TJX Companies Inc (TJX) 2017 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the TJX Companies' second-quarter FY17 financial results conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded, Tuesday, August 16, 2016. I'd now like to turn the call over to Mr. Ernie Herrman, Chief Executive Officer and President of TJX Companies Incorporated. Please, go ahead, sir.

Thank you, Jim. 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 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 29, 2016. Further, these comments and the Q&A that follows are copyrighted today by the TJX Companies, Inc. 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 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 in the Investor Information section of our website, tjx.com. Reconciliations of the non-GAAP measures we discuss today to GAAP measures are 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 is Scott Goldenberg. Let me begin by saying that I am very pleased with our second-quarter results. Consolidated comp-store sales grew a strong 4% over a 6% increase last year, and above our plan. This marks the 30th consecutive quarter of comp growth for TJX.

We are thrilled that the comp was once again driven almost entirely by customer traffic. This is also the seventh consecutive quarter that traffic was the primary driver of our comp increase. In addition, it was great to see that traffic was the primary driver of the comp increases at all four major divisions, as our great brands, amazing values, and eclectic merchandise mix keep resonating with consumers. We are convinced that we are attracting new customers, driving more frequent visits to our stores, and gaining market share. Further, we were pleased with the strong performance across our apparel areas, including accessories and home businesses.

Earnings per share increased 5%, well above our expectations and over a strong increase last year. We achieved these results despite significant headwinds from wage increases and investments to support our growth. Further, we were extremely pleased with our strong merchandise margin increase, despite a significant impact from transactional foreign exchange. Our results once again demonstrate the power of our flexible business model and our ability to execute across many different retail environments.

With our strong second-quarter performance, we are raising our full-year comp and EPS guidance. Looking ahead, the third quarter is off to a solid start, and we have many initiatives planned for the back half of the year to keep driving traffic and sales. We are confident we will achieve our goals, and as always, our Management Team will strive to surpass them. We see many near- and long-term opportunities for growth and are well on our way to growing TJX to a $40 billion-plus Company.

Before I continue, I'll turn the call over to Scott to recap our second-quarter numbers.

Thanks, Ernie, and good morning, everyone. As Ernie mentioned, our second-quarter consolidated comparable store sales increased 4% over last year's 6% growth, which was above our plan. I want to note that this reflects the comp growth in our brick-and-mortar stores and excludes our e-commerce businesses.

We were very pleased that customer traffic was the primary driver of our comp increases at every division again this quarter. It was also great to see an increase in our units sold for another consecutive quarter. Average ticket decreased slightly more than planned.

Diluted earnings per share were $0.84, a 5% increase over last year's $0.80 and well above our plan. As expected, our EPS growth is negatively impacted by approximately 3% due to wage increases. The impact of foreign currency and transactional foreign exchange had a neutral impact to EPS growth versus our expectation of a 2% negative impact.

Consolidated pre-tax profit margin was 11.6%, down 40 basis points versus the prior year and significantly better than we planned. Gross profit margin was 29.4%, up 30 basis points versus last year and significantly better than we planned. This was primarily due to a strong increase in merchandise margins and gains on our inventory hedges.

SG&A expense as a percentage of sales was 17.7%, up 80 basis points versus last year's ratio. This increase was primarily due to wage increases and investments to support our growth, as we had planned.

At the end of the second quarter, consolidated inventories on a per-store basis, including inventories held in warehouses, but excluding in-transit and e-commerce inventories, were flat on a constant currency basis. We are very pleased with our lean inventory position entering the third quarter, as we are set up extremely well to flow fresh goods to our stores throughout the back half of the year.

Now to recap our second-quarter performance by division, Marmaxx comps increased a strong 4% this quarter, on top of last years 4% increase. Once again, it was terrific to see customer traffic as the primary driver of the comp increase. We continued to see a decrease in average ticket and significant increase in units sold. We are pleased that our merchandise mix and values remain a great draw for customers, which tells us that our strategies to balance the mix and offer even better values are working.

Segment profit margin decreased 30 basis points, as our very strong merchandise margin increase was more than offset by wage increases and costs associated with the lower average ticket. We are very pleased with the comp and traffic momentum at our largest division and have many initiatives planned to keep gaining market share.

HomeGoods delivered another great quarter, with comps increasing 5% over last year's 9% growth. Segment profit margin was up 50 basis points due to an extremely strong increase in merchandise margins. As we anticipated, wage increases continued to have a significant negative impact on HomeGoods' margin. Separately, to support the long-term growth potential of this chain, we opened a new distribution center in Tucson, Arizona in the second quarter. As a reminder, we see the potential to expand HomeGoods to be a 1,000-store chain, nearly double its current size.

At TJX Canada, comps grew an outstanding 9% this quarter over last year's 12% increase. Adjusted segment profit margin, excluding foreign currency, was down 150 basis points. This decrease was primarily due to the negative impact that the year-over-year decline in the Canadian dollar had on merchandise margins.

That said, we're very pleased with the sharp execution of our Canadian organization, which mitigated some of this pressure. TJX's Canada's margins were also impacted by increased supply chain costs, as we opened a new distribution center to support this country's future growth. We continued to be thrilled with the strength we have seen across all three of our Canadian chains.

