How much of the fiscal 2006 EPS increase was driven by one-time items?

A large part. Reported EPS rose to $1.41 from $1.21, a gain of about 17%. Excluding the $47M repatriation tax benefit ($0.10), the $22M deferred tax correction ($0.04) and third-quarter items (about $0.02 net cost), adjusted EPS was $1.29, up about 3% from $1.25. Investors should focus on the adjusted figure for underlying trend.

Why did pre-tax margins decline despite sales growth?

Same store sales grew only 2%, too little to leverage fixed costs. Occupancy costs rose about 0.3% of sales at Marmaxx, distribution center costs and store payroll also rose as a share of sales, and the third-quarter events (executive resignation costs, e-commerce exit, hurricane losses) cost about 0.1 point. Partially offsetting this, merchandise margins improved as markdowns fell, especially at smaller divisions.

Is the fourth-quarter improvement sustainable?

Management attributes it to changes made in the third quarter to improve off-price buying execution, along with lower markdowns and leaner inventories. Fourth-quarter same store sales grew 3%, and every division improved segment profit versus the prior year. Whether this persists depends on continued comparable sales growth; the 10-K itself notes weaker Northeast and Midwest results and a weak U.K. retail environment for T.K. Maxx.

What are the main risks to the store growth strategy?

Growth depends on finding suitable real estate at acceptable lease terms, on new store productivity matching existing stores, and on successfully extending the off-price model into new chains and countries. The company is also slowing openings at HomeGoods, A.J. Wright and T.K. Maxx, and A.J. Wright's segment still lost $2.2M in fiscal 2006. Bob's Stores lost $28.0M, with new strategies planned to narrow that loss.

How is TJX returning cash to shareholders and what is its balance sheet position?

In fiscal 2006 TJX spent $603.7M on buybacks (25.9M shares) and paid $105.3M in dividends, with the dividend rising to $0.24 per share from $0.18. Cash was $466M at year-end, with no borrowings under its $1B revolving facilities. Long-term debt rose to $783M after a C$235M Winners term loan used to repatriate Canadian earnings. Total debt was 29.9% of total capitalization, and shareholders' equity was $1.89B.

TJX 10-K FY2006 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 29, 2006. Cited figures are marked; the original filing is the authoritative source.

TJX Companies' fiscal 2006 (ended January 28, 2006) showed strong top-line growth and a sharp improvement in the fourth quarter, though full-year pre-tax margin compressed.

Net sales rose 8% to $16.1 billion^a, driven by about 6 points from new stores and 2 points from a 2% consolidated same store sales increase. Reported net income was $690.4 million, or $1.41 per diluted share, up from $1.21, but this figure includes a $47 million repatriation tax benefit and a $22 million deferred tax correction. Excluding these and other third-quarter items, adjusted EPS was $1.29 versus $1.25 in the prior year, so underlying earnings growth was modest.

Pre-tax margin fell from 6.6% to 6.3% as low single-digit comparable sales growth deleveraged occupancy and other expense ratios. Fourth-quarter results were the bright spot. Same store sales rose 3%, pre-tax margin improved from 6.1% to 7.5%, and reported EPS of $0.60^b was up 82%.

Management credited improved off-price buying and lower markdowns, particularly at Winners, HomeGoods and A.J. Wright. Average per-store inventories fell 11%^c, which supports margin quality heading into fiscal 2007.

Capital allocation remained shareholder-friendly. TJX repurchased 25.9 million shares for $600 million^d, completed a $1 billion program, and authorized another $1 billion with about $650 million planned for fiscal 2007. Operating cash flow was $1.16 billion against capital expenditures of $496 million.

Management plans to slow new store openings at HomeGoods, A.J. Wright and T.K.

Maxx and to cut fiscal 2007 capex to about $395 million. Leadership transition is a watch item: the CEO position was held on an acting basis by Bernard Cammarata after the September 2005 departure of the prior CEO, and a former CEO resignation agreement was a third-quarter cost.

02—Key points

Key Highlights

Net sales of $16.1 billion, up 8%; same store sales up 2% for the year, with about 6 points of growth from new stores.
Reported diluted EPS of $1.41 (up from $1.21), but adjusted EPS of $1.29 (up from $1.25) after excluding a $47M repatriation tax benefit, a $22M deferred tax correction, and about $12M of third-quarter one-time items.
Pre-tax margin declined to 6.3% from 6.6%, mainly from occupancy and store payroll deleverage on low same store sales growth.
Fourth-quarter momentum: same store sales up 3%, pre-tax margin up to 7.5% from 6.1%, and reported EPS up 82% to $0.60.
Store base grew 7% to 2,381 stores; selling square footage rose 8%. Fiscal 2007 plans call for about 105 net new stores.
Returned capital through 25.9M shares repurchased for $600M and dividends of $0.24/share; a new $1B buyback is in place with about $650M planned for fiscal 2007.
Average per-store inventories fell 11% at year-end, and operating cash flow of $1.16B funded capex of $496M and buybacks.

03—Questions

Frequently Asked Questions

How much of the fiscal 2006 EPS increase was driven by one-time items?
A large part. Reported EPS rose to $1.41 from $1.21, a gain of about 17%. Excluding the $47M repatriation tax benefit ($0.10), the $22M deferred tax correction ($0.04) and third-quarter items (about $0.02 net cost), adjusted EPS was $1.29, up about 3% from $1.25. Investors should focus on the adjusted figure for underlying trend.
Why did pre-tax margins decline despite sales growth?
Same store sales grew only 2%, too little to leverage fixed costs. Occupancy costs rose about 0.3% of sales at Marmaxx, distribution center costs and store payroll also rose as a share of sales, and the third-quarter events (executive resignation costs, e-commerce exit, hurricane losses) cost about 0.1 point. Partially offsetting this, merchandise margins improved as markdowns fell, especially at smaller divisions.
Is the fourth-quarter improvement sustainable?
Management attributes it to changes made in the third quarter to improve off-price buying execution, along with lower markdowns and leaner inventories. Fourth-quarter same store sales grew 3%, and every division improved segment profit versus the prior year. Whether this persists depends on continued comparable sales growth; the 10-K itself notes weaker Northeast and Midwest results and a weak U.K. retail environment for T.K. Maxx.
What are the main risks to the store growth strategy?
Growth depends on finding suitable real estate at acceptable lease terms, on new store productivity matching existing stores, and on successfully extending the off-price model into new chains and countries. The company is also slowing openings at HomeGoods, A.J. Wright and T.K. Maxx, and A.J. Wright's segment still lost $2.2M in fiscal 2006. Bob's Stores lost $28.0M, with new strategies planned to narrow that loss.
How is TJX returning cash to shareholders and what is its balance sheet position?
In fiscal 2006 TJX spent $603.7M on buybacks (25.9M shares) and paid $105.3M in dividends, with the dividend rising to $0.24 per share from $0.18. Cash was $466M at year-end, with no borrowings under its $1B revolving facilities. Long-term debt rose to $783M after a C$235M Winners term loan used to repatriate Canadian earnings. Total debt was 29.9% of total capitalization, and shareholders' equity was $1.89B.

04—Continue

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