Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The Thirteen Weeks (second quarter) and Twenty-Six Weeks (six months) Ended August 1, 2020
Compared to
The Thirteen Weeks (second quarter) and Twenty-Six Weeks (six months) Ended August 3, 2019
OVERVIEW
We are the leading off-price apparel and home fashions retailer in the U.S. and worldwide. We sell a rapidly changing assortment of apparel, home fashions and other merchandise at prices generally 20% to 60% below full-price retailers’ (including department, specialty and major online retailers) regular prices on comparable merchandise, every day. We operate over 4,500 stores through our four main segments: in the U.S., Marmaxx (which operates T.J. Maxx, Marshalls, tjmaxx.com and marshalls.com) and HomeGoods (which operates HomeGoods and Homesense); TJX Canada (which operates Winners, HomeSense and Marshalls in Canada); and TJX International (which operates T.K. Maxx, Homesense and tkmaxx.com in Europe, and T.K. Maxx in Australia). In addition to our four main segments, Sierra operates sierra.com and retail stores in the U.S. The results of Sierra are included in the Marmaxx segment.
Impact of the COVID-19 Pandemic
During 2019, COVID-19 emerged and spread worldwide. The World Health Organization declared COVID-19 a pandemic in March 2020, and federal, state and local governments and private entities began issuing various restrictions, including travel restrictions, restrictions on public gatherings, stay at home orders and advisories and quarantining protocols. I n March 2020, the Company temporarily closed all of its stores, distribution centers and offices, and online businesses, with Associates working remotely where possible . In May 2020, the Company began reopening its stores and as of August 1, 2020, more than 4,500 of the Company’s worldwide stores, and each of its e-commerce shopping websites, have reopened.
In addition to the temporary closure and reopening of our stores and other facilities, the ongoing COVID-19 pandemic has led to modifications to our operations, including implementing health and safety protocols, and impacted consumer behavior. The continued scope and impact of the pandemic is unpredictable and may cause additional intermittent or prolonged periods of store closures, and may result in additional changes in consumer demand and behavior or require further modifications to our operations. These potential impacts may lead to increased asset recovery and valuation risks, such as impairment of our stores and other assets and an inability to realize deferred tax assets due to sustaining losses in certain jurisdictions. The uncertainties in the global economy may also impact the financial viability of some of our suppliers, which may interrupt our supply chain, and require other changes to our operations. These and other factors have had and may continue to have a material impact on our business, results of operations, financial position and cash flows.
Store and Associate Actions
We have taken numerous steps to protect the health and well-being of our Associates, customers and communities. We have been highly focused on the changes we are making to operate more safely in light of the COVID-19 pandemic. The Company established several global task force teams focused on a broad range of strategies to navigate the Company through this global health crisis. Globally, the Company has put in place practices designed to help protect the health and well-being of its Associates and customers, including social distancing protocols (which included occupancy limits and reducing in-store inventory levels), access to personal protective equipment and enhanced cleaning efforts. For example, upon reopening its stores, the Company installed protective shields at registers, encouraged social distancing through regular in-store announcements, signage, and markers in our queue lines, implemented new processes for handling merchandise returns, and instituted new cleaning regimens, including enhanced cleaning of high-touch surfaces throughout the day. Further, the Company has mandated that shoppers wear a face covering in its stores throughout the U.S. and Canada. In Europe and Australia, the Company is following regional governmental face covering requirements.
24
Financial Actions
Balance Sheet, Cash Flow and Liquidity
The temporary closure of our stores has had a material impact on our results of operations, financial position and liquidity. As further detailed below in Results of Operations , this impact included a 42% decrease in net sales for the first six months of fiscal 2021 compared to the same period last year, resulting in net operating losses that include significant inventory write-downs.
The Company ended the second quarter with $6.6 billion of cash. During the second quarter, the Company generated positive operating cash flows and paid off the $1.0 billion it drew down from its revolving credit facilities in March 2020. Subsequent to the second quarter of fiscal 2021, on August 10, 2020, the Company also increased its borrowing capacity by entering into a new $500.0 million facility, making a total of $1.5 billion available to the Company under revolving credit facilities. For additional information on the new credit facilities, see Note J—Long-Term Debt and Credit Lines. The Company intends to continue to be prudent with its expenses and capital spend, now expected to be in a range of $0.6 billion to $0.8 billion, lowering fiscal 2021 planned store openings to approximately 50 stores, pausing a majority of our planned store remodels, and delaying a significant portion of distribution center, home office and IT capital spending. The Company did not declare a dividend in the first six months of fiscal 2021 and does not expect to declare a dividend in the third quarter of fiscal 2021 and has suspended its share buyback program.
During the first half of fiscal 2021, we negotiated rent deferrals (primarily for second quarter lease payments) for a significant number of our stores, with repayment at later dates, primarily in fiscal 2022. Consistent with updated guidance from the FASB in April 2020, we have elected to treat the COVID-19 pandemic-related rent deferrals as a resolution of a contingency by remeasuring the remaining consideration in the contract, with a corresponding adjustment to the right-of-use asset, using the remeasured consideration. The Company did not reassess the lease classification and did not update the discount rate used to measure the lease liability.
For the first half of fiscal 2021, the Company evaluated the value of its inventory in light of store closures due to the COVID-19 pandemic. Permanent markdowns, which have been taken upon reopening of the stores, on transitional or out of season merchandise and merchandise that was already in markdown status, combined with the write-off of perishable goods, resulted in a reduction of approximately $0.4 billion in inventory for the six months ended August 1, 2020, which reflects a $0.1 billion reversal of the estimated markdowns recorded in the first quarter of fiscal 2021.
