TJX Companies Inc (TJX) 2017 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to The TJX Companies' third-quarter FY17 financial results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.

(Operator Instructions)

As a reminder, this conference call is being recorded on November 15, 2016. I would like to turn the conference call over to Mr. Ernie Hermann, Chief Executive Officer and President of the TJX Companies, Incorporated. Please go ahead, sir.

Thank you, Tori. 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 and the investor information section of our website, www.TJX.com.

Reconciliations of the non-GAAP measures we discuss today to GAAP measures are posted on our website, www.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 extremely pleased that our momentum continued in the third quarter. Consolidated comp store sales were up a strong 5% over a 5% increase last year and well above our plan.

We are thrilled that customer traffic continued to be the primary driver of our comps against this quarter, which tells us that our merchandise mix and amazing values are resonating with consumers. We are convinced that we are gaining market share across all of our divisions. We also saw excellent performance in both our apparel and home businesses.

Further, merchandise margins were up significantly again this quarter, highlighting the strength of our model. Adjusted earnings per share were $0.91, also well above our expectations. Importantly, we believe that we achieved these results despite significant wage and foreign currency headwinds, and while simultaneously investing to support our growth.

With our strong third quarter performance, we are raising our guidance for adjusted EPS growth. We are in an excellent position for the holiday selling season with many initiatives planned to drive traffic and sales throughout the quarter. As always, our management team is passionate about achieving its plans and striving to surpass them.

We are very confident in our ability to continue our successful growth, and that is both in the US and around the world. Before I continue, I'll turn the call over to Scott to recap our third quarter numbers.

Thanks, Ernie. And good morning everyone. As Ernie mentioned, our third quarter consolidated comparable store sales increased a strong 5%, exceeding our plan. As a reminder, this growth excludes our e-commerce businesses.

It was great to see our momentum and customer traffic continue. Once again, traffic was the primary driver of our consolidated comp increase as we offered shoppers the merchandise they wanted at excellent values. Diluted earnings per share were $0.83 versus last year's $0.86.

As we detailed in today's press release, third quarter earnings per share included a debt extinguishment charge and pension settlement charge, which combined reduced EPS by $0.08. Excluding these charges, adjusted earnings per share were $0.91, a 6% increase over the same period last year and well above our plan. As expected, EPS growth was negatively impacted by 3% due to wage increases. Foreign currency and transactional foreign exchange negatively impacted EPS growth by 1%, versus our plan for a 3% negative impact.

Consolidated pretax profit margin was 10.7%. As we detailed in today's press release, the combination of the debt extinguishment and pension settlement charges reduced consolidated pretax profit margin by 100 basis points. Excluding these charges, adjusted pretax profit margin was 11.7%, down 40 basis points versus the prior year and significantly better than we planned.

Gross profit margin was 29.5%, up 50 basis points versus last year and also significantly better than we planned. This was primarily due to our strong merchandise margin increase and gains on our inventory hedges.

SG&A expense as a percentage of sales was 17.6%, up 90 basis points versus last year's ratio. This increase was primarily due to wage increases and investments to support our growth, as we had anticipated.

At the end of the third quarter, consolidated inventories on a per store basis, including inventories held in warehouses but excluding in transit and e-commerce inventories, were down 2% on a constant currency basis. We are very comfortable with the great liquidity and our inventory position entering the fourth quarter. We are in an excellent position to buy and flow fresh goods to our stores throughout the holiday season.

Now to recap our third quarter performance by division. Marmaxx's strong momentum continued with comps up 5% on top of last year's 3% increase. Again this quarter, customer traffic was the primary driver of the comp and unit sales were up, both of which are a nice indication of the strength of our largest division. Average ticket was down slightly more than planned, but merchandise margins were up significantly.

We continued our strategies of chasing hot categories and flexing within departments to offer the right merchandise mix in our stores. Our traffic, sales and merchandise margin increases tell us our strategies are working.

Segment profit margin decreased 40 basis points. Our very strong merchandise margin increase was more than offset by wage increases and costs associated with the lower average ticket. Marmaxx keeps delivering sales increases year after year, which underscores our confidence in the major growth potential that still remains at our largest division.

HomeGoods delivered another excellent quarter with comps increasing 6% over last year's 6% growth. We were very pleased that the traffic was the primary driver of the comp increase. Segment profit margin was down 10 basis points.

As expected, wage increases continued to have a significant negative impact on the margin. Further, we continued to incur costs related to the opening of our new distribution center last quarter to support the long-term growth potential of 1,000 stores. Our customers love HomeGoods and we couldn't be happier with this division's traffic and growth prospects.

At TJX Canada, comps grew an outstanding 8% this quarter over last year's 10% increase. Adjusted segment profit margin excluding foreign currency was down 100 basis points. The decrease was primarily due to merchandise margin pressure from transactional foreign exchange as well as additional supply chain cost, including the opening of our new distribution center in Vancouver last quarter, the first new DC for Canada in about a decade. We continue to be very pleased with the excellent execution of our Canadian organization.