TJX International's comps were up 2% over a 5% increase last year. While sales in the UK were slightly lower than we planned, our trends leading up to the Brexit vote were very strong. In addition, we were pleased to perform much better than many major retailers in the UK, as the Brexit vote weighed on consumers there.

We believe we are gaining significant market share in this environment. This speaks to our resiliency and ability to drive sales even in challenging times. As a whole, TJX International comps were in line with our plans due to the strong performance of our other European regions.

It was also nice to see the benefit of our diversified European store base this quarter. Further, as we begin the third quarter, comps in the UK had been positive. Adjusted segment profit margin, excluding foreign currency, was down 260 basis points. This decline was primarily due to a combination of integrating Trade Secret in Australia into our business, investments to support growth, and wage increases. We feel great about our international growth potential and our opportunity to maximize our first mover advantages in many geographies.

I'll finish with our shareholder distributions. During the second quarter, we bought back $400 million of TJX stock, retiring 5.2 million shares. For the first half of the year, we have retired 10.2 million shares, buying back $775 million of stock. We continue to anticipate buying back between $1.5 billion to $2 billion of TJX stock this year.

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

Thanks, Scott. I'll begin by reiterating our key strengths, which give us great confidence. We believe these strengths not only differentiate TJX from most other major retailers, but also position us for continued success, particularly in today's retail environment.

First, we are a global sourcing machine. Our world-class buying organization has more than 1,000 associates seeking the best merchandise from a universe of more than 18,000 vendors and over 100 countries. We are extremely proud of the depth, experience, and longevity of our buying teams, which we are convinced is a major TJX advantage.

Second, our global supply chain, distribution network, and proprietary systems have been built and refined to support our global off-price business model. The flexibility of our global infrastructure allows us to adjust the merchandise flow to our stores and respond rapidly to changing consumer end-market trends. We believe this is a key advantage in any retail environment.

Next, we are leveraging our global presence and expertise. Our four major divisions operate as one TJX across nine countries and three continents and are highly integrated and synergistic. We have a culture where associates are encouraged to share ideas, initiatives, and best practices that can be leveraged across our businesses.

All of these factors that differentiate TJX enable us to deliver amazing value to consumers. Value has been the mission of our Company since day one. We are confident that offering consumers quality branded merchandise at great values will continue to attract more US and international shoppers to our stores.

Now I'll briefly recap our three major growth drivers. Our number one initiative remains driving customer traffic and comp sales. Our results tell us that our strategies and initiatives are working. We are even more excited about the opportunity we see to capture additional market share in the US and internationally. While e-commerce represents a very small percentage of our overall sales, we see it as a complement to our physical locations and another way to drive incremental sales and traffic.

Next is our enormous global store growth potential. With nearly 3,700 stores today, we see the opportunity to grow by more than 50% to 5,600 stores long-term. This includes nearly 1,400 more stores in North America and over 500 additional stores in Europe and Australia. This reflects the opportunity we see with just our current chains in just our current markets alone. That's before contemplating the potential to expand into new countries or open new chains in existing markets.

Our third major growth driver is new seeds and innovation. We are always testing new ideas and initiatives across the Company that could lead to new categories or meaningful drivers of future growth. I am convinced that our comps and focus on innovation will keep us differentiated from the rest of the retail world.

To support our goals for growth, we continue to make significant investments in the business. We are investing where we believe we can capitalize on our first mover advantages and build upon our leadership positions around the world. While we expect our investments in new seeds, IT systems, supply chain, including distribution centers, and talent to impact our EPS growth in the short term, we are confident that they will allow us to gain additional market share in the long term.

Now I'll spend a moment on our opportunities for the back half of the year. First, we have many exciting gift-giving initiatives planned for the holiday season. Every year, our goal is to be even better than the year before. We'll be offering amazing gift selections from around the world, all at exciting values, and shipping them throughout the holiday season. I believe all these factors will be a major differentiator for all of our retail brands this holiday season.

Second, I'm very excited about our marketing strategy for the back half. We feel very good about our fall creative campaigns, and during the holiday season, we will be rolling out our tri-branding campaigns in the US and Canada again this year. We'll also continue our integrated marketing approach through TV, digital, mobile, and social media, to engage a wide shopper demographic.

Third, to encourage more frequent visits and cross-shopping our brands, we're growing our loyalty programs in the US and Canada. We also continue to be pleased with our pilot program in the UK.

Next, every day, we work to upgrade the shopping experience in our stores. Our customer satisfaction scores increased at every division in the second quarter, and we have a number of plans for the back half. We believe our in-store initiatives will make the shopping experience exciting, convenient, and extremely positive for consumers during this busy time of year.

Lastly, we see a market place that is loaded with quality branded goods. We are extremely pleased with the abundance of merchandise available to us for the fall and winter seasons.

