10-Q 1 tjx-10qx20181103.htm 10-Q Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q 
(mark one)
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended November 3, 2018
OR
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from                      to                     
Commission file number 1-4908 
The TJX Companies, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
04-2207613
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
770 Cochituate Road Framingham, Massachusetts
 
01701
(Address of principal executive offices)
 
(Zip Code)
(508) 390-1000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  ☒    NO  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    YES  ☒    NO  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
  
Accelerated filer
 
 
 
 
 
 
 
 
Non-accelerated filer
 
  
Smaller reporting company
 
 
 
 
 
 
 
 
Emerging growth company
 
  
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ☐    NO  ☒
The number of shares of registrant’s common stock outstanding as of November 3, 2018: 1,233,145,248




PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
THE TJX COMPANIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
IN THOUSANDS EXCEPT PER SHARE AMOUNTS
 
 
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
 
November 3,
2018
 
October 28,
2017
 
November 3,
2018
 
October 28,
2017
Net sales
 
$
9,825,759

 
$
8,762,220

 
$
27,845,594

 
$
24,903,944

Cost of sales, including buying and occupancy costs
 
6,983,483

 
6,150,020

 
19,797,537

 
17,652,767

Selling, general and administrative expenses
 
1,756,448

 
1,584,219

 
5,006,937

 
4,479,470

Pension settlement charge
 
36,122

 

 
36,122

 

Interest expense, net
 
3,188

 
7,981

 
10,365

 
27,499

Income before provision for income taxes
 
1,046,518

 
1,020,000

 
2,994,633

 
2,744,208

Provision for income taxes
 
284,265

 
378,564

 
776,373

 
1,013,536

Net income
 
$
762,253

 
$
641,436

 
$
2,218,260

 
$
1,730,672

Basic earnings per share:
 
 
 
 
 
 
 
 
Net income
 
$
0.62

 
$
0.51

 
$
1.78

 
$
1.35

Weighted average common shares – basic
 
1,236,842

 
1,268,044

 
1,245,639

 
1,278,383

Diluted earnings per share:
 
 
 
 
 
 
 
 
Net income
 
$
0.61

 
$
0.50

 
$
1.75

 
$
1.33

Weighted average common shares – diluted
 
1,257,562

 
1,285,762

 
1,264,100

 
1,297,344

The accompanying notes are an integral part of the unaudited consolidated financial statements.






THE TJX COMPANIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
IN THOUSANDS
 
 
 
Thirteen Weeks Ended
 
 
November 3,
2018
 
October 28,
2017
Net income
 
$
762,253

 
$
641,436

Additions to other comprehensive income:
 
 
 
 
Foreign currency translation adjustments, net of related tax provision of $143 in fiscal 2019 and benefit of $18,110 in fiscal 2018
 
(18,055
)
 
(46,029
)
Recognition of net gains/losses on benefit obligations, net of related tax benefit of $1,867 in fiscal year 2019 (See Note H)
 
(5,128
)
 

Reclassifications from other comprehensive income to net income:
 
 
 
 
Pension settlement charge, net of related tax provision of $9,641 in fiscal 2019
 
26,481

 

Amortization of prior service cost and deferred gains, net of related tax provisions of $1,109 in fiscal 2019 and $2,414 in fiscal 2018
 
3,047

 
3,669

Amortization of loss on cash flow hedge, net of related tax provisions of $76 in fiscal 2019 and $112 in fiscal 2018
 
208

 
171

Other comprehensive income (loss), net of tax
 
6,553

 
(42,189
)
Total comprehensive income
 
$
768,806

 
$
599,247


 
 
Thirty-Nine Weeks Ended
 
 
November 3,
2018
 
October 28,
2017
Net income
 
$
2,218,260

 
$
1,730,672

Additions to other comprehensive income:
 
 
 
 
Foreign currency translation adjustments, net of related tax benefits of $13,582 in fiscal 2019 and tax provision of $16,212 in fiscal 2018
 
(200,319
)
 
79,393

Gain on net investment hedges, net of related tax provision of $7,113 in fiscal 2019
 
19,539

 

Recognition of net gains/losses on benefit obligations, net of related tax benefit of $1,867 in fiscal year 2019 (See Note H)
 
(5,128
)
 

Reclassifications from other comprehensive income to net income:
 
 
 
 
Pension settlement charge, net of related tax provision of $9,641 in fiscal 2019
 
26,481

 

Amortization of prior service cost and deferred gains, net of related tax provisions of $3,210 in fiscal 2019 and $7,500 in fiscal 2018
 
8,817

 
11,401

Amortization of loss on cash flow hedge, net of related tax provisions of $228 in fiscal 2019 and $337 in fiscal 2018
 
622

 
513

Other comprehensive (loss) income, net of tax
 
(149,988
)
 
91,307

Total comprehensive income
 
$
2,068,272

 
$
1,821,979


The accompanying notes are an integral part of the unaudited consolidated financial statements.





THE TJX COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
IN THOUSANDS, EXCEPT SHARE DATA
 
 
 
November 3,
2018
 
February 3,
2018
 
October 28,
2017
ASSETS
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
Cash and cash equivalents
 
$
2,711,767

 
$
2,758,477

 
$
2,364,244

Short-term investments
 

 
506,165

 
511,618

Accounts receivable, net
 
419,790

 
327,166

 
345,866

Merchandise inventories
 
5,543,413

 
4,187,243

 
4,725,850

Prepaid expenses and other current assets
 
544,427

 
706,676

 
422,719

Federal, state, and foreign income taxes recoverable
 
97,616

 

 
19,737

Total current assets
 
9,317,013

 
8,485,727

 
8,390,034

Net property at cost
 
5,165,875

 
5,006,053

 
4,858,284

Goodwill
 
97,348

 
100,069

 
196,365

Other assets
 
445,006

 
466,166

 
433,012

TOTAL ASSETS
 
$
15,025,242

 
$
14,058,015

 
$
13,877,695

LIABILITIES
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
Accounts payable
 
$
3,340,596

 
$
2,488,373

 
$
2,986,374

Accrued expenses and other current liabilities
 
2,594,561

 
2,522,961

 
2,361,422

Federal, state and foreign income taxes payable
 
78,668

 
114,203

 
120,185

Total current liabilities
 
6,013,825

 
5,125,537

 
5,467,981

Other long-term liabilities
 
1,284,911

 
1,320,505

 
1,159,975

Non-current deferred income taxes, net
 
236,769

 
233,057

 
374,276

Long-term debt
 
2,232,864

 
2,230,607

 
2,229,855

Commitments and contingencies (See Note K)
 

 

 

SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
Preferred stock, authorized 5,000,000 shares, par value $1, no shares issued
 

 

 

Common stock, authorized 1,800,000,000 shares, par value $1, issued and outstanding 1,233,145,248; 1,256,018,044 and 1,264,605,010 respectively
 
1,233,145

 
1,256,018

 
1,264,605

Additional paid-in capital
 

 

 

Accumulated other comprehensive (loss)
 
(591,847
)
 
(441,859
)
 
(602,919
)
Retained earnings
 
4,615,575

 
4,334,150

 
3,983,922

Total shareholders’ equity
 
5,256,873

 
5,148,309

 
4,645,608

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
15,025,242

 
$
14,058,015

 
$
13,877,695

The accompanying notes are an integral part of the unaudited consolidated financial statements.





THE TJX COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
IN THOUSANDS
 
 
 
Thirty-Nine Weeks Ended
 
 
November 3,
2018
 
October 28,
2017
Operating Activities
 
 
 
 
Net income
 
$
2,218,260

 
$
1,730,672

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
601,227

 
532,424

Loss on property disposals and impairment charges
 
14,574

 
2,209

Pension settlement charge
 
36,122

 

Deferred income tax (benefit) provision
 
(15,630
)
 
35,802

Share-based compensation
 
77,353

 
77,152

Changes in assets and liabilities:
 
 
 
 
(Increase) in accounts receivable
 
(97,891
)
 
(84,403
)
(Increase) in merchandise inventories
 
(1,442,577
)
 
(1,042,664
)
(Increase) in income taxes recoverable
 
(69,372
)
 
(3,902
)
Decrease (increase) in prepaid expenses and other current assets
 
194,160

 
(50,357
)
Increase in accounts payable
 
902,502

 
733,340

Increase in accrued expenses and other liabilities
 
97,696

 
83,082

(Decrease) in income taxes payable
 
(33,292
)
 
(86,842
)
Other
 
(5,375
)
 
2,910

Net cash provided by operating activities
 
2,477,757

 
1,929,423

Investing Activities
 
 
 
 
Property additions
 
(872,963
)
 
(827,529
)
Purchase of investments
 
(157,198
)
 
(630,079
)
Sales and maturities of investments
 
634,288

 
658,225

       Other
 
26,653

 

Net cash (used in) investing activities
 
(369,220
)
 
(799,383
)
Financing Activities
 
 
 
 
Cash payments for repurchase of common stock
 
(1,591,392
)
 
(1,238,982
)
Proceeds from issuance of common stock
 
239,608

 
89,198

Cash dividends paid
 
(682,322
)
 
(566,949
)
Cash payments of employee tax withholdings for performance based stock awards
 
(16,014
)
 
(16,823
)
Other
 
(5,409
)
 
(2,312
)
Net cash (used in) financing activities
 
(2,055,529
)
 
(1,735,868
)
Effect of exchange rate changes on cash
 
(99,718
)
 
40,223

Net decrease in cash and cash equivalents
 
(46,710
)
 
(565,605
)
Cash and cash equivalents at beginning of year
 
2,758,477

 
2,929,849

Cash and cash equivalents at end of period
 
$
2,711,767

 
$
2,364,244

The accompanying notes are an integral part of the unaudited consolidated financial statements.





