TJX Companies Inc (TJX) 2013 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the TJX Company's second-quarter fiscal 2013 financial results conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded, Tuesday, August 14, 2012.

I would like to turn the conference call over to the Ms. Carol Meyrowitz, Chief Executive Officer of the TJX Companies, Inc.

Please go ahead, ma'am.

Thank you, and good morning, everyone.

Before we begin, Sherry 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 27, 2012.

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, and our international divisions in today's press release, and the investor information session of our web site, www.TJX.com.

Reconciliations of the non-GAAP measures we discuss today to GAAP measures are included in today's press release, or otherwise posted on our web site, www.TJX.com, in the investor information section.

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

Thanks, Sherry.

So joining me and Sherry on the call are Ernie Hermann and Scott Goldenberg.

I'm happy to say that once again, I'm extremely pleased with our quarterly top and bottom line results.

Our 24% increase in second-quarter earnings per share significantly exceeded our original expectations.

This marks the seventh consecutive year that our adjusted second-quarter earnings per share have grown by 20% or higher.

Consolidated comps increased 7%, also well above our plan, and on top of a 4% increase last year.

It is great to see our momentum continue and be so broad based.

All of our businesses in the US, Canada, and Europe are on track, and delivering excellent results.

To underscore that statement, let me give you a quick recap.

In Marmaxx, segment profit margin was up 150 basis points.

At HomeGoods, it was up 280 basis points.

Excluding the impact of foreign currency, TJX Canada's adjusted segment profit was up 80 basis points, and TJX Europe was up 240 basis points.

Customer traffic was up significantly over increases last year, which we believe speaks to the strengths of our brand, fashion, and values.

These strong results, year after year, in good and bad economies, demonstrates the sustainability of our sales and profit growth.

I'll keep my comments brief today, and take a somewhat different approach.

We believe the numbers speak for themselves, so rather than reviewing divisional results, I will leave more time for Q&A.

I'll share with you a few points that may be less visible externally, but internally give us great confidence in our belief that there's still substantial near and long-term growth in front of us.

We remain as convinced as ever that TJX will grow to be a $40 billion company and beyond, but before I continue, I'll turn the call over to Scott to recap our second-quarter consolidated results.

Thanks Carol, and good morning, everyone.

Now to recap our second-quarter results.

Net sales reached $5.9 billion, a 9% increase over last year.

Consolidated comparable store sales were up a very strong 7%.

I should point out that this was on top of Q2 comp increases of 3% to 4% in each of the last six years.

Diluted earnings per share were $0.56, a 24% increase over last year's $0.45 per share, and well above our original guidance of $0.47 to $0.50.

In terms of the underlying growth rate, it's important to note a couple of factors.

Foreign currency exchange rates had a neutral impact on EPS compared to a $0.01 benefit last year.

In addition, a higher tax rate in this year's second quarter negatively impacted EPS by $0.01.

The consolidated pretax margin was 11.5% for the quarter, well above our expectations and up 130 basis points over last year.

Foreign currency had a 10 basis point negative impact on year over year comparisons.

Again, as Carol mentioned, excluding the impact of FX, pretax margins increased significantly at all divisions.

Gross profit margin increased by a very strong 80 basis points over a 70 basis point increase last year, driven primarily by higher merchandise margins, as well as some buying and occupancy leverage.

SG&A expense improved 40 basis points to 16.5%, which was very favorable to our plan.

We continue to see very high flow through to the bottom line.

SG&A expense on a dollar basis was in line with the high end of our expected range, despite sales being about $130 million above plan.

Further, the incremental investments to support our growth, including talent and infrastructure, which we have discussed on prior calls, negatively impacted SG&A by 20 basis points, which is slightly less than we expected due to the above-plan sales.

As to inventories, at the end of the second quarter, consolidated inventories on a per-store basis, including warehouses, were down 12% versus a 16% increase last year.

We are extremely happy with our inventory levels.

We entered the back half in a very strong position to buy into the terrific opportunities we are currently seeing in the marketplace, and continue shipping fresh merchandise selection to our stores.

In terms of the share repurchases during the second quarter, we retired 7.1 million shares, buying back $300 million worth of TJX stock.

Year-to-date, we've retired 13.6 million shares buying back $550 million of stock.

We continue to anticipate buying back $1.2 billion to $1.3 billion of TJX stock this year.