In closing, I am so proud of our Organization's excellent performance in the second quarter. Marmaxx, TJX Canada, and HomeGoods significantly outperformed their plans, and TJX International proved once again the resiliency of our off-price model in challenging times. In today's uncertain environment, both in the US and internationally, the power and flexibility of our off-price model gives me and our entire Management Team tremendous confidence. TJX is a Company that has achieved sales and profit growth through many kinds of retail, economic, and political climates.

Throughout our history, we have seen, time and time again, that when we stay focused on execution and we deliver compelling brands, fashion, and values to consumers, we succeed. I am convinced we are gaining market share and I am excited about our opportunities for the second half of the year. We remain laser-focused on driving traffic and sales across all divisions.

Our Management Team is committed to achieving our plans and we are passionate about surpassing them. I'm very confident that we have the people and strategy in place to successfully achieve our goals for the future.

Now I'll turn the call over to Scott to go through our guidance. Then we'll open it up for questions.

Thanks, Ernie. Before I begin, I want to briefly talk to the implication of Brexit for us going forward. We continue to monitor the situation very closely, including how we may need to adapt to comply with potential changes such as new regulations or requirements.

We remain as confident as ever in the strength and growth prospects of our European businesses. Further, we are convinced that the flexibility of our business model will continue to serve us well and allow us to gain market share and capitalize on the off-price buying opportunities that disruptions in the marketplace tend to create.

Now to FY17 guidance beginning with the full year. As we stated in our press release this morning, we recently offered eligible former TJX associates who have not yet commenced their pension benefit an opportunity to receive a lump sum pay-out of their vested pension benefit.

We anticipate that the impact of this pension pay-out, primarily a non-cash settlement charge, could negatively impact FY17 EPS by approximately $0.03 to $0.05, but could be higher or lower depending upon participation rates and other factors. To be clear, all of the guidance we are providing today excludes the potential impact of this pension pay-out offer. Further, we plan to present adjusted results in the third quarter that will exclude its potential impact.

Moving on, as Ernie mentioned, we are raising our full-year diluted earnings-per-share guidance to reflect our above-plan second quarter. We now expect FY17 earnings per share to be in the range of $3.39 to $3.43, which would be up 2% to 3% versus $3.33 in FY16. As a reminder, our plans assume a negative impact to EPS growth of about 3% due to wage increases, and approximately 3% due to foreign currency and transactional foreign exchange.

We are also raising our full-year comp sales guidance given our above-plan sales in the second quarter. We now expect a comp increase of 3% to 4% on a consolidated basis in FY17. For the year, pre-tax profit margin is planned to be in the 11.2% to 11.3% range versus 11.8% last year.

We're looking for gross profit margin to be in the range of 28.6% to 28.7% versus 28.8% last year. We expect SG&A as a percentage of sales to be approximately 17.3% versus 16.8% last year. For modeling purposes, we are anticipating a tax rate of 38.5% and net interest expense of about $48 million. We anticipate a weighted-average share count of approximately 665 million.

Now to our full-year guidance by division. At Marmaxx, we are planning a comp growth of 3% on sales of $20.9 billion to $21 billion. Additionally, we now expect segment profit margin to be in the range of 13.9% to 14%. For the second half of FY17, we are now planning Marmaxx's average ticket to decrease slightly versus last year.

The balance of our merchandise mix and our values are clearly resonating with customers and consumers and we plan to continue with our strategies. As always, we are all about great product and our value gap with traditional retailers. Importantly, despite the expected decrease in average ticket, we are still looking for merchandise margins to increase.

At HomeGoods, we continue to expect comps to increase 4% to 5% on sales of $4.3 billion. We now expect segment profit margin to be in the range of 13.1% to 13.3%.

At TJX Canada, we are now planning a comp increase of 7% to 8% on sales of $3.1 billion to $3.2 billion. We now expect adjusted segment profit margin, excluding foreign currency, to be in the range of 13.5% to 13.6%.

At TJX International, we are expecting comp growth of 2% to 3% on sales of $4.4 billion to $4.5 billion and adjusted segment profit margin, excluding foreign currency, to be in the range of 5.5% to 5.6%.

Now to Q3 guidance. We expect earnings per share to be in the range of $0.83 to $0.85 versus last year's $0.86 per share. The guidance assumes an expected negative impact to EPS growth of about 3% due to wage increases and approximately 3% due to foreign currency and transactional foreign exchange.

We are modeling third-quarter consolidated sales of $8.1 billion to $8.2 billion. This guidance assumes a 2% negative impact to 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.

Third-quarter pre-tax profit margin is planned in the 10.9% to 11.1% range versus 12.1% last year. We're anticipating third-quarter gross profit margin to be in the range of 28.9% to 29% versus 29% last year. This assumes an increase in merchandise margins, offset by continued transactional foreign exchange pressure and costs associated with opening new distribution centers to support our growth.

We're expecting SG&A as a percent of sales to be in the 17.7% to 17.8% range versus 16.7% last year. This is primarily due to wage increases and investments to support our growth. For modeling purposes, we're anticipating a tax rate of 38.5% in net interest expense of about $11 million.

We anticipate a weighted-average share count of approximately 663 million. Our third-quarter and full-year guidance implies a fourth-quarter comp increase of 1% to 2% and EPS of $0.98 to $1. We will provide detailed fourth-quarter guidance on our third-quarter conference call. It's important to remember that our guidance for the remainder of the year assumes that currency exchange rates will remain unchanged from the levels at the beginning of the third quarter.

