for gross margin (multiple speakers).

Yes, I think it depends. So I think Brian's question was probably talking beyond this. I think if you look at the balance of this year, we would see merchandise margins again up slightly, with most of the opportunity coming from Europe, who had a 370 basis point decline in their gross profit margin -- in the merchandise margin last year, Brian. So I think there's a big opportunity to make up ground there. And all the other businesses we planned essentially flat in the back half.

And I think as we look out beyond that, we think there's continued opportunities for margin improvement. It, I think, comes from investing in supply chain and systems that allow us to turn our inventories faster, get the right inventory to the right stores. But I would tell you we have not put any gross margin improvement in our long range model as we look at the 3-year model that we share at investor conferences and talk about in our one-on-one marketing meetings. There's really no gross margin further improvement baked in there. That said, we think there is opportunity to turn our inventories faster and to drive some further improvement. It's going to take some improvement in supply chain [and some] investments.

Just one more, on the gross margin again. One of your competitors talks about pack-away inventory having higher gross margin, but obviously having distribution costs associated with it. How does your pack-away flow through the P&L?

We have a significantly lower level. I think what you're referring to is that the competitor you're referring to, when they have inventory increases, there's costs that get capitalized into inventory. And as inventories get reduced those costs flow through. For us, pack-away is such a lower percentage of our business that it doesn't really register on our P&L.

Brian, we're always under 10%, so it really doesn't have a major effect on our business either way.

All right. Terrific. Good luck for the back half. Thanks.

Adrianne Shapira.

Congratulations. Carol, just help us think about, if things do slow, it does seem as if TJX is better positioned to capitalize on it this time versus last time, given your ramped up marketing initiatives. And also the fact that 2/3 of the store base has been remodeled over the past 3 years. Just help us think about, how do you think that manifests itself in terms of share gains or profitability?

Adrianne, I think we're planning our business appropriately, conservatively. We're looking at 2, 3 and 4 year comps. Having said that, I sort of alluded to I'm pretty excited about our marketing plans. And as our stores continue to get remodeled, I think the customer experience is better and better. But it just keeps coming back to how we execute. And as we just keep raising the bar on the level and the fashion and the value of our product, that's how we're going to build our business. And that's what we believe in. So you know our long term goal is to get to be a $40 billion company and I think that's the way we do it. It's details, vigilance, and constantly upgrading our mix and getting better.

Okay. So then just the follow on is that the fact that the back half comp guidance of 1% to 2%, unchanged, despite the fact that the ramped up marketing, even the pack-aways starting to be unleashed in the third quarter. How should we think about that guidance in the context of some pretty exciting stuff hitting in the back half?

Again, it really comes back to being prudent in terms of the way we plan our business, and, too, just looking at the 3 and 4-year comp history. And again, coming back to just planning our business and hopefully beating it and that's our goal.

Adrianne, we looked at the comp stacks. And I think if you look on a 2-year basis you would say it's a very, very conservative plan. If you look on a 3- and a 4-year basis, you would say that the numbers we have in for the back half really line up with those trends. So it really depends. Does the business behave on more of a 2-year basis or does it behave more on a 3- to 4-year basis? We're going to find out.

But we think the prudent way to look it is to look at that 3-year comp stack and plan it that way. And if you do the numbers you'll see that Q3 and Q4 really line up with the Q1 and Q2 trends. I've said, if you look on a 2-year basis, you'd say there's opportunity. I guess we'll find out. We're well-positioned for it. We're very, very flexible. You heard Carol say that the level of forward inventory commitment this year is less than it was last year. So we've got a lot of open to buy and flexibility to chase, which is exciting.

It's always smart to plan and chase. Plan conservatively and chase.

We're fans of the two years. Best of luck.

Kimberly Greenberger.

Very nice quarter. My question is on new store productivity, which looks like it surged here in the second quarter. And we're just trying to parse through it and understand what the contribution was from those new AJWright stores coming in. It looks like relative to the old AJWright store volumes, even a modest Marmaxx plan would put those store volumes up 10% or 20% relative to the legacy volumes. Is that correct?