Now let me turn the call back to Carol.

I will provide details on our third-quarter guidance and recap guidance for the full year at the end of the call.

Thanks, Scott.

So moving straight to the first major point, I want to underscore a deep belief that TJX's business model makes us a Company with tremendous strength for both defense and offense.

While we believe the defenses and elements of our model are well-known, I'll spend more time on our offense, which may be less evident.

On the defensive side, I'll just briefly highlight the consistency and the flexibility of our model.

In good economic times and bad economic times, we have executed well.

When we execute well, TJX has thrived.

In our 35-year history, we have only had one year with a negative comp.

In the last 14 quarters, we have had only one month with a negative comp.

We believe that the flexibility of our business model, which we see as the most flexible in the world, is at the core of our success.

We offer customers tremendous variety in a single store, with a consistently changing mix of products and merchandise categories at extreme values.

We have built the sourcing machine over 35 years, with a universe of over 15,000 vendors.

This flexibility allows us to respond to the market conditions, weather, and current fashion and consumer trends.

Further, with our broad US and international reach, we believe our demographic audience is the widest in retail.

Now to our strengths in offense, which I believe are not as well understood as the defensive story.

It starts with our customers.

We are convinced we will continue to attract more US and international customers with our values.

Our customer traffic is up mid-teens over the last three years, and continues to increase.

While we have made significant market share gains, enormous opportunities remain.

Our consumer reach indicates that our US penetration is still well below most US department stores.

In Canada, we are growing Marshalls, and in Europe we have past vast store growth potential.

Additionally, our research tells us that we are doing a good job of attracting younger customers, which bodes well for the future.

Our job today is to continue working and attracting more new customers, and keeping them coming back to our stores, and I believe we're doing a good job of this.

Next is the power of our banners, and being global.

We have built a business that's on track to be over a $25 billion Company this year, and we believe we are far from the end.

As we raise the bar and execution across the Company, we have huge opportunities to better leverage all of our businesses.

Further, I'm not afraid to say, like most companies, we have made mistakes along the way, and the beautiful thing about TJX is that we have shared our knowledge among our businesses, and learned from those mistakes.

As our banners become bigger businesses, we gain even greater leverage.

The more global the world becomes, the more powerful our banners are.

It's important to understand that when we say global, we are not just talking about our stores, but with our sourcing capabilities, we truly are a global company.

Moving to our supply chain, as good as we are, we believe we still have significant room to improve.

We are investing significant dollars in our supply chain system to run even leaner and faster, and become even more pointed at shipping the right goods to the right stores at the right times.

It's about lean in-store inventories, freshness, exciting merchandise, and faster turns, which help drive stronger sales and margins.

We are taking our time with this, and we'll be extremely careful in its rollout.

We are not anticipating the full benefit from this initiative for several more years.

We are also taking great advantage of today's real estate landscape, which is certainly ripe for TJX, both in the US and internationally.

We are capitalizing on high US vacancy rates, and other retailers closing stores in Europe, and see plenty of growth ahead in Canada.

With our flexible store formats, we can open stores in a variety of sizes and configurations.

We also have the choice of which banner to open in a given location.

Combined with our wide demographic potential, this gives us the flexibility to open stores in a variety of locations.

Now, I'll pick up the point of growing our customer base, and keeping our new customers coming back.

We are using our marketing to attract new customers, and we are working to retain them by providing a great shopping experience through our store remodel program and in-store initiatives.

We're leveling our global marketing abilities across our banners, and have made our marketing messages more powerful, emphasizing current fashion.

We're also aggressively engaging customers through social media.

In terms of our marketing plan for the fourth quarter, I'm very excited about the creative, but you'll have to wait and see.

Our store remodels are succeeding in lifting sales.

We are on target to have about 75% of the Marmaxx stores in the new prototype by year-end and approximately 300 stores across the company remodeled during 2012.

Further, we have many ideas for improving our shopping experience even more, but again, I can't share those with you.

Just know, we never stop raising the bar.

I'll wrap up on the theme of attracting and keeping new customers by saying that at the end of the day, our execution of giving the customer the right brands, fashion, and the right value is paramount, and we are laser-focused on it every day.

Continuing with our strengths in offense, I want to spend some time on our huge growth opportunities in the US and internationally.

Importantly, as a management team, we are focused on fewer, bigger businesses, all with a very wide demographic reach and very strong short and long-term economics.

