TJX Companies Inc (TJX) 2016 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to The TJX Companies first-quarter FY16 financial results conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded February 24 of 2016.

I would like to turn the conference call over to Mr. Ernie Herrman, Chief Executive Officer and President of the TJX Companies, Inc.

Please go ahead, sir.

Thanks, Gabby.

Before we begin, Deb has some opening 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 implementation of the Company's plans to vary materially.

These risks are discussed in the Company's SEC filings, including, without limitation, the Form 10-K filed March 31, 2015.

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

Any recording, retransmission, reproduction or other use of the same for profit or otherwise without prior consistent sent of TJX is prohibited and a violation of 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 and the investor information section of our website, 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 website, TJX.com, in the investor information section.

Thank you.

And now I'll turn it back over to Ernie.

Good morning.

Joining me and Deb on the call are Carol Meyrowitz and Scott Goldenberg.

Before I begin, I'd like to take this opportunity on behalf of myself, our entire management team and our organization to express our sincerest gratitude to Carol.

For nine years as CEO and over a long tenure at the Company, Carol has led TJX to great success with achievements too numerous to cover on this call.

I am delighted that in her new role as Executive Chairman Carol and I will continue our 20-plus years of working together.

Thank you, Carol.

I'd like to start by saying that 2015 was another terrific year for TJX.

We surpassed $30 billion in sales, and consolidated comp sales increased a strong 5%, which was well above our plan.

We are extremely pleased that the comp was driven entirely by customer traffic.

Consumers are loving our stores and shopping us even more frequently.

We're convinced we're gaining market share profitably around the world.

On an adjusted basis earnings per share increased 5%, also above our expectations, and over a strong 12% increase the prior year.

2015 marks the 20th consecutive year of comp and EPS gains for TJX.

In our 39-year history we have seen only one comp store sales decline.

We're also very pleased that we drove merchandise margin increases while offering even more amazing values to our customers.

It's important to note that we achieved these results despite significant foreign currency headwinds, as well as reinvesting in the business.

Further, we were thrilled that our momentum continued into the fourth quarter.

We ended the year with fourth-quarter results that significantly exceeded our plans.

It's also great to see such consistency in our business, with comps hitting 5% to 6% every quarter of the year.

Our 2015 performance once again demonstrates the power of our differentiated, flexible business model to succeed across many different geographic, economic and retail environments.

We were thrilled to expand our global footprint into Austria, the Netherlands and Australia in 2015.

So, now we operate in nine countries across three continents.

Looking ahead, I'm very excited about the future of TJX.

We enter 2016 with terrific momentum and the year is off to a strong start.

We are convinced that we can continue growing our customer base around the world and are pursuing various opportunities to capture market share.

To support our goals for growth we are continuing to make strategic investments in the business.

I am also confident that we are making the right investments today that will help us grow to $40 billion and beyond.

As always, we have a management team that is passionate about achieving its plans and, more importantly, passionate about striving to surpass them.

Before I continue, I'll now turn the call over to Scott to recap our fourth-quarter and full-year numbers.

Thanks, Ernie, and good morning, everyone.

I'll begin with some more details on our full year FY16 results.

Again, we are thrilled that our 5% consolidated comp increase was entirely driven by customer traffic.

It was also great to see that customer traffic was the primary driver of the comp increase at each of our divisions.

We believe we are gaining share profitably across all geographies.

As a reminder, our comp sales exclude e-commerce.

Diluted earnings per share were $3.33, a 5% increase over last year's adjusted $3.16, and exceeded our most recent guidance.

It's important to note that our full-year EPS growth was negatively impacted by approximately 4% due to foreign currency and transactional foreign exchange, and about 4% due to our wage initiative, as well as incremental investments and pension costs.

For the full year, consolidated pretax profit margin was 11.8%, down 50 basis points versus last year's adjusted 12.3%.

Gross profit margin was 28.8%, up 30 basis points versus last year, and merchandise margins were also up.

SG&A expense as a percentage of sales was 16.8%, up 70 basis points versus last year's ratio.

Now to our fourth-quarter results.

Consolidated comps increased 6% over a 4% increase last year and well above our plan.

This marks our 28th consecutive quarter of consolidated comp store sales growth.

We were very pleased that our fourth-quarter comp was also entirely driven by customer traffic.

As with the year, traffic was also the primary driver of each division's quarterly comp increase.

Diluted earnings per share were $0.99, a 6% increase versus last year and also well above our plan.

It's important to note that our fourth-quarter EPS growths was negatively impacted by approximately 4% due to foreign currency and transactional foreign exchange and about 5% due to our wage initiative, as well as incremental investments and pension costs.

Consolidated pretax profit margins was 11.9%, down 50 basis points versus the prior year and significantly better than we planned.

Gross profit margin was 28.7%, up 50 basis points versus last year.

This was due to an increase in merchandise margin and strong buying and occupancy leverage on the 6% comp.

We are very pleased with our gross margin and merchandise margin increases despite the significant negative impact from transactional foreign exchange at TJX Canada and TJX International and increased costs associated with moving more units through our supply chain.