Before we start Q&A, I want to remind you of some of the potential headwinds we are facing in FY18 based on what we know today.

We plan to provide detailed FY18 guidance on our year-end call, but we wanted to review these few points, as we've heard a lot of questions on them. First, we expect that wage increases will have a similar negative impact to EPS growth next year as we are planning this year, so about 3%. Further, we anticipate that wage pressures will continue beyond FY18.

Second, while foreign exchange is an unknown today, at current rates, we would expect foreign currency and transactional foreign exchange to continue to have a negative impact to margins and EPS growth next year. Finally, in FY18, we plan to continue our investments in our IT systems, supply chain, and new seeds to support our growth goals. Again, we'll provide detailed FY18 guidance on our year-end call.

Wrapping up, to reiterate what Ernie said, we feel great about our business and our opportunities for the back half of the year. We believe our increases in traffic, sales, and merchandise margins are all indicators of the fundamental strength of our business.

We continue to make important investments in the business and fund new seeds that we are convinced will help us gain market share in the short and long term. We are extremely excited about the future of TJX.

Now we are happy to take your questions.

(Caller Instructions)

Thanks and now we will open it up for questions.

(Operator Instructions)

We have a question from Kimberly Greenberger. You may ask your question.

Okay, great, thank you so much. Good morning and congratulations on a really solid second quarter. Ernie, my question is on the AUR. I may not be remembering correctly, but I thought last year we started to see the AUR declines in the second quarter, and it sounds like, from your comments today, anniversarying that, there are some incremental AUR declines.

In May, when we talked about this, you indicated that the buyers are seeing really nice opportunities to actually fortify the assortment at the opening price point across categories, and that's really been the driver. Is that still the driver here going into year two, if I'm remembering that correctly? And are there some incremental opportunities that the buyers are seeing out there across categories? Thanks.

Kimberly, good memory. That's [kind sole] -- yes, we discussed that really over the last year, there's been a lot of dynamics going on there. I would say that the average ticket situation has really been a combination and continues to be a combination. It isn't just the buying better value.

It's also a tweaking of the mix across some departments. So some categories have been emphasized, while others deemphasized, and some departments. It so happens that in some of those areas, the average ticket is lower, and since we're bottom-up driven and we did talk about that before, as well, with you guys, we don't top-down manage that process.

The buyers really drive the bus on that. So what happens is some of our hotter businesses and that are trending happen to have lower average ticket, and as we chase them, that lowers the total average ticket in the store down. Having said that, it has moderated from where we were a year ago.

We actually thought, at this point, we would be a little bit more moderated, but it's still leveling off from where it was six months ago, so we're pretty happy with that. To your second question about the opportunities out there, and you're getting at just in general, right? You aren't just referring to certain [opportunities] or certain average tickets, rights?

Right. In general?

In general. We put this in the script, and it's something you know we don't like to give too many specifics on, but the markets have an exceptional amount of goods. The markets always have a lot of goods, so we just right now, I would say, have had to be very diligent on the holding back our buyers and not buying too soon.

We always have to do that. I would say that we probably had to ramp that effort up a little more strongly than we have in the past, only because of the environment out there is yielding a little bit more than we typically would see, especially at this time period. Right now is not exactly the time period you would see so much, but there is quite a bit out there, so yes, a lot of opportunities in not one area, not one price zone, not moderate or better, a little bit across the board.

So one thing we've strategically done is we've leaned up our inventories to more of a flat level so that we could take advantage of this marketplace. Because the marketplace is so flush with goods, we thought it was a good time to actually lean up our inventories a little bit more than we had been running, so that's one reason you saw a little shift there. We're even a little bit more liquid than we were three months or six months ago.

Fantastic. Good luck here for the second half.

Thank you, Kimberly.

Our next question comes from Ike Boruchow. You may ask your question.

Hi. Good morning, everyone. Let me add my congratulations on the quarter.

Thank you.

My question is, you clearly have some big investments that you talked about on the call today around new DCs and supply chain that continue to take shape. And there's ongoing headwinds around wages that you'll need to plan for, as well.

When you look at maybe some of the money-losing areas of the business today, and I'm assuming online falls in that bucket, do you internally discuss what strategies may not be as compelling as they may have looked several years ago when maybe you didn't understand what kind of expense pressures loomed here in 2016, 2017, 2018?

Ike, let me jump in, and then Scott will probably jump in right after. You make a great -- it's interesting -- what you're asking is somewhat of a question, somewhat of a statement. When you think about how we handle e-comm -- and to your point, e-comm, and we've said it many, many times, is a relatively small portion of our business.

We specifically, under the heading of what you're really talking about, is looking at it in the total. We look at the opportunity, we weigh out the effort involved, and certainly, the expense or profitability involved, and we say that we want to take it step-by-step. That is what we have done with our e-comm business, really to your question/statement.

