TJX Companies Inc (TJX) 2012 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the TJX Companies third 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 is being recorded Tuesday, November 15, 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, Elan, and good morning.

Before we begin, Sherry Lang has a few comments.

Good morning.

The forward-looking statements we make today about the Company's results and plans are subject to risks and uncertainties that could cause the actual results and the implementation of the Company's plans to vary materially.

These risks are discussed in the Company's SEC filings including, without limitation, the Form 10-K filed March 30, 2011.

Further, these comments and the Q&A that follows are copyrighted today by the TJX Companies.

Any recording, retransmission, reproduction or other use of the same for profit or otherwise without prior consent of TJX is prohibited and a violation of 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 in our international divisions in today's press release in the investor relations 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, again, 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 I'll turn it back to Carol.

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

Our 15% EPS growth in the third quarter was in line with our expectations and on top of a 14% increase last year and 40% growth the year before that.

Our strong results demonstrate once again our ability to sustain and grow profit margin.

We achieved these results despite unseasonably warm weather in September and October in many key regions of the US and Canada which hindered demand for Fall apparel.

As the weather turned cold, sales picked up nicely and we ended the quarter with a strong finish.

Importantly, although it's early, November is off to a strong start.

Jeff will go into more detail on this but I want to point out the combination of a higher tax rate and lesser benefit from FX than we anticipated in our most recent guidance had a $0.02 negative impact on our EPS compared to our guidance, so EPS would have been slightly above the high end of our expected range without these factors.

Customer traffic was essentially flat for the quarter despite the seasonality issues, but again, strengthened when the weather turned cooler.

Average ticket was slightly up which bodes well for the fourth quarter.

We're offering customers tremendous value and are convinced that the value will continue to be a top priority for the consumers in the holiday season.

Before I continue, I'll turn the call over to Jeff who will recap the third quarter results and then come back.

Okay, thanks, Carol.

Good morning, everybody.

So for the third quarter, net sales reached $5.8 billion, that's a 5% increase over last year and our Q3 consolidated comp store sales increased 3% and that was at the high end of our original guidance which was for comp store sales to increase in the 2% to 3% range.

Diluted earnings per share were $1.06 compared with last year's $0.92, and as Carol mentioned, that represents a 15% year-over-year increase.

As we discussed previously, our tax rate was unfavorable to our original guidance which had a $0.01 negative impact on our results.

Additionally, with the surge in the Canadian dollar in the last few days of the quarter, the benefit of the mark-to-market adjustment on our inventory-related hedges was $0.01 less than we contemplated in that guidance.

The higher tax rate is due to greater than expected levels of earnings at our domestic US businesses which have a higher marginal tax rate and lower than expected levels of earnings at our Canadian and European businesses which have lower tax rates.

So in essence it's a mix issue.

And while we expect to see a similar impact in the fourth quarter, which I'll cover when we get to guidance, we believe the tax rate becomes less of an issue going forward as the foreign businesses rebound.

Consolidated pre-tax profit margin for the quarter was 11.5% and that's up 70 basis points over prior year and above our original guidance.

The mark-to-market adjustment on the Company's inventory-related hedges contributed 20 basis points of this increase, and the remaining increase was primarily driven by improved gross profit margins.

The gross profit margin improved 60 basis points during the quarter versus last year which, again, was better than expected, primarily due to buying and occupancy leverage as well as the 20-basis-point positive impact on the mark-to-market adjustment that I just mentioned.

Merchandise margins were essentially flat against large increases cumulatively over the past three years.

SG&A expense was flat to prior year and in line with our expectations despite deleverage in our corporate expenses where we are funding investments in new systems, talent and eCommerce.

As to inventories, at the end of the third quarter, consolidated inventories on a per-store basis which include the warehouses increased 14% versus the 6% decrease last year.

So as we've been discussing on prior calls, this increase is primarily due to our having selectively taken advantage of continued large quantities of available branded pack-away product at great value.

And this includes goods we bought at the end of the Summer season.

It's important to note, similar to the end of Q2, the increase is all in our distribution centers.

Store inventories, so the actual inventories that are in our stores remain down versus prior year and are turning more quickly.

Additionally, our forward purchase commitments remain down significantly compared to this time last year.

So as a result we remain liquid.

We're in an excellent position to capitalize on the opportunities we're seeing in the marketplace.

Lastly, on inventories, as we look towards year-end we would expect total inventories on a per-store basis to be up in the low- to mid-single-digit percentage range versus prior year, although this will ultimately depend on the level of pack-away at that time.

Finally, in terms of shareholder distributions, we retired 5.5 million shares buying back $295 million worth of TJX stock during the quarter.

Year-to-date, we've retired 18.6 million shares buying back $968 million of our stock and 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, and I'll come back at the end of the call with details on the fourth quarter and full year guidance.

Thanks, Jeff.

I'll go through our four major divisions commenting on our third quarter results and we'll then review our growth catalyst to the future.

I'll wrap up by sharing with you our opportunity for the fourth quarter.

We are particularly pleased with the continued excellent performance of our US division.

Marmaxx posted a 4% comp sales increase, above our expectation.

Segment profit margin also exceeded our plans reaching 13.2%, which was 20 basis points over last year and on top of big gains in the two preceding years underscoring our ability to sustain and grow profit margin.

As we've already mentioned, these strong results were achieved despite unseasonably warm weather in many key regions hurting demand for cold weather apparel.