Given the substantial reduction in our sales and the reduced cash flow projections as a result of the store closures due to the COVID-19 pandemic, we determined that a triggering event occurred and that an impairment assessment was warranted for certain stores. This analysis resulted in an immaterial amount of impairment charges related to long-lived assets and operating lease right of use assets in the first half of fiscal 2021.
Operating Expenses
The Company has incurred additional payroll and supply costs associated with social distancing protocols and cleaning regimens in our stores, distribution centers, and offices. In addition, the Company provided a discretionary appreciation bonus for the second quarter of fiscal 2021 to store and distribution center Associates and incurred incremental costs for personal protective equipment and additional cleaning supplies. We expect that many of these costs will continue through the second half of fiscal 2021. We have implemented, and plan to continue to implement, cost saving initiatives to reduce some ongoing variable and discretionary spending, including substantially reducing expenses such as advertising and other non-essential expenses in the short term.
As a result of the COVID-19 pandemic, governments in the U.S., U.K., Canada and various other jurisdictions have implemented programs to encourage companies to retain and pay employees who are unable to work or are limited in the work that they can perform in light of closures or a significant decline in sales. TJX continued to pay and provide benefits to eligible impacted employees during the second quarter of fiscal 2021. As such, we qualified for certain of these provisions, which partially offset related expenses. During the second quarter of fiscal 2021 and the six months ended August 1, 2020 , these programs reduced our expenses by approximately $0.2 billion and $0.4 billion, respectively, on our Consolidated Statements of (Loss) Income.
25
RESULTS OF OPERATIONS
Matters Affecting Comparability
As a result of the COVID-19 pandemic, our stores, e-commerce businesses and distribution centers were closed for nearly one-third of the second quarter and approximately 40% of the first six months of fiscal 2021. In addition to lost revenues, we continued to pay wages and provide benefits to many of our Associates during the closure, incurred higher expenses due to inventory write-down costs and incremental operating expenses upon reopening for new health and safety practices compliant with local requirements. This significantly impacted the operating results of all of our divisions and as a result, comparisons of expense ratios on reported results are not a meaningful way to discuss our operating results for the periods ended August 1, 2020.
Overview of our financial performance for the quarter ended August 1, 2020:
– Net sales decreased 32% to $6.7 billion for the second quarter of fiscal 2021 versus last year’s second quarter of fiscal 2020 sales of $9.8 billion. As of August 1, 2020, the number of stores in operation (including stores that had been temporarily closed due to COVID-19) increased 3% and selling square footage increased 3% compared to the end of the fiscal 2020 second quarter.
– Diluted (loss) earnings per share for the second quarter of fiscal 2021 were $(0.18) versus $0.62 in the second quarter of fiscal 2020.
– Pre-tax margin (the ratio of pre-tax (loss) income to net sales) for the second quarter of fiscal 2021 was (1.4)%, an 11.8 percentage point decrease compared with 10.4% in the second quarter of fiscal 2020.
– Our cost of sales, including buying and occupancy costs, ratio for the second quarter of fiscal 2021 was 77.6%, a 5.8 percentage point increase compared with 71.8% in the second quarter of fiscal 2020.
– Our selling, general and administrative (“SG&A”) expense ratio for the second quarter of fiscal 2021 was 22.9%, a 5.2 percentage point increase compared with 17.7% in the second quarter of fiscal 2020.
– Our consolidated average per store inventories, including inventory on hand at our distribution centers (which excludes inventory in transit) and excluding our e-commerce sites and Sierra stores, were down 33% on a reported basis and down 34% on a constant currency basis at the end of the second quarter of fiscal 2021 as compared to a 6% increase in average per store inventories on a reported basis and a 7% increase on a constant currency basis in the second quarter of fiscal 2020.
– There were no dividends declared or share repurchases during the second quarter of fiscal 2021. See the Impact of the COVID-19 Pandemic section above for the actions taken regarding the Company's share repurchase and dividend programs.
Recent Events and Trends
COVID-19
See discussion above in the Impact of the COVID-19 Pandemic section.
Impact of Brexit
On January 31, 2020, the United Kingdom (“U.K.”) left the European Union (“EU”), commonly referred to as “Brexit” , and entered an 11-month transition period (the “Transition Period”), during which the U.K. continues to be treated as an EU member for most purposes. This Transition Period is due to end on December 31, 2020, and the U.K. and EU are currently negotiating the terms of their future relationship that will apply after this date.
The terms of the future EU/U.K. trading relationship remain uncertain. Our TJX Europe management team has evaluated a range of possible outcomes, identified areas of concerns, and implemented strategies to help mitigate them.
We expect the future EU/U.K. trading relationship will subject the movement of goods between the U.K. and EU to additional regulatory and compliance requirements, which is likely to have a negative impact on our ability to efficiently move merchandise in the region. We have realigned our European division's supply chain to reduce the volume of merchandise flowing between the U.K. and the EU and have established resources and systems to support this plan.
There are also likely to be additional customs duty costs on EU/U.K. trade, the extent of which remains uncertain. Any customs duties may also impact the profitability of our European division, at least in the short term.
26
New immigration requirements between the U.K. and EU countries may also have a negative impact on our ability to recruit and retain current and future talent in the region. We continue to communicate with our Associates about the new immigration requirements.
In addition to these operational impacts, factors including changes in consumer confidence and behavior, economic conditions, interest rates and foreign currency exchange rates could result in a significant financial impact to our European operations, particularly in the short term. We believe the steps we have taken and plan to take will help us mitigate the effects when the Transition Period ends.
Tariffs
The U.S. Administration has imposed tariffs on imports from China. We continue to monitor the developments very closely and have seen margin pressure based on the tariffs currently in place on the goods sourced directly from China. The impact on vendor and competitor pricing, consumer demand, potential tariff pass-throughs and the fluctuation of the Chinese currency remains uncertain.