SG&A expense as a percentage of sales was 16.7%, up 100 basis points versus last year's ratio.

This increase was primarily due to our wage initiative as we had anticipated, as well as contribution to TJX's charitable foundations, higher incentive compensation accruals due to the Company's above plan performance, and increased supply chain costs.

At the end of the fourth quarter, consolidated inventories on a per store basis, including inventories held in, warehouses but excluding in-transit and e-commerce inventories, were up 6% on a constant currency basis.

We took advantage of some amazing pack-away opportunities during the fourth quarter and ended the year in an excellent inventory position.

Now to recap our fourth-quarter performance by division, Marmaxx finished 2016 with its best quarter of the year.

Comps grew by a very strong 6% on top of a very solid 3% increase last year.

Once again, it was terrific to see that the comp increase was entirely driven by customer traffic.

As we had planned with our merchandising and value strategies, we saw significant increase in transactions and units sold as well as a decrease in average ticket.

Apparel, including accessories and home, both had excellent performance, which is nice to see in today's retail environment.

Segment profit margin was flat as Marmaxx's significant merch margin increased and buying and occupancy leverage offset the expected impact of our wage initiative, higher supply chain costs and investments in e-commerce.

We begin the new year with great momentum at our largest division.

HomeGoods delivered another outstanding quarter.

Comps increased 7% over last year's strong 11% growth, and segment profit margin was up 60 basis points.

We are very pleased with HomeGoods' strong increase in merchandise margins.

Customers clearly love HomeGoods as we keep growing this premium brand.

At TJX Canada, comps grew a phenomenal 14% over a strong 7% increase last year.

This marks the fourth consecutive quarter of double-digit comp growth.

Adjusted segment profit margin, excluding foreign currency decreased 140 basis points, primarily due to transactional foreign exchange as well as higher incentive compensation accruals due to TJX Canada's above plan performance.

I want to point out that the year-over-year decline in the Canadian dollar had a significant negative impact on this division's merchandise margins.

Once again, the efforts that our Canadian organization made to mitigate this currency impact were terrific and highly effective.

We are very pleased that all three chains delivered great performance.

Now to our businesses beyond North America.

These include our European business and Trade Secret in Australia which together now comprise TJX International.

TJX International's comp growth was 1% and adjusted segment profit margin excluding foreign currency decreased 170 basis points.

This was primarily due to investments in new countries and transactional foreign exchange as well as some deleverage on the 1% comp.

While the fourth quarter was softer than we would have liked, we are pleased with the improving comp trends we are seeing in this business.

Further, TJX International delivered an excellent year.

On our e-commerce sites in the US and UK, we also offer customers a constant flow of gift giving selections at amazing values throughout the holiday season.

We have added thousands of new brands to TJMaxx.com since we launched, and plan to continue adding new categories and brands to all of our sites.

Now, to our financial strength and shareholder distributions.

Our business continues to generate excellent cash flows and strong financial returns.

In FY016, free cash flow was $2 billion, and ROIC was a strong 22%, one of the highest we have seen in retail.

This is thanks in large part due to our disciplined approach to capital allocation.

As always we remain committed to returning cash to our shareholders through our share repurchase and dividend programs, while simultaneously reinvesting in the business for the near and long term.

Now let me turn the call back to Ernie and I'll recap our first-quarter and full-year FY17 guidance at the end of the call.

Thanks, Scott.

First I'd like to briefly cover some highlights from the fourth quarter.

Again, we were thrilled to end 2015 with such a strong finish.

Customer response to our exciting assortments and great values was terrific this holiday selling season as well as during the post holiday period.

Every year we work to improve over the year before.

I believe that our marketing and store initiatives, gift giving and constant freshness were even better than last year, and truly set us apart from other retailers.

We believe this drove new shoppers to our stores and encouraged more frequent shopping trips.

Also, we liked how we transitioned our stores after the holidays with our stores looking extremely fresh.

Now I'd like to talk about the major strengths that different TJX from so many other retailers.

We're convinced that the same elements of our business that differentiate us from other retailers are also key to our continued successful global growth.

Further, we believe these elements would be extremely difficult for others to replicate.

First, we have a world-class global buying organization that I believe is the best in retail.

There are over 1,000 people in our buying organization.

And our total merchandising organization, which includes our plan allocation group, is nearly double that size.

Our buyers are located in 11 countries across four continents, and we source from a universe that now numbers more than 18,000 vendors in over 100 countries.

This is why we see ourselves as a global sourcing machine.

Many in our merchandising organization have been with us for multiple decades, and we have dedicated nearly 40 years to cultivating the talent and off-price expertise of our teams, as well as improving on our buying processes.

Further, we take enormous pride in our strong corporate culture which I am convinced is a key factor in our recruiting and retaining top talent.

Second, our global supply chain and distribution network have been developed and refined over nearly 40 years to support our highly integrated international business and opportunistic buying.

There is no off-the-shelf off-price inventory management software to support a global business model like ours, which is why our proprietary IT systems are designed specifically to handle our off-price buying.

Our distribution network can process buys as small as 100 units to over 1 million units from any one of our thousands of vendors in a timely and efficient manner, and then allocate that merchandise to the right stores at the right time.