It's 74 stores, Kimberly. I could start with that.

Yes, it's a relatively small piece, obviously, of the overall estate. And for that reason, there's been a lot of interest that the investing public has had in the store economics for the stores, looking at average sales and contribution margins, et cetera.

I guess all I can say is we're pleased with what we're seeing. We don't really want to break out the economics for these stores separately, given that it's a relatively small piece of the overall estate. But we think there's clearly an opportunity there. That's why we took the Marmaxx store potential up to 2,300 to 2,400. We have seen productivity in all of our new stores, not just the AJWright stores. It's interesting that over the last several years, our stores have consistently beat the pro forma models that we have and been at or slightly under the level of cannibalization that we've projected. So we've had a very successful new store program. I think that's what you're seeing. But again, we open a lot of new stores. I don't want to get into just isolating this small segment.

Kimberly, I think the key is we keep learning and we keep increasing the Marmaxx count. So today we're very comfortably at 2,300 to 2,400 stores, which again, is very different from a year ago. And hopefully, we'll look [at this] a year from now and we'll see more opportunity. But we're pretty excited about the Marmaxx chain.

That makes great sense, Carol. My clarification was just, I think I heard you correctly, you said in the second quarter with the 4% comp, traffic was up and the average value of a transaction was up as well, driven by higher units per transaction?

Yes, correct.

Okay, so ticket's been running flattish and you're planning for a slight uptick in the second half?

Slightly. When I say slightly, I mean slightly.

Ticket was up slightly in the quarter, Kimberly, but the units per transaction were a bigger driver of the basket.

Fantastic.

We really, really want to read value.

Okay, great. Thanks, Carol.

Jeffrey Black.

Congrats. Good quarter. Carol, can you talk about Home? On a 2-year basis, it looks like HomeGoods came off a little bit to end the quarter. What's going on there in terms of traffic, and anything to note there in terms of ticket and/or promotional activity that would have accounted for the margin? I think you discussed some AJWright noise in that margin. Thanks.

HomeGoods business is very, very strong. Their traffic is up and their inventories are very, very lean. And if you look at the profitability, it's basically 100% [with] the combination of AJ's and a slight uptick in advertising. So we feel very, very good about HomeGoods in the back half. We're planning it, I think, appropriately. If you look at, again, a 3 and a 4, even a 2-year comp comparison, we're up against very, very aggressive numbers. But I'm loving the mix and I feel very, very good about their business in the back half. So the miss in terms of getting the margin to LY and better was strictly those 2 issues. Very solid business.

Jeff, I just want to be clear here, though, on the facts. So HomeGoods in the first quarter, it was a 6% on a 15% on a minus 1%, if you look over 3. So that's a 20% 3-year. And in the second quarter, it was 3% on a 9%, which is the same -- it's the identical trend if you're looking on a 3-year basis.

And then as we look at the back half, we're guiding to a 2% to 3% on top of a 2% on top of a 15%, which is that same 20% 3-year stack. So the way we look at it, we think that the trend is entirely consistent in the back half with what we saw in the second quarter, which is entirely consistent with what we saw in the first quarter.

And we are planning segment profit flat to slightly up for HomeGoods in the back half.

Great. Very helpful. Thanks.

Rick Patel.

Congrats on a nice quarter. Just a question on TJX Europe. You made some nice sequential improvement in that business. Can you just touch upon the geographical performance there? And with the recent market volatility over there, I'm just curious which markets are outperforming and how we should be thinking about the under-performing ones in the back half.

We don't really talk to the different markets in the UK. I can tell you that we had a couple of days with the rioting and we're back on track but we don't really break out by region.

All right. Great. Thank you.

Jennifer Davis.

Congratulations on another great quarter. One clarification and one question, if I may. First, on the $50 million to $75 million in cost reductions, how much have you realized so far or how much are you planning on realizing in the back half?

And then I was wondering, Carol, if you could talk a little bit about Canada, what you're seeing there. You said that Marshals -- I forget your wording, but basically it's doing well. So could you talk about maybe what you're seeing at Marshals versus Winners and maybe some of the trends in Canada? Thanks.