Net Sales
Net sales for the quarter ended August 1, 2020 totaled $6.7 billion, a 32% decrease versus last year’s second quarter net sales of $9.8 billion. Net sales for the six months ended August 1, 2020 totaled $11.1 billion, a 42% decrease versus last year’s six-month net sales of $19.1 billion. The decrease in net sales for both periods was driven by temporary store and online business closures as a result of the COVID-19 pandemic, with most stores being closed for nearly one-third of the second quarter and approximately 40% of the first six months of fiscal 2021.
As a result of the extended store closures due to the COVID-19 pandemic and our policy relating to the treatment of extended store closures when calculating comp store sales, we had no stores classified as comp stores at the end of the second quarter fiscal 2021.
In order to provide a performance indicator for our stores as they reopen, the Company is temporarily reporting a new sales measure, open-only comp store sales. Open-only comp store sales includes stores initially classified as comp stores at the beginning of fiscal 2021, and reports the sales increase or decrease of these stores for the days the stores were open in the current period against sales for the same days in the prior year. Our historical definition of comp sales is presented below for reference.
Open-only comp store sales were down 3% for the second quarter and the first six months of fiscal 2021 as compared to same periods last year. These results reflect a decrease in customer traffic partially offset by increased average basket. Our stores were open for approximately two-thirds of the second quarter. Sales were strong across all divisions as we reopened and declined during the quarter, with open-only comp percentages ending the quarter down mid-teens. This decline was due to lower traffic and lower inventory levels. While the environment remains uncertain, these significantly lower open-only comps continued into the start of the third quarter and we expect that this trend may continue through the third quarter. Home businesses across all major divisions outperformed apparel for the second quarter and first six months of fiscal 2021.
Historical Definition of Comp Store Sales
We are temporarily reporting a new sales measure, open-only comp store sales, as described above. The following reflects the way that we have historically classified and reported comp sales results.
We previously defined comparable store sales, or comp sales, to be sales of stores that have been in operation for all or a portion of two consecutive fiscal years, or in other words, stores that are starting their third fiscal year of operation. We calculated comp sales on a 52-week basis by comparing the current and prior year weekly periods that are most closely aligned. Relocated stores and stores that have changed in size are generally classified in the same way as the original store, and we believe that the impact of these stores on the consolidated comp percentage is immaterial.
We define customer traffic to be the number of transactions in stores included in the comp sales and average ticket to be the average retail price of the units sold. We define average transaction or average basket to be the average dollar value of transactions included in the comp sales.
Sales excluded from comp sales (“non-comp sales”) consist of sales from:
– New stores - stores that have not yet met the comp sales criteria, which represents a substantial majority of non-comp sales
– Stores that are closed permanently or for an extended period of time
– Sales from our e-commerce sites, meaning sierra.com, tjmaxx.com, marshalls.com and tkmaxx.com
27
We determine which stores are included in the comp sales calculation at the beginning of a fiscal year and the classification remains constant throughout that year unless a store is closed permanently or for an extended period during that fiscal year. In fiscal 2020, Sierra stores that otherwise fit the comp store definition were included in comp stores in our Marmaxx segment.
Comp sales of our foreign segments are calculated by translating the current year’s comp sales using the prior year's exchange rates. This removes the effect of changes in currency exchange rates, which we believe is a more accurate measure of segment operating performance.
Comp sales may be referred to as “same store” sales by other retail companies. The method for calculating comp sales varies across the retail industry, therefore our measure of comp sales may not be comparable to that of other retail companies.
The following table sets forth certain information about our operating results as a percentage of net sales for the following periods:
Thirteen Weeks Ended Twenty-Six Weeks Ended
August 1,
2020 August 3,
2019 August 1,
2020 August 3,
2019
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales, including buying and occupancy costs 77.6 71.8 86.6 71.7
Selling, general and administrative expenses 22.9 17.7 25.7 18.0
Interest expense, net 0.9 — 0.7 —
(Loss) income before provision for income taxes *
(1.4) % 10.4 % (13.0) % 10.3 %
* Figures may not foot due to rounding.
Impact of foreign currency exchange rates
Our operating results are affected by foreign currency exchange rates as a result of changes in the value of the U.S. dollar or a division’s local currency in relation to other currencies. We specifically refer to “foreign currency” as the impact of translational foreign currency exchange and mark-to-market of inventory derivatives, as described in detail below. This does not include the impact foreign currency exchange rates can have on various transactions that are denominated in a currency other than an operating division's local currency referred to as “transactional foreign exchange,” also described below.
Translation Foreign Exchange
In our financial statements, we translate the operations of TJX Canada and TJX International from local currencies into U.S. dollars using currency rates in effect at different points in time. Significant changes in foreign exchange rates between comparable prior periods can result in meaningful variations in net sales, net (loss) income and (loss) earnings per share growth as well as the net sales and operating results of these segments. Currency translation generally does not affect operating margins, or affects them only slightly, as sales and expenses of the foreign operations are translated at approximately the same rates within a given period.
Mark-to-Market Inventory Derivatives
We routinely enter into inventory-related hedging instruments to mitigate the impact on earnings of changes in foreign currency exchange rates on merchandise purchases denominated in currencies other than the local currencies of our divisions, principally TJX Canada and TJX International. As we have not elected “hedge accounting” for these instruments, as defined by U.S. generally accepted accounting principles (“GAAP”), we record a mark-to-market gain or loss on the derivative instruments in our results of operations at the end of each reporting period. In subsequent periods, the (loss) income statement impact of the mark-to-market adjustment is effectively offset when the inventory being hedged is received and paid for. While these effects occur every reporting period, they are of much greater magnitude when there are sudden and significant changes in currency exchange rates during a short period of time. The mark-to-market adjustment on these derivatives does not affect net sales, but it does affect the cost of sales, operating margins and earnings we report.