Customers continue to respond extremely well to our assortment and value and advertising is just now kicking in.

As to our growth opportunities at Marmaxx, we believe Marmaxx will be even bigger than we thought a year ago and have increased historic growth potentially to approximately 2,400 stores.

We have significantly widened the demographic reach of Marmaxx in all directions and are capitalizing on real estate vacancies in urban markets and filling in smaller markets where we operate very profitable stores.

Our new store performance is beating our plan and as we expand T.J.

Maxx and Marshalls our cannibalization levels are in line, all of which we're very encouraged by.

HomeGoods continues to deliver outstanding results over tough comparisons with comps up by a strong 5% in the third quarter and segment profit up 220 basis points to 11.5%.

HomeGoods is becoming a more powerful brand every day and we believe its notched up advertising in the fourth quarter will help us continue to gain market share.

As we've said before, we are really excited about our growth opportunities at HomeGoods.

We have raised HomeGoods long-term store potential from 600 stores to about 750 stores.

We're now also comfortable modeling this division at a 10%-plus segment profit margin when we used to see this business around 9% to 10%.

In addition, the fact that other US home retail chains operate more than twice the number of stores as HomeGoods does, it gives us even greater confidence.

Further, there are over 100 markets where we operate a T.J.

Maxx or a Marshalls store but don't yet have a HomeGoods store.

Moving to TJX Europe, comps were flat for the quarter but up 5% in October.

Thus far, we're seeing positive trends in November.

Segment profit was slightly up over last year.

I'm encouraged by what we're seeing in the UK, as this was the area in which we focused first and the region where we saw the greatest improvement in the third quarter.

It tells us that what we've been working on is taking hold.

Now we're beginning to see more progress in Germany which we focused on after the UK.

More importantly, customers are voting and they're telling us they like our mix again.

We like our stores, we like the way they look for the holiday selling season, and we remain confident that we'll continue to see even greater improvement as we move through the fourth quarter.

As we've discussed before, we have slowed growth for TJX Europe this year to stabilize the business, and that said, we remain as confident as ever in the enormous growth opportunities that we have in Europe.

We have a strong, proven business in Europe and with other retailers closing stores, we see great real estate and market share opportunity.

We see the long-term potential to expand to the 700 to 875 stores with just our current concept and just our current markets, without even having to think about the next country.

At TJX Canada, comp sales decreased 2% and segment profit decreased 6% excluding the impact of FX.

We're making some progress with the issues we have discussed before and are beginning to see improvement in certain categories.

We also like our gift giving focus for the fourth quarter and believe that the Canadian business is heading in the right direction.

We are continuing to keep our inventories lean as we've worked through fine tuning our mix.

We are excited about Marshalls promising start in Canada.

Our first six stores are outperforming their performers and we are seeing cannibalization in line or slightly above our expectations.

We're particularly pleased with how well our expanded footwear departments at Marshalls are performing.

We're thrilled to launch another growth vehicle in Canada where we're leveraging our existing infrastructure.

Long term, we believe that Marshalls in Canada has the potential to be 90 to 100 stores.

As to eCommerce, as we've said before, we clearly see online in our future.

We view eCommerce as a way to further strengthen our powerful brand and leverage our brick-and-mortar business offering the customer great assortments as well as convenience.

We have a team in place and we'll be investing to support online growth but we still have a lot of work to do.

We'll be methodical with this initiative as always and we'll take our time, test and retest.

As you've heard me say before, we want to do it right and we want to make money.

Importantly, as we pursue these catalysts for growth, our management team is concentrated on fewer bigger businesses.

For the next year, we expect to expand square footage by about 5% netting a total of 130 to 145 stores.

I'm confident that TJX has the potential to grow to about 4,500 stores with just our current concept in our current markets alone.

Now to our plentiful opportunities for the fourth quarter.

First, I believe that we will have the most exciting gift giving initiative we've ever had for the holiday season in every one of our divisions.

Second, we will be shipping the highest percentages of freshness in our merchandise mix ever this holiday season.

Even into two, three, four, and the fifth week of December, consumers will see fresh selections when they come to our store.

We see this as a major differentiator between us and the other retailers.

Third, I believe that our best brand penetration is even stronger this holiday than last year.

Fourth, although our values will continue to be extremely sharp, we do see some opportunity in increased average ticket in the fourth quarter.

This is our powerful marketing.

This holiday season, we will only slightly increase our marketing investment, our marketing impressions, although, will be up 30% over last year in our US division.

And sixth, we'll be more aggressive with our gift card program this year.

Further, we believe that upgrading the shopping experience at our stores will continue to pay dividends this holiday season.

We continue to see lifts in our recently remodeled stores that are comparable to when we first started the program over two years ago.

We will continue the program into next year and certainly beyond that.

In closing, I feel very good about our business as we enter the fourth quarter.

We ended the third quarter strongly and are off to a great start in November.

Marmaxx and HomeGoods continue their excellent performance.

At TJX Europe, we are seeing positive trends.

In Canada, we are seeing progress and like our gift giving focus for the holiday.

For the holiday season, we believe we are very well-positioned with our fresh gift giving selection, powerful marketing and upgraded store experience.

I am convinced that value will remain uppermost in consumers' minds this holiday season and we are all about value.

Value is our mission and I am confident that as long as we execute well and keep delivering our extraordinary values on our rapidly changing assortment, TJX will be a key retailer for today and for the future.

And now I'll turn the call over to Jeff to go through our guidance and then we'll open it up for questions.

