TJX Companies Inc (TJX) 2019 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the TJX Companies First Quarter Fiscal 2019 Financial Results Conference Call.

(Operator Instructions)

As a reminder, this conference call is being recorded, May 22, 2018.

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

Please go ahead, sir.

Thanks, Brad.

Before we begin, Deb has some opening comments.

Thank you, Ernie, and 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 April 4, 2018.

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.

We have detailed the impact of foreign exchange on our consolidated results and our international divisions in today's press release in the Investors 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 Investors section.

Thank you.

And now I'll turn it to 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 first quarter results.

Both our consolidated comp store sales growth of 3% and adjusted earnings per share of $0.96 exceeded our expectations.

I am particularly pleased with the 4% comp sales increase at Marmaxx and the strong performance across their apparel and home categories.

I'm also very pleased to say that we successfully addressed the third quarter execution issues that we had discussed last year, and they are now behind us.

In the first quarter, customer traffic was once again the primary driver of our comp sales increases at all 4 of our divisions.

Further, this quarter marks the 15th consecutive quarter of customer traffic increases for TJX and Marmaxx.

We believe that this consistency in our customer traffic increases speaks to the strength of our underlying business, our ability to succeed through many types of economic and retail environments, and our resiliency, as online retail is growing.

We are convinced that our outstanding values, great brands and treasure-hunt shopping experience will allow us to continue gaining market share around the world across our 4 major divisions.

With our strong first quarter results, we are raising our outlook for our full year earnings, which Scott will detail in a moment.

Looking ahead, the second quarter is off to a strong start, and we see many opportunities to drive consumers to our retail banners.

We see a marketplace that is loaded with quality branded merchandise.

Our management team is laser focused on achieving our plans and, as always, will strive to surpass them.

We are confident that we can continue to grow TJX around the globe today and for the future.

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

Scott?

Thanks, Ernie, and good morning, everyone.

As Ernie mentioned, our 3% consolidated comparable store sales increase exceeded our expectations.

To be clear, our comp sales in fiscal '19 are compared to a shifted fiscal '18 calendar so that our comps are calculated on a like-for-like basis.

Once again, customer traffic was up overall and the primary driver of our comp sales increases at each of our 4 major divisions.

As a reminder, our comp increase excludes the growth from our e-commerce businesses.

First quarter diluted earnings per share were $1.13.

Excluding a $0.17 benefit from the 2017 Tax Act, adjusted earnings per share were $0.96, a 17% increase over last year's $0.82.

Adjusted EPS was $0.09 above our plan, primarily due to better-than-expected operating results, which benefited EPS by an estimated $0.05.

In addition, we had another $0.04 benefit from the combination of our mark-to-market gains on our inventory hedges and share-based compensation coming in above plan.

Overall, foreign currency benefited EPS growth by approximately 3% versus our plan of 1%.

As expected, wage increases negatively impacted EPS growth, by about 2%.

Consolidated pretax profit margin was 11%, up 30 basis points versus the prior year.

This increase was due to several factors.

These included expense savings, better flow-through on the year-over-year sales improvement, a onetime lease buyout in Canada and gains related to inventory hedges.

These benefits were partially offset by higher supply chain costs, a decrease in merchandise margin and wage increases.

At the end of the first quarter, consolidated inventories on a per-store basis, including inventories held in warehouses but excluding in-transit and e-commerce inventories, were up 6% on a constant currency basis versus a 7% decrease last year.

We feel very comfortable with our inventory liquidity as we enter the second quarter.

We are well positioned to capitalize on buying opportunities in a marketplace full of quality, fashionable branded merchandise.

Now to recap our first quarter performance by division.

Marmaxx comps increased a strong 4%, well above our plan.

Comp sales were driven by customer traffic, and both our apparel and home categories performed well.

Again, we are very pleased to move past last year's execution issues.

Further, Marmaxx's average ticket was slightly up and better than we planned.

Segment profit margin increased 10 basis points, primarily due to better flow-through on the 4% comp.

We are very pleased with Marmaxx's strong start to the year and are excited about the initiatives we have planned to drive traffic and sales.

HomeGoods comps grew 2% over last year's 3% increase.

While sales were softer at the beginning of the quarter, business picked up in March and April to levels similar to the last couple of quarters.

Further, overall sales at our first few HomeSense stores continued to exceed our expectations.

Segment profit margin was down 200 basis points.

This was primarily due to lower merchandise margin, largely as a result of increased markdowns earlier in the quarter, increased supply chain costs and expenses related to new store openings.

We feel great about the opportunity we see to grow HomeGoods and HomeSense for the long term.

TJX Canada's first quarter comps grew 3% over a 3% last year.

