TJX (TJX.US) Q2 Conference Call: Revealing Marmaxx's implementation shortcomings and is welcoming the second half of the year with an “offensive attitude”
The Zhitong Finance App learned that TJX (TJX.US) achieved an overall same-store sales increase of 4% in the second quarter of fiscal year 2027, exceeding market expectations. Adjusted earnings of 1.22 US dollars per share increased 11% year over year. The management frankly acknowledged that Marmaxx, the largest department, recorded only 1% same-store growth due to its own execution mistakes, but emphasized that the problem had been clearly diagnosed and improved in August. They are confident that the holiday season will return to a normal rhythm of 2%-3%. Furthermore, the three major divisions of HomeGoods, Canada and the international community all handed over impressive reports of 6%-7%, fully demonstrating the hedging advantage of diversified global businesses. The company raised its annual EPS guidelines to $5.15-5.20 and raised its long-term store target of 500 to 7,500. CEO Ernie Hellman said that TJX is welcoming the second half of the year with an “offensive attitude”. Under the trend of consumers seeking value, the company is fully prepared to continue to seize global market share.
In the second fiscal quarter ending August 2026, TJX recorded a 4% increase in overall same-store sales, exceeding the company's previous plans. Management expressed satisfaction with overall profitability. The adjusted profit margin before tax increased by 50 basis points to 11.9% year over year, and adjusted earnings per share reached $1.22, up 11% year over year. CEO Ernie Hellman pointed out that this quarter's results once again validated the value of diversified global business models — although the Marmaxx division performed less than expected due to execution issues, the three major divisions HomeGoods (+7%), TJX Canada (+6%), and TJX International (+7%) all achieved strong growth of 6% to 7%, strongly hedging the weakness of the largest divisions. Management sees this as a direct reflection of the company's resilience to risk.
Management conducted an honest and in-depth analysis of the “self-harm” that Marmaxx recorded with only 1% same-store growth. Herman made it clear that the problem was entirely at the level of its own execution — the failure to “deliver the right products to the right stores at the right time” in some categories had nothing to do with the external competitive environment. At present, the company has fully intervened from buyers and planning to senior management, and has added two new monitoring mechanisms to the planning system to prevent the problem from happening again. Chief Financial Officer John Klinger added that Marmaxx has shown an improvement trend since August, and management is confident of a more significant recovery during the fourth holiday season. It is worth mentioning that Marmaxx maintained a departmental profit margin of 14.2% despite 1% sales growth, demonstrating the strong profitability of the business.
Looking ahead to the second half of the year, management's overall tone is positive. The third quarter started strongly, and the abundance of products continued to “exceed expectations”. At the same time, the company announced that it would raise its long-term store growth target from 500 to 7,500, and increase the annual store opening rate from 3% to 4%, covering all branches such as Marmaxx and HomeGoods, demonstrating confidence in the continued expansion of long-term market share. On the financial side, the company raised its full-year adjusted pre-tax profit margin guide to 12.0% to 12.1%, and the full-year EPS guideline to $5.15-5.20. For the third quarter, the company expects same-store growth of 2%-3%, and EPS of $1.30-1.32, an increase of 2%-3% year over year. Management emphasized that under the current trend of consumers seeking value, TJX's value proposition, treasure hunting experience, and global procurement capabilities will support the company to continue to “aggressively” gain market share.
The following is the Chinese translation of TJX's second quarter financial results conference call:
Executive speeches
Debra McConnell (Senior Vice President of Global Communications):
Good morning everyone. Today's conference call is being recorded and includes forward-looking statements about our performance and plans. These statements are subject to risk and uncertainty, and may cause actual results to differ materially from those statements, including factors set out in our filings with the U.S. Securities and Exchange Commission (SEC).
Please review our press release for the cautionary statement regarding forward-looking statements and the full safe harbor statement contained in the investors section of our website at tjx.com. We also detailed the impact of foreign exchange on our consolidated results and international business, as well as the reconciliation of the non-GAAP metrics we discussed, in today's press release and the tjx.com investor section. Thanks, now I'm returning the phone to Ernie.
Ernie Hellman (CEO, President and Director):
Good morning everyone. John and I, along with Deb, attended this conference call. First, I'd like to thank our talented colleagues for their continued dedication to TJX and their commitment to providing our shoppers with exceptional value and an exciting treasure hunt-style shopping experience every day.