Thanks.

Before I get to guidance, a couple of clarifying comments about the third quarter and our results.

First, with respect to foreign currency, the benefit that we've described primarily impacted the Canadian numbers, as the impact on our European results was not meaningful.

So while we reported an 11% increase in Canada segment profit margin for the quarter, this was entirely due to the mark-to-market gains on our inventory-related hedges.

Excluding the impact of foreign exchange, the segment profit declined 6% during the quarter, as Carol mentioned.

That's a little bit better than we would expect on a negative 2% comp with Canada doing a good job controlling inventories and limiting markdowns.

Second, since we're talking about currency, regarding overall currency, while it can have a significant impact on an individual quarter, our experience is that it tends to moderate over time.

So over the past five years, including the current year forecast, the FX impact has ranged annually from a $0.04 benefit to a $0.05 hit, clearly not a significant factor.

And cumulatively, the EPS impact from foreign exchange movements over the past five years has been essentially neutral.

So while we call out FX impacts, and they have significantly impacted certain quarters, it hasn't been a significant factor to our overall annual or multi-year results in the past.

Finally, as a reminder, tables are available on our website which lay out the impact of foreign exchange on our consolidated results, as well as the results of our international businesses and that will help you kind of understand the difference between reported and adjusted results from both businesses.

Turning now to guidance.

As you can see from today's release, we've provided fiscal 2012 guidance on both a GAAP basis and an adjusted basis, which excludes the impact of the A.J.

Wright consolidation and also excludes a benefit from a non-operating item in fiscal 2011.

And details of all of this along with the related reconciliations to GAAP financial information can be found in the table in the investor section of our website, and I'd encourage you to refer to these.

Today I'm going to speak to the adjusted numbers.

So for the full year, we've raised the lower end of our previous range of guidance to reflect Q3 performance.

The prior range for adjusted EPS was $3.89 to $3.97 for the full year.

The new range is $3.93 to $3.97 which would represent a 13% to 14% increase over the adjusted $3.49 in fiscal 2011.

I'd also point out this increase would be on top of an adjusted EPS increase of 23% last year and 48% the year before that, so we're pleased with the sequential increases that we're seeing.

This guidance is based on estimates for a 3% comp store sales increase and adjusted pre-tax margins in the 10.7% to 10.8% range, which is up 10 to 20 basis points over the adjusted fiscal 2011 pre-tax margin of 10.6%.

The full year outlook assumes fourth quarter EPS in the range of $1.19 to $1.23, up 13% to 17% over the adjusted $1.05 last year, and this is unchanged from our prior guidance.

So now I'll get into some of the details of the fourth quarter.

First with respect to sales, we're estimating Q4 sales of approximately $6.5 billion to $6.6 billion with comp store sales increases of 2% to 3% on both a consolidated basis and at the Marmaxx Group.

As you can see from the release today, we have raised our comp sales guidance from our previous outlook which called for a 1% to 2% increase to the current outlook of 2% to 3%.

The benefit of the projected additional sales, which reflects a stronger underlying trend in our business, is offset by foreign exchange rate and tax rate unfavorability versus our prior forecast.

The underlying math here is that the extra point of comp would be worth about $0.03 while the increased tax rate would negatively impact us by about $0.01 and the movement in FX rates that are lower than our original guidance would negatively impact us by about $0.02 in the quarter.

As to monthly comps, both on a consolidated basis and at the Marmaxx Group, we expect comps to increase 3% to 5% in November, 1% to 2% in December, and 1% to 3% in January.

With respect to pre-tax profit margins, we now have them planned in the range of 11.4% to 11.7% which is up 20 to 50 basis points versus the adjusted 11.2% last year.

This represents an increase over our prior guidance and reflects the flow through benefit from the expected incremental comp store sales.

We're planning our fourth quarter gross profit margin in the range of 27.2% to 27.4%.

That's up 30 to 50 basis points over the prior year, and we expect SG&A as a percent of sales to be in the range of 15.6% to 15.7% which is flat to up 10 basis points over last year and about what we would expect on a 2% to 3% comp.

For modeling purposes, we're planning a tax rate of 38.7%, net interest expense in the $8 million to $9 million range, and weighted average shares of approximately 381 million.

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

We will now open the call up for questions.

We ask that you please limit your questions to one per person and to keep the call on schedule, we appreciate your cooperation with our one-question limit.

So thank you.

We'll take questions now and, Elan, we'll go ahead and open it up.

Thank you.

(Operator Instructions)

Our first question is from Daniel Hofkin.

Hi, Daniel.

Good morning, guys.

Hi, Dan.

If I could ask for a little bit more detail regarding your expectations for margin performance by division in the fourth quarter.

Do you think Europe, in particular, is likely to show year-over-year improvement on an underlying basis in the profit margin?

And maybe some guidance for the other segments, too?

Daniel, we're not giving specific divisions and the details in terms of the margins by division, but maybe I could give you some color on Europe.

Europe for the full year, we're expecting between $95 million and $102 million, which implies a pretty substantial increase in the fourth quarter.

So I think that reads to our confidence in Europe going forward.

Yes, we're also, Daniel, for the fourth quarter, we did say gross profit margins would be up 30 to 50 basis points.

And a portion of that is merchandise margin, a portion of that is buying and occupancy expense leverage.

And as I just said, Europe is up against some big decreases last year, so that is really helping drive a lot of that.