We continue to invest in our supply chain ahead of our store growth to ensure that we have sufficient capacity to support new stores, new chains, and new countries.

Third, we are capitalizing on our global presence.

TJX is the only major international off-price apparel and home fashions retailer in the world.

We are one of the few major US retailers to have expanded successfully internationally.

We're the largest off-price retailer in the US and Canada and remain the only major brick-and-mortar off-price retailer in Europe and Australia.

We operate highly integrated and synergistic businesses across many geographies and have built global teams and international infrastructures over many decades.

We see our international depth and expertise as a major advantage as we continue to expand our value concept around the world.

These key strengths allow TJX to be one of the most flexible retailers in the world.

Our best-in-class buying organization, combined with our vast vendor universe, allows us to be nimble in the marketplace and capitalize on the best opportunities.

The flexibility of our stores and distribution network allow us to respond quickly to changing customer preferences and trends across many different retail and consumer environments around the world.

Further, while we offer consumers many different chains and merchandise categories, each of our four major divisions operate on the same off-price business model.

We function as one TJX and leverage talent, infrastructure, ideas and expertise across the chains.

This is an important advantage when opening new stores, launching new chains, entering new markets or testing new seeds.

All of these factors give us great confidence that we can continue our successful, profitable global growth.

Further, I believe that it is often underestimated how difficult it would be for other he retailers to try and replicate these strengths.

These key advantages also underscore our confidence in our ability to gain market share profitably and achieve our long-term goals for growth.

Let me take a moment to review our major growth drivers.

And there are really three.

Our number one initiative remains driving customer traffic and comp sales.

We were very pleased with our traffic gains at all divisions in 2015, yet we are convinced that significant opportunity remains to gain market share.

We reach an extremely wide demographic.

And we like the growth in our customer base across all ages, particularly millennials across all of our divisions.

To attract more new customers we will continue to leverage our global marketing capabilities.

During the holiday season we again leveraged our tri-branded campaigns across the US and Canada and believe that they helped drive more customers to our stores.

In 2016, we are strategically shifting our marketing dollars to spend more in certain markets and geographies to capitalize on our biggest opportunities.

We are continuing our integrated marketing approach to engage with shoppers of all ages through television, radio, digital, mobile and social media.

To encourage more frequent visits and cross shopping of our brands we are growing our successful loyalty programs in the US, Canada and the UK.

We also continue to upgrade the shopping experience and plan to remodel about 240 stores across the Company in 2016.

We were pleased to see our overall customer satisfaction scores increase in 2015 but still see room to become even better on this front.

We are confident our wage initiative will help us attract and retain talented store associates.

I should note that while we are always working on improving efficiencies in our business, we haven't taken any customer-facing actions that would diminish the pleasant shopping experience that we want to ensure for our consumers.

Importantly, we see e-commerce as another great way to drive customer traffic both online and to our stores.

Our second major growth driver is our enormous global store growth potential.

As I just discussed, our ability to leverage our global teams' nfrastructure and operational expertise are major reasons for our confidence in being able to continue to open stores profitably around the world.

With over 3,600 stores today, we see the potential to grow by more than 50% to 5,600 stores long term.

To be clear, this reflects the potential we see with our existing chains in our existing countries alone.

But beyond this, we believe huge opportunity remains.

In North America we see the potential to add over 1,400 stores.

In the US, we are far from finished growing our largest, most profitable division.

Marmaxx is nearly a $20 billion business, and TJ Maxx and Marshalls each have more than 1,000 stores.

Yet, we are confident meaningful opportunity remains to continue growing both chains.

Long term, we see Marmaxx growing to approximately 3,000 stores.

At HomeGoods, plenty of white space remains across the US.

We see this chain expanding to at least 1,000 stores, almost double its existing base.

And in Canada our long-term target is about 500 stores.

In Europe we see the long-term potential to expand to 975 stores, almost double our current base.

This reflects the potential we see for TK Maxx in our current geographies alone, and HomeSense in the UK, and this is before we consider the growth prospects we see in other countries.

We are pleased with our launches in Austria and in the Netherlands which underscored our confidence entering into Australia.

We see the potential to develop Trade Secret in Australia as similar to how we grew our Canadian business from a five-store chain to that country's leading off-price retailer.

Australia has a population about two-thirds the size of Canada's with similar customer demographics.

This underscores our confidence in our ability to grow Trade Secret to be at least a 125-store chain.

Clearly this number could be conservative and reflects just the potential we see in the early days of owning this business.

Before I wrap up on store growth, I want to say that we are extremely pleased to have grown our store base by 185 stores or a strong 5% in FY16.

In addition to being at the upper end of our 4% to 5% range for the last several years, we plan to continue at this pace in FY17.

It also feels great to say that even in today's volatile retail environment, we closed only one store last year.

That's on a store base of over 3,600 stores.

All of this speaks to the fundamental strength of our business, our disciplined a approach to real estate, and our decades of operating expertise in the US and internationally.

I should note that we are opportunistic in our real estate strategies, as well, and see volatility in the marketplace as an advantage for our business.