Okay. In terms of our cost reduction, we're very much on track for the total year. We're actually looking at what are our initiatives for next year and trying to put that together because we still think there's opportunity. And we're going to keep doing this every single year. So we're very much on track for the year.

And in terms of Canada, I'm going to have Ernie talk to that. We were both up there recently and we are pretty excited about Marshals in a couple areas you may want to talk about.

Jennifer, I think Marshals, we try to -- again this is something we just started a little while ago, so we don't want to be too specific. We're bullish on the initial results. It looks good, so we're feeling good. I guess the way to sum it up is, for an initial launch business, the way we opened it with a few stores, then another couple, we're happy with the way it's going.

In terms of Winners overall, how does that compare? I think Carol mentioned a little bit earlier we've had a couple of execution issues, really centered around the ladies and kids businesses. And I think over the last few months we're really happy with some of the content shifts we've seen there. I would tell you that I think we're a little shy in some of the fashion items that we could have been into a little bit better way in those areas.

But we're really feeling better about it. Carol was just up there recently. We've been seeing some categories turning again better than they were in the past. So we're feeling better about where we're heading with the Winners business, but we want to give it a little time.

Are those two separate teams for the Marshals in Canada and Winners?

It's actually a bit of a -- I guess you would call it a hybrid. So the teams are, in some ways, the same teams. And sometimes we have some focusing being done on one or the other. Primarily, they're the same team, but we do, as with every business, have specific differentiation categories that we go after. So a little bit earlier, I think we discussed our shoe business as pretty strong in Marshals. So again, we have some focus on shoes in Marshals. That's a little bit different than shoes in Winners. Albeit most of the team is the same team.

Somewhat similar to the way we do Marshals and Maxx.

All right, great. Thanks and best of luck.

Dave Weiner.

Just a question, Jeff, on Europe. I think last quarter, you gave some indication on what your internal plan was on comps for the back half of the year. I was wondering if you could update that. And also, just related to that, if you'd talk about the Internet in Europe. It looks like you've been running that, I don't know exactly for how long, but if you could talk about if you're seeing any contribution yet from that to the overall business?

Yes, I think as you look at the assumptions for Europe for the back half, it's largely unchanged. We're still planning a 2% to 4% comp on top of a minus 4%, so that hasn't changed. In terms of the profit margin, the reported profit margin would be 6.9% to 7.4% in the back half. But that would include a currency impact. And if you backed out the currency impact, it would be up 7.4% to 7.9%. So there's about 50 basis point impact there from currency. So adjusted for currency, 7.4% to 7.9%.

So it's really largely unchanged. I think the thing we would say is, as you think about the conservatism or aggressiveness of it, we've got a 2% to 4% on top of a minus 4%. So on a 2-year stack basis, that's flat to down 2%. That same 2-year stack for June and July ran down 3% and for Q2 it ran down 4%. So there's slight improvement that's baked into the comp expectations. And on the bottom line, we had a 370 basis point gross margin hit in Europe last year, and we're assuming we get back a little bit less than half of it this year. So I think we're being appropriately prudent.

And I think, as it relates to the Internet, that's not a big contribution and it's not a big hit. We're really in the mode there of testing, of learning, experimenting, and learning what we can. So it's not a big operation at this point, but it's also not having a negative impact on profits.

Are you running that and managing that internally or have you outsourced that?

Yes, we're running it internally. And actually it's helping us learn to launch in the US in the future. So we're getting a lot of information from it, but we're keeping it small and tight.

We're running it internally. The one piece that is outsourced is the platform. We haven't developed our own technology platform. We're using a third party for that.

And how long has it been out? Sorry, last question. How long has the Internet been up on TK Maxx?

It's really not fully up. It's really in a --

Yes, again, we've had it open about 1.5 years now.

Right. Okay, great. Thanks a lot.

It's very isolated, and an isolated category.

It's not the full bore of what we have in the stores. It's a handful of categories.

Stacy Pak.