TJX International's comps were flat versus last year's strong 7% increase. While sales were not as strong as we would have liked, we held up better than most major European retailers in the face of a challenging retail environment and unseasonably warm fall weather. We are convinced we are gaining market share in Europe and are focused on keeping the new customers we're attracting for the long term.

Adjusted segment profit margin, excluding foreign currency was down 170 basis points. The decline was primarily due to integrating Trade Secret in Australia in our businesses and some expense deleverage on the flat comp. That said, the team in Europe remained extremely disciplined in inventory management, which helped mitigate some of the margin pressure. As we enter the fourth quarter, we see opportunities to improve upon last year's performance.

I'll finish with our shareholder distributions. During the quarter we paid out $170 million in shareholder dividends and bought back $400 million of TJX stock, retiring 5.2 million shares. For the first nine months of the year, we have paid out $482 million in shareholder dividends and retired 15.4 million shares, buying back $1.2 billion of stock. We continue to anticipate buying back $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 fourth quarter and full year FY17 guidance at the end of the call.

Thanks, Scott. I'd like to begin by highlighting our fundamental strengths, which we believe differentiate TJX from the marketplace and are key to us continuing to gain market share. First, we have a world class buying organization. With over 1,000 associates worldwide today, we have more than doubled the size of our buying team over the last 10 years. During this time, we have added hundreds of new people to our buying team and we also have many buyers who have been with us for multiple decades.

We believe we have one of the widest demographics in retail and that the depth of our buying organization is helping us attract customers of all ages. This includes millennial shoppers, as we are offering fashions and brands relevant to them. Further, our seasoned buyers play a big role in teaching and training our newer buyers and enhancing our off-price buying methodology. I truly believe that the collective knowledge and expertise of TJX's buying organization is the best in retail.

Second, we see ourselves as a global sourcing machine. Today, we source from a universe of over 18,000 vendors in more than 100 countries. This is thousands more vendors and dozens more countries than a decade ago. We believe we are an increasingly attractive outlet for vendors. We operate almost 3,800 stores in nine countries, are opening new stores year after year and are selling a mix of branded merchandise. We are flexible and straightforward in our dealings and offer vendors many ways to grow their business.

Third, our global supply chain distribution network and IT systems have been developed and refined specifically to support our highly integrated international business and opportunistic [buying]. Our global distribution network can process thousands of buys from thousands of different vendors every week.

Using our proprietary IT systems, our experience, planning and allocation team can precisely allocate that merchandise to the right store at the right time. Our flexibility allows us to react rapidly to changing market dynamics and consumer tastes to capitalize on hot product categories and the latest fashion trends. We see our global infrastructure as a major advantage for TJX.

Next, we are capitalizing on our global presence. We have decades of operating experience in the US, Canada and Europe that we can leverage across the Company. We have successfully opened new countries and retail brands by utilizing the expertise and operating knowledge across our organization. Our four major divisions are highly synergistic and share ideas, talent, initiatives and best practices. I believe the depth of our global off-price experience is unmatched and a key advantage as we continue our domestic and international growth.

All of these core strengths allow us to offer consumers an ever changing, eclectic mix of branded merchandise at amazing values every day. In addition, these elements of our business have taken us multiple decades to develop, which is why they would be extremely difficult for any retailer to replicate.

Now, let's talk about our growth initiatives, which we are confident will lead to further market share gains. Our number one initiative remains driving customer traffic and comp sales. We have grown our top line year after year and are convinced that huge opportunities remain to continue growing our customer base.

We are very pleased that our latest research once again shows that millennial shoppers make up the biggest percentage of our new customers in the US. Further, our customer satisfaction scores increased at every division. Innovation continues to be a major focus to keep our stores exciting and responsive to customer tastes. And we are constantly testing new ideas in each of our retail brands.

Our next major growth driver is our enormous global store growth potential. Long-term, we see the potential to grow to 5,600 stores with just our current chains and just our current markets alone. This represents more than 1,800 additional stores on top of our current base, before contemplating the potential of new chains or new countries. Further, we see e-commerce as a complement to our physical locations and as a way to offer consumers the ability and convenience of shopping with us 24/7.

To support our growth, we are making significant investments in our business, which we have discussed on prior calls. I am very confident that we are making the right investments in our global infrastructure and new seeds to build on our leadership positions and capitalize on our first mover advantages. We believe that all of this positions us very well for the future.

Now, on to our opportunities for the fourth quarter, which are numerous. First, we have great gift giving initiatives under way. We are offering exciting selections from around the globe and plan to ship to our stores multiple times each and every week. Shoppers can expect to see something new and surprising every time they visit, a strategy that has worked well for us in recent years, and I believe differentiates us from most major retailers. We are also confident that our efforts to upgrade our stores and customer service will make the shopping experience an exciting and positive one for our customers this holiday season when their time is so very valuable.