Transactional Foreign Exchange
When discussing the impact on our results of the effect of foreign currency exchange rates on certain transactions, we refer to it as “transactional foreign exchange”. This primarily includes the impact that foreign currency exchange rates may have on the year-over-year comparison of merchandise margin as well as “foreign currency gains and losses” on transactions that are denominated in a currency other than the operating division's local currency. These two items can impact segment margin comparison of our foreign divisions and we have highlighted them when they are meaningful to understanding operating trends.
28
Cost of Sales, Including Buying and Occupancy Costs
Cost of sales, including buying and occupancy costs, was $5.2 billion for the second quarter of fiscal 2021, a decrease of $1.9 billion, compared to $7.0 billion for the second quarter of fiscal 2020. Cost of sales, including buying and occupancy costs, was $9.6 billion for the six months ended August 1, 2020, a decrease of $4.1 billion, compared to $13.7 billion for the six months ended August 3, 2019.
The most significant factor in this decline was the cost of merchandise on lost sales, which were approximately $3.1 billion less than last year’s sales for the fiscal 2020 second quarter and approximately $8.0 billion less than sales for the first six months of fiscal 2020. Merchandise margin remained strong due to favorable markon and lower than expected markdowns for the second quarter of fiscal 2021. The merchandise margin for the six months ended August 1, 2020 also reflects improved markon which was more than offset by markdowns, primarily recorded in the first quarter of fiscal 2021. Our estimated markdowns recorded in the first quarter of fiscal 2021 were partially reversed by $0.1 billion in the second quarter of fiscal 2021 as actual markdowns came in lower due to strong sales demand upon initial reopening. In addition, a significant change in our inventory levels has an impact on our buying and distribution costs as a portion of these costs are typically allocated to our cost for merchandise. As a result of our reduced buying activity and lower inventory levels, a greater portion of these costs were expensed in the second quarter and first six months of fiscal 2021 as compared to last year.
The temporary closure of our distribution centers resulted in reduced payroll costs due to Associate furloughs at our distribution centers during the second quarter and first six months of fiscal 2021. In addition, payroll costs were reduced by approximately $28 million for the second quarter and by approximately $63 million for the first six months of fiscal 2021 from government programs available in the U.S. and in Canada, the U.K. and various other jurisdictions. These payroll savings were partially offset by incremental payroll and supply costs to implement safety protocols upon reopening as well as a discretionary appreciation bonus for our Associates.
It is important to note that a significant portion of our occupancy costs are fixed and although rent deferrals were negotiated to help with our liquidity, our year over year occupancy costs were comparable. There was a reduction in some of our variable costs due to the store and distribution center closures, such as store repairs and maintenance and travel costs.
Selling, General and Administrative Expenses
SG&A expenses were $1.5 billion for the second quarter of fiscal 2021, a decrease of $0.2 billion, compared to $1.7 billion for the second quarter of fiscal 2020. SG&A expenses were $2.8 billion for the six months ended August 1, 2020, a decrease of $0.6 billion, compared to $3.4 billion for the six months ended August 3, 2019.
The decrease for the second quarter and six months ended August 1, 2020 was primarily driven by lower store payroll costs. The lower store payroll costs reflect store closures partially offset by incremental payroll investments as stores reopened to allow for enhanced cleaning and monitoring capacity, as well as a discretionary appreciation bonus for the second quarter of fiscal 2021. Store payroll also includes the additional payroll we paid our Associates during the temporary store closures, which was partially offset by $196 million for the second quarter and $348 million for the first six months of fiscal 2021 from government programs available in the U.S. and in Canada, the U.K. and various other jurisdictions. Additionally, other variable store costs such as credit processing fees and advertising spend were lower as a result of the temporary store closures due to the COVID-19 pandemic.
Interest Expense, net
The components of interest expense, net are summarized below:
Thirteen Weeks Ended Twenty-Six Weeks Ended
In millions August 1,
2020 August 3,
2019 August 1,
2020 August 3,
2019
Interest expense $ 60.2 $ 15.4 $ 92.8 $ 30.7
Capitalized interest (1.2) (0.5) (2.2) (1.2)
Interest (income) (1.7) (12.0) (9.9) (25.8)
Interest expense, net $ 57.3 $ 2.9 $ 80.7 $ 3.7
Net interest expense increased for the second quarter of fiscal 2021 and the six months ended August 1, 2020 compared to the same periods in fiscal 2020, primarily driven by the issuance of additional debt, lower interest income and borrowings on the revolving credit facilities due to the COVID-19 pandemic.
29
Provision for Income Taxes
The e ffective income tax rate was (132.8)% for the second quarter of fiscal 2021 compared to 25.7% for the second quarter of fiscal 2020. The e ffective income tax rate was 23.2% for the six months ended August 1, 2020 compared to 25.5% for the six months ended August 3, 2019. The second quarter’s negative effective income tax rate is primarily due to the reversal of income tax benefit recorded in the first quarter related to the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) enacted on March 27, 2020. The CARES Act provides for net operating losses incurred in fiscal 2021 to be carried back to earlier tax years that have higher tax rates than the current year. The projected losses subject to carry back to earlier years decreased in the second quarter of fiscal 2021, resulting in a reduction of the year to date income tax benefit and a second quarter negative effective income tax rate.