The third major growth driver is new seeds and innovation.

We are constantly testing new seeds and ideas across the Company that could reap tremendous benefits for the future.

We are very happy with the early reads in our new Sierra Trading Post stores, and we would be thrilled for STP to eventually become a fourth major chain in the US and Canada.

Also, our successful expansion of TK Maxx into Austria and the Netherlands further demonstrates that our value proposition can work in many other European markets.

I'll wrap up with our outlook for 2016.

We are delighted with the great momentum in the business and our healthy start to the year.

Our business is very strong and we have many initiatives under way to drive sales and traffic.

Our plan for earnings per share growth this year reflects the expected negative impact due to foreign currency and our wage initiative.

In addition, investing in initiatives to gain market share and to strengthen our leadership positions around the world remains a top priority.

We are committed to carefully balancing our growth and investments and we remain disciplined in our approach.

In 2016, we plan to continue investing in our stores, talent, supply chain, IT, and new seeds.

Our strategy is to invest ahead of our growth and we are confident that we are making the right investments today that will give us a strong foundation for the future.

Importantly, we are investing in initiatives in which we have decades of knowledge and expertise.

All of this gives us great confidence that our investment strategies will be successful.

We see many exciting opportunities to expand TJX both domestically and internationally.

We are confident that these investments we are making today will strongly position us to reach the next level of growth.

As always, we are laser focused on beating our plans.

I could not be more excited about the future of TJX.

This is a great Company and I am confident we will continue to deliver successful growth for many years to come.

Now I'll turn the call over to Scott to go through our guidance.

Then we'll open it up for questions.

Thanks, Ernie.

Now to FY17 guidance, beginning with the full year.

We expect earnings per share to be in the range of $3.29 to $3.38, which would be down 1% to up 2% versus $3.33 in FY16.

As Ernie mentioned, similar to last year in FY17 we are planning our earnings per share to reflect the negative impact from a couple of factors.

First, similar to last year, we expect foreign currency and transactional foreign exchange to negatively impact FY17 EPS growth by approximately 4%.

Again this year it's primarily the result of the dramatic decline in the Canadian dollar and British pound rates versus the prior year.

Of course, it's important to remember that FX could moderate or benefit us in the future.

Secondly, as we detailed on our third-quarter earnings call, we are assuming that our wage initiative will have a negative impact of about 4% to FY17 EPS growth.

As always, we are extremely focused on controlling costs and striving to exceed our plans.

Our EPS guidance assumes consolidated sales in the $32.2 billion to $32.5 billion range, a 4% to 5% increase over the prior year.

This guidance assumes a 1% negative impact to reported revenue due to translational FX.

We are assuming a 1% to 2% comp increase on a consolidated basis.

We expect pretax profit margin to be in the range of 10.9% to 11.1%, versus 11.8% in FY16.

We're planning gross profit margin to be in the range of 28.3% to 28.5% versus 28.8% last year.

In terms of the pressure we he see currency having on our mark-on and merchandise margins at TJX Canada and TJX International, we expect the negative impact to be even larger than last year.

Excluding the currency headwind, we would expect the consolidated underlying merchandise margin to be flat to slightly up this year versus last year.

We're planning SG&A as a percentage of sales to be in the range of 17.2% to 17.3% versus 16.8% last year, primarily due to our wage initiative.

For modeling purposes, we're anticipating a tax rate of 38.2%, net interest expense of about $54 million, and a weighted average share count of approximately 662 million.

Now to our full-year guidance by division.

As Marmaxx we're planning a comp growth of 1% to 2% on sales of $20.5 billion to $20.7 billion, and segment profit margin in the range of 13.6% to 13.8%.

As reminder, in FY17 we're planning Marmaxx's average ticket lower in the first half of the year and essentially flat for the second half.

At HomeGoods we expect comps to increase 3% to 4% on sales of $4.2 billion to $4.3 billion, and segment profit margin to be in the range of 12.9% to 13.1%.

For TJX Canada, we are planning a comp increase of 3% to 4% on sales of $2.9 billion, and adjusted segment profit margin excluding foreign currency to be in the range of 12.1% to 12.3%.

At TJX International, we're expecting a comp increase of 2% to 3% on sales of $4.6 billion, and adjusted pretax margin excluding foreign currency to be in the range of 5.6% to 5.8%.

Now to Q1 guidance, we expect earnings per share to be in the range of $0.68 to $0.70 versus last year's $0.69 per share.

This guidance assumes an expected negative impact to EPS growth of approximately 2% due to foreign currency and transactional foreign exchange and about 3% due to our wage initiative.

We're modeling first-quarter consolidated sales in the $7.2 billion to $7.3 billion range.

This guidance assumes a 1% negative impact to reported revenue due to translational FX.

For comp store sales we're assuming growth in the 2% to 3% range on both a consolidated basis and at Marmaxx.

First-quarter pretax profit margin is planned in the 10.2% to 10.4% range versus 11.1% the prior year.

We're anticipating first-quarter gross profit margin to be in the range of 28.2% to 28.3%, flat to down 10 basis points versus the prior year.