Second, we feel great about our marketing campaigns, which all speak to who we are as a Company. We are utilizing tri-branded campaigns in the US and Canada again this year. Our TV commercials have just launched and will be running every week throughout the holiday season. In addition, we are leveraging components of these campaigns across radio, digital, and social media. In Europe, we'll be leveraging our holiday campaign across multiple geographies.

Third, our loyalty programs in the US and Canada are an important vehicle for encouraging customers to shop us more frequently and across more of our retail brands. Next, we believe we continue to get better at transitioning our stores every year and are very focused on our post-holiday plans. Most importantly, we will be offering consumers compelling values on fantastic merchandise. The marketplace is loaded with quality branded merchandise across all of our geographies. We plan to take advantage of the numerous opportunities and buy throughout December.

In closing, I am very proud of our continued momentum, above plan results and the sharp execution of our teams across the Company. It was great to see another quarter of such strong sales and traffic increases. The entire organization is laser focused on bringing more shoppers into our stores this holiday season and throughout the year. We have a clear long-term vision for TJX and I am convinced that we will continue to drive market share gains and achieve our plans for global growth.

I am proud of our ability to simultaneously invest in our growth drivers as well as infrastructure and organization to support our growth while returning cash to shareholders through our substantial share buyback program and dividends. I want to reiterate that our management team is passionate about achieving and surpassing our goals. We are very well on our way to becoming a $40 billion plus Company.

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 fourth quarter. We expect earnings per share to be in the range of $0.96 to $0.98 versus last year's $0.99 per share. This guidance assumes an expected negative impact to EPS growth of about 3% due to wage increases and approximately 6% due to foreign currency and transactional foreign exchange.

We're modeling fourth quarter consolidated sales of $9.3 billion to $9.4 billion. This guidance assumes a 2% negative impact to revenue due to translational FX. For comp store sales, we're assuming growth in the 1% to 2% range on both a consolidated basis and at Marmaxx. This compares to a strong 6% comp increase for both TJX and Marmaxx in the fourth quarter last year.

Fourth quarter pretax profit margin is planned in the 11.0% to 11.1% range versus 11.9% last year. We're anticipating fourth quarter gross profit margin to be in the range of 27.9% to 28.0% versus 28.7% last year.

We're expecting SG&A as a percent of sales in the range of 16.8% to 16.9% versus 16.7% last year. For modeling purposes, we're anticipating a tax rate of 38.3% and net interest expense of about $10 million. We anticipate a weighted average share count of approximately 657 million.

Moving on to full year guidance. On a GAAP basis, we expect FY17 earnings per share to be in the range of $3.39 to $3.41. As we noted in our press release today, we are raising our adjusted full year diluted earnings per share guidance to reflect above plan third quarter results. Excluding the combined impact from the third quarter debt extinguishment and pension settlement charges, we now expect adjusted earnings per share to be in the range of $3.46 to $3.48. This would be up 4% to 5% versus $3.33 in FY16.

Our plan assumes a negative impact to EPS growth of about 3% due to wage increases, and approximately 3% due to foreign currency and transactional foreign exchange. As a reminder, we expect that wage increases will have a similar negative impact of approximately 3% to FY18 EPS growth. On a consolidated basis, we're expecting a comp increase of 4% in FY17.

For the year, we expect pretax profit margin to be approximately 11.1%. Excluding the negative impact from the third quarter debt extinguishment and pension settlement charges of approximately 20 basis points, we expect adjusted pretax profit margins to be in the range of 11.3% to 11.4% range versus 11.8% last year. We're looking for gross profit margin to be approximately 28.9% versus 28.8% last year.

We expect SG&A as a percentage of sales to be about 17.4% versus 16.8% last year. For modeling purposes, we're anticipating a tax rate of 38.4% and net interest expense of $44 million. We anticipate a weighted average share count of approximately 664 million.

Now to our full year guidance by division. At Marmaxx we are now planning comp growth of 4% on sales of $21.1 billion. Additionally, we expect segment profit margin to be about 14%. For the fourth quarter, we are assuming Marmaxx's average ticket to be down versus last year.

At HomeGoods we now expect comps to increase 5% to 6% on sales of $4.4 billion. We now expect segment profit margin to be in the range of 13.4% to 13.5%. At TJX Canada, we are now planning a comp increase of 8% to 9% on sales of $3.2 billion. We now expect adjusted segment profit margin excluding foreign currency to be in the range of 13.6% to 13.7%.

At TJX International, we're expecting comp growth of about 2% on sales of $4.4 billion and adjusted segment profit margin excluding foreign currency to be about 5.8%. 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 fourth quarter.

Now we are happy to take your questions. To keep the call on schedule, we're going to ask that you please limit your questions to one per person. Thanks, and now we will open it up for questions.

Thank you. We will now begin the question-and-answer session.

(Operator Instructions)

Our first question is from Lorraine Hutchinson. Your line is now open.