Net (Loss) / Income and Diluted (Loss) Earnings Per Share
Net (loss) income for the second quarter of fiscal 2021 was $(214) million, or $(0.18) per diluted share compared to $759 million, or $0.62 per diluted share for the second quarter of fiscal 2020.
Net (loss) income for the six months ended August 1, 2020 was $(1.1) billion, or $(0.92) per diluted share compared to $1.5 billion, or $1.19 per diluted share for the six months ended August 3, 2019.
Segment Information
We operate four main business segments. Our Marmaxx segment (T.J. Maxx, Marshalls, tjmaxx.com and marshalls.com) and the HomeGoods segment (HomeGoods and Homesense) both operate in the United States. Our TJX Canada segment operates Winners, HomeSense and Marshalls in Canada, and our TJX International segment operates T.K. Maxx, Homesense and tkmaxx.com in Europe and T.K. Maxx in Australia. In addition to our four main segments, Sierra operates sierra.com and retail stores in the U.S. The results of Sierra are included in the Marmaxx segment.
We evaluate the performance of our segments based on “segment profit or loss,” which we define as pre-tax income or loss before general corporate expense and interest expense, net, and certain separately disclosed unusual or infrequent items. “Segment profit or loss,” as we define the term, may not be comparable to similarly titled measures used by other entities. The terms “segment margin” or “segment profit margin” are used to describe segment profit or loss as a percentage of net sales. These measures of performance should not be considered an alternative to net (loss) income or cash flows from operating activities as an indicator of our performance or as a measure of liquidity.
Due to the temporary closing of all of our stores as a result of the COVID-19 pandemic, the Company’s definition of comp store sales is not applicable for the reported periods. In order to provide a performance indicator for our stores as they reopen, the Company is temporarily reporting a new sales measure, open-only comp store sales. Open-only comp store sales includes stores initially classified as comp stores at the beginning of fiscal 2021, and reports the sales increase or decrease of these stores for the days the stores were open in the current period against sales for the same days in the prior year.
Presented below is selected financial information related to our business segments.
30
U.S. SEGMENTS
Marmaxx
Thirteen Weeks Ended Twenty-Six Weeks Ended
U.S. dollars in millions August 1,
2020 August 3,
2019 August 1,
2020 August 3,
2019
Net sales $ 3,959 $ 6,107 $ 6,657 $ 11,908
Segment profit (loss) $ 101 $ 855 $ (609) $ 1,651
Segment margin 2.5 % 14.0 % (9.2) % 13.9 %
Stores in operation at end of period:
T.J. Maxx 1,271 1,260
Marshalls 1,134 1,107
Sierra 46 39
Total 2,451 2,406
Selling square footage at end of period (in thousands):
T.J. Maxx 27,732 27,577
Marshalls 25,977 25,534
Sierra 766 654
Total 54,475 53,765
Net Sales
Net sales for Marmaxx decreased 35% for the second quarter and 44% for the first six months of fiscal 2021 as compared to the same periods last year. The decrease in net sales for the second quarter and first six months was due to the temporary closures of all stores as a result of the COVID-19 pandemic and, upon reopening, lower customer traffic, partially offset by an increase in the average basket. Open-only comp store sales were down 6% for the second quarter and 5% for first six months of fiscal 2021. Home fashions outperformed apparel for the second quarter of fiscal 2021 and for the six months ended August 1, 2020.
Segment Profit / (Loss)
Segment profit was $101 million for the second quarter of fiscal 2021, a decrease of $754 million, compared to a segment profit of $855 million for the same period last year. Segment loss was $(609) million for the six months ended August 1, 2020, a decrease of $2.3 billion, compared to a segment profit of $1.7 billion for the same period last year. The decrease for the second quarter and first six months was primarily driven by a reduction in sales from the temporary store closures. The decrease for the first six months reflects increased markdowns on merchandise primarily taken in the first quarter of fiscal 2021 due to the COVID-19 pandemic. The estimated write down in the first quarter of fiscal 2021 was partially reversed in the second quarter of fiscal 2021 as actual markdowns came in lower due to strong sales demand upon initial reopening. In addition, segment profit declined as a result of our reduced buying activity and lower inventory levels resulting in higher buying and distribution costs in the second quarter and first six months of fiscal 2021 as compared to last year. The decline in segment profit was partially offset by a reduction in store payroll while the stores were closed, lower advertising spend and other variable store expenses. The reduction in payroll reflects approximately $83 million for the second quarter of fiscal 2021 and $171 million for the six months ended August 1, 2020 from government programs as described in the Impacts of the COVID-19 Pandemic section above. Despite a decline in total store payroll costs, we incurred incremental payroll investments as stores reopened to allow for enhanced cleaning and capacity monitoring.
Our U.S. e-commerce businesses, which represented approximately 4% of Marmaxx’s net sales for the second quarter and first six months of fiscal 2021 and less than 3% for the second quarter and first six months of fiscal 2020, did not have a significant impact on year-over-year segment margin comparisons for the second quarter and first six months of fiscal 2021. Along with our stores, we temporarily closed our online businesses during the first six months of fiscal 2021, as a result of the COVID-19 pandemic.
31
HomeGoods
Thirteen Weeks Ended Twenty-Six Weeks Ended
U.S. dollars in millions August 1,
2020 August 3,
2019 August 1,
2020 August 3,
2019
Net sales $ 1,236 $ 1,425 $ 1,996 $ 2,822
Segment proft (loss) $ 98 $ 129 $ (56) $ 266
Segment margin 7.9 % 9.0 % (2.8) % 9.4 %
Stores in operation at end of period:
HomeGoods 818 783
Homesense 34 23
Total 852 806
Selling square footage at end of period (in thousands):
HomeGoods 14,986 14,383
Homesense 733 492
Total 15,719 14,875
Net Sales
Net sales for HomeGoods decreased 13% in the second quarter and 29% for the first six months of fiscal 2021 as compared to the same periods last year. The decrease in net sales for the second quarter and first six months is due to the temporary closures of all stores as a result of the COVID-19 pandemic and, upon reopening, lower customer traffic, partially offset by an increase in the average basket. Open-only comp store sales were up 20% for the second quarter and 12% for first six months of fiscal 2021.