Is that markdown -- in other words, is that reduced markdowns year-over-year, is that a factor in Europe or is it more --?

It's all of it.

Yes, last year we had a big markdown hit in the fourth quarter, and I'll check my reference.

I believe it's sort of in the 350- to 400-basis-point range, with the decline in the merchandise margin in Europe; and so that's an opportunity to get some of that back.

Okay, thanks.

And I guess, if I could, one other quick question regarding what you're seeing right now in terms of the ability to pass through cost inflation, and maybe what that rate of inflation is doing right now, relative to three or six months ago?

Well, as I said before, our ticket is trending slightly up, but it always comes back to us keeping the gap between us and everyone else.

So we're very focused on just giving extreme value in the fourth quarter.

Cotton prices are coming down.

There's a variance by fabric going on -- some are going up, some are going down -- but we are seeing tickets slightly up.

So we're planning traffic slightly up in the fourth quarter, and tickets slightly up.

To be clear, Daniel, traffic and ticket up slightly, but also we've got a comp of 2% to 3%, and we've got the margin planned up slightly, so I don't think we really see any kind of negative margin hit coming from inflation, since that's the way we plan the business.

Thank you.

Our next question is from Evren Kopelman.

Thanks.

I wanted to ask about inventory.

You mentioned at the end of this quarter they were down on a per-store basis and you're expecting them to be up at the end of, I believe you said, the year.

Thinking about inventory philosophy -- is this a change, in that you're done with being able to run positive comps with down store inventories, or is this for next year?

I know it's early, but can we still see in-store inventories down, and continue to help the merchandise margin?

Thank you.

Yes, no.

Far from it.

When we say our inventories are down per store, our inventories will be down per store, and they will continue.

We still see opportunity, certainly going forward, but when we talk to total inventory, it's in the DCs and it's a combination of DCs, which is pack-aways; but it has nothing to do with our in-store inventory.

In addition, our future on-order, we have more open to buy than we had a year ago.

We're less committed.

We're in great shape going forward.

Evren, we may have confused you with some of the language in the release, so just to walk you through it briefly.

At the end of Q3, our inventory per store was up 14%, that includes the distribution centers.

Our inventories that were actually physically in our stores was down, and the inventory that was in our DCs was up.

As we look towards year-end, we would see that total inventory number, that's up 14% per store as of the end of Q3, that being up in the low- to mid-single-digit percentage range, which implies a reduction in our distribution centers and we will continue to have inventories that are actually physically in our stores down year-over-year.

Thank you.

Our next question is from Stacy Pak.

I was hoping you could dig into HomeGoods a little bit more.

That was a pretty impressive margin increase, and I'm wondering -- what does that store model look like relative to Marmaxx?

How does it change as you open more in the Midwest, Central, and West, which is sort of what it looked like on your expansion?

And why are you saying HomeGoods' long-term segment margin is only a high of 9.7%, when it looks like they will finish above that this year?

Stacy, we actually changed the model to above 10% segment profit.

We changed that model a short time ago.

Okay.

And we've been changing the number of stores, we moved it from 600 to 750.

Is that the end number?

I couldn't tell you today.

As we grow and we learn and we leverage, hopefully, we'll come back to you at some point and that number will get raised, but we have already raised the segment profit going forward.

Yes, the segment profit margin for HomeGoods this year that's implied -- we're happy to give full year guidance numbers here by division, but HomeGoods is -- the segment profit margin for the full year for HomeGoods is 10.3% to 10.4%.

That's what our guidance would imply.

We're already above that 10%.

And, obviously, to the extent we can comp greater than 2% and you can get leverage from new stores, you may be able to do better than that.

But we'll prove that to ourselves over time.

And is there a change, Jeff, if you go to some of these less dense markets in the Central and Upper United States?

No, typically what you find as you go to the less dense -- what we found with Marmaxx, our experience has been that you typically have lower levels of sales, but you also have lower rents.

And on a percentage basis, your four-wall contribution is actually equal to or a little bit better than the chain.

So, no, we don't see any margin dilution coming from that.

We actually love our small-market stores and our single-market stores.

They're terrific for us.

And as you think about the margin potential --a final thought there -- as you think about the margin potential of HomeGoods, the four-wall contributions are pretty comparable.

A little bit below Marmaxx, because of just the absolute size of it and the volumes we do per store.

But pretty comparable.

And the issue really becomes, Marmaxx is a 13% Business because it's also a $15 billion business, and so they get tremendous leverage on some of their SG&A costs and their distribution network.

And we see a lot of potential for HomeGoods, but we don't ever see it being a $15 billion business, getting that leverage.

So the answer is probably somewhere between a 10% and 13% over time.

Although Carol is scowling at me right now, maybe we can get it to a $15 billion business, right?

What's exciting about HomeGoods this year, Stacy, is that for the first time we're going to be on network TV, and you saw our tri-brand commercial, hopefully.

So that will go in markets that have never seen HomeGoods commercials before, so that's pretty exciting.

It also it sets us up for the future as we start to go into new markets with new stores.

Thank you.

Our next question is from Richard Jaffe.

Thanks very much, guys.

A question on inventory again -- the level of pack-away as a percent to total, and how you see that growing or becoming an integral part of your business?

Or is it just a seasonal thing that we shouldn't expect to see ever again?

And then a follow-on question for corporate expenses.

Okay.

Let me start with pack-aways, and then I'll have Jeff go through the corporate expenses.