THE TJX COMPANIES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(UNAUDITED)
IN THOUSANDS
 
 
 
Common Stock
 
 
 
 
 
 
 
 
  
 
Shares
 
Par Value
$1
 
Additional Paid-In
Capital
 
Accumulated Other Comprehensive
Income (Loss)
 
Retained
Earnings
 
Total
Balance, February 3, 2018
 
1,256,018

 
$
1,256,018

 
$

 
$
(441,859
)
 
$
4,334,150

 
$
5,148,309

Net income
 

 

 

 

 
2,218,260

 
2,218,260

Cumulative effect of accounting change (See Note A)
 

 

 

 

 
58,712

 
58,712

Other comprehensive income (loss), net of tax
 

 

 

 
(149,988
)
 

 
(149,988
)
Cash dividends declared on common stock
 

 

 

 

 
(727,975
)
 
(727,975
)
Recognition of share-based compensation
 

 

 
77,353

 

 

 
77,353

Issuance of common stock under Stock Incentive Plan, net of shares used to pay tax withholdings
 
11,030

 
11,030

 
218,079

 

 
(5,515
)
 
223,594

Common stock repurchased and retired
 
(33,903
)
 
(33,903
)
 
(295,432
)
 

 
(1,262,057
)
 
(1,591,392
)
Balance, November 3, 2018
 
1,233,145

 
$
1,233,145

 
$

 
$
(591,847
)
 
$
4,615,575

 
$
5,256,873

The accompanying notes are an integral part of the unaudited consolidated financial statements.





THE TJX COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The Consolidated Financial Statements and Notes thereto have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. These Consolidated Financial Statements and Notes thereto are unaudited and, in the opinion of management, reflect all normal recurring adjustments, accruals and deferrals among periods required to match costs properly with the related revenue or activity, considered necessary by The TJX Companies, Inc. (together with its subsidiaries, “TJX”) for a fair statement of its financial statements for the periods reported, all in conformity with GAAP consistently applied. The Consolidated Financial Statements and Notes thereto should be read in conjunction with the audited consolidated financial statements, including the related notes, contained in TJX’s Annual Report on Form 10-K for the fiscal year ended February 3, 2018 (“fiscal 2018”).
These interim results are not necessarily indicative of results for the full fiscal year. TJX’s business, in common with the businesses of retailers generally, is subject to seasonal influences, with higher levels of sales and income generally realized in the second half of the year.
The February 3, 2018 balance sheet data was derived from audited financial statements and does not include all disclosures required by GAAP.
Fiscal Year
TJX’s fiscal year ends on the Saturday nearest to the last day of January of each year. The current fiscal year ends February 2, 2019 (“fiscal 2019”) and is a 52-week fiscal year. Fiscal 2018 was a 53-week fiscal year.
Use of Estimates
The preparation of financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. TJX considers its accounting policies relating to inventory valuation, impairment of long-lived assets, goodwill and tradenames, retirement obligations, share-based compensation, casualty insurance, reserves for uncertain tax positions and loss contingencies to be the most significant accounting policies that involve management estimates and judgments. Actual amounts could differ from those estimates, and such differences could be material.
Reclassifications 
As a result of a two-for-one stock split in the form of a dividend to shareholders of record as of October 30, 2018, certain amounts in prior years’ Consolidated Financial Statements have been retroactively adjusted to conform to the current year presentation. As such, all share activity, earnings per share and dividends per share amounts have been adjusted to reflect the two-for-one stock split. See Note D—Capital Stock and Earnings per Share for additional information.
Summary of Accounting Policies
Revenue Recognition
TJX adopted Revenue from Contracts with Customers (referred to as “ASC 606”), on February 4, 2018 (“the adoption date”). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. TJX adopted the new guidance under the modified retrospective approach which resulted in a $59 million cumulative adjustment to increase retained earnings. The cumulative adjustment primarily related to revenue recognized on the value of unredeemed rewards certificates issued to customers as part of the Company’s U.S. co-branded credit card loyalty program. We now recognize the estimated unredeemed awards when they are earned, rather than when merchandise credits expire or when the likelihood of redemption becomes remote. In addition, on-line sales are now recognized at the shipping point rather than receipt by the customer.
Other changes relate to the presentation of revenue as certain expenses previously presented as a reduction of revenue are now classified as selling, general and administrative expenses (“SG&A”). The new standard required a change in the presentation of our sales return reserve on the balance sheet, which we previously recorded net of the value of returned merchandise and now is presented at gross sales value with an asset established for the value of the merchandise returned. There is no change in the timing or amount of revenue recognized from point of sale at the registers in our stores, which constitutes the majority of the Company’s revenue.




Financial results for fiscal periods after the adoption date are presented under ASC 606 while results from prior periods are not adjusted and continue to be reported under the accounting standards in effect for the prior period. We applied ASC 606 only to contracts that were not completed prior to fiscal 2019. Adoption of the new guidance resulted in additional disclosure requirements and did not have a material impact on our financial condition or results of operations for the fiscal period ended November 3, 2018.
Net Sales
Net sales consist primarily of merchandise sales, which are recorded net of a reserve for estimated returns, any discounts and sales taxes, related to the sales of merchandise both within our stores and online. Net sales also include an immaterial amount of other revenues that represent less than 1.0% of total revenues, primarily generated from TJX’s co-branded loyalty rewards credit card program offered in the United States only. In addition, certain customers may receive discounts that are accounted for as consideration reducing the transaction price. Merchandise sales from our stores are recognized at the point of sale when TJX provides the merchandise to the customer. The performance obligation is fulfilled at this point when the customer has obtained control by paying for and leaving with the merchandise. Merchandise sales made online are recognized when the product has been shipped, which is when legal title has passed and when TJX is entitled to payment, and the customer has obtained the ability to direct the use of and obtain substantially all of the remaining benefits from the goods. Shipping and handling activities related to online sales occur after the customer obtains control of the goods. TJX’s policy is to treat shipping costs as part of our fulfillment center costs within our operating expenditures. As a result, shipping fee revenues received is recognized when control of the goods transfer to the customer and is recorded as net sales. Shipping and handling costs incurred by TJX are included in cost of sales, including buying and occupancy costs. TJX disaggregates revenue by operating segment, see Note GSegment Information.
Deferred Gift Card Revenue
Proceeds from the sale of gift cards as well as the value of store cards issued to customers as a result of a return or exchange are deferred until the customers use the cards to acquire merchandise, as TJX does not fulfill its performance obligation until the gift card has been redeemed. While gift cards have an indefinite life, substantially all are redeemed in the first year of issuance. Based on historical experience, we estimate the amount of gift cards and store cards that will not be redeemed and, to the extent allowed by local law, these amounts are amortized into income over the redemption period.
In thousands
 
November 3,
2018
Balance, February 3, 2018
 
$
406,506

Deferred revenue
 
1,096,333

Effect of exchange rates changes on deferred revenue
 
(6,561
)
Revenue recognized
 
(1,138,507
)
Balance, November 3, 2018
 
$
357,771

TJX recognized $1.1 billion in gift card revenue for the nine months ended November 3, 2018. Gift cards are combined in one homogeneous pool and are not separately identifiable. As such, the revenue recognized consists of gift cards that were part of the deferred revenue balance at the beginning of the period as well as gift cards that were issued during the period.
Sales Return Reserve
Our products are generally sold with a right of return and we may provide other credits or incentives, which are accounted for as variable consideration when estimating the amount of revenue to recognize. We have elected to apply the portfolio practical expedient and are estimating the variable consideration using the expected value method when calculating the returns reserve, as the difference to applying it to the individual contract would not differ materially. Returns are estimated based on historical experience and are required to be established and presented at the gross sales value with an asset established for the estimated value of the merchandise returned separate from the refund liability. Liabilities for return allowances are included in “Accrued expenses and other current liabilities” and the offsetting receivable is included in “Prepaid expenses and other current assets” on our consolidated balance sheets.