We're expecting SG&A as a percentage of sales to be in the 17.8% to 17.9% range versus 17.0% last year.

For modeling purposes we're anticipating a tax rate of 38.4%, net interest expense of about $13 million, and a weighted average share count of approximately 669 million.

It's important to remember that our guidance for the first quarter and full year assumes that currency exchange rates will remain unchanged from the levels at the beginning of the first quarter.

Moving to our store growth plans for FY17, we plan to add approximately 195 new stores, which would bring our year end total to about 3,809 stores.

This represents store growth of approximately 5% and is at the upper end of our range for the last several years.

I want to point out that our plans this year assume no store closings across our entire global store base.

Beginning with the US, our plans call for us to open about 60 additional stores at Marmaxx and 50 more stores at HomeGoods.

We also plan to open about 5 additional Sierra Trading Post stores this year.

In Canada, we plan to add about 30 new stores.

This reflects the opportunities we see to further expand Winners into rural markets as well as our nationwide opportunities for Marshalls.

In Europe we plan to continue our significant pace of store growth, opening approximately 50 stores this year.

This includes our plans to continue expanding into Austria and the Netherlands.

I'll wrap up with our financial strength and stability, which clearly gives us tremendous of confidence.

In FY17 we plan to continue our balanced approach to the use of cash.

With our increased investments to gain share and support our growth initiatives, we're planning for capital spending to increase to approximately $1.1 billion.

In FY17 we expect that the Board of Directors will increase our quarterly dividend by 24% on top of our 20% increase last year.

This would mark our 20th consecutive year of dividend increases.

We're planning to buy back $1.5 billion to $2.0 billion of TJX stock.

Even with this level of shareholder distributions, we still plan to end FY17 with $1.7 billion to $2 billion in cash and short-term investments which points to our significant financial flexibility.

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.

Thanks.

And now we will open it up to questions.

(Operator Instructions)

Our first question comes from the line of Omar Saad.

Sir, your line is open.

It's Omar Saad at Evercore ISI.

Thanks for taking my question.

Great quarter, guys.

I wanted to dive in on the gross margin line a little bit deeper, Ernie and Scott.

The transactional piece sounds a little bit bigger than perhaps we were thinking about it.

I had been under the impression in the European market you buy in pounds and euros, but maybe Canada's different.

Help me think about the potential, and perhaps use price increase or mix as a way to offset the translational impact, something that some other companies in the apparel space are using.

First, I'll just give you a bit of the breakdown there.

The components of the 4%, Omar, we're talking about next year are largely split between translational, which is just the taking the current British pound and, let's say, Canadian dollar with what averages we actually incurred last year.

The rest of that is just, again, the dropoff of the currency that we've seen in both the British pound and Canadian dollar.

Unfortunately -- or fortunately for us -- most of our purchases have not been made, so they're going to be subject now to this lower Canadian dollar.

If we had bought out like other chains, you would probably have less of an impact.

But with a big dropoff you're still going to have a dropoff that at this point's a bit more than last year.

I'll now turn it over to Ernie.

Omar, a good question.

What happens on that front, by the way, maybe adjusting retails would makes sense if we saw others doing that.

We haven't experienced that to that degree.

And our number one strategy, as you can see, overall, has been to gain market share.

So we're on this mission to continue to offer the outrageous value and not being the first one to try to up the retail.

We've been successful of recent by ensuring our value is the sharpest out there.

So, we do not want to mess with that.

And even though we're getting hit on the buying of the goods in US dollars with the Canadian dollar translation, we still haven't moved our values.

I believe if you look at our Canadian comps it's helping us gain significant market share, actually, in that market.

So right now that's the strategy that we're focused on.

Thanks.

That makes a lot of sense.

Scott, to be clear, the Canadian market, you're buying in Canadian dollars for the Canadian market?

But in the UK are you buying in British pounds, the cost of goods?

Omar, what it is, actually is in both markets we buy certain percentage of the mix.

So, in Canada we buy -- and I think we've been public on this -- about half the mix in US dollars and the other half is not, it's Canadian.

That's still a big chunk, as you can imagine.

And then in Europe about half of our goods are bought, let's just say, between US dollars and euro and that's about half split between, of that 50%, the US dollar and the euro.

Thank you.

That's really helpful.

Good luck, guys.

Thank you.

The next question comes from the line of Richard Jaffe.

Sir, your line is open.

Thanks very much, guys.

And, really, congratulations on a very strong quarter.

A two-part question.

One is, the traffic strength has been remarkable.

I'm wondering what are the levers you're pulling or what is the source of the success there?

Marketing?

Direct mail?

The e-commerce?

The effort we've seen in the US?

And then if you could just comment briefly on the decreasing ticket at Marmaxx and if it's the same at each division.

Okay, Richard.

Let's start at the top there.

In terms of the traffic, first of all, there's a lot of levers being pulled, just as you mentioned.

Marketing -- it's never one thing, obviously we won't give any specific breakdowns on it -- but marketing is a play.

We've been very happy, as you can see, and you've witnessed some of it, I'm sure, some of the creative we've had out there like our tri-brand campaign at holiday.

