How did TJX perform financially in fiscal 2002?

Sales grew 11.8% to $10.71 billion and diluted EPS from continuing operations rose to $1.94, up from $1.86. Reported net income of $500.4 million ($1.80 per share) was lower than the prior year's $538.1 million because of a $40 million after-tax charge for contingent lease obligations of the bankrupt House2Home chain.

What drove the decline in profit margins?

Pre-tax margin fell to 8.2% from 9.0%. Most of the increase in cost of sales came from lower merchandise margins, reflecting aggressive pricing in the third quarter after September 11, higher markdowns at smaller divisions such as Winners and HomeGoods, and higher inventory shortage. Distribution costs also rose as the company invested in its distribution network.

What are the main growth drivers and expectations for fiscal 2003?

Growth comes mainly from new stores: TJX plans a net 184 new stores in fiscal 2003, including 75 T.J. Maxx/Marshalls, 25 T.K. Maxx, 32 HomeGoods, 30 A.J. Wright, and 14 Winners and 8 HomeSense stores. It expects a 3% same-store sales increase, capex of about $485 million, and a slight improvement in the cost-of-sales ratio, though A.J. Wright is expected to post operating losses for several more years.

What are the main risks and legal exposures?

The largest contingent exposures are lease guarantees tied to discontinued operations: House2Home (up to 41 leases, with a $64.6 million potential cost versus the $40 million charge taken) and Ames (13 leases with a roughly $21 million reserve). TJX also faces four California class actions claiming store managers were misclassified as exempt from overtime. Management believes none of these will have a material adverse effect. Foreign currency and interest rate sensitivity analyses also showed no material impact.

How is TJX's balance sheet and capital structure positioned?

Shareholders' equity was $1.34 billion and total assets were $3.6 billion. Long-term debt rose to $672 million, mainly from the zero-coupon convertible notes, which holders can put in February 2004, 2007, and 2013. Cash of $493 million and $912 million in operating cash flow give strong liquidity, and the company had no borrowings under its revolving credit facilities at year-end.

TJX 10-K FY2002 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed April 24, 2002. Cited figures are marked; the original filing is the authoritative source.

TJX Companies' fiscal 2002 (year ended January 26, 2002) showed strong top-line growth but margin pressure.

Net sales rose 11.8% to $10.71 billion^a, driven by a 11.5% increase in store count and a 3% consolidated same-store sales gain, with a 6% gain in the fourth quarter. However, diluted EPS from continuing operations rose only 4.3% to $1.94, and net income fell to $500.4 million ($1.80 per diluted share) after a $40 million after-tax charge for contingent lease obligations tied to the bankruptcy of House2Home, Inc. Merchandise margin compressed (cost of sales rose to 75.9% of sales from 75.0%), reflecting aggressive pricing after September 11, higher markdowns at smaller divisions, and inventory shortage. Operating margin on the consolidated P&L drifted down, with pre-tax margin at 8.2% versus 9.0% a year earlier.

Balance sheet and cash flow were strengthened. Operating cash flow reached $912.4 million^b, up from $556.8 million, helped by a more liquid inventory position (inventory fell to 13.6% of sales from 15.2%). Cash rose to $492.8 million.

The company issued $517.5 million^c (gross proceeds $347.6 million) of zero-coupon convertible notes in February 2001, which lifted long-term debt to $672 million and total debt to 34.4% of capitalization. TJX spent $424 million repurchasing 13.2 million shares and paid $48 million in dividends. Capital expenditures roughly doubled to $449 million to fund store growth and distribution center investment.

Growth outlook remains focused on store expansion across all chains. Management plans a net 184 new stores in fiscal 2003 and a 3% same-store sales increase, and expects capex of about $485 million^d.

TJX also announced a two-for-one stock split to be distributed May 8, 2002, and replaced its credit facilities with new $350 million five-year and $300 million 364-day revolvers on March 26, 2002. Key risks include the House2Home lease exposure, the Ames bankruptcy lease liabilities, and a California class-action lawsuit over the classification of store managers as exempt from overtime, which management does not expect to be material.

02—Key points

Key Highlights

Net sales grew 11.8% to $10.71 billion, with same-store sales up 3% and the store base up 11.5% to 1,665 stores across seven chains.
Diluted EPS from continuing operations rose to $1.94 from $1.86, but net income fell to $500.4 million ($1.80 per share) after a $40 million after-tax House2Home lease charge.
Gross margin pressure: cost of sales rose to 75.9% of sales from 75.0%, mainly from lower merchandise margin tied to post-9/11 pricing and markdowns at smaller divisions.
Operating cash flow nearly doubled to $912.4 million, and cash reached $492.8 million as inventory became more liquid (13.6% of sales vs. 15.2% prior year).
Total debt rose to 34.4% of capitalization from 22.7%, driven by $517.5 million face-value zero-coupon convertible notes issued in February 2001.
Capex increased to $449 million, and TJX repurchased $424 million of stock (13.2 million shares) while declaring $0.18 in annual dividends per share.
Subsequent events include a two-for-one stock split effective May 2002 and new $650 million in combined revolving credit facilities.

03—Questions

Frequently Asked Questions

How did TJX perform financially in fiscal 2002?
Sales grew 11.8% to $10.71 billion and diluted EPS from continuing operations rose to $1.94, up from $1.86. Reported net income of $500.4 million ($1.80 per share) was lower than the prior year's $538.1 million because of a $40 million after-tax charge for contingent lease obligations of the bankrupt House2Home chain.
What drove the decline in profit margins?
Pre-tax margin fell to 8.2% from 9.0%. Most of the increase in cost of sales came from lower merchandise margins, reflecting aggressive pricing in the third quarter after September 11, higher markdowns at smaller divisions such as Winners and HomeGoods, and higher inventory shortage. Distribution costs also rose as the company invested in its distribution network.
What are the main growth drivers and expectations for fiscal 2003?
Growth comes mainly from new stores: TJX plans a net 184 new stores in fiscal 2003, including 75 T.J. Maxx/Marshalls, 25 T.K. Maxx, 32 HomeGoods, 30 A.J. Wright, and 14 Winners and 8 HomeSense stores. It expects a 3% same-store sales increase, capex of about $485 million, and a slight improvement in the cost-of-sales ratio, though A.J. Wright is expected to post operating losses for several more years.
What are the main risks and legal exposures?
The largest contingent exposures are lease guarantees tied to discontinued operations: House2Home (up to 41 leases, with a $64.6 million potential cost versus the $40 million charge taken) and Ames (13 leases with a roughly $21 million reserve). TJX also faces four California class actions claiming store managers were misclassified as exempt from overtime. Management believes none of these will have a material adverse effect. Foreign currency and interest rate sensitivity analyses also showed no material impact.
How is TJX's balance sheet and capital structure positioned?
Shareholders' equity was $1.34 billion and total assets were $3.6 billion. Long-term debt rose to $672 million, mainly from the zero-coupon convertible notes, which holders can put in February 2004, 2007, and 2013. Cash of $493 million and $912 million in operating cash flow give strong liquidity, and the company had no borrowings under its revolving credit facilities at year-end.

04—Continue

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