Goodwill
Goodwill includes the excess of the purchase price paid over the carrying value of the minority interest acquired in fiscal 1990 in TJX’s former 83%-owned subsidiary and represents goodwill associated with the T.J. Maxx chain, as well as the excess of cost over the estimated fair market value of the net assets acquired by TJX in the purchase of Winners in fiscal 1991, the purchase of Sierra Trading Post (“STP”) in fiscal 2013, and the purchase of Trade Secret in fiscal 2016, which was re-branded under the T.K. Maxx name during fiscal 2018. The following is a roll forward of goodwill by component:
In thousands
 
Marmaxx
 
Winners
 
Sierra Trading
Post
 
T.K. Maxx in
Australia
 
Total
Balance, January 28, 2017
 
$
70,027

 
$
1,686

 
$
97,254

 
$
26,904

 
$
195,871

Impairment
 

 

 
(97,254
)
 

 
(97,254
)
Effect of exchange rate changes on goodwill
 

 
98

 

 
1,354

 
1,452

Balance, February 3, 2018
 
70,027

 
1,784

 

 
28,258

 
100,069

Effect of exchange rate changes on goodwill
 

 
(93
)
 

 
(2,628
)
 
(2,721
)
Balance, November 3, 2018
 
$
70,027

 
$
1,691

 
$

 
$
25,630

 
$
97,348

Goodwill is considered to have an indefinite life and accordingly is not amortized. In the fourth quarter of fiscal 2018, the Company recorded an impairment charge of $99.3 million, which included $97.3 million of STP goodwill and $2.0 million for certain long-lived assets of STP, as the estimated fair value of the STP business fell below its carrying value due to a decrease in projected revenue growth rates. The impairment charge is included within the Marmaxx segment results. Goodwill, and the related impairments, if any, are included in the respective operating segment to which they relate.
Future Adoption of New Accounting Standards
Leases
In February 2016, the Financial Accounting Standards Board (“FASB”) issued updated guidance on leases to increase transparency and comparability among organizations by requiring lessees to recognize right of use assets and lease liabilities on the balance sheet and requiring disclosure of key information about leasing arrangements. The new standard is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods; early adoption is permitted. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which allows entities to apply the transition requirements at the effective date rather than at the beginning of the earliest comparative period presented as previously required. The effect of initially applying the standard can be recognized as a cumulative-effect adjustment to retained earnings in the period of adoption and an entity’s reporting for the comparative periods presented in the year of adoption would continue to be in accordance with ASC 840, Leases (Topic 840) (“ASC 840”), including the disclosure requirements of ASC 840. If the new transition method in ASU 2018-11 is not elected, the new standard must be adopted using a modified retrospective transition and requires application of the new guidance for leases that exist or are entered into after the beginning of the earliest comparative period presented. The Company plans to adopt this standard in the first quarter of the fiscal year ending February 1, 2020 ("fiscal 2020") using the optional transition method under ASU 2018-11.
The Company is in the process of implementing a new lease accounting system and has established a cross-functional team to implement the updated lease guidance. This team is in the process of evaluating our lease portfolio to assess the impact this standard will have on our Consolidated Financial Statements and Notes thereto. The Company has determined that the initial lease term will not differ under the new standard versus current accounting practice, and therefore the income statement impact of the new standard is not expected to be material. Any impact to the income statement would be the result of the timing of expense recognition and would not be incremental over the term of the lease. For example, under ASC 842 certain initial direct costs will no longer be capitalized and amortized over the lease term and will be expensed as incurred. In addition, in certain instances, the cost of our renewal options may be recognized earlier in the life of the lease than under the existing lease accounting rules. The Company expects this standard will have a material impact on its Consolidated Balance Sheet as it will record a significant asset and liability associated with its nearly 4,300 leased locations. The Company plans to implement the transition package of three practical expedients permitted within the standard, which among other things, allows for the carryforward of historical lease classifications. The Company expects to make an accounting policy election that will keep leases with a term of 12 months or less off the balance sheet and result in recognizing those lease payments on a straight-line basis over the lease term. As our leases do not provide an implicit rate, nor is it readily available, we plan to use our incremental borrowing rate based on information available at commencement date to determine the present value of future payments.




Hedging Activities
In August 2017, the FASB issued updated guidance on hedge accounting. The updates allow hedge accounting for new types of interest rate hedges of financial instruments and simplify the documentation requirements to qualify for hedge accounting. In addition, any gain or loss from hedge ineffectiveness will be reported in the same income statement line with the effective hedge results and the hedged transaction. The updated guidance is effective for annual reporting periods beginning after December 15, 2018, and early adoption is permitted. The Company does not anticipate this pronouncement will have a material impact on its consolidated financial statements.
Income Statement – Reporting Comprehensive Income
In February 2018, the FASB issued updated guidance related to reporting comprehensive income. The updated guidance allows for a one-time reclassification from accumulated other comprehensive income to retained earnings for stranded tax effect resulting from the enactment of the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”). The updated guidance is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period for reporting periods for which financial statements have not yet been issued. The updated guidance should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the 2017 Tax Act is recognized. The Company has not yet determined the timing of adoption or estimated the effect on its consolidated financial statements.
Non-Employee Share-Based Payments
In June 2018, the FASB issued updated guidance related to compensation - stock compensation: Improvements to Non-Employee Share-Based Payment Accounting. The updated guidance aligns the measurement and classification guidance for share-based payments to non-employees with the guidance for share-based payments to employees, with certain exceptions. The amendments in this ASU will be effective for the Company for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The Company does not anticipate this pronouncement will have an impact on its consolidated financial statements.
Intangibles-Goodwill and Other-Internal-Use Software
In August 2018, the FASB issued guidance related to accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. The standard allows entities who are customers in hosting arrangements that are service contracts to apply the existing internal-use software guidance to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. The guidance specifies classification for capitalizing implementation costs and related amortization expense within the financial statements and requires additional disclosures. The guidance will be effective for annual reporting periods, including interim reporting within those periods, beginning after December 15, 2019. Early adoption is permitted and can be applied either retrospectively or prospectively. The Company is currently evaluating the transition methods and the impact of the adoption of this standard on its consolidated financial statements.
Fair Value Measurement Disclosure Framework
In August 2018, the FASB issued guidance related to changes to the disclosure requirements for fair value measurements. This ASU modifies the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. The primary focus of the guidance is to improve the effectiveness of the disclosure requirements for fair value measurements. In general, the amendments are effective for all entities for fiscal years and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted for the removed disclosures and delayed adoption until fiscal year 2021 permitted for the new disclosures. The removed and modified disclosures will be adopted on a retrospective basis and the new disclosures will be adopted on a prospective basis. The Company is currently evaluating the potential effects of the pronouncement on its disclosure requirements.
Compensation Retirement Defined Benefit Plans Disclosure Framework
In August 2018, the FASB issued guidance related to changes to the disclosure requirements for defined benefit plans. This ASU removes certain disclosures that are not considered cost beneficial, clarifies certain required disclosures and requires certain additional disclosures. The standard is effective on a retrospective basis for fiscal years ending after December 15, 2020, with early adoption permitted. The Company is currently evaluating the impact of the pronouncement on its disclosure requirements.
Recently Adopted Accounting Standards
Revenue Recognition
See Revenue Recognition in this Note A for the impact upon adoption.




Cash Flows
In the first quarter of fiscal 2019, TJX adopted a pronouncement that addresses differences in the way certain cash receipts and cash payments are presented in the statement of cash flows. The new guidance provides clarity around the cash flow classification for eight specific issues in an effort to reduce the current and potential future differences in practice. The standard did not have a material impact on our consolidated statements of cash flows.
Retirement Benefits
In the first quarter of fiscal 2019, TJX adopted a pronouncement related to retirement benefits, which requires that an employer report the service cost component of net periodic pension and net periodic post retirement cost in the same line item as other compensation costs arising from services rendered by the employees during the period. It also requires the other components of net periodic pension and net periodic postretirement benefit cost to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if such a subtotal is presented. The amendments in this update were applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement. The impact to prior periods was immaterial. As a result of the adoption, for the three and nine months ended November 3, 2018, service costs are recorded in the same line items as other compensation costs and non-service costs are recorded in SG&A in our income statement.
Income Taxes
In the first quarter of fiscal 2019, TJX adopted Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 (referred to as "ASU 2018-05"), which provides guidance on accounting for the tax effects of the 2017 Tax Act. This guidance allows a company to record a provisional amount when it does not have the necessary information available, prepared, or analyzed in reasonable detail to complete its accounting for the change in the tax law during the measurement period. The measurement period ends when the company has obtained, prepared, and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year. We will continue to assess our provision for income taxes as future guidance is issued.
Note B. Property at Cost
The following table presents the components of property at cost:
In thousands
 
November 3,
2018
 
February 3,
2018
 
October 28,
2017
Land and buildings
 
$
1,423,528

 
$
1,355,777

 
$
1,294,992

Leasehold costs and improvements
 
3,318,857

 
3,254,830

 
3,145,922

Furniture, fixtures and equipment
 
5,728,827

 
5,357,701

 
5,172,488

Total property at cost
 
$
10,471,212

 
$
9,968,308

 
$
9,613,402

Less accumulated depreciation and amortization
 
5,305,337

 
4,962,255

 
4,755,118

Net property at cost
 
$
5,165,875

 
$
5,006,053

 
$
4,858,284

Depreciation expense was $203.6 million for the three months ended November 3, 2018 and $186.9 million for the three months ended October 28, 2017. Depreciation expense was $601.5 million for the nine months ended November 3, 2018 and $534.0 million for the nine months ended October 28, 2017. Depreciation expense was $726.0 million for the twelve months ended February 3, 2018.