Segment Profit / (Loss)
Segment profit was $98 million for the second quarter of fiscal 2021, a decrease of $31 million, compared to a segment profit of $129 million for the same period last year. Segment loss was $(56) million for the six months ended August 1, 2020, a decrease of $322 million, compared to a segment profit of $266 million for the same period last year. The decrease for the second quarter and first six months was primarily driven by a reduction in sales due to the temporary store closures. In addition, the decrease for the first six months reflects increased markdowns on merchandise primarily taken in the first quarter of fiscal 2021 due to the COVID-19 pandemic. In addition, segment profit declined as a result of our reduced buying activity and lower inventory levels resulting in higher buying and distribution costs in the second quarter and first six months of fiscal 2021 as compared to last year. The decline in segment profit was partially offset by a reduction in store payroll while the stores were closed and lower advertising spend. The reduction in payroll reflects approximately $24 million for the second quarter of fiscal 2021 and $46 million for the six months ended August 1, 2020 from government programs as described in the Impacts of the COVID-19 Pandemic section above. Despite a decline in total store payroll costs, we incurred incremental payroll investments as stores reopened to allow for enhanced cleaning and capacity monitoring.
32
FOREIGN SEGMENTS
TJX Canada
Thirteen Weeks Ended Twenty-Six Weeks Ended
U.S. dollars in millions August 1,
2020 August 3,
2019 August 1,
2020 August 3,
2019
Net sales $ 592 $ 967 $ 972 $ 1,815
Segment profit (loss) $ 22 $ 118 $ (75) $ 215
Segment margin 3.7 % 12.2 % (7.7) % 11.9 %
Stores in operation at end of period:
Winners 279 274
HomeSense 141 132
Marshalls 102 91
Total 522 497
Selling square footage at end of period (in thousands):
Winners 6,009 5,882
HomeSense 2,585 2,425
Marshalls 2,141 1,929
Total 10,735 10,236
Net Sales
Net sales for TJX Canada decreased 39% during the second quarter and 46% for the first six months of fiscal 2021 compared to the same periods last year. The decrease in the net sales for the second quarter and first six months is due to the temporary closures of all stores as a result of the COVID-19 pandemic and, upon reopening, lower customer traffic, partially offset by an increase in the average basket. Open-only comp store sales were down 18% for the second quarter and 13% for first six months of fiscal 2021.
Segment Profit / (Loss)
Segment profit was $22 million for the second quarter of fiscal 2021, a decrease of $96 million, compared to a segment profit of $118 million for the same period last year. Segment loss was $(75) million for the six months ended August 1, 2020, a decrease of $290 million, compared to a segment profit of $215 million for the same period last year. The decrease for the second quarter and first six months was primarily driven by a reduction in sales due to the temporary store closures. In addition, the decrease for the first six months reflects increased markdowns on merchandise primarily taken in the first quarter of fiscal 2021 due to the COVID-19 pandemic. The decline in segment profit was partially offset by a reduction in store payroll while the stores were closed. The reduction in payroll reflects approximately $73 million for the second quarter of fiscal 2021 and $104 million for the six months ended August 1, 2020 from government programs as described in the Impacts of the COVID-19 Pandemic section above. Despite a decline in total store payroll costs, we incurred incremental payroll investments as stores reopened to allow for enhanced cleaning and capacity monitoring.
33
TJX International
Thirteen Weeks Ended Twenty-Six Weeks Ended
U.S. dollars in millions August 1,
2020 August 3,
2019 August 1,
2020 August 3,
2019
Net sales $ 880 $ 1,283 $ 1,452 $ 2,514
Segment (loss) profit $ (131) $ 50 $ (390) $ 79
Segment margin (14.9) % 3.9 % (26.9) % 3.1 %
Stores in operation at end of period:
T.K. Maxx 597 580
Homesense 78 72
T.K. Maxx Australia 57 51
Total 732 703
Selling square footage at end of period (in thousands):
T.K. Maxx 12,027 11,849
Homesense 1,142 1,074
T.K. Maxx Australia 1,035 937
Total 14,204 13,860
Net Sales
Net sales for TJX International decreased 31% for the second quarter and 42% for the first six months of fiscal 2021 compared to the same periods last year. The decrease in net sales for the second quarter and first six months is due to the temporary closures of all stores as a result of the COVID-19 pandemic and, upon reopening, lower customer traffic, partially offset by an increase in the average basket. Open-only comp store sales were down 1% for both the second quarter and first six months of fiscal 2021.
E-commerce sales represented approximately 4% of TJX International’s net sales for the second quarter and first six months of fiscal 2021 and less than 3% for the second quarter and first six months of fiscal 2020. Along with our stores, we temporarily closed our online businesses during the first six months of fiscal 2021, due to the COVID-19 pandemic.
Segment (Loss) / Profit
Segment loss was $(131) million for the second quarter of fiscal 2021, a decrease of $181 million, compared to a segment profit of $50 million for the same period last year. Segment loss was $(390) million for the six months ended August 1, 2020, a decrease of $469 million, compared to a segment profit of $79 million for the same period last year. The decrease for the second quarter and first six months was primarily driven by a reduction in sales due to the temporary store closures. In addition, the decrease for the first six months reflects increased markdowns on merchandise primarily taken in the first quarter of fiscal 2021 due to the COVID-19 pandemic. The decline in segment profit was partially offset by a reduction in occupancy costs, store payroll while closed and lower advertising spend. The reduction in payroll reflects approximately $40 million for the second quarter of fiscal 2021 and $86 million for the six months ended August 1, 2020 from government programs as described in the Impacts of the COVID-19 Pandemic section above.