Thank you. Good morning. I wanted to follow up on the commentary around Marmaxx's average ticket being down slightly more than planned? Was that due to mix or are you continuing to see pressure from some of the department stores or other competitors on pricing?

And then what's the outlook? I know you said ticket down versus last year. Do you think that gets worse in the fourth quarter, or do you think you can hold this current level?

So I'll just start and Ernie will chime in. First, on average ticket, as we said earlier the majority of it in the third quarter had to do with chasing hot categories, so it was more mix related based on consumer preferences that we were just -- that we're working and we're following their taste. I'd also like to point out that we're buying better and passing some of those values onto the customers, as our merchandise margin improved both based on, certainly markdown improvement based on the strong sales, but also an improvement in our mark-on.

Lorraine, also I think another thing -- I guess it speaks to mix a little bit -- is we had some seasonal -- the weather was fairly warm and we consciously went into third quarter knowing we were going to push back some of the seasonal categories, which tend to be higher ticket as well. So as Scott said, we went after the hot trending categories but we also affected the ticket by consciously pushing off things like outerwear a little bit later and heavier knit sweaters that tend to be higher ticket.

So hopefully that makes sense and helps answer that question. I think, will it continue to moderate -- as best we think, the only unknown is the market is loaded with goods and that piece that Scott referred to as the second piece could still be applicable as the environment stays rather difficult. We want to continue to take advantage of those opportunities.

So tough to say. We still have plenty of open to buy we look out to the spring, first quarter. Hopefully that answers it.

The only other thing to add is, on our last call we didn't make a call on the average ticket. So we now have average retail down in Marmaxx in the fourth quarter. So that's a change from our prior guidance. So we have provided for some of those costs in the fourth quarter.

Thank you.

Thank you. Our next question is from Matthew Boss. Your line is now open.

Thanks. On the gross margins, can you just break down the 50 basis point expansion this quarter between the merchandise margin improvement and the FX gains? And then just the headwinds embedded in the fourth quarter guide, any commentary there? And then finally, on FX as we think to next year, if rates held exactly where they're at today, how do we think about the headwind from FX next year versus the 3% bottom line that you outlined this year?

I'll try to get all three questions there, Matt.

The first, in terms of the gross margin being up 50 basis points, the majority of that was due to strong merchandise margin led by Marmaxx. We also had some hedge benefit. So we would have been up more than the 50 with the combination of those two, but they were offset as we had costs related to supply chain costs, including our DC investments that offset actually some of the buying and occupancy leverage we had with our [run tax and cam]. So it was strong merchandise margin and some gain on the hedges offset by the supply chain cost.

In terms of -- I'll go to the third question on next year. Too early to make a call on the FX. We'll certainly talk about it next quarter. But as we talked about last quarter, with the continuing drop of the pound, there clearly could be some pressure for FX next year, primarily with the British pound impact on our Europe business.

And then fourth quarter headwinds?

The fourth quarter headwinds, significant part of that in the gross -- I assume you're calling out the gross margin -- is two things. One, it's the reversal of the gains we had on the hedge, which make up a little less than half of our 70 basis points drop in the gross profit margin in the fourth quarter. And then the continued supply chain cost, but also some deleverage on the 2 comp on the high end that we have that's in the buying and occupancy line. Those would be the three major headwinds in the fourth quarter to the gross margin.

Great. Best of luck.

Thank you.

Thank you. Our next question is from Michael Binetti. Your line is now open.

Hey, guys. Congrats on a nice quarter. Can I just continue on that last question quickly? What level of comp do you think would help you mitigate that deleverage that you talked about on some of the supply chain cost in the fourth quarter?

Typically it's a strong three that you need to leverage your buying and occupancy cost.

Okay. Thanks for that. And then we've seen the department stores all come in and start lowering their inventories, and you guys are saying your AURs have been lower and part of it is mix? Seems like the gap should bed widening for your pricing umbrella, relative to the department stores? Has that historically given you guys room to let your AURs move up more?

Or do you look at that and say, look its an opportunity for us, we always prefer to gather share? How do you look at some of the higher level changes we're seeing across the industry right now as far as your outlook for AUR?

So Michael, you're hitting on two great points. First of all, we look at it as market share opportunity, so we're very reluctant to raise prices unless we see them raise. So we don't lead that process.

We let those retailers, as you're talking about the ones that -- even though they have the lean inventories, they still have unfortunately, right, in many cases a decreasing sales base. So they are not necessarily going to raise the retail. We haven't seen it yet, anyway. And we let that process happen more bottom-up from our buyers and merchandise managers that are always looking at what the other retailers are retailing at.

So I would tell you, yes, it presents two opportunities. We do a little of both. We might be able to go up in retail if we see it happening.

We just don't call that up at our level. We really let that -- just like, by the way, when the average tickets were going down, that was driven by a strategy from the buyer and merchandise manager level. This happened surgically, very surgically, by item, by vendor, down to the department level, when we surgically take them up at times.