We believe Marmaxx will be an even bigger business, with the potential to grow up to 2,400 stores.

Marmaxx's new store performance has been phenomenal over the last three years.

Further, as we have worked to widen our demographic reach in all directions, Marmaxx has been very successful in moderate income markets and both densely populated urban markets and rural areas.

As I mentioned, our ability to open stores in a variety of shapes and sizes adds to our confidence that our largest division continues to hold significant store growth potential.

We also see HomeGoods as being an even bigger business, with the potential to expand to about 750 stores.

Other US home retailers are more than twice the size of HomeGoods, speaking to the size of our opportunity for this chain.

We are also seeing strong store performance in new markets we opened last year, which is extremely encouraging.

Anecdotally, I can't tell you how many letters we receive from customers asking us to put a HomeGoods in their city or hometown.

In Europe, where we are the only major off-price retailer, we have vast opportunities, and see the potential to grow up to about 875 stores with just our current banners in our current countries.

I want to make an important point about our performance in Europe.

As we look back, we believe what hurt our results a few years ago was our own execution, which got off track when we grew too fast.

We had been doing extremely well previous to the first quarter of 2010 as the economy in the UK worsened.

Then we stubbed our toe and got off balance with our mix, and the customer let us know it.

We worked to right the ship.

We're back on track, and we can more effectively take advantage of the opportunities that the macro environment provides for us.

While we have clearly exhibited improvement in Europe, we believe we are just scratching the surface in terms of further improving this business.

In Canada, we see another big growth catalyst with Marshalls, which we believe has the potential to grow up to about 100 stores.

We're very pleased with our Marshalls stores in Canada, which is very promising for our future growth in that country.

We view e-commerce as another major growth catalyst, an opportunity to increase our customer base for the future.

We're not ready to talk timing yet.

We are taking our time to get it right, and the good news is that we believe we can afford to do that.

We have a ton of growth from other places, and do not believe we're suffering from not being in e-commerce at this moment, and we will keep you posted as to our progress.

Another important point that I'd like to make is that while we are making strategic investments for the future, we're maintaining our 10% to 13% annual EPS growth model.

As always, we'll strive to surpass our goal.

Before closing, I'll spend a moment on our financial strength and shareholder returns.

Our business model delivers outstanding financial returns, and generates an enormous amount of cash, and we remain committed to distributing excess cash to our shareholders.

In the last 14 years, we have bought back over $10.6 billion of TJX stock.

For 16 consecutive years, we have raised the dividend, and over that same time period, have delivered a compound annual growth rate of 23%.

We are increasing our capital spending for the current year to approximately $1 billion versus our prior guidance of $875 million to $900 million, due to the purchase of our home office property in Framingham this month.

We're very pleased to have made this purchase, which along with the building, we recently purchased in Marlborough, will provide TJX with the space we need to accommodate our anticipated home office growth for many years.

Even with this increase, we expect to end the year with $1.5 billion to $1.6 billion in cash, which is more than we originally expected.

This is after reinvesting in our businesses, and returning excess cash to shareholders through our dividend and buyback program.

Summing up, in the short-term, we significantly outperformed our expectations for the first half of 2012, and enter the second half with great momentum in all of our businesses.

August is off to a good start, and we see plenty of opportunities for the back half.

Our inventories are in excellent shape and turning faster than last year.

This puts us in a terrific position to pursue opportunities in the marketplace, and our customers are seeing extremely fresh and exciting merchandise in our stores.

We plan to be extremely focused on gift giving in the holiday selling season again this year, and have many exciting initiatives up our sleeves.

I believe our brand penetration, merchandise mix, and values will only get better.

Our marketing campaigns through the back half are the best I've ever seen, and I'm confident we will drive more new customers to our stores.

In the long-term, we believe our global business model offers some of the best defenses and offenses in retailing.

When we execute well, we can succeed in virtually all types of macro environments.

We are leveraging our four powerful divisions more and more every day, and have confidence in ultimately growing TJX for the $40 billion and beyond.

And now I'll turn the call back to Scott to go through guidance, and then we'll open it up for questions.

Thanks Carol.

Before I get to guidance I first want to provide some detail on the impact of FX on TJX Canada's profit margins in the second quarter.

On a reported basis, TJX Canada's second-quarter segment profit margin was down 50 basis points versus last year.