Adjusted segment profit margin, excluding foreign currency, was up 170 basis points, primarily due to a onetime gain related to a lease buyout, which was consummated -- contemplated in our plan.

Canada's significant wage pressure was mostly offset by increase in merchandise margin, which was up significantly, primarily due to favorable transactional foreign exchange.

Without the lease buyout benefit, adjusted segment profit margin was still up.

We continue to be pleased with the overall performance with our Canadian business.

At TJX international, comps increased 1% in the first quarter.

In Europe, while we were pleased with the solid execution of our organization, we believe sales were negatively impacted by periods of very unseasonable weather early in the quarter.

In Australia, sales continue to be very strong.

Adjusted segment profit margin at TJX international, excluding foreign currency, was up 40 basis points, primarily due to operating leverage in Australia.

Further, merchandise margin was up.

In Europe, we remain confident that we're gaining market share despite the challenging retail environment.

Our European organization is capitalizing on the numerous opportunities in the vendor marketplace that the environment is presenting to us as we add more exciting brands and vendors to our sourcing universe.

I'll finish with our shareholder distributions.

During the first quarter, we bought back 400 million of TJX stock, retiring 4.9 million shares.

We anticipate -- we continue to anticipate buying back 2.5 billion to 3 billion of TJX stock this year.

In addition, we increased the per-share dividend by 25% in April, marking the 22nd consecutive year of dividend increases.

Now let me turn the call back to Ernie, and I will recap our second quarter and full year fiscal '19 guidance at the end of the call.

Thanks, Scott.

I'd like to reiterate the major reasons for our confidence in continuing to gain market share around the world.

First and foremost, we are convinced that our excellent values, fashions and brands will continue to drive consumers to our stores.

In today's evolving retail environment, with the growth of e-commerce in general, we are delivering excellent value on comparable merchandise versus both brick-and-mortar and online retailers.

In fact, we believe the growth of online retail has heightened the visibility of our values for consumers, which is very positive for our business.

Second, we are confident in the enduring appeal of the treasure hunt shopping experience we offer.

We are convinced that the ability to touch and feel the merchandise and the inspiration that our shopping experience elicits leads to instant gratification, all important factors for shoppers.

Further, we offer a wide variety of branded items across multiple categories in a simple, easy-to-shop layout.

We also locate our stores in convenient, easy-to-access locations.

Our flexible store format and rapidly changing assortments allow us to quickly react to changing consumer trends.

This helps us ensure that our stores are fresh, and there is always something to surprise and excite our customers.

Third, while we continue to attract customers of all target age groups in all divisions, we are especially pleased that we have been disproportionately attracting new millennial and Gen Z customers.

This bodes very well for the future of TJX.

Next, we are laser focused on driving customer traffic and comp sales.

We have many initiatives planned to attract new consumers, encourage more frequent visits and drive cross-banner shopping.

We are excited about our marketing plans, which are moving towards a more continuous media strategy to support our business throughout the year.

This includes more weeks on television this year as well as a continued focus on digital platforms to ensure our retail banners show up wherever the consumer is looking.

Further, we are emphasizing our loyalty programs across the U.S., Canada and the U.K. and are pleased with the strong growth in the number of customers joining our programs.

We are focused on enhancing the shopping experience, improving customer satisfaction and, as always, innovating.

We feel good about the continued growth of our e-commerce sites.

While still a small piece of our business, we're happy to offer our customers the choice of when and where to shop us, and our marketing is helping to make them aware that they can shop us 24/7.

Next, we see a tremendous opportunity to keep growing our global store base.

Giving us confidence is our disciplined approach to real estate and decades of operational experience.

Long term, we see the potential to grow our 4 major divisions to a total of 6,100 stores with just our current chains and our current countries alone.

The last reason for our confidence is product availability.

We are extremely confident that we will always have great -- access to great-quality branded merchandise to support our growth plans.

Availability of inventory continues to be terrific, and we are thrilled with what we are seeing in the global marketplace from both existing and new vendors.

Let me share with you some of what we do at TJX to make it attractive for vendors to do business with us.

First, we aim to establish long-term, mutually beneficial relationships.

Our buyers around the world constantly work with vendors to find additional ways to do business.

Next, we have over 4,000 stores across 9 countries, in addition to our online sites, and we are still growing.

In an environment where other retails are closing stores, we can offer vendors an excellent way to grow their business and access new markets.

Further, we are very flexible in our dealings and offer vendors an efficient way to clear merchandise.

We can purchase an extremely wide assortment of items, styles and sizes as well as quantities ranging from small to very large.

Finally, we offer such great brands in our stores and see that vendors appreciate that their products will be mixed in with our other great brands.

This is extremely desirable to them.

Before I wrap up, I want to remind you that we are committed to reinvesting in our global business.