Our pack-away is really never more than 10% of our total purchases, so it's higher than last year this year; and we'll probably end the year slightly higher, because we are seeing some terrific deals.

So, again, it depends on the season, it depends on the category -- but we have no tremendous strategy or philosophical change in the business going forward.

That's great.

Jeff, just wanted to know about the general corporate expense increase year-over-year, was surprising and wondering where the money is going?

Yes, many of the investments that we're making, Richard, are being funded through the corporate, that corporate-wide.

So if you think about some of the investments that we're making in systems, which consists of new merchandise, investments we're making -- and Carol has talked about before, new merchandising and supply chain systems.

We are also investing in a new data center.

Our existing data center is over 25 years old, and so we are actually having to make some reinvestments there that are very meaningful.

We are investing in talent in two ways.

We have bench money available to bring executives in that we can develop before they go into assignments.

We also have TJX University, which is our group that helps develop people in our organization, principally merchants.

And then we are also making investments in eCommerce.

So all that is flowing through that corporate line.

The investments we're making represent more than 50% of the increase you're seeing year-over-year.

But the thing I'd want to point out is that, you look at the G&A in Q3, we had a flat G&A ratio on a 3% comp with that increase.

So we're more than covering that in other areas of our business through both cost reduction and productivity.

Absolutely.

Can you just elaborate on your last point?

I think the word was eCommerce?

Yes, we are investing in eCommerce.

Any chance of elaborating on that?

Yes, I'll elaborate and I'll repeat what I said.

We have a team in place.

We're doing a lot of work.

We are investing, as you see, our corporate expense in dollars is increasing.

However, we do continue to remain with our model going forward of 10% to 13%.

So we continue to invest in eCommerce.

It's certainly a big chunk of that, but we're going to take our time and we'll let you know, as we get closer, where we are.

We've got Europe testing and helping us get some additional information, which is terrific; and I could say it a million times.

I want to do it right and we want to make money and we want to leverage our brick and mortar, so that's really where we are with the eCommerce.

Yes, nothing imminent, Richard.

Thank you.

Our next question is from John Morris.

Congratulations on great results.

Thank you.

Can you talk a little bit more about Canada, your progress there?

I'm interested to know where the sources of weakness is, where the challenges have been other than weather and what you're doing for the improvements?

And kind of similar to that, you said you were encouraged with the Business, particularly in the UK, where you've really focused quite a bit and you've seen some improvement.

So what is it that you're doing there that's working, just beyond the easy comparison, the easy markdowns to a year ago, so both Canada and the UK?

Well, first of all, in terms of the UK, I'm going to have Ernie walk through the two divisions for you.

The most important message I want to give is, we're liking the mix; and that is absolutely key, and the customer is voting that they like the mix.

So that is the overview.

And the same thing, in terms of working on Canada.

But, Ernie, you want to talk to the specifics?

Yes, John, I think in Canada, you asked for specifically one thing besides weather, and I would tell you that the Ladies Business up there has been something we've been looking at very diligently.

Our execution there has not been as strong as we would like.

As you know, our Ladies Apparel Business is a key driver for our total Business, so we've been making some progress there.

We've been really taking a look at what we've been buying, being more selective.

We go through all of the things we do -- without getting too specific with you -- which is look at vendors, look at values, look at where we're buying the goods, look at how we're retailing the goods, et cetera.

So we're feeling better, looking at being on more of a solid track by the end of the year.

But we still feel like there's work to do.

Ernie, when Carol's talking about the mix, whether it's the UK or Canada, what is the mix between?

Within apparel categories, or between apparel and hard lines, or what's happening there?

Well, when she's saying the mix, she's referring to the quality, I think, of the mix throughout every category, meaning the brand value, the fashion.

Got it, yes, okay.

The quality -- not necessarily the mix of the departments or the categories within the store, but the actual quality level, the brands, the price, et cetera, within every department.

So in Ladies, in Canada, that's really been a focus, is getting the mix, improving the mix in that area in Canada.

And, of course, the buyers are helping you all there.

Have you changed up the buying talent to help in that identification of the better brands for the mix?

Well, that's a piece.

Sometimes it's also a training and leadership thing, where we get in there and we try to regroup on what our strategies have been; because sometimes it's not the people that need to be changed, it's the strategy that needs to be changed.

Great, okay.

Terrific.

When we go to the UK, it's a very different story, and we've talked about this before.

In the UK, we probably grew too fast and we weren't ready for some of the growth as quickly as we grew.

On the other hand, over the last nine months to a year, I think we've made great progress in really training some of the new people that were put in place, figuring out some of the logistics involved between expanding in Germany -- we talked about this at our Investor Day.

So we have a lot of people in place that I think we're going to reap benefits.

Now Carol said we like our mix there.

I think that's accurate.

We have been feeling really strong about what's been happening throughout all of the different departments in Europe, and so I think we're in a good position there.

I think what's key, too, is that in Germany we have the German brands that the German consumer wants; and the same thing in the UK.

And we sort of talked about in the past that when you grow into the next country, we were not country-centric enough.

So the guys there are very focused on the right brands for the particular country, and that makes a very big difference.

And I think also the right fashion, that's the other thing we've learned there.

Because that has varied between England and Germany as well.

Thank you.

Our next question is from Brian Tunick.

I think that's a great lead-in.

I was trying to get a better sense on the TJX Europe business.

If you look at the full year operating margin guidance implied, can you talk about Germany versus the UK from a profitability standpoint?