As Carol mentioned, on an adjusted basis, excluding the impact on FX, segment margins were up 80 basis points over last year, which is more than we would typically expect on a 5% comp.

As a reminder, tables are available on our web site, which lay out the impact of foreign exchange on our international businesses, as well as our consolidated results.

Now to fiscal 2013 guidance, beginning with the full year.

As we noted in our press release today, we are raising our guidance for the full year by $0.01 to reflect our second-quarter earnings per share.

The new guidance calls for full-year earnings per share to be in the range of $2.39 to $2.45, which would represent a 20% to 23% increase over the adjusted $1.99 last year.

As a reminder, we had raised our full-year EPS guidance when we announced July sales a couple of weeks ago.

That raise was driven by our outlook for higher comp sales for the remainder of 2012.

Let me recap the key changes versus guidance we provided on the Q1 earnings call in May.

We now estimate consolidated comp store sales growth of 4% to 5% for the full year compared to our prior guidance of 2% to 3% growth.

Also, we now expect pretax profit margins of 11.6% to 11.8%, which is 90 to 110 basis points higher than last year's adjusted margin of 10.7%, and better than the guidance we provided in May of 11.1% to 11.5%.

As a reminder, our guidance includes a 53rd week in the fiscal 2013 calendar, which we expect will benefit the full year and the fourth quarter by approximately $0.07 per share.

On a 52-week basis, excluding the $0.07 benefit, full year EPS would be $2.32 to $2.38, up 17% to 20% over the adjusted $1.99 in fiscal 2012.

Our plan assumes a negative $0.02 share impact from a higher tax rate of 38.5%.

Let me now discuss the back half guidance.

We expect EPS to be in the range of $1.28 to $1.34, up 11% to 17% over $1.15 in the prior year.

This guidance is now based on comp store sales growth in the 1% to 3% range, versus the outlook we provided in May for comps to be flat to up 1%.

We're planning pretax margins to be 11.5% to 11.9%, up 10 to 50 basis points over last year.

This includes an estimated 10 basis points negative impact from foreign currency.

Now, I'll move to the third-quarter guidance.

We expect earnings per share to be in the range of $0.56 to $0.59, a 6% to 11% increase over last year's $0.53 per share.

Some of the components are as follows.

We're assuming a third-quarter top line in the $6.1 billion to $6.2 billion range.

This is based on consolidated sales growth in the 2% to 4% range, both on a consolidated basis and at the Marmaxx group.

As to monthly comps on both the consolidated basis and at the Marmaxx group, we are planning comp sales increases of 5% to 6% in August, 1% to 3% in both September and October.

Pretax profit margins for the third quarter are planned in the 11.2% to 11.6% range, down 30 basis points to up 10 basis points over the prior year.

This guidance includes an anticipated 30 basis points negative impact from foreign currency, so excluding FX, pretax margin would be flat to up 40 basis points.

We're anticipating third-quarter gross profit margins to be in the range of 28.1% to 28.3%, flat to up 20 basis points versus the prior year.

We expect mark-to-market adjustments on the Company's inventory-related hedges to negatively impact gross profit margins by approximately 20 basis points.

In terms of SG&A, as a percent of sales, we're anticipating a rate of 16.5% to 16.8%, which is flat to 30 basis points higher than last year.

This guidance includes approximately a 30 basis negative impact from the incremental investments to support our growth, which I mentioned earlier.

Assuming foreign exchange rates at current levels, FX would have a neutral impact on EPS in the third quarter, versus the $0.01 positive impact on Q3 EPS last year.

For modeling purposes, we're anticipating a tax rate of 38.5% in the third quarter, down 30 basis points versus last year.

Net interest expense is estimated to be in the $8 million to $9 million range, and we anticipated a weighted average share count of approximately $747 million.

Our full-year guidance implies fourth-quarter EPS in the range of $0.72 to $0.75, compared with $0.62 last year.

This guidance reflects comp sales to be flat to up 2%.

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.

Now, we are happy to take your questions.

To keep the call on schedule, we're going to continue to ask you to please limit your questions to one per person.

We appreciate your cooperation with that.

Thanks, and we will open it up for questions now.

(Operator Instructions)

Our first question today is from Richard Jaffe.

Congratulations.

Thank you.

You're welcome.