While we're expecting investment spending to be significant over the next few years, we believe we are making the right strategic investments to support our long-term growth plans.

Further, in an environment where cost pressures continue to rise, we are using our off-price approach to look at long-term structural ways to reduce expenses.

In closing, we feel great about our strong start to the year and our plans for the second quarter and back half of 2018.

We are extremely focused on our near-term execution while simultaneously having our sights set on our long-term vision for TJX.

The many strengths of our business give us enormous confidence.

We believe that the depth and breadth of our off-price knowledge in the U.S. and internationally is unmatched and extremely difficult to replicate.

We are confident that our relentless drive to bring consumers an exciting treasure-hunt shopping experience, both in stores and online, and an ever-changing mix of excellent brands at outstanding values will continue to be a winning strategy for us.

Again, our management team is passionate about surpassing our goals.

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

Scott?

Thanks, Ernie.

I'll begin with our full year fiscal '19 guidance.

For modeling purposes, I'll remind you that fiscal '19 is a 52-week year compared to fiscal '18, which is -- which was a 53-week year.

As we mentioned in our press release this morning, we are increasing the high end of our adjusted EPS guidance by $0.02.

Our full year plan assumes that $0.07 of our $0.09 first quarter EPS beat will be offset by the following factors: First, we're expecting a $0.03 negative impact due to a combination of factors.

This is primarily due to significantly higher freight costs than we originally anticipated, partially offset by the stronger operational performance we now expect as we've seen our noncomp store results exceeding our plans.

Second, we expect about $0.02 of the first quarter benefit from our inventory hedge gains to reverse throughout the remainder of the year.

Lastly, we now expect the full year benefit from translational foreign exchange to come in $0.02 lower than we originally planned.

I want to point out that we would have increased the high end of our EPS guidance further if not for the reduction of the expected translational FX benefit.

On a GAAP basis, we expect fiscal '19 earnings per share to be in the range of $4.75 to $4.83.

We now expect a benefit of $0.72 to $0.73 from items related to the 2017 Tax Act.

This benefit is approximately $0.02 lower than our previous guidance as we continue to evaluate the impact from the 2017 Tax Act.

Again, excluding this tax benefit, we're increasing our adjusted earnings per share guidance from $4.04 to $4.10.

This would be a 5% to 6% increase versus the adjusted $3.85 in fiscal '18.

Our guidance includes an assumption that wage increases will have a negative impact to EPS growth of about 2%.

This EPS guidance assumes consolidated sales in the $37.7 billion to $37.9 billion range, a 5% to 6% increase over the 53-week prior year.

We're assuming a 1% to 2% comp increase on a consolidated basis, similar to our plans for prior years.

We expect pretax profit margin to be in the range of 10.7% to 10.8%, down 40 to 50 basis points versus the adjusted 11.2% in fiscal '18.

We're planning gross profit margin to be in the range of 28.5% to 28.6% compared with the adjusted 28.8% last year.

We're expecting SG&A as a percentage of sales in the range of 17.7% to 17.8% versus the adjusted 17.5% last year.

For modeling purposes, we're currently anticipating a tax rate of 26.2%, net interest expense of $23 million and a weighted average share count of approximately 624 million.

Now to our full year guidance by division.

At Marmaxx, we're continuing to plan comp growth of 1% to 2%.

We're now planning sales of $22.9 billion and segment profit margin in the range of 13.2% to 13.3%.

At HomeGoods, we continue to expect comps to increase 2% to 3% on sales of $5.7 billion.

We're planning segment profit margin to be in the range of 11.6% to 11.8%.

For Canada, we continue to plan a comp increase of 2% to 3% on sales of $3.9 billion.

The reduced total sales expectation is entirely due to translational FX.

We're now assuming a lower Canadian dollar rate for the remainder of the year, which may cause transactional FX to negatively impact segment margin.

Adjustment segment -- adjusted segment profit margin, excluding foreign currency, is expected to be in the range of 14.6% to 14.8%.

At TJX International, we continue to expect comp growth of 1% to 2% on sales of $5.3 billion to $5.4 billion.

Adjusted segment profit margin, excluding foreign currency, is expected to be in the range of 5.1% to 5.3%.

Moving on to Q2 guidance.

We expect earnings per share to be in the range of $1.02 to $1.04.

Excluding an estimated benefit of $0.15 from items related to tax reform, adjusted earnings per share would be in the range of $0.87 to $0.89 versus the prior year's $0.85 per share.

This guidance assumes that restructuring costs within our global IT department will negatively impact EPS growth by 3% to 4%, and wage increases will negatively impact EPS growth by another 2%.

We are also anticipating that foreign currency will benefit EPS growth by 4%.

As we noted in the press release this morning, these IT restructuring costs were recontemplated in our original plans.