Now let's take a look at our second quarter results. Overall, same-store sales increased 4%, which is higher than our plan. Our second-quarter same-store performance highlights the benefits of our global diversified business. Although our Marmaxx division's sales fell short of our expectations, our other three divisions saw same-store sales growth of between 6% and 7%, driving performance beyond our planned limit.
At Marmaxx, we think we could have done a better job in implementing the store's product portfolio. I meant that we could have delivered the right products to the right stores at the right time. We are convinced that these problems are of our own making, and within our control, we have made good progress in addressing them. We saw an improvement in Marmaxx sales at the beginning of the third quarter, and we believe we will see even greater improvements by the holiday sales season.
Regarding profitability for the second quarter, I am very satisfied that profits have once again significantly exceeded our plans. In light of this, we are raising our full-year pre-tax margin and earnings per share outlook. John will be detailing our second quarter results and guidance later.
Looking ahead to the second half of the year, we are focusing on driving the business opportunities we see. The third quarter had a strong start, and the supply of goods was still very plentiful. We believe we have the right steps in place to drive sales and customer traffic growth for all retail brands, and I am confident that we will execute our plans.
In the long run, we continue to see that TJX has a long development track in the future. We're excited about the continued growth in sales, the continued expansion of our global footprint, and the potential to continue to gain more market share around the world for many years to come. Now I'm going to hand over the phone to John to give him a detailed review of our second quarter results.
John Klinger (Senior Executive Vice President and Chief Financial Officer):
Thanks, Ernie. I would also like to thank all of our colleagues around the world for their continued hard work and dedication to TJX. As I review the results for the second quarter, I will explain the adjusted caliber, which does not include the impact of tariff refunds received up to the end of the second quarter and associated incremental compensation accruals.
A reconciliation table detailing the net impact of these projects on our results can be found in today's press release and the investor section of the website. Now I'll share some additional details about the second quarter compared to the same period last year.
As Ernie mentioned, our consolidated same-store sales increased 4% in the second quarter, which was higher than our plan. Same-store growth in the second quarter was driven by a combination of higher average customer unit prices and increased customer transaction volume. Furthermore, our home category performed better than the clothing category.
The adjusted profit margin before tax was 11.9%, up 50 basis points year over year, far higher than our plan. The adjusted gross margin was 31.4%, up 70 basis points from the previous year, mainly due to rising commodity margins, mostly due to the favorable impact of tariffs. Adjusted sales and management expenses (SG&A) were 19.7%, a year-on-year disadvantage of 20 basis points, mainly due to increased store wages and salary costs. The impact of net interest income on pre-tax profit margins was neutral year over year.
Adjusted earnings per diluted share were $1.22, up 11% year over year, far higher than our plan. The second-quarter adjusted profit margin before tax and adjusted diluted earnings per share significantly exceeded our plans, mainly due to increased operating cost efficiency, higher product margins, and the cost leverage effect brought about by better sales, which were partially offset by donations to the TJX Charitable Foundation.
Now let's take a look at our department's results for the second quarter. At Marmaxx, same-store sales increased by 1%, driven entirely by a higher average customer unit price, partially offset by a slight decline in customer transaction volume. While sales fell short of our expectations, same-store sales increased across all regions and income groups. The adjusted profit margin for the division was 14.2%, the same as in the same period last year.
We have had another good quarter with sales performance at our Sierra store, and we are continuing to expand this chain network in the US. We continue to add new brands to our US e-commerce site, bringing more freshness to online shoppers. We're excited about what T.J. Maxx, Marshalls, and Sierra stores are planning for this fall and holiday season. Over the long term, we are confident in the market share opportunities for the largest divisions.
HomeGoods performed well, with same-store sales increasing 7%, mainly driven by higher average customer unit prices, and increased customer transaction volume. We are very pleased with the strong performance of our two brands, HomeGoods and HomeSense, and across all regions and income groups. The adjusted division's profit margin was 12.4%, an increase of 240 basis points. Our HomeGoods and HomeSense brands provide customers with a highly differentiated home fashion portfolio from all over the world, with strong value competitiveness. We are the largest affordable home fashion retailer in the US. I believe we are developing well in the future and can continue to seize more market share.