Seeing inventory down and turning so quickly, I want to know your thoughts, especially with new systems coming on board for inventory in the second half.

Well, we're planning inventories down again in the second half, and Richard, we're going to continue lean up our inventories going forward.

As I said, we're investing in our systems and we will probably be able to even be finer and more pointed in terms of the right inventory to the right stores in the future, but that's probably another couple of years plus out.

Got it.

Thank you.

Thank you.

Our next question is from Jennifer Davis.

Congratulations.

Thank you.

Since Europe is going well again, I just wanted to see if you could talk a little bit about the UK and Germany and Poland, since Germany and Poland are more kind of the growth avenues?

Thanks.

Well, I was very pleased with both Germany and Poland and the UK, obviously -- honestly, all three businesses are doing extremely well, so today, we put out there, 850 stores.

We absolutely think we can be 850 stores.

We're taking things slow and carefully, and then we'll see where it leads at that point.

Obviously, that's just with our current models in those three countries today.

But we're pretty excited about it.

All right.

Great, thanks and best of luck.

Our next question is from Jeffrey Stein.

Question for Scott.

Scott, wondering if you could talk a little bit more about the general corporate expense increase year-on-year.

I understand you're making some investments for the future, but I'm wondering if you could perhaps be a little bit more granular in terms of kind of ranking the initiatives, what they are, and should we expect that year-on-year increase to subside at all as we move into the back half of the year?

We haven't gotten into any of the detail in terms of ranking them.

The major pieces of the corporate expense increase have been what we stated before, e-commerce, investment in systems as Carol talked about, our new data center, and increases to support our growth primarily, and talent.

In terms of we are on plan on a full year for the corporate expenses we laid out for those items.

The only change, significant change from the first half to the back half, which it is moderating, as we said on the last call, is the increase in our incentive accruals because of our above-plan results, and that makes up the majority of the difference between our original plan and our full-year plan now.

Okay.

Thank you.

Thank you.

And our next question is from Roxanne Meyer.

Let me add my congratulations on a continued terrific performance.

Thank you.

Sure.

I'm just wondering if you could share with us in terms of your guidance, your profit margin expectations by division.

We're going to give you the full year, right?

Sure.

Let me -- so I'm going to be going through the full-year guidance.

Just as a note, all the numbers I'm going to be going through are on a 53-week basis, so let me start -- I'll go through each division, starting with Marmaxx.

Marmaxx comps for the full year are 4% to 5%, with a pre-tax margin of 14.3% to 14.4%.

It's against last year's 13.6% so a pre-tax margin change of plus 70 to 80 basis points.

HomeGoods' full year comps 5% to 6%, 11.8% to 11.9%, against last year's 10.6%, so an increase of 120 to 130.

Canada, 3% to 4% comp, 13.5% to 13.6% ex-FX, so ex-foreign currency, against 12.8% on a comparable basis.

FX last year were up 70 to 80 basis points.

Europe, 6% to 7% comp, 5.5% to 5.9%, again all on ex-FX against last year's 2.4% comparable number or up 310 to 350 basis points.

And again, just repeating what we said earlier in the script, a 4% to 5% full-year comp, where we're 90 to 110 basis points again over last year, and the same on -- with and without ex-foreign currency adjustments.

Okay.

Great.

Thanks and best of luck.

Our next question is from Kimberly Greenberger.

Great.

Thank you.

Good morning, Carol.

You've been saying in past quarters that your comps have been driven by very significant increases in customer traffic.

Did that continue here in the second quarter?

I think you had been indicating that ticket was sort of roughly flat.

And are there any places in particular where you think you're picking up traffic, and what are the initiatives to sustain that here through the back half of the year?

Thanks.

Kimberly, you know I won't give you all the initiatives.

It's mostly driven by customer traffic again in the second quarter, which is great, and our ticket is pretty much flat, very, very slightly up.

But what's even more exciting is the new customers we're getting, is we're seeing a lot of younger customers, which is really going to bode well for the future.

So we've got some great marketing plans for the back half.

I think it's going to be absolutely traffic-driven, so we're pretty excited.

I don't see our ticket including substantially.

We're going after giving extreme value.

In terms of just traffic, where is it coming from, we are straight across the board.

There isn't an area that isn't -- it's the flattest I've ever seen it across the board, in terms of where our comps are, so there's no particular area or region or demographic driving it.

Really across the board.

Thanks, Carol.