So hopefully that answers your question. You were hitting on both appropriately, both aspects.

Can I just can ask you, you referenced the comments you made last quarter about looking ahead to your FY18 to next year a little bit and some of the headwinds for us to be thinking about as we do some longer range modeling? Would you mind truing us up, another quarter has gone by at this point, FX has moved a little bit. Minimum wages, you guys have done a good job of offsetting a lot of the wages.

You also mentioned some investments to leave a little bit of flexibility. I think it all rounded out to 500 to 600 basis points of headwind in the model for next year, similar to this year. Is that still the right range to be thinking about? Any kind of updates to the way you've been thinking about that over the last three months? Thanks.

This is Scott talking. I think, no new news to report, in terms of whether it's wages, investments or as I talked earlier, in terms of answering the question Matt asked on FX. So we'll be giving guidance and updating it on the next call. Other than that, really no new news to report.

On our year end call, Michael, is where we plan to get into more depth.

Appreciate it.

Our next question is from Lindsay Drucker Mann.

Wonder if you could add any color on performance by region or by store type?

The only thing we would talk about in terms of by-region in terms of our largest division, Marmaxx, is that sales were strong across all of our regions in the US. I'm not sure if you were asking about the divisions or you were asking about Marmaxx, but sales were strong across all divisions and we were pleased that both the apparel sales again were strong for the third quarter in a row at Marmaxx as well.

Okay. Great. And just a follow-on. Inventory per store, excluding currency down, versus your comp, and has slowed or has been slowing for a few successive quarters. I was hoping maybe you could give a little more color as to what's going on, if there's any shift in your approach to buying and any sort of change in the availability of goods out there for you to buy? Thanks.

Lindsay, when you're saying slowing you mean you've seen the inventory levels coming down?

Yes, yes, exactly.

Over time here recently. So there is a -- how would I put it? There's always a lot of goods. But as you saw or heard in the script, and we talked about it last time as well, the market is ramped up a little bit in terms of more loaded marketplace across more categories than we've seen in the past.

So as much as you'll read that retailers have tightened up on inventory, we are not running into that situation in terms of market availability, in terms of what's in the wholesale market. So that presents an opportunity for us to, where possible, run with leaner inventories to take advantage closer in on the buying. So hopefully you understand. We're going to try to buy, I guess simplifying it more, hand to mouth, closer in, than we were a year ago because of the availability.

Is the primary driver of your change in inventories being down now?

It's a piece. You always have an iteration sometimes when you look at this year versus last year, you can -- when you're off-price and opportunistic, you can have gyrations that hit points in time that aren't as pure as that. But we did feel like at this time period, it would be nice to have more liquidity based on what's going on in the market. So it was I'd I say, I don't know, half of that was a strategy.

Yes, I mean, just to echo on what Ernie said, we ended the second quarter with our inventories on a constant currency flat and we delivered a 5 comp. Going back over many periods whether our inventories have been low or slightly higher than that it really hasn't impacted our ability to get -- to procure the inventory and feed whatever sales are out there for us to get.

Having said that, as Ernie said, also we are very comfortable in our per store inventories at the store across all our divisions are pretty much where we want them to be.

I would say right now this is textbook where we would like to be. We couldn't ask to be in a better position going into this quarter than where we are right now in the inventories and the open to buy.

Great. Thanks so much.

Welcome.

Thank you. Our next question is from Paul Lejuez. Your line is now open.

Hey, thanks, guys. Curious about your future investment in e-com? What are those investments going to look like relative to what you spent in the past? Are you thinking about kicking them up? Pulling them back?

And also curious as relates to e-com, if you included the e-com business in your US Marmaxx business comp, and your UK e-com business and the international comp, just wondering if it would move the dial? Thanks.

So Paul, two very good questions. I would say the first one is on the investments. We're very methodical about it. We don't, as others have, we aren't going in and investing off the high board, so to speak. We are, I guess you would call it leveling off on our investments there actually because we're a couple of years in on the www.tjmaxx.com business.

We're getting very comfortable, we like the traffic we're getting, we like the sales, the way it's going. On the flip side, as you know with e-com you have to be careful on your cost structure. So in terms of the domestic e-com businesses, which are really www.tjmaxx.com and STP, we have taken a hard look at the cost structures and making sure that we keep our investment at a very appropriate level, and in fact a leveling off level I guess would be the best way to describe it.

Also in Europe, similar approach. And we're actually running that very efficiently and same idea with the investments. We're looking hard and fast. And all of that links into your second question, why do we do all that.

Well, our e-com business in total is a little over 1% of our total business. So when you ask the question, first of all, would the e-com increases help our comp, yes. But would it register? I would say not mathematically, not that strong, because it's such a small percentage of the total today. Having said that, it's growing at a faster clip than the brick and mortar, it's just a very small base, a little over 1%.

Not growing so fast that it would actually kick the comp up a bit in either region?