And we like what we're hitting out there with for this first quarter coming up.

Our loyalty programs have been strong.

Also very happy with that.

I would tell you one of the key drivers, though, still, especially in a business like ours which has so much traffic and frequency of shopping is that we've been executing the model, which is to deliver great goods at exciting values.

And we've been going after clearly these brands and quality and fashion at retails that in some cases are obviously lower.

That's a piece of why the average ticket had dropped -- so, to your question there.

By the way, your other part of your question, with the average ticket drop we've had a little bit of it in the other divisions but Marmaxx has really been more so the division that has experienced more of it.

It's not as big a swing in other places in the corporation.

But the traffic, we've been happy with it because we feel like we're working on all fronts.

And even at this point in time the amount of branded pack-away opportunities that have existed out there has really allowed us to position ourselves going into the new year, we think, to continue to help with the traffic pull.

How much is that pack-away?

We cannot give you that number.

That is a good question.

If you'd like to, maybe you'd like to ask Carol to see if she --?

Yes, you'll get that out of me.

(laughter) It's a small percent.

Thank you very much.

Thank you.

The next question comes from the line of Kimberly Greenberger.

Ma'am, your line is open.

Thanks so much.

I was wondering, Scott, you talked about rising supply chain costs.

Can you just put some numbers around that?

Are supply chain costs simply increasing because TJX volumes continue to grow quarter after quarter and year after year?

Or is there some deleveraging happening within the supply chain?

And I'm wondering if you have any initiative in 2016 or 2017 on the supply chain side.

The biggest piece of the supply chain cost in last year, and will be more first-half oriented this year, will be related to the lower average retail at Marmaxx and the cost of moving more units through, moving through our network.

So, we would expect that piece of that to moderate substantially in the back half at the moment.

The other piece, frankly, relates to, we did not plan, going back a few years ago, the 7 to 8 comps that we've experienced at HomeGoods, nor the double-digit comp increase that we've had at Canada, thereby necessitating, really more of a timing, moving forward the needs of our supply chain infrastructure, and even a little bit of that at Marmaxx given the lower average retail.

So, this is more of a timing of the next year or two where we continue to have those incremental costs and we would see that to moderate over time.

And at the same time, adding into that, as you've seen in the plans, we've upped the amount of HomeGoods new store openings, which is also in addition to obviously our comps, is adding to additional capacity needs because we're very bullish on the future of our store openings with HomeGoods.

All high-class problems.

Thanks so much and congratulations on a great year.

Thank you.

The next question comes from the line of Matthew Boss.

Sir, your line's open.

Congrats on a great quarter, guys.

As we think about SG&A, if you excluded the wage investment this year, would the comp leverage point in 2016 still be around that 2% hurdle?

And then just as we think about the investment opportunities, how would you rank them this year and next between international, systems, e-commerce?

Clearly a lot of different ways you guys can take the investments?

And then, finally, just any color on your current business post holiday, I think would be really helpful just given all the disruption from some of your competitors.

Matthew, let me just start with some of the color.

We'll let Scott speak to the SG&A.

That's in his wheelhouse, so to speak.

On the investing, first of all, we do what we think makes sense in each area.

Clearly we look at each independent.

Like international, where we look at there versus systems versus e-commerce.

We look at our strategy independently of each and decide what do we think is the right long term and the appropriate amount.

I'll tell you, on our e-commerce business, we've discussed this before, it's a relatively small piece of our business, and we are taking approach there of investing in a very methodical way and a careful way.

Having said that, we're very happy with the business where it is today.

We will keep that in ratio to the benefit and where we think we are headed with that.

Systems are certainly a maintenance side to that and a part of running the business that we are cognizant of.

And international, clearly you can tell from what we talked about in the script, that is a key focus for us and we have shown to make our model work whenever we replicate our model, wherever we go.

In fact, as I believe I mentioned, in Australia we are pretty happy with our early indicators there, going in fairly recently and already experiencing, I think, some pretty good success.

So, we can't give you specifics by the different investments.

We would tell you they're all long-term oriented and they're all doing what makes sense for the business.

In terms of color post holiday, also, as we mentioned, we're feeling very bullish, I would say, starting the new year off strong.

And that's across many categories.

Yes, there are plentiful opportunities in the market as we talked about going back at the last two quarter calls.

I think Carol and you I both discussed that with you in the last two quarters, but nothing has really changed in the environment out there.

In fact, there just continues to be a lot of opportunities.

If anything, we're at one of those high points of taking advantage of pack-aways but still having to control our merchants to make sure that we don't buy too much, actually, because there's so much to choose from.

So, we're feeling really strong about the positioning post holiday.

The liquidity is in a good position.

That is feeling healthy.

And I guess that's that.

I will ask Scott to jump in on the SG&A.

I won't give much more color on the investment, but our capital budget increase over last year is pretty similar when you talk about the new stores renovation, as Ernie talked about earlier.

And the biggest incremental piece of our increase over last year, frankly, relates to timing of some spend between FY16 and FY17, and then, as we talked about, just the cost related to the new distribution centers.

Moving to the SG&A, the comp breakeven is a solid 3%.