Note C. Accumulated Other Comprehensive Income (Loss)
Amounts included in accumulated other comprehensive income (loss) are recorded net of taxes. The following table details the changes in accumulated other comprehensive income (loss) for the nine months ended November 3, 2018:
In thousands
 
Foreign
Currency
Translation
 
Deferred
Benefit
Costs
 
Cash
Flow
Hedge
on Debt
 
Accumulated
Other
Comprehensive
Income (Loss)
Balance, January 28, 2017
 
$
(491,803
)
 
$
(199,481
)
 
$
(2,942
)
 
$
(694,226
)
Additions to other comprehensive income:
 
 
 
 
 
 
 
 
Foreign currency translation adjustments (net of taxes of $16,212)
 
79,393

 

 

 
79,393

Reclassifications from other comprehensive income to net income:
 
 
 
 
 
 
 
 
Amortization of loss on cash flow hedge (net of taxes of $337)
 

 

 
513

 
513

Amortization of prior service cost and deferred gains/losses (net of taxes of $7,500)
 

 
11,401

 

 
11,401

Balance, October 28, 2017
 
$
(412,410
)
 
$
(188,080
)
 
$
(2,429
)
 
$
(602,919
)
 
 
 
 
 
 
 
 
 
Balance, February 3, 2018
 
$
(280,051
)
 
$
(159,562
)
 
$
(2,246
)
 
$
(441,859
)
Additions to other comprehensive income:
 
 
 
 
 
 
 
 
Foreign currency translation adjustments (net of taxes of $13,582)
 
(200,319
)
 

 

 
(200,319
)
Net investment hedges (net of taxes of $7,113)
 
19,539

 

 

 
19,539

Recognition of net gains/losses on benefit obligations,(net of taxes of $1,867)
 

 
(5,128
)
 

 
(5,128
)
Reclassifications from other comprehensive income to net income:
 
 
 
 
 
 
 
 
Pension settlement charge (net of taxes of $9,641)
 

 
26,481

 

 
26,481

Amortization of prior service cost and deferred gains (net of taxes of $3,210)
 

 
8,817

 

 
8,817

Amortization of loss on cash flow hedge (net of taxes of $228)
 

 

 
622

 
622

Balance, November 3, 2018
 
$
(460,831
)
 
$
(129,392
)
 
$
(1,624
)
 
$
(591,847
)

Note D. Capital Stock and Earnings Per Share
Capital Stock
On September 17, 2018, TJX announced that its Board of Directors approved a two-for-one stock split of its common stock in the form of a stock dividend. The split was subject to shareholder approval of an increase in the number of authorized shares of common stock. On October 22, 2018 the shareholders approved an increase in the number of authorized shares of common stock by 0.6 billion to 1.8 billion. One additional share was paid for each share held by the holders of record as of the close of business on October 30, 2018. The shares were distributed on November 6, 2018 and resulted in an issuance of 617 million shares of common stock. The balance sheet as of November 3, 2018 and all periods presented have been adjusted to retroactively present the two-for-one stock split. As of November 3, 2018, all historical per share amounts and references to the common stock activity, as well as basic and diluted share amounts utilized in the calculation of earnings per share and dividends per share, have been adjusted to reflect the stock split.




TJX repurchased and retired 11.4 million shares of its common stock at a cost of $0.6 billion during the quarter ended November 3, 2018, on a “trade date” basis. During the nine months ended November 3, 2018, TJX repurchased and retired 34.0 million shares of its common stock at a cost of $1.6 billion, on a "trade date" basis. TJX reflects stock repurchases in its financial statements on a “settlement date” or cash basis. TJX had cash expenditures under repurchase programs of $1.6 billion for the nine months ended November 3, 2018, and $1.2 billion for the nine months ended October 28, 2017. These expenditures were funded by cash generated from operations.
In February 2017, TJX announced that its Board of Directors had approved an additional stock repurchase program that authorized the repurchase of up to $1.0 billion of TJX common stock from time to time. Under this program, which was completed during the third quarter of fiscal 2019, TJX repurchased 21.9 million shares of common stock at a cost of $1.0 billion, on a “trade date” basis.
In February 2018, TJX announced that its Board of Directors had approved an additional stock repurchase program that authorized the repurchase of up to $3.0 billion of TJX common stock from time to time. Under this program, on a “trade date” basis through November 3, 2018, TJX repurchased 8.6 million shares of common stock at a cost of $464 million. As of November 3, 2018, TJX had $2.5 billion available under the stock repurchase program announced in February, 2018.
All shares repurchased under the stock repurchase programs have been retired.
Earnings Per Share
The following table presents the calculation of basic and diluted earnings per share (“EPS”) for net income:
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
In thousands, except per share data
November 3,
2018
 
October 28,
2017
 
November 3,
2018
 
October 28,
2017
Basic earnings per share
 
 
 
 
 
 
 
Net income
$
762,253

 
$
641,436

 
$
2,218,260

 
$
1,730,672

Weighted average common shares outstanding for basic EPS
1,236,842

 
1,268,044

 
1,245,639

 
1,278,383

Basic earnings per share
$
0.62

 
$
0.51

 
$
1.78

 
$
1.35

Diluted earnings per share
 
 
 
 
 
 
 
Net income
$
762,253

 
$
641,436

 
$
2,218,260

 
$
1,730,672

Shares for basic and diluted earnings per share calculations:
 
 
 
 
 
 
 
Weighted average common shares outstanding for basic EPS
1,236,842

 
1,268,044

 
1,245,639

 
1,278,383

Assumed exercise/vesting of:
 
 
 
 
 
 
 
Stock options and awards
20,720

 
17,718

 
18,461

 
18,961

Weighted average common shares outstanding for diluted EPS
1,257,562

 
1,285,762

 
1,264,100

 
1,297,344

Diluted earnings per share
$
0.61

 
$
0.50

 
$
1.75

 
$
1.33

Cash dividends declared per share
$
0.195

 
$
0.156

 
$
0.585

 
$
0.469

The weighted average common shares for the diluted earnings per share calculation exclude the impact of outstanding stock options if the assumed proceeds per share of the option is in excess of the average price of TJX’s common stock for the related fiscal periods. Such options are excluded because they would have an antidilutive effect. There were 6.1 million such options excluded for each of the thirteen weeks and thirty-nine weeks ended November 3, 2018. There were 25.2 million such options excluded for the thirteen weeks and thirty-nine weeks ended October 28, 2017.
Note E. Financial Instruments
As a result of its operating and financing activities, TJX is exposed to market risks from changes in interest and foreign currency exchange rates and fuel costs. These market risks may adversely affect TJX’s operating results and financial position. TJX seeks to minimize risk from changes in interest and foreign currency exchange rates and fuel costs through the use of derivative financial instruments when and to the extent deemed appropriate. TJX does not use derivative financial instruments for trading or other speculative purposes and does not use any leveraged derivative financial instruments. TJX recognizes all derivative instruments as either assets or liabilities in the statements of financial position and measures those instruments at fair value. The fair values of the derivatives are classified as assets or liabilities, current or non-current, based upon valuation results and settlement dates of the individual contracts. Changes to the fair value of derivative contracts that do not qualify for hedge accounting are reported in earnings in the period of the change. For derivatives that qualify for hedge accounting, changes in the fair value of the derivatives are either recorded in shareholders’ equity as a component of other comprehensive income or are recognized currently in earnings, along with an offsetting adjustment against the basis of the item being hedged.




Diesel Fuel Contracts
TJX hedges portions of its estimated notional diesel requirements based on the diesel fuel expected to be consumed by independent freight carriers transporting TJX’s inventory. Independent freight carriers transporting TJX’s inventory charge TJX a mileage surcharge based on the price of diesel fuel. The hedge agreements are designed to mitigate the volatility of diesel fuel pricing (and the resulting per mile surcharges payable by TJX) by setting a fixed price per gallon for the period being hedged. During fiscal 2018, TJX entered into agreements to hedge a portion of its estimated notional diesel requirements for fiscal 2019, and during the first nine months of fiscal 2019, TJX entered into agreements to hedge a portion of its estimated notional diesel requirements for the first nine months of fiscal 2020. The hedge agreements outstanding at November 3, 2018 relate to approximately 46% of TJX’s estimated notional diesel requirements for the remainder of fiscal 2019 and approximately 28% of TJX’s estimated notional diesel requirements for the first nine months of fiscal 2020. These diesel fuel hedge agreements will settle throughout the remainder of fiscal 2019 and throughout the first ten months of fiscal 2020. TJX elected not to apply hedge accounting to these contracts.
Foreign Currency Contracts
TJX enters into forward foreign currency exchange contracts to obtain economic hedges on portions of merchandise purchases made and anticipated to be made by the Company’s operations in TJX International (United Kingdom, Ireland, Germany, Poland, Austria, The Netherlands and Australia), TJX Canada (Canada), Marmaxx (U.S.) and HomeGoods (U.S.) in currencies other than their respective functional currencies. These contracts typically have a term of twelve months or less. The contracts outstanding at November 3, 2018 cover a portion of such actual and anticipated merchandise purchases throughout the remainder of fiscal 2019 and throughout the first half of fiscal 2020. Additionally, TJX’s operations in Europe are subject to foreign currency exposure as a result of their buying function being centralized in the United Kingdom. All merchandise is purchased centrally in the U.K. and then shipped and billed to the retail entities in other countries. This intercompany billing to TJX’s European businesses’ Euro denominated operations creates exposure to the central buying entity for changes in the exchange rate between the Euro and British Pound. The inflow of Euros to the central buying entity provides a natural hedge for merchandise purchased from third-party vendors that is denominated in Euros. However, with the growth of TJX’s Euro denominated retail operations, the intercompany billings committed to the Euro denominated operations is generating Euros in excess of those needed to meet merchandise commitments to outside vendors. TJX calculates this excess Euro exposure each month and enters into forward contracts of approximately 30 days duration to mitigate the exposure. TJX elected not to apply hedge accounting to these contracts.
TJX also enters into derivative contracts, generally designated as fair value hedges, to hedge intercompany debt and intercompany interest payable. The changes in fair value of these contracts are recorded in selling, general and administrative expenses and are offset by marking the underlying item to fair value in the same period. Upon settlement, the realized gains and losses on these contracts are offset by the realized gains and losses of the underlying item in selling, general and administrative expenses.
TJX periodically reviews its net investments in foreign subsidiaries. During the fiscal quarter ended May 5, 2018, TJX entered into net investment hedge contracts related to a portion of its investment in TJX Canada. During the fiscal quarter ended August 4, 2018, TJX de-designated the net investment hedge contracts. The remaining life of the foreign currency contracts provided a natural hedge to the declared cash dividend from TJX Canada. The contracts settled during the second quarter of fiscal 2019 resulting in a pre-tax gain of $27 million while designated as a net investment hedge and subsequent to de-designation, a pre-tax gain of $19 million. The $27 million gain is reflected in shareholders equity as a component of other comprehensive income. The $19 million gain subsequent to de-designation is reflected in the income statement offsetting a foreign currency loss of $18 million on the declared dividends.