Scott, I don't know if you have anything to add there. But that's really, strategically, how we've looked at that piece of the business and it would fall under the heading you were talking about is, something that you don't fuel too heavily, although we're happy with the way it's going.

As Ernie has said before, the primary driver with us opening almost 200 stores this year, and hopefully more than that in the future, that's going to be the primary driver of our incremental sales growth and the comp growth on our existing base. Having said that, as Ernie said, we're pleased with a lot of the metrics and the sales growth we see at tkmaxx.com and tjmaxx.com.

We like our conversion, our average order value, a lot of what we see, the adding of categories, vendors, et cetera. We've said that before. And we're investing proportionately in our $1 billion-plus capital. We're spending money but it's proportionate to the size of the business, so that's all I have to add.

Great, thanks.

Thank you.

Our next question comes from Paul Lejuez.

Hey, thanks, guys. Macy's is closing 100 stores the end of this year. Just curious what that means to you guys, as they're clearing through inventory, as those stores do close down, versus the market share opportunity potential for you guys next year? How are you thinking about it and what have you seen in the last class of Macy's stores that have closed? I'm just curious if you're doing anything from a marketing perspective in those markets? Thanks.

Paul, good question. Clearly, an indicator of the times that we're in and the environment that's out there. We don't like to comment specifically on another retailer or what's going on there. Under our big heading, you heard us talk about gaining market share numerous times throughout our call. That is still our focus.

We believe any of the uneasiness that is happening or any of the store closures, not just Macy's, anywhere across the board in this market, and there's been a fair amount announced this year in FY17, let alone in FY16, and it's what you're getting at. We believe there's additional market share opportunities for us.

We don't really watch the actual closing effects as much and what that does on the nearby locations because it's temporary. We tend to be more long-term oriented. But clearly, there's some uneasiness and some changing dynamics with all of the store closures that are going on domestically and internationally, by the way, so we look at what's happening domestically and this is far beyond just Macy's. Scott?

Yes, a couple points, as Ernie -- in addition to Macy's, there's been between all of the -- close to 2,000 stores that are going to be closing. Macy's, the Macy's stores that they announced last year, the 35 to 40, as Ernie said, just to put this in context, when we were asked over previous years, with other retailers, I'm sure we're getting our fair share from other retailers.

But when other retailers' comps have gone up and down, I don't think it's the primary driver of the comp increase that we were getting. But I do think, as Ernie said, it does portend well for us, not necessarily per se Macy's, but the real estate environment as other retailers both, as Ernie indicated, both in Europe and the US, to feel confident in our store openings that we've talked about and hopefully even more in the future.

To that point, by the way -- it's a little bit of a tangent -- but when we look at the Europe environment, and Scott was just touching on it, we feel like there are real estate opportunities for acquiring real estate sites, as well as merchandising and sales market share opportunities, so that's another interesting dynamic that will take place.

Thanks, guys. Good luck.

Thank you.

Our next question comes from Mike Baker. You may ask your question.

Thanks, guys. I wanted to ask about the trend of the business through the quarter. Can you talk about how that played out?

One thing that we look at is the gap between your comps and department stores, and while you guys are clearly taking market share still, that gap did narrow. I'm wondering, did you see them being a little bit more promotional to try to win back some share or anything specific to point out there? Thanks.

Mike, on the GAAP narrowing, are you looking at that relative to first quarter, or--?

Yes, exactly. If you just simply do your comp minus an average of some of the discount department stores and compare that gap to what it was in the first quarter, it did narrow, so just wondering if you could provide why you think that may have happened. Were they more promotional or any other thoughts? Thanks.

I don't know. We have a few dynamics going on. I don't know if this is the total answer, but one thing is we were up against a 6% comp in the second quarter, that's one thing. Number two, and we've talked about -- we've been open about this -- in our first quarter, we had, when we ran a 7%, we had a benefit of weather, which that helped us by a little bit. Certainly we still had a very healthy comp.

Then secondly, in our second quarter, because Europe is a piece of our business, we probably would have been 1 point higher in comp if Europe was more normalized. So if you take into account the pre-Brexit trend we had versus post, we would have been, and Scott is running the numbers, we would have been a 5%, but I don't know if that answers -- I don't know what numbers you're looking at. We look at it and we still say, we ran at the end of the day, we ran a 4% comp on a 6% comp, that's a 10% two-year stack and we feel pretty good about it.

Yes, not much different than Ernie. If you're somewhat normalizing the first quarter, been running for the last three quarters in that 10% two-year stack, which we started to accelerate to in the fourth quarter, so feel good. Again, as Ernie said, in terms of the UK business, they were trending quite strongly before Brexit, extremely strongly in the regions outside of the UK, and as we just indicated a few minutes ago, pleased with our trends as we start the first quarter in our European businesses -- third quarter.

Okay, thanks. And trend through the quarter by month? You guys give us some color there?

No, we don't give that.

No. We don't give color on that, Michael.

Okay. Thanks for the time.

Thank you.

Our next question comes from Michael Binetti. You may ask your question.

Hey, guys. Good morning. Thanks for all of the detail today.

Good morning.