At TJX Canada, same-store sales performed well, growing 6%. Same-store growth is mainly driven by increased customer transaction volume. At a fixed exchange rate, the adjusted departmental profit margin was 16.3%, an increase of 30 basis points. We are Canada's leading affordable retailer and are very pleased with our strong brand recognition and loyal customer base. We continue to see opportunities for further growth in Canada through three retail brands.
At TJX International, same-store sales growth was outstanding, reaching 7%. This same-store growth was also mainly driven by increased customer transaction volume. We are very pleased with the strong and continued sales performance in Europe and the excellent sales performance in Australia. At a fixed exchange rate, the adjusted departmental profit margin was 7.3 per cent, an increase of 210 basis points. This quarter, we opened our second TK Maxx store in Spain, and the customer response was also very positive. We are excited about plans to grow our international business and are confident of attracting more European and Australian shoppers in the long term.
Move to inventory. Balance sheet inventory increased 7% and single-store inventory increased 2% at the end of the second quarter. We are satisfied with the level of inventory and are confident that we are fully prepared to take advantage of the abundant procurement opportunities in the market. Regarding capital allocation, we returned $1.3 billion to shareholders in the second quarter through share repurchases and dividend plans while continuing to invest in business growth. Now I'm going to return the phone to Ernie.
Ernie Hellman (CEO, President and Director):
Thanks, John. I'd like to first highlight the opportunities we've seen, which give us confidence in sales and customer growth in the second half of the year. First, we are convinced that in the current environment, consumers will continue to seek value. We believe we have a large and highly loyal customer base, strong brand awareness, and a product portfolio that appeals to many age and income groups.
We're convinced that we're still a very attractive choice for shoppers looking for quality brands and stylish, high-value choices, and are confident they'll be visiting our retail brands this fall and holiday season.
Second, we are excited about the planned product category initiatives. We've developed into a year-round gift shopping destination and are particularly pleased with the initiatives in this area. This strategy has worked very well for us, and we believe it helps us stay ahead of the curve in the minds of consumers. All of this gives us confidence that our ever-changing and exciting product portfolio will excite shoppers and encourage them to visit our stores more often. Third, the supply of products in all categories and brands continues to be abundant, far exceeding our procurement capacity. I am confident that our team of over 1,400 buyers will bring the right mix and excellent value to our customers.
Finally, we're excited about our marketing plans for this fall and holiday season. We will continue to track consumer viewing habits, using multiple channels, with a particular focus on digital and social media. Our marketing campaigns will continue to reinforce our value leadership through insightful and entertaining creative content to connect with shoppers of all ages and income groups. We believe our thoughtful approach to integrated marketing will help attract new customers and stay ahead of existing shoppers.
Looking to the longer term, I am confident that TJX will have significant opportunities to seize more market share in the long term. I'll give you a brief overview of the key characteristics of our business that give us confidence. First is our reputation as a trusted value leader in the US, Canada, Europe, and Australia. We believe this is a huge advantage, and our top priority has always been to provide our customers with exceptional value every day.
Second, we are a global procurement machine. We work with approximately 21,000 suppliers every year to plan an unrivaled combination of high-quality, better, and optimal products for our customers. Third, we believe we have the strongest supplier relationships in the retail industry. We have been working with many domestic and foreign suppliers for decades. Additionally, we believe our suppliers are happy to work with us because we continue to source on the market throughout the year, introduce their brands to new consumers, and provide an attractive way to grow their business.
Next, we attracted shoppers across a broad range of income and age groups in the US, Canada, Europe, and Australia. With our proprietary planning and distribution systems and expertise, we can create differentiated treasure hunt-style shopping experiences that appeal to a wide range of consumers across our markets.
Fifth, many aspects of our business benefit from flexibility, which we believe is a key advantage. This includes procurement, store formats, supply chains, and systems. Next, we continue to see huge opportunities to significantly expand our store base around the world. Today, we've increased our long-term store growth potential by 500, to a total of 7,500, which means we can add more than 2,200 stores to our current retail brands in 10 countries alone. This now reflects the long-term potential of our T.J. Maxx and Marshalls brands to expand an additional 300 to a total of 3,300 companies, and the HomeGoods division's potential to expand an additional 200 to 2,000 locations.