Paul, it's Scott. As Ernie said, it's 1% of our total sales. By definition, the most it could round it, would be to round it potentially 1 percent in total on a TJX basis.

Yes, ironically, Paul, in Europe it would actually help. It would actually move the comp there a little bit. Because we're a little bigger in Europe as a percent to our business.

And I was just in Europe last week, coincidentally, and we spent quite a bit of time talking strategically about where we're going with e-com, as well as looking at the metrics and what it's doing for the total in terms of traffic, et cetera. And it would actually move the comp in Europe, but not 1 full point but a little bit, just under that, actually.

Got you. Great. Good luck.

Thank you.

Thank you. Our next question is from Brian Tunick. Your line is now open.

Hi, wanted to stick with that Europe theme? Just curious, your margins there used to be 7%, 8%, I think you had somewhat more aspirational goals than that. So just curious what kind of comp do you need in Europe to get the margins close to that high single digits? When does Trade Secret become more neutral to the earnings?

And then the second question, hypothetically at a 15% tax rate, you guys would be throwing off an additional $1 billion of free cash next year. So curious -- I know you have a mix of international as well as many domestic taxes, but is there really a thought internally that this is what could play out next year? And would you use that additional $1 billion for share repurchase versus dividends?

Any thoughts along those lines would be helpful. Thanks very much.

Well, just I'll jump in before Ernie talks about Europe in more detail, Brian. But it's just too early to speculate on potential impact of new policies or legislation until it's passed and then it would only comment, obviously if it's relevant to our business. So just too early at this point to speculate.

And in terms of Europe, I'll just start off for a second, then Ernie. Some of the biggest impact has been FX over the -- in the last -- certainly last couple -- this year as it has been with Canada. We've had opening up the new businesses, not new businesses, new countries in the last year or two.

We've also been ramping up the number of stores, so with the 50 plus stores we've opened up both this year and almost at that level last year, new stores, since it takes several years to get majority, put a bit of an impact on your earnings. That in combination with the systems and the infrastructure needed to support stores has certainly put it down.

So it's really less about the comp, the same level of comp when you hit that 3 plus range at all our divisions. All things being equal, its usually the break point but with wage systems and opening up the number of stores in new countries put a bit of a pressure.

The only other thing before Ernie talks about Trade Secret and Europe in general is, as we move to the fourth quarter we purchased Trade Secret at the end of October a year ago, so in terms of the deleverage we would expect that to moderate and not be a meaningful impact as we enter actually the quarter that we're currently in, the fourth.

That's what I was going to say on that. So Brian, in terms of Europe, it's good timing for your question. I was there last week coincidentally and we went, did a lot of floor walks with the merchants as well as our field, store personnel, and we are well poised for the fourth quarter.

I have to tell you that I am extremely bullish on what I saw over there last week for where we are heading into mid-November, in terms of a mix in the stores and how we're presenting and how we're staffed for servicing the customer. So feeling very good about that.

The other thing to keep in mind there, and this I think starts to answer your question at least in terms of, yes, comp would help, why do I think the comp will get better, is they are positioned well. The sales that we have, the flat quarter, we were dealing with unseasonably warm, unseasonably warm weather there, and you look at the environment as it is and we are clearly gaining market share.

If you look at some of the results that come out and we don't like to give specifics on that, but you can see we are making very major inroads not dissimilar than we are here, it's just all of the numbers are lower there. There are bigger decreases, some store closings were just announced from a couple of the retailers over there which you can figure out who they were.

So we're very bullish on our market share gain there. Yes, the FX has really put a bit of a damper on the margin rate. Scott and I are often talking about how that has to come back to us at one point.

And the medium and short-term here, I'm looking for us to continue to gain more customers. And that team over there, I wish sometimes you could see the team over there, they are extremely diligent at staying execution oriented when times get tough.

So one of the things I give them credit for -- I think you notice the profit over there was slightly above our segment profit plan and that was due to how diligently they controlled their liquidity and managed expenses in a quarter when the sales were only flat. I give that team a lot of credit for staying liquid, watching expenses, and getting poised for plenty of availability of which you can imagine they have enormous availability over there for the fourth quarter.

So again, feeling very good about them.

Super. Thanks. Good luck for holiday, guys.

Thank you, Brian.

Thank you. Our next question is from Omar Saad. Your line is now open.

Thanks. Good morning. Great quarter, guys. I still wanted to ask about the comp guide for the fourth quarter? I know you initially gave that guidance last quarter, I think at the time you said you'd give more insight around it.

You've been giving 2% to 3% comp guides I think for the last six or seven quarters until now, is there something different you're seeing in the fourth quarter this year? Is it just a more difficult compare? Are there other dynamic underlying that we should think about? Trying not to read too much into it.