It sounds like just listening to some of the people reporting over the last few weeks, the industry is looking at -- the strategy is inventories cleaner into the back-half. It seems like some of your competitors are pivoting towards lower levels of promotionality in the second half of the year. How do you see a pivot like that impacting you into the back half and maybe what kind of traffic are you baking into the second-half comp guidance?

Michael, we look -- we've seen some articles -- lower levels of promotions, which in theory, could be tied to leaner inventories. I think that's what you were getting at. That what some of the articles talk to. If the retailers, in general promote, less, for us that widens the gap, so what's interesting as we look at that is still market share opportunity and probably a little bit of margin opportunity.

That there's still availability out there doesn't mean we will raise retails on like-for-like items because we say it's an opportunity to show even better value and pass it on to the consumer. So bottom line, we don't get that caught up in that, as to what happens with those type of forecasts and reality. Over the longer-term, you'd see us adjust some things, if it happened over a six-month, nine-month period, but probably does not shift us much in the shorter-term.

If I could follow-up, you gave a lot of good detail on -- obviously, you're very confident in your traffic that you've seen fairly consistently, and on the store count opportunities, so we can build some thinking around how you guys are looking at your top line. But for awhile the earnings algorithm seemed a pretty steady low double-digit algorithm. There's been costs that have come up but we're now almost two years into the wages and the FX volatility.

As you look ahead, since you gave us some preliminary comments on next year, does this ramp urgency to you, to try and find other areas in the supply chain to drive out costs, to try and pull the earnings algorithm back up to low doubles? Or do you think we're in an extended period where you say, look, we want to continue gaining the share even if that means a mid single-digit algorithm for a couple of years?

Yes, you just summed it up well. Our focus would be -- we think long-term. What we're very, very happy about is, long-term, continuing to gain market share and do everything -- when we talked about the store execution and the merchandise mix, driving that is our best form of marketing and long-term customer retention and best for our long-term growth.

So yes and we haven't commented on what the long-term model is but we are really driven to beat the top line. That's been our focus and drive traffic. Because we think long-term, over the next three to five years, that's the best thing we can do, especially in this environment where consumers are fairly open to where they shop, so it's a good time to keep acquiring new customers, and increase frequency of our existing customers.

Okay. Thanks, guys.

Our next question comes from Jeff Stein. You may ask your question.

Hey, guys. Can you talk a little bit about what's going on in Canada? You seen outsized comps now for quite a few quarters, and wondering what the dynamic is that's driving top line there? Thank you.

With Canada, again, we had a 9% comp versus our 14% comp. Obviously, the foreign exchange has kept some of the Canadians who would tend to shop across border, in Canada, shopping there. We would attribute some of that but, certainly, it's not the most significant, we think of why we're getting 9% and 10% comps. There have been store closings.

I'll let Ernie talk about the mix, the merchandise, because that's what's really driving it, but there's a bit of the cross-border shopping helping out or people staying and not traveling as much.

Jeff, the other thing is, as you can imagine, when you have comps like we've being having up there, there's not one answer, because the comps are so significant. A few things we believe playing into it. One is, like Scott said, you have the cross-border purchasing retention where they aren't leaving the country as much.

That can apply to also not spending out online. They could have spent more online before, US dollars, so that stays there. But one of the important things that has happened is, we talk a lot about our talent and how we've had such a push throughout our Company on building talent and merchant talent and our buying organization, even in the script today we talked about competitive advantage.

We have a team up there whose now really executing at a high level. A lot of that is because, about three years ago, we started putting a [full core] press on developing that team and stretching them and putting in the type of training programs and seniority and tenure that we really wanted, that we, at the time, didn't have actually have up there as much as we had in some of our other businesses.

When you have a strong merchant team, which we do up there, merchandising and planning, and it's more seasoned now, you start to reap some of the benefits. That's what we were also reaping last year, as well as this year. Probably one of the biggest reasons is that merchant team up there.

Great. Thank you very much.

Thank you.

Our next question comes from Marni Shapiro. You may ask your question.

Hey, guys. Congratulations.

Thank you, Marni.

Ernie, I'm thinking your buyers are having a very relaxing summer.

(Laughter) I'm not sure (inaudible) [quite that way] but--

I'm curious, you've talked a lot about the trends here in the United States, about strong traffic, adjusting the AURs down a little bit, the abundance of goods. Can you talk to those three trends, even specifically, globally?

Is traffic up globally? Have you changed the AURs globally? Is there an abundance of inventory globally?

Let me just, without giving you too much detail, say yes, the availability is global. It has been global -- it's not just recent. I would say it's been that way for a year or two now. Some, by the way, some of what we have been buying in Marmaxx and in HomeGoods is abundance of merchandise located internationally that we've brought over here.

As well as our Europe division has clearly taken advantage of goods in Europe and in other places. There are goods everywhere. Far East. There's more than -- it's not just a domestic trend, which is what you were asking, Marni, right?

Yes, exactly.

And the traffic increase has been across all divisions for several quarters now.

That applies overseas, as well.

Yes.

And then the ticket price, have you adjusted that globally as well, or is there something you're just doing at Marmaxx?