I know you've talked a lot how the Germany store maturity curve has weighed on the margins there.

But just hoping you could break out where those two major countries are.

And then second question, on the Filene's and SYMS liquidation -- how many centers do you guys have in common with them?

Well, we don't talk about -- I'll come back to Europe in a minute.

In terms of Filene's, obviously, we don't talk about our particular deals, but we will certainly take advantage of everything that makes sense.

Our real estate group is looking at everything.

I don't know the exact number that will overlap, but there, obviously, could be potential there.

So we're always excited about any new opportunity for us in terms of real estate or de-storing, whether it's in the United States or in Europe.

Brian, we really don't break out the countries, the same thing we don't do in Winners -- we don't break out the different divisions.

I can tell you that we have seen a real positive trend in the UK in terms of both sales and margin, and we're starting to see that in Germany.

So we are absolutely moving in the right direction in both countries, and that's, obviously, why we're giving, as I said before, for the full year $95 million to $102 million implies a pretty big increase in the fourth quarter in terms of the last three quarter trend.

Thank you.

Our next question is from Jennifer Davis.

I have a couple of clarifications.

First, Jeff, did I understand this right -- versus your original guidance, ForEx and a higher tax rate, higher than you anticipated, negatively impacted earnings by $0.02; so had that not happened, EPS would have been $1.08?

Am I understanding that right?

Yes, and you can see that clearly.

I mean, look, the tax rate was -- oh, hang on one second.

38.8%.

Yes, but the expectation was 38.1%, so if you do the math on that it's $0.01.

And then what happened is, at the very end of the quarter the Canadian dollar surged from $0.98 up to $1.01; and when that happened that meant that there were less gains in our hedges, Jennifer, so that added $0.01.

Believe it or not, from the time of the investor event, until two days later when we closed the books, we lost $0.01 because of the mark-to-market impact on the hedges of the higher Canadian dollar.

All right.

If you look at FX long term over the five years, it's equivalent to $0.04 or $0.05 negative or positive.

So over time, it doesn't really impact the business.

Right, I understand.

And then did you guys comment on merchandise margins in the US?

No, we haven't.

They've been relatively --

Will you?

They've been relatively flat.

Yes, I mean, they've been relatively flat.

Okay.

And then in terms of pack-aways, do you ticket those when you buy the merchandise, or when you flow it into the stores?

I'm just trying to get a sense of how higher ticket prices are factored in there.

We ticket the goods according to the value of what we think our merchandise is.

We will, if we have a pack-away, and if we feel time goes on and that pack-away is a different value, we will readdress it.

But that's typically -- we look at the best value we can for our pack-aways.

Yes, you're not locked in at the time you make the deal.

Right.

Thank you.

Our next question is from Adrianne Shapira.

Carol and Jeff, my question really relates to gross margin.

You obviously have made great progress, merchandise margin is flat, it sounds as if you're optimistic on ticket, and 30 to 50 basis points in gross margin opportunity in the fourth quarter.

But in this earning season, we're definitely hearing a consistent message from many retailers, that it's costing more to get that customer's attention -- everyone from JCPenney and Saks.

It sounds as if it's, perhaps, a need to intensify their price investment.

So if you could help us reconcile -- you clearly are looking to maintain that value message and maintain that gap with what potentially could be a more intensified environment heading into the holiday season.

Help us think about the margin outlook.

Well, I think what you've got to, again, realize about our business is that we still have tremendous open-to-buy.

And so, we have tremendous open-to-buy, and Ernie and I are shutting down this place because there is more deals, it is very, very plentiful.

So we're really in a situation where not only is it plentiful, but it's plentiful with brands and fashion and everything that we absolutely love.

So that will allow us to not only buy to the right value, but buy to the right value up to the last minute.

And that is what our business is about, and it's the best way to explain it -- that we are wide open.

And you would characterize it, considering where you would like to be at this point heading into the holiday season, probably better, more encouraging, more open, more liquid than you probably would have expected maybe a few months ago?

We made sure that we stayed very liquid.

So we're very happy with the position that we're in today.

We've also planned on shipping a higher percent of fresh merchandise, which is really critical to the newness, the excitement, and, again, coming back to making sure that you have the greatest value.

So we're up to the minute.

We can price it up to the minute.

We can buy it up to the minute.

That's what's different about our Business and the flexibility.

Adrianne, it's that flexible business model that we've talked about before.

This is what Carol is talking about, is really the epitome of it to this time period.

When the environment gets difficult, there's a delayed effect; we take advantage of that, and we can flex with that.

The other thing we've worked on, our logistics areas over the past couple of years.

So that when Carol was talking about we will buy to the last minute, we are more able to turn the goods through faster, and that allows our merchants to actually take themselves and stay open to be buying to the very last minute -- more so than even a few years ago.

Yes, we said today in the release that our goods on order are significantly below where they were last year at this time, so we've got a lot of flexibility.

When we talk about our investment in systems and the supply chain, this is a constant goal, for us to get better and better at it.

And we definitely see opportunity.

I talked a lot about getting the right goods to the right store at the right time, and this is a big part of, now, improvement, and for the future.

Thank you.

Our next question is from Paul Lejuez.

Jeff, can you maybe talk a little bit about merchandise margins in the third quarter by division?

Which were up, which were down; and I believe you said you expected fourth quarter merchandise margin to be up a bit?

And maybe if you could just break that down for us, where you expect to see improvement, versus any of the divisions that might be going the other way?