Additionally, we plan to increase our store opening rate to 4% starting next year to take advantage of the growth opportunities we see. I want to assure you that we are very confident that there will be enough quality products on the market to support our growth plans.
Last and most importantly, our global talent. I truly believe that our depth of knowledge and expertise in the field of affordable retail, as well as the long-term stability of TJX's in-house talent, is unrivaled. Talent development has always been our priority, and we remain focused on developing and training the next generation of TJX leaders. Additionally, I'm very proud of our culture and believe this will be a major advantage for our continued global growth.
I'm sure the combination of all of these core strengths sets us apart from many other big retailers. Furthermore, I believe these advantages have enabled us to successfully cope with various retail and macro environments over our nearly 50-year corporate journey, and I am confident they will continue to benefit us.
To sum up, we're happy with TJX's overall performance in the second quarter. Once again, our performance beyond plan is proof of the strength and strength of our globally diverse business. I would like to repeat that at Marmaxx, we have seen sales improvements in the early third quarter and are confident to see even greater improvements during the holiday sales season. We had a strong start to the third quarter, and we believe we are well positioned in the current consumer environment. We're excited about the initiatives for the rest of the year. Importantly, in the near and long term, we plan to continue our offensive in marketing, product planning, in-store shopping experience, global store expansion, and talent investment. I am convinced that TJX is fully prepared to take full advantage of the growth opportunities we see globally and continue for many years to come.
Now I'm going to return the phone to John, who will introduce our guidelines, and then we'll open the questioning session.
John Klinger (Senior Executive Vice President and Chief Financial Officer):
Thanks again, Ernie. As I review the guidance for the rest of the year, I'll explain it on an adjusted scale that doesn't include the revenue from the tariff refunds we received in the second quarter and expect to receive in the third quarter. Our adjusted guidelines also do not include incremental compensation accruals associated with second, third, and fourth quarter tariff refunds. Similarly, reconciliation tables can be found in the Investors section of our website.
Starting in the third quarter, we plan to increase overall same-store sales by 2% to 3%, and our consolidated sales are expected to be between $15.6 billion and $15.8 billion, up 3% to 5% year over year. The adjusted profit margin before tax is expected to be between 12.3% and 12.4%, down 30 to 40 basis points from 12.7% in the same period last year. The adjusted gross margin is expected to be between 32.1% and 32.2%, down 40 to 50 basis points from 32.6% in the same period last year, mainly driven by rising fuel costs. The adjusted sales and management expenses are expected to be 20%, an improvement of 10 basis points from 20.1% in the same period last year.
We assume net interest income of $28 million, and the impact on pre-tax profit margins for the third quarter is expected to be neutral year over year. The assumption is based on our September repayment of $1 billion in maturing notes. The third quarter guidance assumes a tax rate of 24.6%, and the weighted average number of shares is approximately 1.11 billion shares.
Based on these assumptions, we expect adjusted third-quarter earnings per diluted share to be between $1.30 and $1.32, up 2% to 3% from $1.28 in the same period last year.
Switch to the whole year. We continue to expect overall same-store sales growth of 3% to 4%. We expect consolidated sales for the full year to be between $63.4 billion and $63.8 billion, up 5% to 6% year over year. We raised our full-year adjusted profit margin guidance to 12.0% to 12.1%, an increase of 30 to 40 basis points from 11.7% after the previous year's adjustment. We now expect the adjusted gross margin for the full year to be between 31.2% and 31.3%, up 20 to 30 basis points from 31.0% after the previous year's adjustment.
We now expect adjusted sales and management expenses for the full year to be 19.5%, the same as 19.5% after the previous year's adjustments. We assume net interest income of approximately $131 million, and the impact on full-year pre-tax profit margins is expected to be neutral year over year. The full-year guidance also assumes a tax rate of 24.6% and a weighted average number of shares of approximately 1.12 billion shares.