So to be clear, these restructuring costs have no incremental negative impact to our expected fiscal 2019 EPS growth versus our original guidance.

We're modeling second quarter consolidated sales of approximately $9 billion.

This guidance assumes a 1% benefit to reported 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.

Second quarter pretax profit margin is planned in the 9.7% to 9.9% range versus 10.7% the prior year.

We're anticipating second quarter gross profit margin to be in the range of 28.3% to 28.4% versus 28.5% last year.

We're expecting SG&A as a percent of sales to be approximately 18.5% versus 17.8% last year.

The expected increase in SG&A is primarily due to the restructuring costs, which, again, were contemplated in our original plan.

For modeling purposes, we're currently anticipating a tax rate of 26.6%, net interest expense of about $5 million and a weighted average share count of approximately 629 million.

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

Now we are happy to take your questions.

(Operator Instructions)

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

(Operator Instructions) And our first question comes from Kimberly Greenberger.

Okay, wonderful.

Scott, I wanted to ask about your commentary with regard to your global IT.

I think you said reorganizational restructuring.

I know you've been in process for a number of years now on improving the whole technology infrastructure.

Can you just talk to us about the progress on that, the expected benefits and the need to do this reorganization?

Just what's driving that?

Kimberly, it's Ernie.

I'll jump in here for Scott.

Really, this boiled down to -- and by the way, this is certainly always a difficult thing to do for a number of reasons.

But it boils down to positioning us for the future in terms of the IT area and from our growth plans.

We really don't give out the specifics of what the benefit's going to be, but it is something, as Scott had said, that we have in our plans contemplated already and felt it was necessary to take us into the next few years of the growth rates that we plan on achieving.

Ernie, can I just ask a follow-up on your commentary during the prepared remarks with regard to inventory availability?

It seems very clear to us, having followed the company here for almost 20 years, that, that is never really an issue for you.

But we're still hearing sort of resurgent concerns out there.

Given the inventory position, it looks like you are able to find every bit as much inventory as you'd like to buy, but I thought I'd just give you a forum to opine on the availability of the inventory and the quality of goods you're seeing.

Kimberly, so first of all, I know you go way back with us, for years and years, so I actually appreciate you asking this question because you've seen the ups and downs in terms of what the market talks about on that front.

And there has been times in the years past, although I can't remember in the recent years, certainly not for the last 5 or 6. Right now, there is an unusual degree of supply across all, I would call it, tiers of vendors and goods quality and brand levels.

So we're talking probably in general, more better brands.

And we hear -- by the way, we get asked all the time.

We hear all the dialogue that's happening in the industry about vendors and manufacturers cutting back.

It's just nothing in our pipeline or with regard to our buyers, what they're experiencing, reflects any of that dialogue.

It's been the complete opposite.

And my team has never had it more challenging, I would say, to be selective on how much we buy, how quickly.

It's been that plentiful out there, I would say.

And the interesting thing is, usually, it varies more by -- well, it always varies by category, the degrees to the availability.

But right now, it seems to be in most every category across most every tier of brand.

So it's a little puzzling to a degree.

And then I hear like -- I'm glad you brought the question because we hear the same question.

So what you're hearing out there is exactly what we hear being asked.

It's just not based on what we're experiencing in any way.

Our next question comes from Omar Saad.

Scott, I wanted to ask you to maybe dive in a little bit deeper on the rising freight costs.

You've obviously been dealing with payroll the last few years.

We're watching commodities and energy prices go up.

Amazon's raising its Prime membership fees.

We're seeing rising kind of transportation and freight costs across the industry.

How are you guys thinking about this tactically over the next year or 2?

And then does it eventually evolve into a situation where the kind of entire industry needs to elevate prices to accommodate the higher expenses to deliver goods to consumers?

So let me just take you through.

I think Ernie will comment a little bit about how that -- about the retails and that.

I think we had built in just -- maybe to give you a little more color on some of the rising freight costs.

But obviously, we have built an increase into our year.

At this point, obviously, it was not as much as we had anticipated.

The largest impact to this is due to the strengthening of the government regulation that allows -- that monitors drivers behind the wheel.

As a result of that, we're seeing higher rate increases that -- more than we had anticipated.

We had, had, let's just say mid-single digit increases, and they're several points higher than we had anticipated.

And it's obviously impacting our costs related to how we do our logistics network.

We're also seeing higher fuel surcharges as rates have gone up significantly over the last couple weeks on fuel, and to a lesser extent, higher volumes as both -- that really more relate to the rest of the year as we have -- we built in some additional sales into our forecast into the last 9 months of the year, primarily at Marmaxx.

Finally, just to be clear, spot rates, where you may have read our -- which are considerably higher, is not a major impact to us as the vast majority of what we do are through contracted rates for our shipping.

