01—Abstract
Summary
Summary of the 10-K filed March 28, 2007. Cited figures are marked; the original filing is the authoritative source.
TJX Companies' fiscal 2007 10-K (year ended January 27, 2007) shows a strong operating year overshadowed by a serious data breach.
Net sales rose 9% to $17.4 billiona, same store sales grew 4%, and income from continuing operations reached $776.8 million, or $1.63 per diluted share, up from $1.41. The pre-tax margin improved to 7.2% from 6.3%, driven by better merchandise margins and cost containment, though the company also absorbed a planned rise in marketing spend. Net income after the A.J.
Wright store-closing charge was $738 millionb, or $1.55 per diluted share. The central risk for investors is the Computer Intrusion disclosed in this filing. TJX believes customer payment card and personal data were stolen from its systems in 2005 and 2006.
So far the company has recorded only a roughly $5 millionc pre-tax charge and states it cannot yet reasonably estimate further losses. It faces numerous putative class actions in the U.S. and Canada, card-issuer claims, and investigations by a multi-state group of state attorneys general, the FTC, and Canadian privacy regulators. Management acknowledges these losses could be material, so the contingent liability is the key unknown for the equity.
On the positive side, the balance sheet strengthened, with cash rising to $857 million and shareholders' equity to $2.29 billiond. Operating cash flow was $1.195 billion, and the company returned capital through $557 million of buybacks and $123 million of dividends.
Management plans roughly $900 million of repurchases in fiscal 2008, though buybacks were temporarily suspended after the breach was discovered. Capital spending is expected to rise to about $500 million in fiscal 2008, and the store base is planned to grow by 83 net stores.
02—Key points
Key Highlights
- Net sales grew 9% to $17.4 billion; same store sales rose 4%, with about 5 points of growth from new stores.
- Diluted EPS from continuing operations was $1.63, up 15.6% from $1.41; net income was $738 million ($1.55 per diluted share) after a $38 million after-tax charge for closing 34 underperforming A.J. Wright stores.
- Pre-tax margin improved to 7.2% from 6.3%, driven by a 0.4-point merchandise margin gain and expense leverage from cost containment.
- Computer Intrusion: customer payment card and personal data were allegedly stolen in 2005 and 2006; only about $5 million in costs has been recorded, and further losses cannot yet be reasonably estimated.
- Litigation and regulatory exposure is significant: dozens of putative class actions in the U.S. and Canada, card-issuer claims, a multi-state AG investigation (about 30 states initially), and an FTC inquiry.
- Balance sheet strengthened: cash rose to $857 million, shareholders' equity to $2.29 billion, and operating cash flow was $1.195 billion; the debt-to-capitalization ratio fell to 26.1%.
- Fiscal 2008 plans include about $900 million of share repurchases, roughly $500 million of capex, and a net addition of 83 stores, after buybacks were temporarily suspended during the breach investigation.
03—Questions
Frequently Asked Questions
How much has the Computer Intrusion cost TJX so far, and could losses be material?
TJX recorded a pre-tax charge of approximately $5 million ($0.01 per share) in the fourth quarter of fiscal 2007 for investigation, containment, security upgrades, customer communication, and legal and technical fees. Beyond this, the company says it does not have enough information to reasonably estimate losses from litigation, card-issuer claims, and regulatory fines. It states that such losses could be material to results of operations and financial condition, so no liability has been accrued.
What customer data was believed stolen?
The company believes payment card data (including some magnetic-stripe track 2 data and, in limited cases, unencrypted data) was stolen, along with personal ID numbers tied to some returns and check transactions. TJX says customer names and addresses were not included with the payment card data, and it does not believe PINs were compromised. Much of the stolen data was reported as deleted before discovery, and the company has been unable to identify most of the files it believes were taken.
Has TJX's financial performance been affected, and what is the outlook for buybacks?
Fiscal 2007 earnings were strong despite the breach, with EPS up 15.6% from continuing operations. TJX temporarily suspended share repurchases after discovering the intrusion in December 2006, so fiscal 2007 buybacks totaled $557 million (22.0 million shares), below plan. The company has $436 million remaining under its October 2005 program, plus a new $1 billion authorization approved in January 2007. It plans about $900 million of repurchases in fiscal 2008.
Why did TJX close 34 A.J. Wright stores, and what is the financial impact?
Management identified 34 underperforming A.J. Wright stores, about 21% of the chain's store base but only 16% of its sales, with profit margins well below the chain average. The closings produced a $62 million pre-tax charge (about $38 million after tax, or $0.08 per share), recorded as a discontinued operation. Management says the move will focus resources on better-performing stores, and A.J. Wright's segment loss for fiscal 2007 was $10.3 million.
Which segments drove growth, and where are the weak spots?
Marmaxx (T.J. Maxx and Marshalls) remains the largest segment, with sales of $11.5 billion and a 9.4% segment margin, though same store sales grew only 2%. Winners/HomeSense (Canada) posted a 19% sales increase, 5% local-currency same store sales growth, and a 10.4% margin. T.K. Maxx (UK/Ireland) grew sales 23% with 9% same store sales growth, and HomeGoods' margin nearly doubled to 4.5%. Bob's Stores and A.J. Wright remain loss-making, with segment losses of $17.4 million and $10.3 million.
04—Continue