It used to be a bit lower but more having to do with the -- this is going back several years -- significant opportunities that were, at that point, in terms of cost efficiencies and lower lying fruit on merchandise inventories as we were bringing down substantially our inventories.

The last year and I would say still certainly with the wage piece, and a little bit with the average ticket, the incremental costs obviously are weighing on you because of the wage increases and with the average retail are mitigating a bit of what that would be on your flow-through.

So, a solid 3% excluding what would be, I would just say, the wage increase.

Okay.

Great.

Best of luck, guys.

Thank you.

The next question comes from the line of Paul Lejuez.

Sir, your line is open.

Thanks, guys.

On the Trade Secret business, is that currently losing money?

If it is, can you share with us how much in 2015 and maybe how much in 2016?

And just thinking about, now that you have that Australian business, does that change your pack-away strategy at all just given seasons are opposite?

Might you use less pack-away in the North America business, maybe ship some of the goods down there?

And just wondering, obviously related to that, does it maybe change your open to buy here in North America?

Thanks.

Paul, I'm not going to give a lot of color but clearly in the fourth quarter and early part of this year the Trade Secret acquisition will be a large portion of the decrease in the TJX International and a relatively -- an impact but a relatively small impact over the course of the year for TJX in total.

Paul, on your merchandise really mix and opportunity question there -- which, by the way, is a great question because one of the benefits we've liked about it is we have been able to bob and weave, so to speak, the way you have just described it.

So, we're able to take things that are a little out of season here and go there with it.

Now, you have to keep in mind we're dealing with 35 stores versus billions, right?

So, it's not a major swing impact for like the Marmaxx guys or the home business here, but there is a strong benefit for that new Australian business for Trade Secret because they're able to take advantage, to your point, of the off-season goods.

It becomes not a pack-away, it becomes an in-season use there.

And there's going to be some benefit, additionally, in terms of reading some trends on a certain fashion item, that we'll be able to go ahead of it there, like we're able to do with our Down South stores here, as well.

But even there, a little earlier.

That will give us some reads actually on some fashion items ahead of the curve so we can maybe take advantage of that back here.

So, great question.

And we're happy, again, as I said before, very happy with what we've already done with that.

And we have some great people working there.

We have a senior executive -- and I think we talked about this before from our Canada division 00 that has relocated there, as well as a handful of other TJX associates.

So, we are really TJX-sizing that business rather quickly.

Already -- and you guys are familiar with how we pride ourselves on turning fast to create the treasure hunt -- that division is already turning significantly faster than it did last year with a huge reduction in inventory.

So, all good signs.

And I think the subject you brought up about the way we'll buy it will just help that.

That will be another benefit in the future.

Great.

Thanks and good luck.

Thank you.

Our next question is from the line of Stephen Grambling.

Sir, your line is open.

I have a bit of big picture question and one follow-up if I can.

We often hear pushback from investors on how big off-price can be and if it really needs full price.

And this quarter seems to alleviate those concerns.

But can you give us any thoughts you have on that relationship between full price and off price, how that might be changing any quantification of how big the off-price market should be or can be?

Stephen, obviously I guess you would say in the big picture you're asking a group of people that are maybe not totally objective on this because we would say off-price can continue to get bigger and bigger and bigger, and we are not as high on the full price business for a reason.

I think in the environment that we're in right now, by the way, I think the value off-price business still plays better.

And some of the results that come out there, I think that will validate that.

If you look at our store growth that we've laid out, that tells you how bullish we are.

And then if you look at, I think, some of the other reports that have been out recently over the last couple of months on other types of retail that do not have store growth going the other way, so to speak, I think that would tell you that we believe the off-price is the big opportunity.

Sometimes there's a concern there's going to be a lack of goods as we continue to grow and add all these stores.

It just, as you know -- I think I said it like 20 minutes ago -- we actually have to hold the merchants back, still.

There's so much goods out there.

We've never not had it be that way.

It goes in waves, sometimes a little more than others.

Yes, right now it's a little bit more of that.

But even when it cuts back a little, there's still more goods than we can take in.

So, we're just bullish on this model.

We can't speak to, nor can the team, speak to really any other retail model as well as we can this one.

But we're very comfortable and confident where the potential lies in TJX and growth here.

Fair enough.

As a follow-up, you had outlined, I believe it was a 10% to 13% EPS growth algorithm at the Analyst Day back in 2013.

Is that still the right way to think about the long-term growth ex FX and maybe once wage hikes normalize?

We aren't really providing today our long-term EPS model because there's just a few factors impacting our growth.

The first one is clearly the foreign exchange issue has been in flux, by the way.

Some day that could go the other way and actually benefit us, but right now that's been in flux, as we just talked about.

Secondly there's a negative impact from our wage initiative, which Scott referred to, and it's bigger in FY17 that we're entering.

We expect it, by the way, in FY18 to go back to 2016 levels but it's still significant.

And the other, again, unknown there or a bit in flux is that we could be further impacted if additional cities, states or countries increase their minimum wage.

So that, again, hits us there potentially but we don't know by how much.

And then lastly we have our investments to fuel our future growth.