So I'll try not to kill you with my questions, as I normally do (multiple speakers). So I guess the sort of big question is, what are you seeing in pricing to you, from vendors? Does it seem more or less favorable? What are you seeing in pricing to your customers? Are you taking any pricing, whether it's through mix or otherwise? And I did hear the discussion with Kimberly. And what are you seeing in the industry?

And then I guess on the TK, I wanted to just follow up and ask, I guess I thought I'd see a better margin this quarter, because I thought you cleared the inventory. And so I'm wondering -- just help me understand that a little bit better.

Okay, first of all, Europe was very much where we thought it would be. And we're going to continue to see progress, so we're not surprised. As a matter of fact, going from where we went from first quarter to second quarter on a flat comp, we're pretty comfortable. And I think we're on our way to seeing better turns and on our way to start comping in a positive zone, which will read extremely well. We're also planning the back half, yes, fast improvement against a year-ago certainly, but we're trying to take it half way and build. We still believe that it's going to continue to build and accelerate and be a very, very strong business for us. So we're just, again, planning it conservatively.

In terms of pricing, Stacy, we are -- again, we are in a mode of keeping our guys back. There are a lot of goods out there. There's tremendous value that we think we can bring to the customer. Whenever there's volatility, and it seems like every single year there's something else going on, I think everybody knows about the cotton prices, the numbers are crazy. They accelerated beyond belief. And now I think they're something like 50%-something less than they were when this all started to hike up. So it's going to be very, very interesting.

We love our value. And what we did, be it cotton, cashmere, we think we are at tremendous value to our customer and we're sticking to that. So we think we're going to have an exciting back half. But when things are all over the place, we love it.

And then just one last follow-up, and I promise that's it. The August number that you gave, the comp guidance, looks lighter than I would have thought for the 3 year even, if my math is correct. Is that conservativism or has there been a slowdown at all in August?

What we did was we strategically are keeping our inventory, our in-store inventory, very, very lean. Our clearance is way below last year. We're turning faster than last year. We're going to start to slow our pack-aways, not currently but very shortly. And we're in great position going forward. But we are keeping our inventories very lean starting this season and I think it's going to bode very well for us.

Okay. Thank you , guys.

Daniel Hofkin.

Congratulations on the quarter. Just to follow up on that, aside from inventory being lean, have you seen any change in the purchasing patterns of customers, aside from what you're doing internally? And then I guess a little more detail would be helpful on what has enabled you to continue to improve the merchandise margins in the US? Is it mix? Is it some of the inventory management initiatives you talked about earlier?

The merchandise margins, we are continuing to reduce our in-store inventory. At the end of the year, we will probably be flat in total inventory. Pack-aways will probably be equivalent to last year or slightly up. But we've talked about it a lot. We are investing in our supply chain, and a lot of our cost initiatives we're doing so that we can reinvest that money. We're very, very far from really shipping the right goods to the right store at the right time. We still do quite a bit manually. So this is going to be a year over year process. It's probably going to take us 2 to 3 years to get it to where we want it to be. But our intent is to reduce our in-store inventories each year slightly, quickening the turn. So it's a combination of that and obviously the buying environment, and that changes all the time. So all of that allows us to feel like we can sustain and hopefully increase our margin.

Dan, I think in terms of August, our guidance at this point in time would reflect, obviously, we [put] our guidance based on what we're seeing with our business. As Carol mentioned, we are managing inventories very conservatively in-store, and trying to turn them so we start the season leaner and put ourselves in a position to chase, in terms of having lower levels of forward commitment. So that's how we're thinking about in managing the business. The other call-out I'd give you is August is the most challenging comparison versus -- comparisons get easier as we move through September and October in the quarter.

Daniel, I'd just like to jump in on one thing. On the goods, some of these things become numbers discussions on the inventory levels. But I think the other thing that's been happening is the buyers have been doing an overall good job at getting the right goods at the right value. As Carol mentioned before, value has been key at top of mind. So obviously turn has to be a function of the customer voting, they like the goods that are out there. So even if the inventories are lean and they didn't like the goods, you wouldn't see the turns that we've been seeing. So I have to give our merchants actually a fair amount of credit on really executing to good mixes. So I thought I'd throw that in.