Based on the above assumptions, we raised our full-year adjusted diluted earnings per share to $5.15 to $5.20, an increase of 9% to 10% over the previous year's adjusted $4.73. Finally, our implied guidance for the fourth quarter assumes no further tariff refunds and excludes incremental accruals associated with third and fourth quarter tariff refunds. For the fourth quarter, we expect overall same-store sales to increase by 2% to 3%, an adjusted profit margin of between 11.9% and 12.0%, down 20 to 30 basis points from 12.2% after the previous year's adjustment, and adjusted diluted earnings per share of between $1.44 and $1.47, up 1% to 3% from $1.43 in the same period last year.
In conclusion, I'd like to repeat that we're excited about the growth and market share opportunities we're seeing in the near and long term. We are in an excellent position to continue investing in TJX's growth while returning significant amounts of cash to shareholders. Thank you, and now we are happy to answer your questions.
Q&A session
Matthew Boss (J.P. Morgan Chase Research Division):
So I have two questions, Ernie. First, can you talk about how Marmaxx's same-store sales have progressed during the second quarter and detail the main drivers of the Marmaxx sales improvements you mentioned in August and a strong start to the third quarter? Then John, can you talk about recent performance metrics for new stores and the opportunities you see today to improve your store goals?
Ernie Hellman (CEO, President and Director):
OK, Matt, I think... John, you want to answer questions about the quarter first, then I'll add.
John Clinger (Senior Executive Vice President and Chief Financial Officer):
Overall, we had a stronger start in May, then sales remained consistent in June and July, which was generally consistent across the board.
Ernie Hellman (CEO, President and Director):
Then, Matt, about the strong start to the third quarter you mentioned and what we're seeing so far. Yes, this is true for all business segments, and this is where we mentioned one of the benefits. Obviously, everyone is concerned about Marmaxx's same-store data, but I think what we're showing this quarter is our ability to maintain overall consistency through outstanding performance in all other businesses (from Canada to Europe to HomeGoods), and Marmaxx did not perform well due to some execution issues.
What I want to tell you is that I am very satisfied with the starting trend of all of these businesses in the third quarter of August. On the Marmaxx side, we saw an improvement over previous trends. And what I'm really looking forward to is that Marmaxx will see even more significant improvements as we move into the fourth quarter. But I think you're asking about an overall strong start.
John Clinger (Senior Executive Vice President and Chief Financial Officer):
Then answer your second question. We review store potential very frequently, and recently we've been seeing some opportunities for MarmaXX and HomeGoods to expand their store base. As a result, we seized the opportunity to increase Marmaxx by 300 and HomeGoods by 200 during the quarter.
Once again, for Marmaxx, we see an opportunity in rural markets where department stores are closing. We've also seen that, due to continued strong same-store growth over many quarters, we're able to open stores in denser regions than previously thought. Furthermore, the small store format has also enabled us to expand in many densely populated urban areas. As a result, we've been seeing opportunities for increased store growth potential, and based on the usability we've seen almost across the entire line, the annual growth rate has increased from the 3% we previously mentioned to 4%. As we looked at these opportunities, we saw opportunities in every brand.
Ernie Hellman (CEO, President and Director):
Yes. So — as John said, Matt, we're seeing this additional 1% store growth also spread across the board; it's not just one or two departments driving it. Yes. Also, I think what the team has done well is becoming more flexible in the form of small stores. What John said is that our team — whether it's the planning team responsible for product distribution or the real estate department responsible for site selection, design, and construction of the store — is becoming more flexible based on factors such as population density, which I think has also opened up more opportunities.
John Clinger (Senior Executive Vice President and Chief Financial Officer):
Right. Also, I know you asked this, and I just didn't answer it. The performance of our new store has been exceeding our expectations for a long time, and the performance of opening a new store continues to exceed expectations. So we don't have any concerns about this either.
Lorraine McKees (Bank of America Securities Research Division):
I would love for you to provide more details about the issues Marmaxx is having. What steps have you taken to fix it? And how long do you think it will take Marmaxx to return to a more normal 2% to 3% same-store growth rate?
Ernie Hellman (CEO, President and Director):
Yes, Lorraine, good question. Obviously, we think it's important to discuss this issue on the conference call, which is why we included it in our statement. As for exactly which categories — you know we never give specific details — but if you look back, you've been following us for a long time, and we had implementation issues even a few years ago.