The following is a summary of TJX’s derivative financial instruments, related fair value and balance sheet classification at November 3, 2018:
In thousands
 
Pay
Receive
Blended
Contract
Rate
Balance Sheet
Location
Current Asset
U.S.$
Current
(Liability)
U.S.$
Net Fair
Value in
U.S.$ at
November 3,
2018
Fair value hedges:
 
 
 
 
 
 
 
 
Intercompany balances, primarily debt and related interest
 
 
 
 
 
 
62,000

£
12,983

0.2094

Prepaid Exp
$
475

$

$
475

 
48,950

£
43,612

0.8909

Prepaid Exp
626


626

 
A$
30,000

U.S.$
21,207

0.7069

(Accrued Exp)

(429
)
(429
)
 
U.S.$
77,079

£
55,000

0.7136

(Accrued Exp)

(5,545
)
(5,545
)
Economic hedges for which hedge accounting was not elected:
 
 
 
 
Diesel contracts
 
Fixed on 1.3M – 3.0M gal per month

 
Float on 1.3M – 3.0M gal per month

N/A

Prepaid Exp
4,965


4,965

Intercompany billings in Europe, primarily merchandise related
 
 
 
 
 
 
82,000

£
71,853

0.8763

(Accrued Exp)

(231
)
(231
)
Merchandise purchase commitments
 
 
 
 
 
 
C$
582,670

U.S.$
447,800

0.7685

Prepaid Exp / (Accrued Exp)
3,216

(543
)
2,673

 
C$
29,614

19,500

0.6585

Prepaid Exp / (Accrued Exp)
4

(342
)
(338
)
 
£
271,690

U.S.$
369,500

1.3600

Prepaid Exp / (Accrued Exp)
15,585

(132
)
15,453

 
U.S.$
2,692

£
2,067

0.7678

Prepaid Exp / (Accrued Exp)
15

(28
)
(13
)
 
A$
45,132

U.S.$
32,962

0.7303

Prepaid Exp / (Accrued Exp)
441

(21
)
420

 
289,208

£
59,158

0.2046

Prepaid Exp / (Accrued Exp)
744

(373
)
371

 
U.S.$
67,459

57,065

0.8459

(Accrued Exp)

(2,235
)
(2,235
)
Total fair value of derivative financial instruments
 
 
$
26,071

$
(9,879
)
$
16,192






The following is a summary of TJX’s derivative financial instruments, related fair value and balance sheet classification at February 3, 2018:
In thousands
 
Pay
Receive
Blended
Contract
Rate
Balance Sheet
Location
Current
Asset
U.S.$
Current
(Liability)
U.S.$
Net Fair
Value in
U.S.$ at
February 3,
2018
Fair value hedges:
 
 
 
 
 
 
 
 
Intercompany balances, primarily debt and related interest
 
 
 
 
 
67,000

£
14,035

0.2095

(Accrued Exp)
$

$
(45
)
$
(45
)
 
51,950

£
46,095

0.8873

(Accrued Exp)

(318
)
(318
)
 
U.S.$
77,079

£
55,000

0.7136

Prepaid Exp
1,636


1,636

Economic hedges for which hedge accounting was not elected:
 
 
 
Diesel contracts
 
 
 
 
 
 
 
 
 
 
Fixed on
2.2M – 3.0M
gal per month
 
Float on
2.2M– 3.0M
gal per month
N/A

Prepaid Exp
7,854


7,854

Intercompany billings in TJX Europe, primarily merchandise related
 
 
 
 
26,000

£
22,948

0.8826

(Accrued Exp)

(2
)
(2
)
Merchandise purchase commitments
 
 
 
 
 
C$
462,464

U.S.$
367,200

0.7940

Prepaid Exp /
(Accrued Exp)
49

(5,478
)
(5,429
)
 
C$
22,562

15,000

0.6648

Prepaid Exp
557


557

 
£
176,911

U.S.$
238,000

1.3453

Prepaid Exp /
(Accrued Exp)
173

(12,838
)
(12,665
)
 
288,646

£
60,023

0.2079

(Accrued Exp)

(1,303
)
(1,303
)
 
A$
28,635

U.S.$
22,230

0.7763

Prepaid Exp /
(Accrued Exp)
43

(573
)
(530
)
 
U.S.$
44,223

36,950

0.8355

Prepaid Exp
1,905


1,905

Total fair value of financial instruments
 
$
12,217

$
(20,557
)
$
(8,340
)




The following is a summary of TJX’s derivative financial instruments, related fair value and balance sheet classification at October 28, 2017:
In thousands
 
 
Pay
Receive
Blended
Contract
Rate
Balance Sheet
Location
Current
Asset
U.S.$
Current
(Liability)
U.S.$
Net Fair 
Value in 
U.S.$ at 
October 28, 2017
Fair value hedges:
 
 
 
 
 
 
 
 
Intercompany balances, primarily debt and related interest
 
 
 
 
 
67,000

£
13,000

0.1940

(Accrued Exp)
$

$
(1,211
)
$
(1,211
)
 
 
49,950

£
43,317

0.8672

Prepaid Exp /(Accrued Exp)
277

(1,600
)
(1,323
)
 
 
U.S.$
68,445

£
55,000

0.8036

Prepaid Exp
3,849


3,849

Economic hedges for which hedge accounting was not elected:
 
 
 
Diesel contracts
 
 
 
 
 
 
 
 
 
 
Fixed on 250K – 2.5M gal per month
 
Float on 250K – 2.5M gal per month

N/A

Prepaid Exp
5,226


5,226

Intercompany billings in Europe, primarily merchandise related
 
 
 
 
 
27,000

£
24,062

0.8912

Prepaid Exp
202



202

Merchandise purchase commitments
 
 
 
 
 
C$
511,004

U.S.$
399,650

0.7821

Prepaid Exp /
(Accrued Exp)
5,023

(4,770
)
253

 
 
C$
25,305

17,000

0.6718

Prepaid Exp /
(Accrued Exp)
63

(62
)
1

 
 
£
163,682

U.S.$
214,000

1.3074

Prepaid Exp /
(Accrued Exp)
678

(2,298
)
(1,620
)
 
 
A$
27,187

U.S.$
21,351

0.7853

Prepaid Exp
467


467

 
 
313,150

£
65,249

0.2084

Prepaid Exp /
(Accrued Exp)
580

(350
)
230

 
 
U.S.$
2,928

£
2,245

0.7667
Prepaid Exp
16


16

 
 
U.S.$
68,723

58,859

0.8565

Prepaid Exp /
(Accrued Exp)
729

(989
)
(260
)
Total fair value of financial instruments
 
 
$
17,110

$
(11,280
)
$
5,830






Presented below is the impact of derivative financial instruments on the statements of income for the periods shown:
 
 
 
 
Amount of Gain (Loss) Recognized
in Income by Derivative
 
Amount of Gain (Loss) Recognized
in Income by Derivative
 
 
 
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
In thousands
 
Location of Gain (Loss)
Recognized in Income by
Derivative
 
November 3, 2018
 
October 28,
2017
 
November 3,
2018
 
October 28,
2017
Fair value hedges:
 
 
 
 
 
 
 
 
 
 
Intercompany balances, primarily debt and related interest
 
Selling, general and administrative expenses
 
$
672

 
$
(1,454
)
 
$
(3,538
)
 
$
(3,820
)
Economic hedges for which hedge accounting was not elected:
 
 
 
 
 
 
 
 
Intercompany receivable
 
Selling, general and administrative expenses
 

 

 
18,823

 

Diesel fuel contracts
 
Cost of sales, including buying and occupancy costs
 
1,572

 
4,947

 
7,530

 
3,630

Intercompany billings in Europe,
primarily merchandise related
 
Cost of sales, including buying and occupancy costs
 
1,718

 
328

 
1,024

 
(3,116
)
Merchandise purchase commitments
 
Cost of sales, including buying and occupancy costs
 
8,463

 
13,336

 
61,091

 
(20,829
)
Gain / (loss) recognized in income
 
 
 