So just to give you a little more color on the costs there.

And so as a follow-up, do you guys see, anticipated opportunity or response in terms of pricing as the company and other retailers presumably are synthesizing similar cost increases?

So, Omar, what we -- and we're trying to follow it closely.

So when it comes to retails, first of all, just so you know how we would operate, and you've known us for a while as well, we would follow the leader, so to speak, and we would adjust the -- to make sure our out-the-door retail gives the appropriate savings relative to the out-the-door retail at other retail.

So your question, of course, is will they start to increase their prices, and then, by definition, could we go up?

The only thing is, right now, it's a little -- there's not enough specifics out of the box on the news as to how much the other retails are affected.

We might --- our model of business, with the way we ship and our frequency of delivery is perhaps our freight impact might be slightly better -- not meaningful, but slightly increased versus some of the other retailers.

So we're right now, and we've been monitoring it.

I'm a little unclear as to, based on certain other retailers, how big it is.

Although it is being called out in a fair amount of the release as we just are trying to get a handle on it.

And certainly, nothing would happen right away.

My long-winded answer is it could happen, to your point, if it continued to go that way.

I don't know also, given all of the dynamics Scott talked about, if that continues to get actually worse in that situation, the freight could go up even more.

I think that does lead to something.

You were just hinting at, where retails do get moved up a notch.

So I think we'll wait to see.

But we are very sensitive to what you just asked about.

So, very good question.

The next question comes from Oliver Chen.

On the Marmaxx side, the ticket being up was encouraging and different from prior trends.

Can you just help us understand what's happening there in terms of what you're thinking about categories?

And a bigger-picture question was around strategy and M&A.

One of the markets that we've been following closely is resale and resale disruptors.

What are your thoughts about that business and opportunity as it gets more mainstream and as millennials and new generations continue to be interested in different ways to drive a value-driven experience?

So, Oliver, I'm going to let Scott take the average ticket one; then I'll take the second one.

Yes.

In terms of strategies, we do not go into the exact details of what we are doing other than some of this.

I'll just go to what Ernie said a bit, is that we're seeing more -- a better mix, more best brands.

So that's certainly a piece of it.

The other piece indirectly is as you get a healthy mix of -- as both the apparel does well, that certainly helps, but I'm not going to go into the specific categories that may have helped within that.

I would say that one of the changes to the second quarter is we have retail planned flat at this point.

I'm talking at Marmaxx.

So that is slightly better than we had anticipated with the back half retails planned slightly flat to slightly up.

So again, we see less pressure than, obviously, for the first time in years, that we have with the approach.

So for the last couple of years, you've heard us talk about retail decreases at Marmaxx.

So this is a big change.

And, Oliver, I'll just jump in with something else there, as Scott mentioned it at the beginning as far as the mix of departments and the way that has brought some back.

So just like in the beginning where this was not a top-down strategy, and it was really down at merchandise manager level, category level driving it.

And you mentioned categories in your question.

So what's happening, and Scott was just trying to give a little more color here, some of the categories that are trending now are helping us with the ticket.

It's going the other way.

And again, bottom-up.

Not anything we're generating -- I guess, I want you to understand, the same way it got -- it was driven down from not a top-down approach, it's also coming back also from that level, from the merchandise managers and the buyer level and the GMM.

So it's a good -- it's a nice thing to see because generally, when you see that happening, just like it took us longer than we thought it would moderate, it usually goes on to this cycle.

So hopefully, we'll keep seeing the trend in those categories continue and keep helping our ticket.

On the resale market question, I think I would tell you when you asked about is that something down the road, we would find appealing, or do we think there's likes to that or expandability to that if it goes more mainstream, I think, you were asking.

I -- we actually do believe it's interesting.

It's not at the level now where it's big enough to be something that we would probably entertain that strongly.

However, we look at everything, and we're intrigued, A, by the sites we see it on.

We're intrigued by the business is not dissimilar to what we do.

There's real value in it.

It's very branded.

I like that resale market carries a lot of great designer branded product, which really is up our alley in terms of content and fashion and certainly the price that they're selling it at.

So, obviously, we won't commit to anything on this conference call.

We'll just say it's very intriguing.

Good question.

Okay.

And just a quick one on the distribution centers in terms of supply chain as you continue to really look at great opportunities in non-apparel.

Are there things we should think about on a longer-term basis?

Because you've done a really good job entering categories, which have very different dynamics in terms of handling and also differentiation with the pack sizes.

So what should happen there?

Just because it isn't -- it isn't very easy to move around such the home product, et cetera.

So Oliver, you must -- are you asking us about that ability to process goods more efficiently, maybe?

Is that what...