Our next question is from Omar Saad.

Carol, we really appreciate the strategic update and the color you gave in the prepared remarks, so thanks for that.

Thank you.

On the topic of the offense that you talked about, the offensive side of the TJX story, how do you think about the productivity opportunity long run, even if it's on kind of a theoretical basis, how much higher can sales per store go on lower inventories per store?

And is there eventually an inflection point where you're going to need more inventories to continue to drive the comps and the sales and the productivity?

Thanks.

It's really not about the level of inventory.

What we're trying to do is speed up, almost on a daily basis, freshness into the store, so when we look at the initiatives that we have in place for the future, we don't look at it as, here's the inventory level.

We really look at it as that speed to store.

So, I don't know.

It's a great question you just asked, in terms of productivity per store, because I don't know how high is high.

And we asked that question because we're just -- we're at the beginning, and obviously every day we see more and more opportunity.

So, the idea of speeding up that freshness, and every day, and in some stores even twice a day delivering to the store, plus the in-store initiatives of treating our customers better.

We're going to continue to improve the remodels and the things we have to do within the store.

So, I don't have the answer to the end game.

And then the third element to that is we're still not -- we're still not so sophisticated to the levels we think we can be, in terms of categories to the right stores.

For example, we have certain stores that are just much better in juniors and a younger customer.

We're not great at targeting that perfectly yet, so there's just a lot a lot of opportunities.

Thank you.

Our next question is from Mark Montagna.

Just regarding the new customers that you've been getting, is there a particular ramp, in terms of, they're much stronger in their second year of becoming a TJX customer versus their first?

And then just dealing with those systems that you were talking about, is that -- are we going to see incremental gains along the way, or is it the type of thing that in a few years the whole thing is plugged in, and that's when we start to see the gains?

I think it's going to -- it's just going to keep eking.

As I say, what tends to happen with us is we try something, we see it, and we're like, this is interesting we may have some other opportunities.

But this is -- we have two big initiatives in place in terms of systems, and they're not going to be simultaneously.

We're going to be doing one first, and then the second one.

In terms of the customer the second year, we don't have data on that, but we just know that we're keeping our customers and they continue to come back.

We're also -- when our customers learn more and more about us, and they shop more than one brand, we really see incremental spending, and that's what's exciting about our marketing game plan going forward, is getting more customers to not only find us, but to find all three brands, let's say in the United States like a HomeGoods, a Marshalls and a T.J. Maxx.

Okay.

All right.

Great.

Thank you.

Our next question is from Rick Patel.

One of your off-price competitors, Daffy's, is currently liquidating.

Can you just talk about the implications of this on your business?

Do you see this as a big market share opportunity for you, either from a sales or merchandising perspective, and secondly, can you also talk about any real estate opportunities that emerge from this around the New York metro area?

Is this a region where you'd be looking to increase your store base further?

Well, we are looking to increase our store base further, and you're going to see -- you're going to see more stores in the future in New York, and honestly all over, because we keep increasing the count.

Daffy's isn't that significant.

We always tend to gain a little bit if it's near one of our stores, but we don't look at it that way.

Our next question is from Paul Lejuez.

Just wondering if the higher merchandise margin that you saw during the quarter was more a function of initial margins, or was it more of an issue of having lower mark downs, and I guess I'm also wondering which of those pieces do you kind of view as more sustainable, if in fact they came from both?

And then also just curious about where you are today on pack away levels, versus same time last year?

Thanks.

I think we gained a lot in mark downs, and I think we gained a little bit in the merchandise margins, but again, that all comes back to turning the business a lot faster.

Ernie you want to comment on our pack away?

Pack aways have been kind of in a similar realm to where we had them in the past, maybe they've eked up a little bit, I'd say, but nothing substantially different.

But the only thing I would say is the quality of the pack aways has been, a lot of opportunities, so we're very happy with the content and the excitement there.

The brands that are in the pack aways this year I feel like are a notch from where we were in the past, so we're looking forward to the future on that.

That feels good.

And in total, in general, pack aways reflect that there's just a lot of desirable goods in the marketplaces, and that's all the different families of business.

And that actually applies, as you can see from the results in Europe or Canada or the US, and in the home categories as well.

HomeGoods is filling itself.

We're very happy with what we're finding in the marketplace out there.

Just as a follow-up, where are you in the split between upfront versus in-season buys?