GENERAL CORPORATE EXPENSE
Thirteen Weeks Ended Twenty-Six Weeks Ended
In millions August 1,
2020 August 3,
2019 August 1,
2020 August 3,
2019
General corporate expense $ 123 $ 129 $ 224 $ 250
General corporate expense for segment reporting purposes represents those costs not specifically related to the operations of our business segments. General corporate expenses are primarily included in SG&A expenses. The mark-to-market adjustment of our fuel hedges is included in cost of sales, including buying and occupancy costs.
The decrease in general corporate expense for the second quarter was primarily driven by the mark-to-market adjustment on the fuel hedge partially offset by contributions to TJX's charitable foundations made during the quarter.
The decrease in general corporate expense for the first six months of fiscal 2021 was primarily driven by lower share-based compensation costs partially offset by contributions to TJX's charitable foundations made during the second quarter.
34
ANALYSIS OF FINANCIAL CONDITION
Liquidity and Capital Resources
As part of the actions we have taken, and are continuing to take, relating to the COVID-19 pandemic, as described in Impact of the COVID-19 Pandemic above and in Note B—Impact of the COVID-19 Pandemic of Notes to Consolidated Financial Statements, in the first quarter of fiscal 2021, TJX issued $4.0 billion aggregate principal amount of notes, and in May 2020, the Company amended the covenant requirements under its revolving credit facilities. In March 2020, we drew down $1.0 billion on our revolving credit facilities, and in the second quarter of fiscal 2021, the Company paid off these borrowings. Subsequent to the fiscal quarter ending August 1, 2020, on August 10, 2020, the Company increased its borrowing capacity by entering into a new $500 million facility, making a total of $1.5 billion available to the Company under revolving credit facilities. See Note J—Long-Term Debt and Credit Lines of Notes to Consolidated Financial Statements for additional details of these transactions.
The Company did not declare a dividend for the first half of fiscal 2021 and does not expect to declare a dividend in the third quarter of fiscal 2021. The Company suspended its share repurchase program and does not anticipate repurchasing any stock for the remainder of fiscal 2021. The Company also qualified for certain government programs in the U.S., U.K., Canada and other jurisdictions to support payroll and other operating costs. The Company has also reduced and plans to continue to reduce spending more broadly across the Company, evaluating operating expenses and taking actions to reduce ongoing variable and discretionary spending and only incur critical operating and capital spending. The Company has negotiated rent deferrals for a significant amount of our stores, with repayment at later dates, primarily in fiscal 2022. The challenges posed by the COVID-19 pandemic on the Company's business are evolving rapidly. Consequently, the Company will continue to evaluate its financial position in light of future developments, particularly those relating to the COVID-19 pandemic.
We believe that our existing cash, internally generated funds and our credit facilities, as described in Note J—Long-Term Debt and Credit Lines of Notes to Consolidated Financial Statements will be sufficient to fund necessary operating cash requirements and capital expenditures for at least the next twelve months.
As of August 1, 2020, we held $6.6 billion in cash. Approximately $1.4 billion of our cash was held by our foreign subsidiaries with $0.7 billion held in countries where we provisionally intend to indefinitely reinvest any undistributed earnings. TJX provided for all applicable state and foreign withholding taxes on all undistributed earnings of our foreign subsidiaries in Canada, Puerto Rico, Italy, India, Hong Kong and Vietnam through August 1, 2020. If we repatriate cash from such subsidiaries, we should not incur additional tax expense and our cash would be reduced by the amount of withholding taxes paid.
Operating Activities
Net cash provided by operating activities resulted in net cash inflows of $0.2 billion for the six months ended August 1, 2020 and $0.9 billion for the six months ended August 3, 2019. The Company's operating cash flows for the six months ended August 1, 2020 decreased by $0.7 billion compared to the first six months of fiscal 2020. The COVID-19 pandemic had a material impact on the Company's operating cash flows. The loss of sales as a result of temporarily closing our stores and e-commerce businesses resulted in a net loss of $1.1 billion for the first six months of fiscal 2021 compared with net income of $1.5 billion in the six months of fiscal 2020. This decrease in cash flows was offset by the $1.4 billion favorable impact of a decrease in merchandise inventories, net of accounts payable and an increase in income taxes recoverable, accrued expenses and lease liabilities of $0.4 billion. The favorable impact of the change in merchandise inventories, net of accounts payable was driven by lower inventory levels.
Investing Activities
Net cash used in investing activities resulted in net cash outflows of $0.3 billion for the six months ended August 1, 2020 and $0.6 billion for the six months ended August 3, 2019. The cash outflows for both periods were driven by capital expenditures.
Investing activities in the first six months of fiscal 2021 primarily reflected property additions for new stores, store improvements and renovations as well as investments in our offices and distribution centers, including buying and merchandising systems and other information systems. Cash outflows for property additions were $0.3 billion for the first six months of fiscal 2021 and $0.6 billion for the first six months of fiscal 2020. In order to preserve liquidity throughout the COVID-19 pandemic, we have decreased new store openings to approximately 50 stores and paused most scheduled store remodels, thereby deferring a substantial amount of our previously planned fiscal 2021 capital expenditures. Our expected fiscal 2021 capital investments total $0.6 billion to $0.8 billion. Planned investments for the remainder of the year are limited to those critical to our operations, primarily investing in our distribution centers and systems.