$
12,425

 
$
17,157

 
$
84,930

 
$
(24,135
)

Note F. Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date or “exit price.” The inputs used to measure fair value are generally classified into the following hierarchy:
Level 1:
  
Unadjusted quoted prices in active markets for identical assets or liabilities
 
 
 
Level 2:
  
Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability
 
 
 
Level 3:
  
Unobservable inputs for the asset or liability
The following table sets forth TJX’s financial assets and liabilities that are accounted for at fair value on a recurring basis:
In thousands
 
November 3,
2018
 
February 3,
2018
 
October 28,
2017
Level 1
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
Executive Savings Plan investments
 
$
245,856

 
$
249,045

 
$
231,618

Level 2
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
Short-term investments
 
$

 
$
506,165

 
$
511,618

Foreign currency exchange contracts
 
21,106

 
4,363

 
11,884

Diesel fuel contracts
 
4,965

 
7,854

 
5,226

Liabilities:
 
 
 
 
 
 
Foreign currency exchange contracts
 
$
9,879

 
$
20,557

 
$
11,280





Investments designed to meet obligations under the Executive Savings Plan are invested in registered investment companies traded in active markets and are recorded at unadjusted quoted prices.
Short-term investments, foreign currency exchange contracts and diesel fuel contracts are valued using broker quotations, which include observable market information. TJX’s investments are primarily high-grade commercial paper, institutional money market funds and time deposits with major banks. TJX does not make adjustments to quotes or prices obtained from brokers or pricing services but does assess the credit risk of counterparties and will adjust final valuations when appropriate. Where independent pricing services provide fair values, TJX obtains an understanding of the methods used in pricing. As such, these instruments are classified within Level 2.
The fair value of TJX’s general corporate debt was estimated by obtaining market quotes given the trading levels of other bonds of the same general issuer type and market perceived credit quality. These inputs are considered to be Level 2. The fair value of long-term debt as of November 3, 2018 was $2.1 billion compared to a carrying value of $2.2 billion. The fair value of long-term debt as of February 3, 2018 was $2.2 billion compared to a carrying value of $2.2 billion. The fair value of long-term debt as of October 28, 2017 was $2.2 billion compared to a carrying value of $2.2 billion. These estimates do not necessarily reflect provisions or restrictions in the various debt agreements that might affect TJX’s ability to settle these obligations.
TJX’s cash equivalents are stated at cost, which approximates fair value due to the short maturities of these instruments.
Note G. Segment Information
TJX operates four main business segments. The Marmaxx segment (T.J. Maxx, Marshalls and tjmaxx.com) and the HomeGoods segment (HomeGoods and Homesense) both operate in the United States, the TJX Canada segment operates Winners, HomeSense and Marshalls in Canada, and the TJX International segment operates T.K. Maxx, Homesense and tkmaxx.com in Europe and T.K. Maxx in Australia. We also operate Sierra Trading Post (“STP”), an off-price retailer that includes sierratradingpost.com along with a number of retail stores in the U.S. We currently consider all of STP as part of our e-commerce operations. The results of STP are included in the Marmaxx segment.
All of TJX’s stores, with the exception of HomeGoods and Homesense, sell family apparel and home fashions. HomeGoods and Homesense offer home fashions.
TJX evaluates the performance of its segments based on “segment profit or loss,” which it defines as pre-tax income or loss before general corporate expense, pension settlement charge and interest expense, net. “Segment profit or loss,” as defined by TJX, 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 alternatives to net income or cash flows from operating activities as an indicator of TJX’s performance or as a measure of liquidity.




Presented below is financial information with respect to TJX’s business segments:
 
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
In thousands
 
November 3,
2018
 
October 28,
2017
 
November 3,
2018
 
October 28,
2017
Net sales:
 
 
 
 
 
 
 
 
In the United States:
 
 
 
 
 
 
 
 
Marmaxx
 
$
5,973,476

 
$
5,298,479

 
$
17,202,115

 
$
15,550,253

HomeGoods
 
1,463,892

 
1,228,768

 
4,060,569

 
3,506,435

TJX Canada
 
1,036,884

 
983,236

 
2,828,456

 
2,554,033

TJX International
 
1,351,507

 
1,251,737

 
3,754,454

 
3,293,223

 
 
$
9,825,759

 
$
8,762,220

 
$
27,845,594

 
$
24,903,944

Segment profit:
 
 
 
 
 
 
 
 
In the United States:
 
 
 
 
 
 
 
 
Marmaxx
 
$
762,911

 
$
666,092

 
$
2,343,682

 
$
2,100,138

HomeGoods
 
166,090

 
163,835

 
455,540

 
457,272

TJX Canada
 
182,170

 
206,472

 
446,089

 
392,581

TJX International
 
102,432

 
87,066

 
191,949

 
132,893

 
 
1,213,603

 
1,123,465

 
3,437,260

 
3,082,884

General corporate expense
 
127,775

 
95,484

 
396,140

 
311,177

Pension settlement charge
 
36,122

 

 
36,122

 

Interest expense, net
 
3,188

 
7,981

 
10,365

 
27,499

Income before provision for income taxes
 
$
1,046,518

 
$
1,020,000

 
$
2,994,633

 
$
2,744,208

Note H. Pension Plans and Other Retirement Benefits
Presented below is financial information relating to TJX’s funded defined benefit pension plan (“qualified pension plan” or “funded plan”) and its unfunded supplemental pension plan (“unfunded plan”) for the periods shown:
 
 
Funded Plan
 
Unfunded Plan
 
 
Thirteen Weeks Ended
 
Thirteen Weeks Ended
In thousands
 
November 3,
2018
 
October 28,
2017
 
November 3,
2018
 
October 28,
2017
Service cost
 
$
10,781

 
$
11,655

 
$
572

 
$
403

Interest cost
 
12,837

 
13,866

 
994

 
820

Expected return on plan assets
 
(17,468
)
 
(17,309
)
 

 

Recognized actuarial losses
 
3,241

 
5,428

 
914

 
641

Expense related to current period
 
$
9,391

 
$
13,640

 
$
2,480

 
$
1,864

Pension settlement charge
 
36,122

 

 

 

Total expense
 
$
45,513

 
$
13,640

 
$
2,480

 
$
1,864





 
 
Funded Plan
 
Unfunded Plan
 
 
Thirty-Nine Weeks Ended
 
Thirty-Nine Weeks Ended
In thousands
 
November 3,
2018
 
October 28,
2017
 
November 3,
2018
 
October 28,
2017
Service cost
 
$
34,007

 
$
35,264

 
$
1,794

 
$
1,578

Interest cost
 
40,767

 
41,384

 
2,700

 
2,506

Expected return on plan assets
 
(59,392
)
 
(52,073
)
 

 

Recognized actuarial losses
 
9,469

 
16,582

 
2,556

 
2,305

Expense related to current period
 
$
24,851

 
$
41,157

 
$
7,050

 
$
6,389

Pension settlement charge
 
36,122

 

 

 

Total expense
 
$
60,973

 
$
41,157

 
$
7,050

 
$
6,389


TJX’s policy with respect to the funded plan is to fund, at a minimum, the amount required to maintain a funded status of 80% of the applicable pension liability (the Funding Target pursuant to the Internal Revenue Code section 430) or such other amount as is sufficient to avoid restrictions with respect to the funding of nonqualified plans under the Internal Revenue Code. We do not anticipate any required funding in fiscal 2019 for the funded plan. We anticipate making contributions of $2.5 million to provide current benefits coming due under the unfunded plan in fiscal 2019.
The amounts included in recognized actuarial losses in the table above have been reclassified in their entirety from other comprehensive income to the statements of income, net of related tax effects, for the periods presented.
During the third quarter of fiscal 2019, TJX annuitized and transferred current pension obligations for certain U.S. retirees and beneficiaries under the funded plan through the purchase of a group annuity contract with an insurance company. TJX transferred $207.4 million of pension plan assets to the insurance company, thereby reducing its pension benefit obligations. The transaction had no cash impact on TJX but did result in a non-cash pre-tax pension settlement charge of $36.1 million, which is reported separately on the consolidated statements of income. As a result of the annuity purchase the Company re-measured the funded status of its pension plan as of September 30, 2018. The assumptions for pension expense presented above includes a discount rate of 4.00% through the measurement date and 4.40% thereafter. The expected rate of return on plan assets is 6.00% through the measurement date and 6.00% thereafter. The discount rate for determining the obligation at the measurement date is 4.40%.

Note I. Long-Term Debt and Credit Lines
The table below presents long-term debt, exclusive of current installments, as of November 3, 2018, February 3, 2018 and October 28, 2017. All amounts are net of unamortized debt discounts.
In thousands
 
November 3,
2018
 
February 3,
2018
 
October 28,
2017
General corporate debt:
 
 
 
 
 
 
2.50% senior unsecured notes, maturing May 15, 2023 (effective interest rate of 2.51% after reduction of unamortized debt discount of $200 at November 3, 2018, $234 at February 3, 2018 and $245 at October 28, 2017)
 
$
499,800

 
$
499,766

 
$
499,755

2.75% senior unsecured notes, maturing June 15, 2021 (effective interest rate of 2.76% after reduction of unamortized debt discount of $194 at November 3, 2018, $250 at February 3, 2018 and $269 at October 28, 2017)
 
749,806

 
749,750

 
749,732

2.25% senior unsecured notes, maturing September 15, 2026 (effective interest rate of 2.32% after reduction of unamortized debt discount of $5,844 at November 3, 2018, $6,403 at February 3, 2018 and $6,590 at October 28, 2017)
 
994,156

 
993,597

 
993,410

Debt issuance cost
 
(10,898
)
 
(12,506
)
 
(13,042
)
Long-term debt
 
$
2,232,864

 
$
2,230,607

 
$
2,229,855

As of November 3, 2018, February 3, 2018 and October 28, 2017, TJX had two $500 million revolving credit facilities, one which matures in March 2020 and one which matures in March 2022.