And also the future of the DCs and how that might reorientate just in the nature of the non-apparel mix and that part growing over time.

So I mean, we've expanded our home area processing DCs.

I think that's part of what you're getting at.

In terms of the new processes that we're taking a look at to put there, we can't externally talk about that, but we're looking at always ways to increase our efficiency out of the DCs, in the home area specifically, because as you mentioned, it is one of our least-efficient categories for processing, however, obviously, an enormous sales opportunity as we move forward.

So I don't know.

I guess, Scott, do you have...

Yes.

I think the only thing I would say is that I think it goes back to one of the things Ernie said earlier in our prepared remarks, that it's a key differentiator as we do 30-plus percent of our business in home.

And we think we are pretty efficient in the way we handle that bulky, difficult items to ship, and I think that's something that we do very well.

And certainly, with the growth of HomeGoods, we've been adding supply chain capacity to do that, and I think we do it very efficiently.

Just to Ernie's point of view, it's obviously a slightly more expensive model to do.

But I think, again, I think the big key differentiator is that we're able to get all these items and do it in these -- with thousands of different SKUs and do it very efficiently, compared to, I think, others that probably don't do the same level of volume and haven't been doing it for as long.

Our next question comes from Lorraine Hutchinson.

I was hoping you could comment a little further on HomeGoods, what the challenges were early in the quarter.

And then do you feel that you're back on track to put up positive merchandise margins for the remainder of the year, at HomeGoods specifically?

Yes.

I'll just take it and Ernie will jump in.

I think as it relates to the merchandise margin, I -- what we called out at the end -- on our year-end call that we did expect some mark down pressure in the first quarter, primarily due to the -- some of the what we call the flow issues that we had as we move through the end of the year.

I think it lasted a bit longer than we would have anticipated, and it clearly had an impact both on our markdowns and our sales in the beginning of the quarter.

But I think as we indicated, the sales trends picked up to what we were seeing for the majority of last year.

So again, as we move through the quarter, the clearance and everything else was -- as we moved to middle of the quarter, March and April was back to normal letters -- normal levels with a normal level of fresh flow.

So we would expect our, at least, the markdown component of that to be pretty normalized as we move through the rest of the year.

Yes.

I will jump in, Lorraine, also in terms of the top line and the sales.

It was a bit of a double-edged sword.

As we came out of January, we ended that fourth quarter with the flow disruption that we had talked about a while ago.

And as Scott said, that impacted our markdowns in January and February and, of course, our sales as well.

But to highlight a little bit more.

Our transactions for the quarter actually accelerated during the first quarter as we moved through.

So from February to March to April, they got better each month.

So again, we were unfortunately kind of prepared, based on the flow situation, that we would start out of the gate a little slow, but we were encouraged at the end of the quarter.

One other dynamic I'd like you to be aware of just going forward there, and it's something -- it's easy to forget.

We were opportunistic in our real estate over the last couple of years.

And so just like anything we do, and this is one reason our store count and new store openings at HomeGoods, we had accelerated because we found very advantageous real estate deals in numerous pockets throughout the country.

So ironically, the last 15 months, we had opened -- prior to that quarter, we had opened 115 HomeGoods stores on a relatively small base.

So that was -- as you can imagine, with about a 20% growth in new stores, we were probably experiencing a tick more in our transfer sales coming out of our comp, and that is something that Scott and I have looked at actually going forward over the next couple of quarters.

Anyway, that probably ticks up a little bit further because, again, we have a lot more new-store growth.

So if you guys take a look at our top line growth in HomeGoods this year versus last year, it's even greater because of so many of the new stores.

So the comp, for the reasons we talked about, was a little under where we'd normally like it.

But our top line is in a good place, I guess, so to speak.

So just like you to keep that in mind as we look at a little bit more cannibalization over the next couple of quarters.

Still the right thing to do, though.

We are very happy, very happy with where we're positioned in HomeGoods and thrilled that we have all these stores, because a couple of years down the line, it will bode us very good income on these stores.

So great question, Lorraine.

Our next question comes from Paul Lejuez.

Yes, Ernie, that last point you made was actually going to be my question.

I was curious if there was any quantification of the stores, the HomeGoods stores, that -- and if you look at comps of the stores impacted by new-store openings versus those that are not impacted, if you could maybe share with us what the difference might be there.

And then also, speaking -- keeping with the home theme, the earlier reads on HomeSense and the performance of HomeGoods stores nearby and anything that you're seeing there from a category perspective that might impact your thinking on HomeGoods?

Yes, Paul, I'll let -- Scott did you want to...

Yes.

I'll just -- I mean, I said, again, I think it's just reiterating what Ernie said.

Just it's a bit more cannibalization, but I don't think -- there's not a large difference.