That's helpful. I guess just to paraphrase, it sounds like maybe there's a little bit of inherent conservatism built in, as well. Not just in terms of how you're managing the inventory but also what the off-take might be, maybe partly because of the prior year comparison in August but maybe also because of the environment. Is that fair to say?

I hope so.

Okay. Free cash flow expectation for the year at this point?

We expect we'll end the year with $1.5 billion in cash on the balance sheet. That's the number that we gave you at the beginning of the year and that's a number we still feel very comfortable with.

Great. Thanks a lot, guys.

Richard Jaffe.

Just, one, a bookkeeping question, just a follow-up. And also the second, maybe we could dig a little bit more on the e-commerce. So, first, on bookkeeping. Just profitability, operating margin and comps by division, your expectations. If you could detail the guidance a little bit more, that would be helpful.

You want the back half guidance?

Yes, please.

So the back half, I'll just take it by division. So Marmaxx, the back half is a 1% to 2% comp store increase. On that, we have segment profit margin that's essentially flat. HomeGoods, a 2% to 3% comp increase; segment profit margin, anywhere from down 10 to plus 20 basis points. So for both Marmaxx and HomeGoods, really the segment profit lines up with what we'd expect with the comp range. TJX Canada, we're 0% to 1% on the comp. The segment, the margin we would report is 70 to 80 basis points down. Excluding FX, it's down 160 to 170. Year-to-date, we are down 120, so there's a little bit more baked in but we're up against very strong comparisons in Canada so we're being a little bit conservative on those numbers.

TJX Europe, we have a 2% to 4% comp, and we have segment profit margin up 220 to 270. On a reported basis, if you strip out foreign exchange, it's up 270 to 320. And again, as a reminder, we had a 370 basis point reduction in our merchandise margins last year and we're assuming that we get a little bit less than half of that back, plus leverage on a 4 comp at the high end. So that's how the numbers kind of work there.

And for the total Company, we've got -- for the back half, I've already given you the EPS numbers. We've got -- on sales, we've got $12.3 billion to $12.5 billion. And we've got a pretax margin that's up 20 to 40 basis points, and that's primarily driven by the gross profit margin. G&A is planned flat to 10 basis points of leverage. The balance of that of 20 to 40 basis point improvement on the bottom line is gross profit.

In terms of e-commerce, we have no set date. We want to do it right. I've said that a few times. We want to make money. We are absolutely hiring top talent and getting them involved in our business. And that's part of our bench and part of our costs that we are setting aside. Our intention is to really maximize both the brick-and-mortar and the Internet business and e-commerce for the future. So we're feeling pretty good about it. And again, we're not ready to say when our date is, but we're building the team and our intent is to do it right.

And the other part of that, the Internet channel as a marketing or relationship building, obviously there's some of that going on. Is there opportunity to accelerate that or invest into it?

We are doing a lot of -- again in the back half, we're shifting a lot of dollars to social networking. I think we're being very smart on how we're handling our marketing dollars, and we're learning a lot about that. So the marriage, again, between the future of where we see the Internet and our business is going to be a combination of various things that we're doing to drive both parties. So we're pretty excited about it.

I look forward to it. Thanks very much.

Howard Tubin.

Great quarter. Just one clarification on inventory. The total -- the per-store number now that's up 16%, do you envision that coming down over the course of the rest of the year as you flow the pack-away into stores or will that stay up?

No, that will be coming down.

Yes, as we look at the end of the year, we think on a per-store basis, flat to slightly up. It really depends on the quantity of the pack-aways that we have at year-end, which is somewhat difficult to predict and really depends upon the environment we see as we close out the year.

Again, we don't think pack-away is more than 10%, but we'll see. It could be 5%, it could be 10%, that will be the difference in the year-end.

The volatility of the environment right now, we think, is a wild card.

To Jeff's point, as we get to the year-end, based on what happens with everything around us, those pack-away numbers are a little bit unpredictable. But if they do end up there, it's a good thing because it's buys that we felt were the right branded value.

That is great. Thanks.

Paul Lejuez.