Have you seen a peak on the in-season side, or is there still an opportunity to push?

Good try, Paul, but we don't comment on that.

No, not -- I don't want the number, I just want directionally, can it go higher in-season?

We're very happy with our liquidity.

We're in great shape.

Thanks.

Good luck.

Our next question is from Brian Tunick.

Congrats as well.

Was wondering two things, I guess maybe, can you talk about the lift you are seeing from the remodels or the prototypes, can you maybe talk about how much that might be contributing to the above-planned sales?

And then, I think, Carol, on the last call, you might have mentioned from a flow-through perspective normally you guys think of one comp point equalling about $0.05, and I think this year you thought about $0.02.

So just wondering as some of the initiatives, e-commerce, et cetera, roll off, can we look back or look ahead to next year?

Will every one comp point get back to equaling $0.05 of earnings?

First of all, for each comp in the back half, it's equivalent to about $0.03, and we really don't discuss our lifts for our remodels.

And we'll just continue look for the next initiative.

So Scott, you want to make a comment?

Again, certainly it's something we have been, as you know, by the number of remodels we're doing in that 300-plus range this year, and we always try to get -- we feel real good about the remodels, and we try get them done early in the year in terms of the capital spend.

And thus far year-to-date, we have completed the majority, almost 275 of our remodels.

And that's usually how we plan it every year.

But we haven't given out plans for the future, but it's still a big part of our capital spend program for the next few years.

I just want to make one other comment, just on the flow through and going forward.

Omar asked a great question in terms of the productivity per store.

So again, we don't know the end game.

We just know that we execute and we keep the flexibility.

And our ability to find ways to keep driving sales, is just going to keep moving us in what we feel in a positive direction.

We have lots and lots of seeds, so I really don't know the end game of the comp and the flow through.

But we just see tremendous opportunity.

Our next question is from Evren Kopelman.

A two-part question on Europe, as your comps improve, what's your thought process in terms of the timing of returning to higher square footage growth there?

And the second question is, the segment margins are mid single digits, significantly below, obviously, US.

How much of that is just scale?

Because it doesn't look like a sales productivity issue?

Is there a merchandise margin structurally lower in Europe, or is it almost all scale issue?

Thanks.

Well the majority or it is a scale issue.

We always put the model out there.

I think we put an 8% model out there, and obviously, as we grow, we hope to beat that.

Ernie, you have a--?

Yes, I'll address it on a scale, we were at a higher margin at one point before, and as Carol mentioned in the script, the growing too fast we've learned from, and so in the growing too fast, really it became an issue of we needed more experienced people in the right jobs and in the right countries.

So with that, I think you're going to see the margin continue to get back, and go back towards that higher level that Carol just talked about.

And on the square footage growth, I think that's really once step at a time, so we've learned our lesson when we too aggressively went after the square footage growth before the infrastructure was there.

We're happy with the business right now, as you can see.

We're happy with the top line and the bottom line directionally, is really, as you know a couple hundred basis points up, so that all feels good, but we don't want to ramp up the square footage growth until we have consistency.

So again, one step at a time.

Yes, we have a lot of opportunity ahead of there, but we're taking it slow and steady.

Ernie and his team are really looking at all the real estate opportunities, though, and taking full advantage of it, so we are very, very pleased with what we're seeing, and if someone should be storing, especially in the UK, that that's one thing we're not going to miss, is taking advantage of that.

Our next question is from Patrick McKeever.

Do you feel like you're picking up any business from Penney's?

I guess just looking at the stores that you have that are close to Penney's, are those performing any differently than stores that are not so close?

Yes, so Patrick, Marmaxx has been -- all of our business has been consistently strong across the board, but even where we don't have a JC Penney's, it's very consistent.

We don't take the time to analyze that, but I can tell you across the board, where there isn't Penney's we're very pleased with our Business.

And then just a real quick one, on the month-to-month guidance for the quarter for the third quarter, August 5% to 6% and then September and October, 1% to 3%, is that largely the comparisons, the cadence?

Part of it's a comparison, and again, we want to build our plans and work very hard to beat our plans.

That's how we run our Business.

We try to keep them lean and always strive to beat, if we can.

Thank you.

Our next question is from Howard Tubin.

Maybe, Carol, generally speaking can you give us an update on your marketing plans for the fall season, whether you're spending more this year for fall versus last year, and whether your TV impressions will be up versus last year?