I mean, it would be a difference in a store that got cannibalized versus a nonimpacted store.

But overall, versus the prior year, it's a bit more.

So I don't think there's any -- I think the point Ernie was trying to make in terms of when you have so many stores that are opening, what we still have not seen, it's pretty consistent among all our divisions, is once you start getting into the first, second, third year of your comp -- of your -- of the age of the stores, those stores comp more.

So we should, in the future, starting next year, start seeing a benefit to that as we'll have met a couple of hundred stores that will be 2 years or less there now just entering the -- as they start to enter the comp status.

In terms of -- the one other thing I mentioned, going back to the last call with -- question with Lorraine is, although most of the -- in terms of the merchandise margin, basically, the higher -- all of the shortfall was due to markdowns, and I think this is across many of our divisions, we're seeing strong mark on, and the mark-on essentially offset most of our freight pressure, at least at HomeGoods for the last quarter.

So just wanted to get that out.

Paul, and then on HomeSense, we look at this constantly.

Yes, their top -- their sales continue to outperform at the HomeSense stores.

And our nearby -- we are pleasantly surprised with the nearby HomeGoods stores are experiencing less transfer than planned.

So we are, right now, winning on both fronts.

And really, the driver of that is -- and I think you were asking about certain categories, et cetera.

Well, the categories have been so differentiated that -- which is why, even initially, we pulled out soft home from HomeSense to even accelerate the differentiation, which the stores are so differentiated.

That's why we think the cannibalization from the nearby HomeGoods has been reduced beyond the plan.

And -- but we're just so pleased with the HomeSense top line performance relative to the pro formas on each new store.

It's just been better than we expected.

Great.

Can you just touch on home versus apparel in Canada and Europe?

Yes.

Let's see.

Yes.

Home's been performing -- we won't give you the numbers, but it's been performing -- we'll, put it this way.

Healthy in both.

How's that?

Outperforming apparel, though?

We will not -- we don't want to give that right now.

The next question comes from Adrienne Yih.

Ernie, I wanted to follow up on the inventory supply sources.

Is there inventory growth that's coming from pure-play e-commerce brands?

And then, Scott, can you talk about the e-commerce strategy, the percentages today, how aggressively you want to build that?

Adrienne, so interesting, your first question.

I don't know if you caught in the script, the prewritten script that, A, the online players, and that would apply to the vertical as well as non, it creates an umbrella of value for us in terms of compare-add value.

So that's been a side benefit of the online business.

But secondly, the availability from whether they're vertical or not vertical, we've been able to buy goods from both of those markets and type of situations.

And that we -- our prediction is that will continue to grow.

So if you look at -- we all believe that the online vertical retailers and omni-channel, et cetera, are all going to continue to expand over the next few years, I can't see any reason why availability of merchandise -- because those businesses, by the way, are harder to predict and harder for those merchants, as you know, to flow the appropriate amount -- quantity of goods off of what they're going to sell on the sites, so I think it's a harder challenge for them.

And what we've seen is they enjoy the benefit of knowing they can come to us.

And those goods, which are visible online, will get very dispersed into a treasure hunt format with other strong brands, which also, we mentioned in the script, in terms of they're really appreciating the fact that they hang with other strong brands and the T.J. Maxx and the Marshalls.

And so we see this as not only is it something, yes, we're already doing, but we see it as a growing opportunity.

Great, very helpful.

Yes, in terms of the e-commerce that Ernie talked a little bit about the strategy going forward, in terms of what we're seeing, certainly, at tjmaxx.com and in our tkmaxx.com business, we've seen very strong increases in the first quarter.

We like -- we also like a lot of the metrics around what we're seeing.

The awareness of both the sites is up.

The customer satisfaction scores are up.

In the U.K., particularly pleased with the percent that we've grown in the business.

Our sales, in terms of a percentage of the business in the U.K., is up almost 200 basis points in the quarter versus the prior year, so some pretty significant growth.

Have a few advantages there that we do Click and Collect in virtually all of our stores in the U.K. And about 40% of the online businesses is done through Click and Collect.

So a nice advantage that we have there, so real pleased with the results.

In terms of growing it, I think we are growing it -- I think we're going to -- hope to see similar rates of growth.

It's still a small part of the business.

But certainly, we are -- we like what we're seeing in terms of the incremental visits we're getting.

We believe that -- and due to the nature, we also get returns back to the store.

I think we view it as certainly adding positive business to TJX overall.

The next question comes from Matthew Boss.

Ernie, is it fair to think about the execution issues that both HomeGoods and Marmaxx is now fully in the rearview mirror?

And any key learnings, maybe guardrails that you've now put in place to reduce the likelihood of reoccurrence?

Matthew, good question.

Yes, on the Marmaxx, execution issues are in the rearview mirror.