I would say what you said right at the very end there about not reading too much into out it would probably be the right attitude. This is a classic case of wanting to stay, as we always have, conservative in our planning and our intention here is to beat those numbers. It's just we have a long way to go in the quarter and so we -- and we had planned this back at the beginning of the year, up against one of our healthier quarters when you look at a couple year stack.

We just thought it was on our end to be judicious and conservative and it's really no different than that. So again, the last thing you said, I wouldn't read too much into it. We're feeling good about it. But that's the best way we thought to plan that quarter relative to the other quarters where we planned the 2 to 3.

Thanks, Ernie. That's helpful. Good luck for holidays.

Thank you, Omar. Same to you.

Thank you. Our next question is from Kimberly Greenberger. Your line is you now open.

Great. Thank you. Good morning.

Scott, I just wanted to go through the 2017 growth investments? It seems like at least some of these will be rolling off in either the first or the second quarter of -- rather, let's go through the 2016 growth investments and I think some of them will roll off throughout calendar year 2017.

You talked about the HomeGoods distribution center, the Canadian distribution center opened in the second quarter of this year, obviously once we get past Q1 you will basically have anniversaried those. But I'm wondering if you can just go through the list of 2016 investments and just talk about where you are in terms of the timing of how those investments are flowing into the expense structure? Including an update on your systems, upgrades that you're working on?

And looking out to 2017, we understand you're not providing guidance today, obviously, but are there some expense pressures or investments that we should keep in mind looking out into calendar 2017? Thanks so much.

Hi, Kimberly. So just to cover them, again, as I said earlier, really no new news here. The biggest thing we called out, we reiterated again in the script today, was that there's the 3% wage increase. So that we still have in the 3% impact to next year in terms of EPS growth.

In terms of other items, too early to make a call on FX other than at this point it would be -- it's clearly as we called out a 3% overall impact this year. Too early to make a call other than with the continued drop of the pound over the last two quarters. It will be some impact but that's about all we're going to say at this point in time.

There's too much buying that hasn't taken place and all that to really get he's specific in terms of what the impact on currency will be on our mark-on. And as we all know, there's been a lot of movements in the last two years at the end of the year in currency, so too early to call on the mark-to-market other than what we have in our guidance for the fourth quarter.

In terms of the investments for both systems and supply chain, you're correct. We have the two DCs of Canada and HomeGoods that happened this year. But we really haven't been specific, other than what we said in the last two quarters that we expected our supply -- overall supply chain and IT cost to be about the same impact next year.

Again, that's not our -- that's what we've been saying. We'll give further clarification on that in the year -- on our year-end call. Unfortunately, no new news in terms of the specific timing on how it's going to impact the quarters and next year.

Understood. Thank you for that, Scott. I'm wondering if you can just remind us what were the supply chain and IT headwinds that you articulated for calendar year 2017 -- sorry, calendar year 2016, your FY17?

We never actually broke out the specifics, other than in terms of an EPS growth. We were really just calling out the FX and the wage increases. So other than -- that's really it. So --

Understood. Okay. Thanks so much.

And the only other thing I would add is the thing that's been a bit of -- Ernie talked about earlier and I think Ernie would say is the average ticket impact to next year, so too early --

Too early, yes, to really forecast exactly where that's going to be.

Thank you.

Thank you. Next question is from Bob Drbul. Your line is now open.

Hi. Good morning. Just a couple questions. Can you talk a little about the month to month progression throughout the quarter? And the second question that I have is, can you talk about the performance of the home business, really both within HomeGoods and also within the home business at Marmaxx and how that's been trending?

Sure, Bob. We'll talk a little about the progression. Scott will get that a little bit together.

On the home business, I think we talked about it. One thing by the way, I would like everyone to know is our apparel business has been strong throughout the year and the last quarter. So it has been healthy all the way across the board but our home business in particular, as you guys can see from HomeGoods results has continued to take major market share and accelerate.

That would apply to Marmaxx, our home business is healthy. We don't give the numbers, obviously. And I would just say domestically, home continues to present an opportunity for us and we will continue to expand there and execute and again, we like our model there. It's quite the treasure hunt and quite the impulsive model that has resonated extremely well with consumers all year long and we don't see that changing.

So great question.

Bob, in terms of the cadence, unfortunately to disappoint you but it's been several years and we don't comment on the inter-quarter sales trends.

Thank you very much.

Thank you. Our next question is from Mike Baker. Your line is now open.

Thanks. So you're very liquid in terms of your open to buy? How quickly can you react to that and get product into the stores? What kind of lead time do you need to get things into the stores before Christmas?

Great question, Mike. We talked about in some of the supply chain advantages that we've created over the last few years, what we've enabled the merchants to do is buy a little closer in. We probably saved -- and we can't really give you an exact amount of time, but it's really down to -- how about this.

It's down to more like a few weeks and it used to be double that, not so long ago. So what that has allowed our merchants to do is continue to buy later into the season with more knowledge and take advantage of more inventory closeout lists that sometimes show up at a time when before it would have become a pack-away. And now it can become an in-season sales drive that is great for the vendor because they don't have to deal with us on a pack-away and at the same time it's great for our customers, more importantly, because they get to see these fresh goods hitting in just before Christmas or just before Thanksgiving that are very fresh and were just recently in other stores.