Thanks.

Yes, I think as you look at Q3, Marmaxx is essentially flat, HomeGoods was up, Europe was up, and Canada was down; and that all blended out to essentially flat for the quarter.

I would expect a similar kind of a profile, for the fourth quarter, Paul, as we look forward.

I think we get a little bit more lift because Europe is up against easier comparisons.

We had a much, much bigger markdown hit last year in the fourth quarter than we did in the third quarter for Europe.

So with the continual improvement there, I think the magnitude of the year-over-year improvement for Europe will be much greater in the fourth than it was in the third, and on a consolidated basis, that will help drive our merchandise margins up a little bit.

Got you, thanks, and quick -- did you see any impact from Ross' entry into the Chicago market?

If you might comment on that?

Not really.

Yes, it's not something we really want to comment on.

But I think, when you look at our comps, and as we've been talking about comps, they've been pretty much following the trends that they've been following.

So clearly, we haven't seen any impact on the regional comps as we report them.

Okay.

Thank you.

Our next question is from David Weiner.

A quick question -- a lot of my questions have been asked -- but I wanted to follow up on Europe and Canada, and specifically on seasonality.

I know that for both of those regions seasonality, temperature, has been a problem over the last couple months.

Has that, relative to the product that you have in the store right now in both Canada and UK and Germany -- are you starting to see the seasonality, the types of temperatures that you want to see improve?

So it's less of an impact on your comp?

Towards the end of the month, we definitely saw, certainly, in both divisions, when Europe did turn colder, absolutely triggered the business.

The home, the non-apparel areas, were stronger, certainly, than the apparel areas in Canada.

Outerwear was down 22%.

That was in Canada?

There's just no getting around that, so that's absolutely a factor.

But as we get into the fourth quarter, and you're a little more gift-giving, the impact of the seasonality isn't as critical, or doesn't affect the business to the same degree that the third quarter is.

We always have more volatility in the third quarter.

Okay, thanks a lot.

Thank you.

Our next question is from Kimberly Greenberger.

Carol, it's clear that your execution in Europe --

I can't hear you.

I'm sorry.

Could you be a little louder?

Sorry about that.

It's clear that your execution in Europe, and the UK in particular, is driving the improvement in your comps there.

But I'm wondering if you can talk about your view of the health of the consumer, either in the UK or Europe?

What are you hearing from your organizations on the ground there, about the general health?

And are you seeing any signs of improvement at all there?

Well, I think you hear the news that we hear every single day.

This morning they had a conversation about why the pound is still $1.35.

So every day is another story.

I think the important point about Europe is, number one, we needed to fix our execution, which we're on the way; and that's really the key factor.

Number two, there is de-storing going on in the UK.

There are many, many businesses that are closing, which bodes well for us getting a bigger piece of the pie.

And as we do what we are supposed to do, is execute every day, we leave that we're going to get a bigger piece of that pie in the UK.

And we've talked about fixing that, and then fixing Germany, and I really think that we're in a pretty good position going forward.

Next year we won't be adding a ton of stores.

We want to make sure the infrastructure is really solid, and then we'll start to move from there.

However, we will take advantage of any great real estate deal.

We're seeing, certainly, in the London area some fabulous deals, and we will take advantage of that.

Terrific, thanks.

And one clarification -- on the 3% comp during the third quarter, I think you said ticket was up slightly and traffic was up slightly.

I just wanted to make sure I heard you correctly.

Traffic was flat in the third quarter, ticket was slightly up.

Going into the fourth quarter, we're planning both ticket and traffic slightly up.

Okay, great, thank you.

Thank you.

Our next question is from Jeff Stein.

Two questions, real quickly.

One for Jeff -- the growth in corporate expenses, can you give us a little bit of guidance of what we should expect in Q4?

And then, on a go-forward basis, have you pretty much year-rounded this new phase of investing, and should we see kind of a growth rate in corporate expenses more in line with inflation?

I think as you look at Q4, we would expect we are continuing to invest at the same level and the things that we're investing in, so I think you're thinking comparable year-over-year impacts, Jeff, Q4 versus Q3.

And so I think directionally, that would be a good assumption as you build a model.

And then I think as we look at next year, like we remain comfortable with our three-year model of 10% to 13% EPS growth.

And in terms of those components, I'd like to reserve the right to wait to comment on that until we get to our February call.

We're still pulling some of our plans together.

In any planning process, you have to make choices between things you want to do and things you don't want to do.

But just feel confident that we have a model of 10% to 13% EPS growth.

We're comfortable next year we'll fit into that model.

But as to the individual components of the plan, though, we still have to finalize all that.

Why are you modeling your December comps lower than November?

Because you have an extra selling day in December this year.

Wouldn't that tend to give you a little bit more of a boost in December?

Yes, it's a tougher comparison, but if you look at two-, three-, four-year stacks, Jeff, it all lines up.

December has been a very strong month for us now for -- last year it was 2% on top of 14% the year before that, where the comparisons aren't as daunting in the November.

Got it.

Okay, thank you.

Thank you.

Our next question is from Roxanne Meyer.

Great, thanks, and let me add my congratulations on a terrific quarter.

You raised your comp outlook to 2% to 3% and I'm wondering how, if any at all, you've contemplated the SYMS liquidation that's going on in November and December?

And then as a follow-up, is that part of the reason why you feel that you're getting access to some of what you called best product out there?