The impressions will definitely be up.

We're being pretty aggressive on TV, so you're going to see our tri-branding, all three businesses coming together.

You're going to see gift certificates.

You're going to see the ability for the consumer to have the choice, when they do gift cards, so we're pretty excited about all of it.

Our next question is from Marni Shapiro.

Congratulations, everybody.

And I'm curious about that gift cards that you can use across the brands, that sounds very interesting, that you just mentioned.

But my question was, you have a younger shopper coming in, and I was curious if this was across the brands, and if, due to this you're seeing any segments distort sales-wise, and growing at a faster pace, and are you able to chase those businesses?

Well, we're not going to get into specific businesses, but we are seeing a younger customer, without a doubt.

HomeGoods is probably the one business where we don't have that young teen customer, but don't put it past us to not have things up our sleeves.

So, our goal is really to keep our customers in that average, we always ran in the average and the high 40s age-wise.

Our goal is to keep our customers all ages, and to gain new customers, and have them for the future, and we're pounding away at that.

Excellent.

And the gift cards, you'll be able to use them across all of your brands?

Is that what you said?

Correct, if you get a gift card, you can use it at a HomeGoods, a Marshalls, or a Maxx.

That's brilliant.

Congratulations.

Good luck with fall.

Our next question is from David Glick.

Scott, just a quick question on the incremental investments you're making and your growth initiatives.

I was just wondering if you could quantify those this year and whether, going forward, we should still expect you to make those investments, and do you still anticipate being able to leverage SG&A in your long-term 10% to 13% EPS growth model?

So in terms of the investment for this year, again, we haven't specifically addressed all the details, but on a full year, they're impacting us approximately 30 basis points this year.

In terms of going forward, we expect them to moderate, I think as we've called out before.

In terms of -- in terms of us on our SG&A rate on our model, which we do on a 1 to 2 comp, we expect to be flat to slightly leveraged.

If we beat the 2 comp, then we will leverage the SG&A, so that's no real change there, other than we expect to moderate our incremental investments going forward.

Great, that's very helpful, thank you.

And just one follow up on your free cash flow in the first half was very powerful, from lower inventory levels and higher net income, among other reasons, and you referenced, Carol, some pretty high excess cash levels, or total cash levels.

Do you think any differently about how you return cash to shareholders going forward?

You're already buying back well over $1 billion in stock.

Or do you think more about the dividend, or are you just going to continue on the same path?

Well, we're going to obviously we look at that every year, and we want to keep giving cash -- increase our dividend each year.

So we look at that every year and we will evaluate it, but we always want to obviously have a good amount of cash, in case something interesting comes up in the future.

Scott, you want to comment?

Yes, again, we certainly love having the flexibility of slightly more cash than we might need, but we have, I think over time, as Carol has pointed out, it was in the script, increased that dividend, and also over time we've been including the shareholder buybacks, so I think we remain committed to that.

Our next question is from [Brendan Fox].

I have a quick follow up on inventory levels, one, the inventories on a dollar basis were down 12%, if you could help us understand what that was on the unit basis.

And also as a follow up, I want to ask from a very high level, if you could tell us, has your buying organization expressed to you any sort of change in where they've seen the best opportunities over the last say three to six months, to buy the fashion, and also how they see that evolving over the back half of the year?

Thank you.

So, no, in terms of buying organization change.

Understand, we really buy from over 15,000 vendors and we're all over the world, so we continue to try to just spice it up and make it very exciting.

So they're just out there pounding the pavement every day.

In terms of our unit basis, we really don't give the -- we don't go into our units by store or unit basis.

That information is a little bit on the competitive side.

Okay.

Great.

Thank you.

Our next question is from Jaime Katz.

Can you talk a little bit about the productivity of maybe some of the new stores in Canada and Europe versus some of the established stores, and whether or not it's been more difficult getting established in new markets versus the ones that you were in?

I can tell you, Jaime, all of our new stores are very highly productive, as well as that's where our comp is coming from.

Number one, our comps have been terrific, and our new store performance across the board has been above plan, so we're just seeing the overall business very strong.

Okay.

Thank you.

And I am showing no further questions at this time.

Thank you everyone, and we really look forward to reporting on Q3.

Thanks again.

Thank you and this does conclude today's conference.

You may disconnect at this time.