35
Financing Activities
Net cash provided by (used in) financing activities resulted in net cash inflows of $3.5 billion in the first six months of fiscal 2021 and net cash outflows of $1.1 billion for the six months ended August 3, 2019.
Debt
The cash inflows in the first six months of fiscal 2021 were a result of completing the issuance and sale of (a) $1.25 billion aggregate principal amount of 3.50% notes due 2025, (b) $750 million aggregate principal amount of 3.75% notes due 2027, (c) $1.25 billion aggregate principal amount of 3.875% notes due 2030 and (d) $750 million aggregate principal amount of 4.50% notes due 2050, all of which were outstanding at August 1, 2020. In addition, in the first quarter of fiscal 2021 we drew down $1.0 billion on our previously undrawn revolving credit facilities, which were paid off in full during the second quarter of fiscal 2021. Subsequent to the fiscal quarter ending August 1, 2020, on August 10, 2020, the Company increased its borrowing capacity under revolving credit facilities by entering into a new $500 million 364 Day Revolving Credit Facility, maturing in August 2021. With the new revolving credit facility, the Company has increased its borrowing capacity to $1.5 billion, all of which currently remains available to the Company. See Note J—Long-Term Debt and Credit Lines of Notes to Consolidated Financial Statements for additional information.
Equity
Under our stock repurchase programs, during the first quarter of fiscal 2021, we paid $0.2 billion to repurchase and subsequently retired 3.4 million shares of our stock on a settlement basis. These outflows were partially offset by proceeds from the exercise of employee stock options, net of shares withheld for taxes in the first six months of fiscal 2021. We paid $0.7 billion to repurchase and subsequently retired 13.3 million shares on a settlement basis in the first six months of fiscal 2020. For further information regarding equity repurchases, see Note E—Capital Stock and (Loss) Earnings Per Share of Notes to Consolidated Financial Statements.
In February 2020, TJX announced that its Board of Directors had approved a new stock repurchase program that authorizes the repurchase of up to an additional $1.5 billion of TJX common stock from time to time. In March 2020, in connection with the actions taken related to the COVID-19 pandemic as described in Impact of the COVID-19 Pandemic above and in Note B—Impact of the COVID-19 Pandemic of Notes to Consolidated Financial Statements, the Company suspended its share repurchase program and does not intend to repurchase additional shares for the remainder of fiscal 2021.
Dividends
In March 2020, prior to the declaration of the COVID-19 pandemic, we paid our fourth quarter fiscal 2020 quarterly dividend which totaled $0.3 billion. As a result of the uncertainty surrounding the COVID-19 pandemic, the Company did not declare a dividend for the first or second quarter of fiscal 2021 and does not anticipate declaring a dividend in the third quarter of fiscal 2021. The Company is committed to resuming dividend payments whenever the environment and its business stabilize for the long term. We declared quarterly dividends on our common stock wh ich totaled $0.46 per share in the first six months of fiscal 2020. Cash payments for dividends on our common stock totaled $0.3 billion for the first six months of fiscal 2021 and $0.5 billion for the first six months of fiscal 2020.
Contractual Obligations
Changes to our aggregate indebtedness, including related interest and terms for new issuances, are described in Note J—Long-Term Debt and Credit Lines of Notes to Consolidated Financial Statements. During the first half of fiscal 2021, we negotiated rent deferrals for a significant number of our stores, with repayments to later dates, primarily in fiscal 2022. In addition, approximately $1.0 billion of obligations under purchase orders for merchandise were cancelled in the first quarter of fiscal 2021. As our stores reopened during the second quarter of fiscal 2021, we resumed placing orders for merchandise.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
For a discussion of accounting standards, see Note A—Basis of Presentation and Summary of Significant Accounting Policies of Notes to Consolidated Financial Statements included in TJX’s Annual Report on Form 10-K for the fiscal year ended February 1, 2020 and Note A—Basis of Presentation and Summary of Significant Accounting Policies of Notes to Consolidated Financial Statements in this Quarterly Report on Form 10-Q.
36
FORWARD-LOOKING STATEMENTS
Various statements made in this Quarterly Report on Form 10-Q are forward-looking and involve a number of risks and uncertainties. All statements that address activities, events or developments that we intend, expect or believe may occur in the future are forward-looking statements. The following are some of the factors that could cause actual results to differ materially from the forward-looking statements: execution of buying strategy and inventory management; operational and business expansion and management of large size and scale; customer trends and preferences; various marketing efforts; competition; economic conditions and consumer spending; the ongoing COVID-19 global pandemic and associated containment and remediation efforts; labor costs and workforce challenges; personnel recruitment, training and retention; data security and maintenance and development of information technology systems; corporate and retail banner reputation; quality, safety and other issues with our merchandise; compliance with laws, regulations and orders and changes in laws, regulations and applicable accounting standards; serious disruptions or catastrophic events and adverse or unseasonable weather; expanding international operations; merchandise sourcing and transport; commodity availability and pricing; fluctuations in currency exchange rates; fluctuations in quarterly operating results and market expectations; mergers, acquisitions, or business investments and divestitures, closings or business consolidations; outcomes of litigation, legal proceedings and other legal or regulatory matters; disproportionate impact of disruptions in the second half of the fiscal year; cash flow; inventory or asset loss; tax matters; real estate activities; and other factors that may be described in our filings with the Securities and Exchange Commission, including our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission. We do not undertake to publicly update or revise our forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied in such statements will not be realized.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in our primary risk exposures or management of market risks from those disclosed in our Annual Report on Form 10-K for the fiscal year ended February 1, 2020 .
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.