Why did TJX's profits fall so sharply in fiscal 1995 even though sales grew?

Sales growth came from new stores, not stronger customer demand. Same-store sales fell 1%. Management cited a weak U.S. apparel market with a lack of new fashion, a shift in spending toward home furnishings, a highly promotional retail environment, and unseasonably warm weather. Higher markdowns and weaker sales pushed gross margin down, and SG&A grew as a share of sales, including start-up costs for the U.K. venture and HomeGoods. Chadwick's execution problems and Hit or Miss's narrow apparel focus added to the decline.

How healthy is TJX's balance sheet and cash position?

The balance sheet is conservative. Shareholders' equity was $607 million, and equity was about 72% of long-term capitalization. Long-term debt was $239.5 million, and cash was $41.6 million. The company had $300 million in committed bank credit lines, all available at year end, plus $115 million in uncommitted lines. Operating cash flow was $104.5 million, which covered capital spending of $127.8 million only with help from payables growth.

What is the outlook for capital spending, dividends, and share repurchases?

Management expects capital expenditures of about $125 million in fiscal 1996, including about $52 million for new stores, $40 million for store improvements, and $33 million for offices and distribution centers. The quarterly common dividend was raised to $0.14 per share from $0.125. The board authorized up to $100 million in share repurchases in August 1994, and the company bought $19.3 million of stock in fiscal 1995 with plans to buy more over time.

What are the main risks for investors?

The main risks are continued weakness in U.S. apparel demand and fashion trends, which affected all divisions; the risk of further markdowns given inventories grew faster than sales; and the pressure on margins from higher occupancy and operating costs. Hit or Miss plans to close about 50 stores in fiscal 1996, and Chadwick's needs to fix its operations. The company also has contingent liabilities tied to the former Zayre leases through the Ames bankruptcy, with $13.1 million in reserves, and an ongoing shareholder class action in Delaware that management says lacks merit. The U.K. venture remains unproven and adds a new international risk.

TJX 10-K FY1995 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed April 19, 1995. Cited figures are marked; the original filing is the authoritative source.

TJX Companies' fiscal 1995 (year ended January 28, 1995) was a difficult year.

Net sales rose 6.0% to $3.84 billion^a, but income before extraordinary items and accounting changes fell 35% to $82.6 million, or $1.03 per fully diluted share, from $127.0 million ($1.62) in fiscal 1994. Management attributed the decline to a weak U.S. apparel environment, a promotional retail climate, unseasonable weather, and execution problems at Chadwick's of Boston. Consolidated same-store sales fell 1%, and operating income in the three core segments dropped 21.2%.

Gross margin compressed as the cost of sales rose to 76.2%^b of sales from 75.1%, and SG&A rose to 19.5% of sales from 18.6%. The effective tax rate also rose to 42% from 40%, reflecting the new U.K. operation's start-up losses. The balance sheet remains conservative.

Shareholders' equity was $607 million^c, and equity made up about 72% of long-term capitalization. Long-term debt was $239.5 million. Inventories grew 21% to $937.7 million, or 24.4% of sales versus 21.3% a year earlier, which is a watch item given the markdown pressure.

Operating cash flow was $104.5 million^d, and capital spending was $127.8 million. Management plans roughly $125 million of capex in fiscal 1996, and it began a $100 million share buyback, repurchasing $19.3 million of stock during the year. Common dividends rose to $0.56 per share from $0.50.

The company's growth strategy continues to expand its store base. T.J. Maxx added 44 stores, and HomeGoods, T.K.

Maxx (U.K.), and Winners (Canada) expanded. Hit or Miss is being restructured through heavy closings, and Chadwick's is working to fix operational issues. Investors should weigh the strong off-price model and balance sheet against the margin pressure, the fashion-cycle exposure, and the need for Chadwick's and Hit or Miss to recover.

02—Key points

Key Highlights

Net sales grew 6.0% to $3.84 billion, but same-store sales declined 1% on a consolidated basis, with T.J. Maxx flat and Hit or Miss down 7%.
Income before extraordinary items fell 35% to $82.6 million ($1.03 per share) from $127.0 million ($1.62 per share), driven by margin compression.
Gross margin deteriorated: cost of sales rose to 76.2% of sales from 75.1%, and SG&A rose to 19.5% from 18.6%.
Operating income in the three main segments fell 21.2%. Hit or Miss posted an operating loss of $4.5 million, and Chadwick's operating income dropped to $6.1 million from $24.7 million.
Inventories rose 21% to $937.7 million, or 24.4% of sales versus 21.3% a year earlier, which raises markdown risk.
The balance sheet is conservative, with equity at about 72% of long-term capitalization and long-term debt of $239.5 million. Management began a $100 million buyback program, buying $19.3 million of stock in fiscal 1995.
Expansion continues: T.J. Maxx opened 44 stores, Winners opened 10 and now runs 37, and HomeGoods and T.K. Maxx have 15 and 5 stores respectively, with plans for more in fiscal 1996.

03—Questions

Frequently Asked Questions

Why did TJX's profits fall so sharply in fiscal 1995 even though sales grew?
Sales growth came from new stores, not stronger customer demand. Same-store sales fell 1%. Management cited a weak U.S. apparel market with a lack of new fashion, a shift in spending toward home furnishings, a highly promotional retail environment, and unseasonably warm weather. Higher markdowns and weaker sales pushed gross margin down, and SG&A grew as a share of sales, including start-up costs for the U.K. venture and HomeGoods. Chadwick's execution problems and Hit or Miss's narrow apparel focus added to the decline.
How healthy is TJX's balance sheet and cash position?
The balance sheet is conservative. Shareholders' equity was $607 million, and equity was about 72% of long-term capitalization. Long-term debt was $239.5 million, and cash was $41.6 million. The company had $300 million in committed bank credit lines, all available at year end, plus $115 million in uncommitted lines. Operating cash flow was $104.5 million, which covered capital spending of $127.8 million only with help from payables growth.
What is the outlook for capital spending, dividends, and share repurchases?
Management expects capital expenditures of about $125 million in fiscal 1996, including about $52 million for new stores, $40 million for store improvements, and $33 million for offices and distribution centers. The quarterly common dividend was raised to $0.14 per share from $0.125. The board authorized up to $100 million in share repurchases in August 1994, and the company bought $19.3 million of stock in fiscal 1995 with plans to buy more over time.
What are the main risks for investors?
The main risks are continued weakness in U.S. apparel demand and fashion trends, which affected all divisions; the risk of further markdowns given inventories grew faster than sales; and the pressure on margins from higher occupancy and operating costs. Hit or Miss plans to close about 50 stores in fiscal 1996, and Chadwick's needs to fix its operations. The company also has contingent liabilities tied to the former Zayre leases through the Ames bankruptcy, with $13.1 million in reserves, and an ongoing shareholder class action in Delaware that management says lacks merit. The U.K. venture remains unproven and adds a new international risk.

04—Continue

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