Could you just tell us what the merchandise margin change was by division in the second quarter? And also just wanted to make sure I heard you properly earlier. Did you say that you expected in the back half merch margin to be flat at all divisions except TK you expected up?

We said as a Company, it's planned flat to up in the back half. Clearly we should get a big lift at Europe so that would say that essentially our other divisions in aggregate are planned essentially flat, Paul.

In terms of the second quarter, I think we've already broken it out pretty well. We've got merchandise margin for the quarter that was flat. And we said it's up roughly 10 basis points, in the 10 to 20 basis point range for our North American businesses. So I think that's all the guidance we really want to provide at this point in time.

Does that include the mark-to-market in Canada?

No, that's all excluding the mark-to-market. So if you look at the gross profit margin, we've got buying and occupancy leverage, you've got the mark-to-market. And then excluding the mark-to-market, the merchandise margins -- the pure merchandise margin was flat.

But specifically in the US, were we up in the US and down in Canada? Is that how we should look at it?

No, you were actually up in both places. You're up slightly in Canada which, again, speaks to the way they manage the inventory. They manage the inventories very lean up there (multiple speakers).

On a negative 3% comp.

On a negative 3% comp. Again, it just speaks to the flexibility of our model and how we can, as Carol said, zig and zag and respond to opportunities and stay flexible. Not unlike what happened in the fourth quarter of 2008, where you had Armageddon and our merchandise margins were flat.

Yes, great. Thanks and good luck.

That's the beauty of the model.

Laura Champine.

Most of my questions have been asked. Just a finer point, though, on the European pressure in the merch margin, which I know you expect to improve. Is that business structured in a different way because of number of vendors or types of vendors that would keep its merch margin below Marmaxx over the long term?

No, not really, Laura, no.

Thank you.

Jeff Stein.

Carol, interested in your comment regarding your pricing plan for the back half of the year. So, are you going into the fall with lower initial markups due to the fact that you're keeping your AUR up only slightly? Or are you just buying better, which is allowing you to maintain your initial mark on?

No, our mark on is pretty much -- pretty flat, pretty similar to where we planned it. And we see opportunity in markdowns. So we'll see how the back half goes. But you've got to remember that we're far from being bought up in the back half, so we've got a long way to go.

And your marketing spend for the back half of the year, is it planned to be up as a percent to total sales?

No. It's flat in terms of percent, slightly up in dollars, but much, much greater penetration. We have a completely different -- not a completely, but a different strategy from last year, so you're going to see us a lot more on TV and we're pretty excited about it.

Got it. Thank you.

Mark Montagna.

Just a question about Europe and Canada. Europe has struggled for about 1 year, Canada just for about 6 months. And you had indicated your confidence in Canada for the second half. What's the difference between the two in terms of why such confidence in such a short-term on Canada versus how long it took for Europe? Thanks.

Yes, I think a primary difference is, and we've talked about this before, in Europe we grew probably too fast. In Canada, we did not. So Canada is more of a short-term execution issue, where we, I'd say, took our eyes off the ball, really, in a couple areas. In Europe, again, some of the infrastructure, I'd call it, was strained with the quick growth. So it takes a little bit longer to come out of that type of situation. I'd say at a high level that's really the key difference between the two.

Yes, that's what we've been talking about as we've been meeting with investors; it really is a function of outgrowing the ability of the organization to support the growth, support the business. And whereas in Canada, that hasn't been the case. We've got a real experienced team up there and we're confident that it can come back more quickly.

And I think we talked about a little bit earlier, in Canada, again, we've already seen a little bit of life in two of the areas that were actually a bit of a struggle for us, fairly recently. So I think a quicker turn than we even experienced out of Europe, where some of the things did not happen as quickly. Although there now, again, we're seeing some improvements in categories that in Europe were slow prior. So we're feeling good also in Europe. And we're also looking at the availability of what's happening with key branded goods over there. And that's looking pretty good for us going forward. But very different issues that started the problem or the execution issues, and so different ways of coming out of it.

I want to thank everyone and we look forward to reporting our third quarter. Thanks again.

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