We put guardrail -- we traditionally have the guardrails in, and what happens is this isn't -- how do I put this?

It isn't a totally structured, rigid business that we're in, right?

It's a little gray.

So if you remember, the Marmaxx issues were more fashion-oriented issues.

And when you have fashion-oriented issues, it's dealing with a bit of a subjective taste and balance to the look of the goods that you're buying and to what degree you have that amount of goods.

And so we -- certainly, the likelihood of it happening has lessened.

It's just -- it's impossible to put a firm guardrail.

Does that make sense, Matthew?

And so -- but the good news is in our model of business, as you can see, we were very able to quickly -- as we have over all the years, quickly identify and fix and really minimize the impact of any of those missed execution issues.

So that -- I'm just being conservative on my answer, because I would tell you, yes, we put guardrails.

We spend a lot of time restrategizing those areas and put things in place that would help to minimize the likelihood.

It's just, I know from past experience, something can always happen, especially if it involves a qualitative, or a bit of an art form part of the business, then it's a little tougher.

But we do pride ourselves in our past on our ability to quickly fix and recover from any type of execution issue that we have.

And that, I think, we've had years of proof in the pudding.

Great question.

Got it.

And then, Scott, since your current guide, ex tax reform, I think, now calls for 5% to 6% bottom line growth.

If we were to look through some of the more transitory items, I guess, can you talk to some of the margin efficiency initiatives as we look forward and just maybe how to think about the earnings profile in the years ahead?

Nothing really new to add there.

I mean, we will -- we're not going to really talk about what we could be doing at this point.

But I think what we said on the earlier -- when we said on the year-end call that we -- our plan at the moment is to continue to tick up the EPS growth, and no real change to that.

Obviously, that implies both a healthy merchandise margin and very strong expense control.

And the final question for today comes from Marni Shapiro.

I just wanted to do a follow-up on a couple of things that, over the years, you've put into work, and we haven't -- we've focused so much on a strategy miss here, technology here, foreign exchange.

If you could just maybe bring us up to speed on things like, is the runway still rolling out?

Are you bringing -- is it international?

And what about the cube?

And you've talked about the shoe departments at Marmaxx and the beauty departments in general, and all of it's sort of taken a backseat to what's been pressing.

But are all of these things still in the works?

And are they in the works internationally?

Like, are you putting them into Australia, for example?

Okay.

So let's deal with the first couple.

So it's good, Marni, because that was like a...

10-part.

It's one question, but it's with 5 mini parts.

So on the runway, we've added -- and you've been watching us for years, we've added runway stores little by little.

And you probably haven't heard an update, and that's something that Scott could even circle back to you on.

But yes, we have been adding runway stores.

Shoe.

When you got -- now some clarity -- and by the way, we love what we've been doing there.

It's obviously -- we put the runway in certain stores, and we do it -- we want to be careful that we don't do it, A, and the wrong stores will rob some of other runway stores for a new store that may not be the appropriate runway store, if that makes any sense.

But to clarify from your question on shoes, what were you -- on shoes, you're asking?

It was a push for an extended expanded shoe department at Marshalls at one point.

And you guys rolled it out into a whole bunch of stores.

And then, again, like all these little subsegments, you went a little radio silent on it.

And I didn't know where that stood.

Yes, we just don't -- the shoe -- the expanded shoe format has gone into all of our Marshalls stores.

And I think we went radio silent because it became ingrained in the business.

It is actually a key differentiator for us between T.J. Maxx and Marshalls.

We have expanded it into Canada when we opened the Marshalls in Canada.

We have not done that over in the U.K., because we have to deal with each business separately.

So when you go over to the U.K., they don't have the amount of real estate square footage space, so we got stuck with a rack situation there.

And so that -- albeit we've upgraded those racks, but it's still more rack.

So it's more like T.J. Maxx, but we did expand.

So every new Marshalls you see to this day has that expanded footwear area in it.

Then the other category -- what was the other category?

Beauty and personal care, which you guys have been growing pretty significantly across store and T.J. Maxx.

What does that department look like today and what are your thoughts there?

It's been a very -- obviously, a very hot category, but it's also had a lot of puts and takes in the last 6 to 12 months, I'd say.

Yes.

We don't -- we can't give specifics on category.

I would tell you that, as you can see from in the store, yes we've taken a pretty good position in it, but we don't -- we can to give you future -- we don't like to give out future department strategy in terms of what we're thinking of expanding or not until it's a little bit more in the rearview mirror, so to speak, and we cannot give out some of the secret sauce.

And I think that was our last caller.

At this point, I would really like to thank all of you for joining us today, and I look forward to updating you on our second quarter earnings call in August.

Thank you, everybody.

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

You may all disconnect.

Thank you for participating.