And these investments, by the way, as I said before, these are the right things to do.

And two of the key components there are building our supply chain earlier because we've had this high-class problem of growing faster than we planned on, and our systems investments.

And having said all that, we are so confident in TJX long-term vision for growth.

Yes, we're not giving you that long-term model today but our business is so fundamentally healthy.

Our traffic gains in FY16 and our momentum entering into FY17 are so strong.

We're just building talent for the future, is another thing we're after, and we are making long-term investments where we think they make sense.

So, hopefully that helps you.

That's helpful.

Thanks.

Best of luck this year.

Thank you.

Our next question comes from the line of Lorraine Hutchinson.

Ma'am, your line is open.

Thanks, good morning.

I wanted to follow up on the guidance for flat ticket in the second half.

Is this just a matter of lapping last year's initiatives?

And is there an opportunity to continue to sharpen the value proposition for customers as we move through the year?

Lorraine, it's funny, we talk about this quite a bit internally here.

So, we would say we expect it to moderate second quarter of next year.

You're exactly accurate.

Part of that was a mix component.

If you remember -- there were really two facets.

One, because of the nature of the environment right now, buying the same goods for less.

But then you have the other half of the component which was really just we juggled some of the mixes and the penetrations of certain mixes with lower ticket went up.

So it created a mix content issue.

To your question, we would think that's going to happen.

The only thing I would tell you is we have bought so little of that time period at this point because we're so opportunistic that we have so much open to buy for the second quarter that we could end up -- yes, we could end up -- slightly down in ticket again.

I doubt it would be to the he degree that we've had it last year over the year before, but it could be down a few points.

That's possible, because we don't want to predict.

One of the best parts of this business is when we have significant open to buy, we don't feel a need to have to call it today on where we could end up then.

We want to go with the best values that are out there.

Great.

And then can you talk about any trends at HomeGoods in terms of ticket?

Have those been up or down over the past couple years?

We don't really talk about that.

It's been of uneventful, I would say.

And ticket has not been a component of that business.

They are just doing so many other things that are driving the business, clearly.

We're just happy with the business because of all the execution on the other fronts.

If you walk in there, as you know, it's one of our, I would say, most impulsive mix stores.

It's difficult if you're a customer to walk in and not spend $200 -- that's the way we like to describe it -- because there's so much exciting impulse merchandise there.

It's really less of a ticket issue there and more about the ever-changing.

And I think you guys are aware, Lorraine, I'm sure you've heard from us how fast we turn HomeGoods.

It is our fastest turning business.

So I think we're getting a customer there that not only is impulsive to begin with, she could go back a week and a half later and it's different again.

So, we're excited about it.

Thank you.

Thank you.

And our last question comes from the line of Mike Baker.

Sir, your line's open.

Thanks.

I'll finish up by asking about the competitive environment relative to department stores and promotions -- IE, we know that they are pretty heavy in inventory and pretty promotional because of the warm weather earlier in the winter.

Did you see that?

How did you work against that?

But, more importantly, are you seeing any change in the promotional environment?

Presumably department stores have started to work through some of that inventory and the weather has gotten a little bit more seasonal in some areas, so are you seeing less promotional competitive pressures out there?

Mike, I have to tell you, I haven't seen no major shift of recent.

Right now you see less relative to fourth quarter because that's the nature of the time period when you're transitioning into the new season.

So, yes, there's less right now than there was before.

However, if you ask me how does it compare this year to last year for department stores, I could not answer that.

We try to focus on what we're feeling here.

What we feel in general is an environment of, again, a lot of availability of merchandise, so we don't know where that -- some of it's department store, some of it's specialty store, some of it's other types of stores.

That's really our own barometer.

In terms of their promotional activity, again, not sure.

We do see their ticket actually declining, is our perception.

I would say not declining but we see their ticket staying in the zone that it's been to last year, very similar, like we don't see any major shifts in what they're carrying.

Okay.

Understood.

One more, if I could.

I think I have these numbers right.

When you adjust out the wage and the currency, your earnings growth last year at this time, you talked about 9% to 12%.

This year, if you add back the 8 percentage points from those things it's more like 7% to 11%.

So, is the lower expected growth, excluding all those two one-time things, is it because of the investments you're making or is there something else in there?

The primary difference, or one of the biggest differences, is the wage versus last year, but also we don't have as high a level of merchandise margin increase also compared to last year.

So, as we talked about, we still have a merchandise margin that's planned up excluding the currency.

It's not planned at the higher levels that we had on the plan last year.

Again, comparable to the 1% to 2% comp that we had last year.

Those would be the two of the bigger components.

And Mike, I would like to reiterate, and I think we say this often, that we always plan conservatively and, as you know, our intention is always to beat these plans.

We are clearly putting together what we believe is the right plan to put together but our intention is to certainly surpass the plan.

Understood.

Appreciate that.

Thank you.

Thank you.

I think that was our last question.

We look forward to having the opportunity to talk with you guys again after the first quarter.

Thank you all for your time today.

Ladies and gentlemen, that concludes your conference call for today.

You may all disconnect.

Thank you for participating.