We didn't specify which areas, for competitive reasons. What we can say, though, is that we've identified the problem, which areas are obvious. Our T.J. Maxx and Marshalls' product mix — a combination, to be precise — didn't do the right thing, and it was entirely our own fault, and it was entirely within our control. So much so that I and all of my teams participated in adjustments in these areas, including buyers, product managers, general category managers, senior buyers, and our planning and distribution team, all involved in diagnosing implementation issues. Everyone was involved, from buyers and planners all the way to myself.
We've identified the issues, and I think we're successfully resolving them. Based on our past experience, when we focus on solving execution mistakes, they can usually be corrected quickly. Regarding the timeline implied in your question, when can we go back to 2% to 3% — I'm saying we already saw an improvement in the trend in August, which is an improvement compared to the second quarter. What I'm most confident about is that we'll see the level you'd expect in the fourth quarter and gradually transition over the next few months. I don't want to lock down the exact numbers right now, but we feel good about it. Again, everyone is involved, we know exactly where we went wrong, and I can tell you that it's absolutely unrelated to any competitive factors, if there are any concerns about this.
We've done the measurements—we actually measured how our stores performed almost exactly as compared to our direct and affordable competitors' stores, regardless of whether the competitor was near or far from our store. The good and bad part of this is that it tells us that the problem is with our own execution. So, looking back, I've always told the team that when we have trouble, it's usually our own reasons. John and I talk about this a lot, going back to the situation in Europe a few years ago, when, as you know, we weren't strong in execution there.
In fact, we set sales goals and more profitable bottom line goals at the time, which took longer, far more time than needed this time, but that was an execution problem we identified and solved in the overall business. Hope this answered your question, but this is clearly a very relevant one.
Paul Lejuze (Citigroup Research Division):
Clarify it. I think you mentioned that May had a stronger start, and June and July are similar. I was wondering if both June and July were positive, and this quarter has also been positive so far. Also, regarding the slight decline in Marmaxx transaction volume you mentioned, Ernie, could this be driven by traffic or conversion rates? Are there any deviations in price points that may affect the conversion rate, such as high prices? Can you talk about this dynamic?
John Clinger (Senior Executive Vice President and Chief Financial Officer):
Yes. Just to be clear, I'm sure you're asking Marmaxx specifically. Marmaxx was slightly stronger in May at the beginning of the quarter and remained consistent in June and July. All three months have been on the same page as store growth.
Ernie Hellman (CEO, President and Director):
Yes. The drop in transaction volume has nothing to do with the conversion rate, more because we don't have it—in our missing product category, it's not because the price of similar products is rising and the value is bad. We did a positive competitive price comparison, our value is truly the best in the industry, and no one sells it cheaper than us. The specific problem is (I can't give details) what product mix we're missing.
As a result, you didn't capture that sale. And it's not about implementing the product portfolio we already have. So -- this applies to those few areas I've mentioned before. In other words, when a customer enters the store, you're unable to close the deal. I think you could say if we had those products, whether we would increase our conversion rate is hard to measure, but we know what the problem is.
Paul Lejuze (Citigroup Research Division):
So, Ernie, you think the lack of those products is more of a traffic problem — customers know there aren't those products there, not...
Ernie Hellman (CEO, President and Director):
No, no, no. Because most of our traffic is routine, much of our traffic comes from word of mouth, that is, continuous traffic. We do not advertise single item prices. People know we're treasure hunted shoppers — right, we're treasure hunted shopping.
So they know we sometimes have some products and sometimes we don't. The problem is that if we're missing some impulse purchases, customers may pick them up when they enter the store, but they don't necessarily know we'll buy them. Then we lost some sales. Also, we've lost some sales in some of the more basic product categories. Also, for competitive reasons, I can't specify which categories; we're missing the right mix. I don't think customers knew we didn't have it, but they probably won't be able to buy it once they enter the store.
John Clinger (Senior Executive Vice President and Chief Financial Officer):
Our transaction volume is counted through the cashier desk.
Ernie Hellman (CEO, President and Director):
Right.
John Clinger (Senior Executive Vice President and Chief Financial Officer):
Not the number of people entering the store.
Ernie Hellman (CEO, President and Director):
We don't have a passenger flow counter, yeah. Paul, if it were me, I'd ask the same question.