Or can you just elaborate on what you're seeing, and if that's going to become a bigger part of your strategy going forward?

Yes, no, Roxanne.

SYMS -- it has absolutely nothing to do with our projections or any opportunity.

We're just running our business the way we run our business every day.

Jeff went through why we raised the comps.

You want to run through that one?

Yes, we raised the guidance because we saw a stronger underlying trend, and we're comfortable doing that.

But we don't granularly build it up based upon our competition.

That would be a very challenging modeling exercise, to say the least.

So we look more at the underlying trends in our Business, what's going on with traffic versus ticket, our thoughts on our mix, the comparisons that we're up against.

And those are the kinds of things that inform the estimates we make, Roxanne.

But I think a competitor, particularly a competitor of that size, isn't likely to have a significant impact on our year-over-year growth or the availability of goods for that matter.

Okay, great.

Thanks very much and best of luck for holiday.

Thank you.

Thank you.

Thank you.

Our next question is from Pamela Quintiliano.

A few questions.

I was wondering if I could get more information on your higher store growth opportunity, and when I think about real estate availability versus a larger addressable market, more sustainable availability of product with new vendors -- just how should we think about it?

And then if you could go through again -- I believe you have the stats on who's familiar with the brand, on how many people are actually shopping it domestically and internationally, and where you see the opportunity there?

Well, Pamela, that was four questions.

You're only allowed one.

(laughter)

We'll do our best.

All right, Jeff, you want to go through the store growth?

Yes, the store growth -- we've got 2,300 to 2,400 stores at Marmaxx.

We used to say 2,000.

That's really a result of shutting down A.J.

Wright and the additional opportunities that we have in those markets.

HomeGoods, we raised it from 600 to 750.

Again, that's a function of the performance that we're seeing from the division; a bottoms-up assessment in terms of the real estate opportunity based upon potential sites and cities and markets; and also a comparison to where our competitors are in some of the store growth.

The store potential numbers that some of our competitors put out on the street really lead us to believe that there's an opportunity for HomeGoods.

Winners, we really haven't adjusted that; it's still 240 stores.

HomeSense, we think, has an opportunity of 90; so between HomeSense and Winners, that is 330 stores.

Although we've said we think Marshalls Canada can be 90 to 100 stores, and we have six today.

Our estimates for T.K.

Maxx really haven't changed; that's still in that 300 to 325 range.

Really, our estimates for T.K.

Maxx, HomeSense UK, Germany, and Poland really haven't changed.

So that the change of the store growth estimates come from Marmaxx and from HomeGoods, and from the incremental opportunity given us by Marshalls in Canada.

And then just those stats again -- I know you've given them before -- about people who are familiar with your brand or who have shopped, who haven't shopped?

Right.

Basically, there is 75% of adults in the US that have not shopped us, which is a much higher percent than typically the department stores, which really gives us a lot of opportunity for growth.

So that's generally what we're going after.

And do you have those stats on international basis?

Are you providing them?

I don't have it on an international basis.

Again, the de-storing, what's going on in Europe is still a tremendous opportunity for us and the additional brand of Marshalls.

We are finding that, in Canada, they are well aware of the Marshalls brand, so we're pretty excited about bringing the brand across the border.

Okay, thanks so much.

As far as product goes, Pamela, there's always abundance of product.

I could say it a million times.

We will get to $40 billion and we will still have an abundance of product.

It's not the issue.

The issue is really us actually controlling it.

Thank you.

And our final question today is from Mark Montagna.

My question is really more looking long term in terms of earnings.

Carol, in the past you've mentioned that you feel that TJX is a long way from getting the right merchandise in the right stores at the right time.

You've obviously been growing your earnings pretty well.

I'm wondering, what are you doing to improve that notion?

Is there some sort of systems upgrade, or is it just training or -- how exactly are you doing that, or do you plan to do that?

Yes, and part of our corporate expense is investment in systems.

As Jeff said, we have a new data center, but along with that, we have a fairly aggressive plan in merchandising systems.

As much as we've gotten better and better, you wouldn't believe how much we have to do manually.

So we really see that as a big rock, especially for the next two to three years.

In addition to that, supply chain -- our plans will be another DC on the West Coast -- and this is all in our model going forward.

So we continue to see the opportunity to reduce our inventories to bring more freshness into the stores.

But more importantly, again, to target the stores to do the right goods at the right time in the right stores -- the right stores, right time, right product -- still lots of room there.

Okay, and are you going to target one division at a time to beta test the different changes?

Yes, we're doing it very slow.

We have a test -- we'll actually test by category.

It's a very detailed, very methodical progression, and in terms of costs over time.

Yes, and it's designed to mitigate risk, Mark, so there's no big bang here.

It will be one category, one division, we'll roll it out slowly.

The downside is, it will take us longer to get the benefit; but the upside is we don't put the Business at risk.

So that's the way we'll intend to (inaudible.)

We don't shut off anything until we know we can shut it off.

Okay.

Lastly on that -- have you already started that, or is that something that we're looking for next year?

We started to look at what it should be.

We're probably looking at two years out for the benefit, but we also have some things in the next two years built in our plan that we still think we can take advantage of.

Okay.

(Inaudible)

All right, thank you.

I want to thank everyone, and we're looking forward to the fourth quarter; and we hope you'll shop for those of you that are near Wall Street.

Our store opens November 18.

Please buy -- the 17th, excuse me, the 17th; I just got corrected -- so have fun.

Thanks.

Thank you all.