It's primarily Marmaxx, but again, when you ask that question, adjusted, we bought them up the ticket. So each division -- I would tell you has worked out to be Marmaxx to the largest degree, but it will -- when we say it's Marmaxx, it could change in a few months, where we have the other divisions come down in ticket based on the dynamics where merchandise managers and buyers see in their own area where they have an opportunity in a category or in buying something better.

Again, we've had one-half of this be from the mix, not just from a buying the same item better. So that has panned out and it's bottom up, though, so it not something we drive from here. So not only is it driven in division, it's driven down at the middle management buyer level in a division.

That's great. And could I just one last follow-up on that? Are you also seeing -- I know the HomeGoods has been very strong, and home in general has been strong here. You had a nice lift from, it sounds like, women's. Are you seeing those kinds of trends? Is home strong globally and are you seeing category trends similar globally that you're seeing in the US?

Our home trend, obviously, as we've reported, is very healthy. As we've talked many times, our merchants share best practices and share a lot of ideas and information, as well as category performance, so those guys like any of our teams, do share that information globally.

Excellent. Best of luck for the fall season.

Okay. Thank you, Marni.

Our next question comes from Oliver Chen. You may ask your question.

Thanks a lot. Ernie, regarding your earlier comments, what would you isolate as, in the gift-giving department, the biggest year-over-year changes in terms of what you might be doing differently this year versus last year? Also, as you guys think about your in-store execution and customer satisfaction levels, as well as shrink, what are the big opportunities that you see with in-store execution that we should think about over the next near- and longer-term? Thank you.

Well, Oliver, let me say, two good questions, both of which we really can't give you the information on. Gift-giving is, like we often say, we are poised strategically, and this is something we've looked at in all of the four major divisions, we're poised to do a better job, from -- I can't give you any specifics, but what I could say is from a -- how about this -- from a merchandise mix perspective on a marketing front, as well as store execution because we have worked at all three of those factors and try and become more of a gift-giving destination.

Years ago, as you would probably guess T.J. Maxx maybe was not the coolest to get a gift from. We are now today a very cool place to buy a holiday gift from. Our marketing programs have really helped with that, the merchandise mix. The other thing we've done is because our supply chain is a better executed supply chain, we can turn goods around faster.

So for holiday, we have a lot of last-minute buys that now we can sprinkle in and get in pre-Christmas that we weren't able to do before. That's something we talked about with you, but sometimes we forget to mention it again. In addition to the strategic gift-giving, marketing, and store set-up that we do, and merchandise mix, that this year we have some more, I would say, fashion-oriented categories that are going to be great impulse buys for the consumers.

We're going to also have the quick turnaround from the market closer in, unpredictable buys, that will create a more exciting fourth-quarter business and what I just said to you applies to all four divisions. I touched a little on the in-store execution, but we look at that as clearly -- and that's why it was in my script -- we at the -- first of all, we talk a lot about the merchants -- our store operators are fantastic.

We have some extremely talented associates in our store operating divisions across all of our companies. That has become a place and it's helped with the cool factor in people shopping us, is the way we execute our stores. It's brought in younger customers and more excitement, in that, yes, merchandise is certainly a high priority, but that has been right there had with it in terms of driving top line and increasing market share.

Okay. Scott, merch margins were impressive. Was the main driver here lower markdowns and faster inventory turns? Was there anything we should know about how you've been able to do that so well?

The merchandise margins were extremely strong, as we indicated, at both Marmaxx and HomeGoods. I was a combination, obviously due to the above- plan sales, but it was a combination of both [mark on] and markdowns in both the combination of HomeGoods and Marmaxx. Offset though, still had some FX impact on currency in both Canada and Europe, more weighted toward Canada in the quarter, but no, extremely strong margins, both in HomeGoods and Marmaxx.

Perfect. Thanks for the details, and on next year, too. Thanks for those details. Best regards.

Thank you.

Our next question comes from Lindsay Drucker Mann. You may ask your question.

Thanks. Good morning, everyone. I wanted to ask Ernie about the comment you made in your -- as part of either the script or Q&A -- just about the availability of goods right now relative to what you normally see, just a whole lot of opportunity in the market. I was hoping maybe you could put a little bit more context around that and also discuss if there's any -- what you attribute that to and whether it's in a specific category or classification? Thanks.

Lindsay, also a good question. We can't -- we really don't like to comment on specific areas of where the availability is, high or low, categories, et cetera. What I would tell you is it's across most families of business and it is most price ranges and it's not really a -- it's not like it's a glutton one area or another. It seems to be fairly widespread.

We don't -- and then also I'd like you to keep in mind, there's never not goods, right? So when I say that it's up a level from where it's been, it's not that there weren't goods before, clearly, because there's always goods, and that's why we are always holding the merchants back. I don't know if that answers your question.

What do you attribute the change to?

I'll tell you one thing that has happened. Let me give you the internal versus -- the external, we all know, the retail environment is holding up -- but there's always new vendors opening. So the thing you have to keep in mind that it is easy to forget is we are actually up to about 18,000 vendors now that we deal with. We continually expand our vendor portfolio.