The terms and covenants under the revolving credit facilities require quarterly payments of 6.0 basis points per annum on the committed amounts for both agreements. This rate is based on the credit ratings of TJX’s long-term debt and will vary with specified changes in the credit ratings. These agreements have no compensating balance requirements and have various covenants. Each of these facilities require TJX to maintain a ratio of funded debt and four-times consolidated rentals to consolidated earnings before interest, taxes, depreciation and amortization and consolidated rentals (EBITDAR) of not more than 2.75 to 1.00 on a rolling four-quarter basis. TJX was in compliance with all covenants related to its credit facilities at the end of all periods presented. As of November 3, 2018, February 3, 2018 and October 28, 2017, and during the quarters and year then ended, there were no amounts outstanding under these facilities.    
As of November 3, 2018, February 3, 2018 and October 28, 2017, TJX Canada had two uncommitted credit lines, a C$10 million facility for operating expenses and a C$10 million letter of credit facility. As of November 3, 2018, February 3, 2018 and October 28, 2017, there were no amounts outstanding on the Canadian credit line for operating expenses. As of November 3, 2018, February 3, 2018 and October 28, 2017, our European business at TJX International had an uncommitted credit line of £5 million. As of November 3, 2018, February 3, 2018 and October 28, 2017, and during the quarters and year then ended, there were no amounts outstanding on the European credit line.
Note J. Income Taxes
The effective income tax rate was 27.2% for the third quarter of fiscal 2019 and 37.1% for the third quarter of fiscal 2018. The effective income tax rate was 25.9% for the first nine months of fiscal 2019 and 36.9% for the first nine months of fiscal 2018. The decrease in the effective income tax rate was primarily due to the reduction of the U.S. federal corporate tax rate to 21% as a result of the 2017 Tax Act and the jurisdictional mix of income.
Under ASU 2018-05, we have accounted for the impacts of the 2017 Tax Act to the extent a reasonable estimate could be made and we recognized provisional amounts related to the deemed repatriation tax, offset by the re-measurement of our deferred tax assets and liabilities to record the effects of the tax law change in the period of enactment. This guidance allows a company to record a provisional amount when it does not have the necessary information available, prepared, or analyzed in reasonable detail to complete its accounting for the change in the tax law during the measurement period. The measurement period ends when the company has obtained, prepared, and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year. We will continue to monitor for new guidance related to provisional amounts recorded.
TJX had net unrecognized tax benefits of $65.3 million as of November 3, 2018, $57.3 million as of February 3, 2018 and $41.2 million as of October 28, 2017.
TJX is subject to U.S. federal income tax as well as income tax in multiple state, local and foreign jurisdictions. In the U.S., fiscal years through 2010 are no longer subject to examination. In Canada, fiscal years through 2008 are no longer subject to examination. In all other jurisdictions, fiscal years through 2009 are no longer subject to examination.
TJX’s accounting policy classifies interest and penalties related to income tax matters as part of income tax expense. The total accrued amount on the balance sheets for interest and penalties was $13.8 million as of November 3, 2018, $11.9 million as of February 3, 2018 and $8.5 million as of October 28, 2017.
Based on the outcome of tax examinations or judicial or administrative proceedings, or as a result of the expiration of statutes of limitations in specific jurisdictions, it is reasonably possible that unrecognized tax benefits for certain tax positions taken on previously filed tax returns may change materially from those presented in the financial statements. During the next 12 months, it is reasonably possible that tax examinations of prior years’ tax returns or judicial or administrative proceedings that reflect such positions taken by TJX may be finalized. As a result, the total net amount of unrecognized tax benefits may decrease, which would reduce the provision for taxes on earnings, by a range of zero to $23 million.
Note K. Contingent Obligations and Contingencies
Contingent Obligations
TJX has contingent obligations on leases, for which it was a lessee or guarantor, which were assigned to third parties without TJX being released by the landlords. Over many years, TJX has assigned numerous leases that it had originally leased or guaranteed to a significant number of third parties. With the exception of leases of former businesses for which TJX has reserved, the Company has rarely had a claim with respect to assigned leases, and accordingly, the Company does not expect that such leases will have a material adverse impact on its financial condition, results of operations or cash flows. TJX does not generally have sufficient information about these leases to estimate our potential contingent obligations under them, which could be triggered in the event that one or more of the current tenants does not fulfill their obligations related to one or more of these leases.




TJX may also be contingently liable on up to eight leases of former TJX businesses, for which we believe the likelihood of future liability to TJX is remote, and has contingent obligations in connection with certain assigned or sublet properties that TJX is able to estimate. We estimate that the undiscounted obligations of (i) leases of former operations not included in our reserve for former operations and (ii) properties of our former operations if the subtenants do not fulfill their obligations, are approximately $40.1 million as of November 3, 2018. We believe that most or all of these contingent obligations will not revert to us and, to the extent they do, will be resolved for substantially less due to mitigating factors including our expectation to further sublet.
TJX is a party to various agreements under which it may be obligated to indemnify the other party with respect to certain losses related to matters such as title to assets sold, specified environmental matters or certain income taxes. These obligations are often limited in time and amount. There are no amounts reflected in our balance sheets with respect to these contingent obligations.
Contingencies
TJX is subject to certain legal proceedings, lawsuits, disputes and claims that arise from time to time in the ordinary course of our business. In addition, TJX is a defendant in several lawsuits filed in federal and state courts brought as putative class or collective actions on behalf of various groups of current and former salaried and hourly associates in the U.S. The lawsuits allege violations of the Fair Labor Standards Act and of state wage and hour and other labor statutes. TJX is also a defendant in a putative class action on behalf of customers relating to compare at pricing. The lawsuits are in various procedural stages and seek monetary damages, injunctive relief and attorneys’ fees. In connection with ongoing litigation, an immaterial amount has been accrued in the accompanying financial statements.





Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The Thirteen Weeks (third quarter) and Thirty-Nine Weeks (nine months) Ended November 3, 2018
Compared to
The Thirteen Weeks (third quarter) and Thirty-Nine Weeks (nine months) Ended October 28, 2017
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 nearly 4,300 stores through our four main segments: in the U.S., Marmaxx (which operates T.J. Maxx, Marshalls and tjmaxx.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). We also operate Sierra Trading Post (“STP”), an off-price retailer that includes sierratradingpost.com along with a number of retail stores in the U.S. We currently consider all of STP as part of our e-commerce operations. The results of STP are reported in our Marmaxx segment.
Results of Operations
Overview of our financial performance for the quarter ended November 3, 2018:
Net sales increased 12% to $9.8 billion for the third quarter of fiscal 2019 over last year’s third quarter sales of $8.8 billion. At November 3, 2018, stores in operation increased 6% and selling square footage increased 4% compared to the end of the fiscal 2018 third quarter.
Consolidated comp sales (defined below) increased 7% for the third quarter of fiscal 2019 over the comparable period last year ending November 4, 2017. Customer traffic was the primary driver of the comp sales increase.
Diluted earnings per share for the third quarter of fiscal 2019 were $0.61 versus $0.50 per share in the third quarter of fiscal 2018.
Our pre-tax margin (the ratio of pre-tax income to net sales) for the third quarter of fiscal 2019 was 10.7%, a 0.9 percentage point decrease compared with 11.6% in the third quarter of fiscal 2018.
Our cost of sales, including buying and occupancy costs, ratio for the third quarter of fiscal 2019 was 71.1%, a 0.9 percentage point increase compared with 70.2% in the third quarter of fiscal 2018.
Our selling, general and administrative (“SG&A”) expense ratio for the third quarter of fiscal 2019 was 17.9%, a 0.2 percentage point decrease compared with 18.1% in the third quarter of fiscal 2018.
Our consolidated average per store inventories, including inventory on hand at our distribution centers (which excludes inventory in transit) and excluding our e-commerce businesses, increased 9% on a reported basis and 10% on a constant currency basis at the end of the third quarter of fiscal 2019 as compared to a 2% decline in average per store inventories on a reported basis and a 4% decline on a constant currency basis in the third quarter of fiscal 2018.
During the third quarter, we returned $841 million to our shareholders through share repurchases and dividends.
The following is a discussion of our consolidated operating results, followed by a discussion of our segment operating results.
Net sales: Consolidated net sales for the quarter ended November 3, 2018 totaled $9.8 billion, a 12% increase over last year’s consolidated third quarter net sales of $8.8 billion. The increase reflects a 7% increase from comp sales, a 6% increase from non-comp sales, offset by a 1% negative impact from foreign currency exchange rates. This increase compares to sales growth of 6% in the third quarter of fiscal 2018, which reflects a 5% increase from non-comp sales and a 1% positive impact from foreign currency exchange rates.
.