So great question. Again, it's been a -- it's been one of the big needle movers I think in our buying approach over the last five or seven years.

Okay, great, thanks for the color. I don't know if other people stuck to the one question, I can't remember. So I'll try one more.

SG&A, the expected deleverage is a lot less in the fourth quarter than it was in the third quarter, which by the way is opposite what you're saying about the gross margins? I'm wondering why that might be in the fourth quarter?

Yes, Michael. So we have the same amount of wage and I'll call it supply -- the investments that we have in there, except last year in the fourth quarter we're going against a contribution we made to our foundation, and some incentive accruals that due to the great fourth quarter we had last year, that were more booked -- where a higher percentage were booked in the fourth quarter.

So we're cycling that. We have a benefit. That's why we have the significantly lower SG&A rate in the fourth quarter.

Makes perfect sense. Thank you.

Thank you. Next question is from Roxanne Meyer. Your line is open.

Great. Thanks. Good afternoon. My question is on the increased globalization of your product? I'm just wondering if you can update us on your buying strategy, particularly for Marmaxx, as you take a more global approach to your product and merchandise? Thank you.

Okay. Roxanne. When you say global, I just want to make sure I'm answering the question correctly. When you say a global approach in terms of Marmaxx, are you referring to goods you see in the stores or --?

Yes. Even in your prepared remarks you talked about getting more eclectic goods from around the world in your stores, and I'm just wondering how you've changed how you're buying your merchandise?

Well, so we have a few different ways. One is our divisions are more linked up. So we have a division in Europe which has many buyers in Europe, a division in Canada that travels to Europe and internationally as well as satellite buying offices. We have buyers in Europe and a satellite office that represents HomeGoods and Marmaxx.

We have a California buying office. They travel to other countries. Our buying offices do a lot more exploratory trips. All the different buying offices will try going to new places where we think there are new categories of goods that will be exciting.

Examples are like leather goods out of Italy, right. Or something that is out of Africa that would be great in the home deck area. Those are the type of things you're talking about that would hit Marmaxx that are more global type buys.

There's clearly, if you look, we've even had like outdoor type items that are bought for HomeGoods that are bought certainly obviously internationally purchased by our buyers. So we've added to -- I think we talked about the buying staff has doubled over the last 10 years and part of that buying structure is buying global merchandise, buying from other areas. So that has been a huge, huge advantage.

That's why we have 1,000 buyers now and when you see that, I think I mentioned that we have 18,000 vendors. That has grown a significant amount in really just the last five years. A lot of those vendors are international vendors and are giving us that different flavor.

So it's a great question because what we get out of it, we think, is a differentiating piece in our mix that other retailers really can't show and it's because as I said in my script, that's where I think we're a sourcing machine and really we just have a very talented buying team that gets a lot of ground covered a in a lot of parts of the world. Hopefully that answers your question.

It does. Thanks a lot and best of luck for holiday.

Thank you.

Thank you, speakers. Our final question for today comes from Richard Jaffe. Your line is now open.

Thanks very much, guys. And just a digression to Sierra Trading? It was an interesting acquisition several years ago, wondering how that's playing out, how accretive it's become and perhaps more importantly, could you talk about some of your learnings from that business? Thank you.

Sure, Richard. So Sierra trading post when we acquired it -- I think we've talked about this before. We've been going through some learnings in terms of remodeling the business because the business was -- the website was much more promotional than as you can imagine we would want it to be, being an everyday value off-price retailer.

So interesting timing for you to ask this question, because we have recently taken a big chunk of that and gone to everyday value. When I say recently, that was about a month ago, and we were not happy with our results prior to that as we were kind of weaning ourselves off that situation. But since that we're feeling much better about the day in, day out traffic and purchasing.

We still are not all in all happy with that -- with the website business. It's a little early to tell. So we have really gone after the store initiative which I think we've talked about. We want -- we've got plenty of room now to find out about the web business because of this value pricing.

We've done some reorg with merchants that are now in place, and we're feeling really good about going forward there and we're actually -- we have so much we can't talk about, some interesting marketing plans for the website going forward that I think are going to pay big dividends, along with the value pricing that we've just started there.

We put in some new merchants there to help with the website business and the store end of the STP business we've actually been very happy with. That one's been a longer term success rate for us. It's just early and it's really early in the whole curve of building that business.

So we're going to have some sites, that at the year end call we'll talk in more depth. We won't go into that today. We'll talk about at the year-end call, some of the stores that we're going to open there and we'll give more color I think on the total business at that point in time.

Okay. Thank you.

You're welcome. So I believe that is the end of our call. Thank you all for joining us today and we look forward to updating you at our year-end earnings call in February. Thank you, everybody.

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