As you do that, you're find more goods, so that is one of the things we would attribute it to, is our desire to always open new vendors, which that's a little contrary to other models of retail. The other models of retails, by the way, are doing the right thing for their model of retail. Our model functions on a treasure hunt approach in a very shallow assorted eclectic mix, and with that comes a desire to open thousands of vendors, and when you do that, there tends to be even more availability of goods.

Okay, great. Thanks.

You're welcome.

Our next question comes from Richard Jaffe. You may ask your question.

Thanks very much, guys, and a very impressive quarter. Ernie, could you spend a little time on marketing, and particularly the loyalty program, and how you see that working? Will it be across all brands or by division across all markets or just domestically? And how do you expect to reach the consumer? Will it be an outreach through e-mail, through texting, points, gift certificates? If you could give us some more details, that would be very helpful? Thank you.

Yes, let me give you what I can, Richard. The loyalty program, domestically -- I think you're aware, we run -- and I think when you ask about the loyalty program, you're also asking about the credit card, which--

That's part of it, right.

The credit card part of it has been very successful. We've talked many times -- Scott has actually given you some information on that a few times in the past. We also run what's called an access program, which is -- you'd call it not a hard reward -- it's a soft reward loyalty program.

It's not tied in with a credit card but they get access to certain events and there's a constant flow of information. It hooks you up more to be in the T.J. Maxx or HomeGoods or Marshalls customer. Both have been growing. And we are very, very happy with the growing of our credit card program, which we are adding more active, significantly more active, members, we can't give you the number, but significantly more every year, and obviously we get additional spending from those consumers.

When you go to Canada, they do not have a credit card loyalty program, but they do have a non-credit card loyalty program, which is also doing very, very well. In the UK, we are testing a loyalty program as we speak. So that's very early in the process.

And when you ask what is our -- our vision is to continue to do this in the model of our business because we don't want to do anything that gets, how would I put it, gimmicky or promotional, out of the loyalty program, which some retailers use it to every now and then do coupons, et cetera. That is not a route we will take, but the way we do it, we feel like has brought tremendous communication between us and the consumer and loyalty and additional spending from those customers. Scott, you want to add anything?

Again, we're talking we have millions on our credit-based program and we don't give the facts, but close to adding a seven-figure number almost every year. These are our most loyal, as Ernie said, most loyal customers. They cross-shop more than our other customers. Ernie said it right, we will add -- we would love to add things to our other countries, but we have to do it within the confines of our business model and our partners, what's available for both -- works for both us and them.

One of the things we didn't -- we just mentioned earlier when Ernie was talking about stores and our sales is that our customer satisfaction scores have been going up in all of our divisions. Some of it obviously happens to do with they're pleased with what they find with their overall shopping experience in finding the goods. But part has to do with the store presentation folks and doing a better job and our store standards, the friendliness of our store associates, hiring better folks, training better.

That's certainly highly correlated to our having positive sales. Again, our customer satisfaction scores have been going up at all of our divisions.

One other thing failed to note, talking about loyalty, in Canada, we have a non-credit based loyalty program that is extremely very successful in terms of the penetration, more so there than in the US, the total penetration, and again, they are just highly engaged. Obviously, as we've talked about, we're very well known in Canada, so that is a piece of our business and why we're doing, as well, better there in terms of our comp sales.

Thank you.

Thank you, Richard.

Our next question comes from Matthew Boss. You may ask your question.

Thanks. On gross margin, what's the type of comp, what level of comp do you need to leverage buying and occupancy? What's the best way to think about merchandise margins in the back half of the year? And then just largely, the question is excluding foreign exchange and wages, has anything changed with your 10% to 13% bottom-line model here?

I'll start addressing a few of those points. Again, we haven't been giving out the 10% to 13% because both last year and this year, the three things we've been talking about still exist and that's why we did portend some of them. We're not saying they're going to be at the same--

Exchange rate fluctuation.

Right. We aren't going to say they are going to be at the same level but the three major pieces being, wage being the biggest one, which is similar. We're not saying it's not going down in future years, which if nothing happens, it might moderate going past next year, but at the moment, we just called it out because it's approximately at the same rate at this year.

The second piece being foreign exchange and that's why we called out again. At the moment, it would not be at the impact of this year's impact of 3%, but it still would be low single-digits, so we just wanted to call that out. Again, hopefully that will moderate, and at some point will be a tailwind. Right now, it's a headwind.

The third piece is the investment to support our growth, again, primarily the distribution centers, which has been a bit lumpy as we've tried to explain before, because we did not plan the high level of comps we've experienced in some of our businesses, forcing us to move forward, make sure we could continue to gain all of the market share we've gained.

So those will still impact us going forward but we think will moderate those systems and our distribution spend as we move forward in future years, but still going to impact us at least going forward for next year at a similar rate. So there's those three big components. I don't think anything has changed, hopefully, they will start to moderate going forward.

Great. Then just the comp to leverage the buying and occupancy?

It's in and around 3%.

Okay, great. Best of luck.

Thank you.

Sir, we show no question in queue.

Okay. I would like to thank you all for joining us today. We look forward to updating you on our third-quarter earnings call in November. Thank you, everybody.

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