Consolidated net sales for the nine months ended November 3, 2018 totaled $27.8 billion, a 12% increase over $24.9 billion in last year’s comparable period. The increase reflects a 6% increase from comp sales, a 5% increase from non-comp sales and a 1% positive impact from foreign currency exchange rates. This compares to sales growth of 5% for the nine months ended October 28, 2017, which reflects a 4% increase from non-comp sales, a 1% increase from comp sales, and a neutral impact from foreign currency exchange rates.
As of November 3, 2018, our consolidated store count increased 6% and selling square footage increased 4% compared to the end of the third quarter last year.
Consolidated comp sales for both the quarter and nine months ended November 3, 2018 reflect an increase in the customer traffic across all divisions. On a consolidated basis, apparel categories outperformed home categories for both the quarter and nine months ended November 3, 2018.
For both the quarter and nine months ended November 3, 2018, comp sales in the U.S. were strong throughout the country. Comp sales for both TJX Canada and TJX International, while solid, were below the consolidated average.
We define comparable store sales (“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 calculate 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 calculation 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 calculation.
Sales excluded from comp sales (“non-comp sales”) consist of sales from:
New stores, meaning stores that have not yet met the comp sales criteria, which represents the vast majority of non-comp sales
Stores that are closed permanently or for an extended period of time
Our e-commerce businesses, meaning STP (including stores), tjmaxx.com and tkmaxx.com
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. For the third quarter and nine months of fiscal 2019, comp sales are based on a shifted fiscal 2018 calendar so that they are calculated on a comparable week basis.
Comp sales of our foreign segments are calculated by translating the current year’s comp sales of our foreign segments at the same exchange rates used in the prior year. 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 consolidated operating results as a percentage of net sales for the following periods:
 
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
 
November 3, 2018
 
October 28, 2017
 
November 3, 2018
 
October 28, 2017
Net sales
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
Cost of sales, including buying and occupancy costs
 
71.1

 
70.2

 
71.1

 
70.9

Selling, general and administrative expenses
 
17.9

 
18.1

 
18.0

 
18.0

Pension settlement charge
 
0.4

 

 
0.1

 

Interest expense, net
 

 
0.1

 

 
0.1

Income before provision for income taxes*
 
10.7
%
 
11.6
%
 
10.8
%
 
11.0
%
*
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. Two ways in which foreign currency exchange rates affect our reported results are as follows:
Translation of foreign operating results into U.S. dollars: 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 consolidated net sales, net income and 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.
Inventory-related 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 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.
We refer to the impact of the above two items throughout our discussion as “foreign currency.” This does not include the impact currency exchange rates can have on various transactions that are denominated in a currency other than an operating division’s local currency. When discussing the impact on our results of the effect of currency exchange rates on such transactions we refer to it as “transactional foreign exchange.”
Cost of sales, including buying and occupancy costs: Cost of sales, including buying and occupancy costs, as a percentage of net sales was 71.1% for the third quarter of fiscal 2019, an increase of 0.9 percentage points from 70.2% for the third quarter of fiscal 2018 and was 71.1% for the nine months ended November 3, 2018, an increase of 0.2 percentage points from 70.9% for the nine months ended October 28, 2017. The increase for the quarter was driven by the unfavorable year-over-year comparison related to the Company’s inventory hedges, lower merchandise margin (due to higher freight costs), as well as an increase in supply chain costs. These items more than offset expense leverage on the strong comp sales growth. For the nine months ended November 3, 2018, the lower merchandise margin and increased supply chain costs more than offset expense leverage from comp sales growth.
Selling, general and administrative expenses: SG&A expenses, as a percentage of net sales, were 17.9% in the third quarter of fiscal 2019, a decrease of 0.2 percentage points over last year’s third quarter ratio of 18.1%. The improvement in this expense ratio for the third quarter was primarily due to administrative expense leverage on the strong comp sales.
SG&A expenses, as a percentage of net sales, were 18.0% for the nine months ended November 3, 2018, flat to last year's third quarter ratio. Increases due to wage increases and the global IT function restructuring costs were offset by expense savings and a gain related to a lease buyout in Canada.




Pension settlement charge: During the third quarter of fiscal 2019, TJX annuitized and transferred current pension obligations for certain U.S. retirees and beneficiaries under the funded plan through the purchase of a group annuity contract with an insurance company. TJX transferred $207.4 million of pension plan assets to the insurance company, thereby reducing its pension benefit obligations. The transaction had no cash impact on TJX but did result in a non-cash pre-tax pension settlement charge of $36.1 million.
Interest expense, net: The components of interest expense, net are summarized below:
 
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
In thousands
 
November 3,
2018
 
October 28,
2017
 
November 3,
2018
 
October 28,
2017
Interest expense
 
$
17,248

 
$
17,349

 
$
51,896

 
$
51,881

Capitalized interest
 
(752
)
 
(1,066
)
 
(3,728
)
 
(3,528
)
Interest (income)
 
(13,308
)
 
(8,302
)
 
(37,803
)
 
(20,854
)
Interest expense, net
 
$
3,188

 
$
7,981

 
$
10,365

 
$
27,499

The decrease in net interest expense for the third quarter and the nine months ended November 3, 2018, compared to the same periods in fiscal 2018, was driven by additional interest income, primarily due to higher return rates.
Income taxes: The effective income tax rate was 27.2% for the third quarter of fiscal 2019 compared to 37.1% for the third quarter of fiscal 2018. The effective income tax rate was 25.9% for the nine months ended November 3, 2018 compared to 36.9% for the nine months ended October 28, 2017. The decrease in the effective income tax rate was primarily due to the decrease of the U.S. federal corporate tax rate from 35% to 21% as a result of the 2017 Tax Act and the jurisdictional mix of income.
Under ASU 2018-05, we have accounted for the impacts of the 2017 Tax Act to the extent a reasonable estimate could be made and we recognized provisional amounts related to the deemed repatriation tax, offset by the re-measurement of our deferred tax assets and liabilities to record the effects of the tax law change in the period of enactment. This guidance allows a company to record a provisional amount when it does not have the necessary information available, prepared, or analyzed in reasonable detail to complete its accounting for the change in the tax law during the measurement period. The measurement period ends when the company has obtained, prepared, and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year. We will continue to monitor for new guidance related to provisional amounts recorded.
Net income and diluted earnings per share: Net income for the third quarter of fiscal 2019 was $762 million, or $0.61 per diluted share compared with $641 million, or $0.50 per diluted share for the third quarter of fiscal 2018. The lower effective tax rate realized due to the 2017 Tax Act resulted in an estimated net benefit to diluted earnings per share of approximately $0.09 per share. The pension settlement charge had a $0.02 negative impact on earnings per share for the third quarter of fiscal 2019. Foreign currency had a $0.01 negative impact on earnings per share for the third quarter of fiscal 2019 compared to a $0.02 positive impact on earnings per share for the third quarter of fiscal 2018.
Net income for the nine months ended November 3, 2018 was $2.2 billion, or $1.75 per diluted share, compared to $1.7 billion, or $1.33 per diluted share for the nine months ended October 28, 2017. The lower effective tax rate realized due to the 2017 Tax Act resulted in an estimated net benefit to diluted earnings per share of approximately $0.26 per share. The third quarter pension settlement charge had a $0.02 negative impact on earnings per share in the first nine months of fiscal 2019. Foreign currency had a $0.01 positive impact on earnings per share in the first nine months of fiscal 2019 compared to a neutral impact on earnings per share in the prior year.
Our stock repurchase programs, which reduce our weighted average diluted shares outstanding, benefited our earnings per share growth by approximately two percent in the third quarter of fiscal 2019 and three percent for the first nine months of fiscal 2019.
Segment information: We operate four main business segments. Our Marmaxx segment (T.J. Maxx, Marshalls and tjmaxx.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. We also operate Sierra Trading Post (“STP”), an off-price retailer that includes sierratradingpost.com along with a number of retail stores in the U.S. We currently consider all of STP as part of our e-commerce operations. The results of STP are included in our 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, pension settlement charge and interest expense, net. “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 income or cash flows from operating activities as an indicator of our performance or as a measure of liquidity.
U.S. Segments:
Marmaxx
 
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
In millions
 
November 3,
2018
 
October 28,
2017
 
November 3,
2018
 
October 28,
2017
Net sales
 
$
5,973

 
$
5,298

 
$
17,202

 
$
15,550

Segment profit
 
$
763

 
$
666

 
$
2,344

 
$
2,100

Segment profit as a percentage of net sales
 
12.8
%
 
12.6
 %
 
13.6
%
 
13.5
%
Increase in comp sales
 
9
%
 
(1
)%
 
7
%
 
%
Stores in operation at end of period
 
 
 
 
 
 
 
 
T.J. Maxx
 
 
 
 
 
1,247

 
1,219

Marshalls
 
 
 
 
 
1,091

 
1,057

Sierra Trading Post
 
 
 
 
 
35

 
26

Total
 
 
 
 
 
2,373

 
2,302

Selling square footage at end of period (in thousands)
 
 
 
 
 
 
 
 
T.J. Maxx
 
 
 
 
 
27,396

 
27,034

Marshalls
 
 
 
 
 
25,291

 
24,827

Sierra Trading Post
 
 
 
 
 
598

 
451