Brooke Roach (Goldman Sachs Research):
Ernie, you mentioned earlier that implementation issues are more about “what is missing” rather than “what you have.” Your buyers are usually very aware of customer needs and what categories and items are trending. What do you think caused their mistake in judging the customer's pulse? And what changes are you implementing in procurement and distribution to ensure greater stability during the important holiday season?
Ernie Hellman (CEO, President and Director):
Yes. We — again, I can't be specific — we have implemented two more systemic changes in planning. I can't tell you exactly what it is, but the planning department is introducing measures to help monitor the situation to prevent the problem from happening again. Once again, our business was to some extent an art form and a secret recipe. Things were not that rigid, and the buyer was making the best judgment at the time.
Sometimes, I want everyone to realize that Marmaxx has been doing very strong business for many quarters. The last time something similar happened was probably about 8 years ago. So I need to be careful not to overreact; this is indeed a lack of execution in a few areas, and this can happen in an artistic business. You look for clearance items in certain areas, we plan ahead, and sometimes we don't have the right plans and the right combination of those plans to execute.
So, there are a lot of variables, which are rare, but they can happen. As a result, we've implemented some largely systematic processes. Some of them actually involved the planning department, which ironically was supposed to help the buyer solve this problem.
I think this will help mitigate this problem in the future, and as I mentioned before, we have involved everyone in discussions on these areas, from buyers to product managers, category managers, Marmaxx presidents, Marmaxx chief buyers, myself, the senior executive vice president, and planning leaders, etc., to ensure that they are institutionalized. So, good question, Brooke. But I think we've basically sorted out the problem.
Alexandra Stratton (Morgan Stanley Research Department):
OK. Maybe I'll move to another department and talk about HomeGoods. Can you analyze the department's very strong same-store performance, including customer flow and customer unit price, and category conditions, and talk about whether you think the business can continue to grow by a single digit in the second half of the year?
Also, with regard to this division, which has been achieving significant substantial profit margin expansion, can you talk about what is driving this improvement? And how do you think this business could become a structural limitation for a medium ten-digit profit margin sector in the long term?
Ernie Hellman (CEO, President and Director):
Alex, that's a great question, I love it when it comes to the whole HomeGoods business. First, that team has been executing very well. As you said, it's been going for a while and going against industry trends to a certain extent, right? I think they've really succeeded in creating an exciting, impulsive treasure hunt shopping experience over the past few years, covering everything from household items to kitchen gadgets, kitchen textiles, towels, sheets, gifts, European cuisine, seasonal decor, wall decor, and more.
Everything is in full bloom. Also — we've talked about this before — you can probably guess what category their consumables business, that is, products that need to be refilled on a regular basis. I think some of the initiatives this team has implemented are continuing to drive steady traffic growth, because now people not only know that HomeGoods has been known for impulse consumption for many years, but they also know that every day there is a daily supply of consumables that need to be replenished regularly — these teams have done a great job in this regard.
I think in terms of store execution, in terms of shopping convenience, our store team also did an excellent job of displaying items within HomeGoods, making it very easy to buy some categories that were originally difficult to buy. And I think our store execution is unique. Also, I think our entire company's home buyers — I know you're asking about HomeGoods, but our entire home furnishing business, once again, has surpassed one-third of our business, over 35%, and now the entire line is healthy.
I think this is because of the good collaboration between HomeGoods and other home buyers. This has created a stronger and more diverse product portfolio, which is reflected not only in HomeGoods, but also in other divisions of TJX. So I think -- yeah, I think we have more opportunities in the future. Incidentally, it is undeniable that it is also due to the lack of execution of competitors in the home furnishing industry in various countries (especially the US). Our competitors there, IMHO, can't offer the combination of products we offer at HomeGoods that are both stylish and functional.
So -- as you can imagine, you mentioned profit margins, and I know John will talk about it briefly. However, the team's speed in driving revenue growth and profit margin expansion is indeed helping to improve TJX's overall performance. I know you're asking about HomeGoods, but I also have to mention Canada because Canada and Europe sometimes get less attention, and I brought it up because you mentioned other departments. Canada's size is close to HomeGoods, and these divisions continue to perform at a high level of execution and gain market share in their respective geographic regions, just as HomeGoods is doing domestically. John, I don't know if you...
John Clinger (Senior Executive Vice President and Chief Financial Officer):
Yes, let me add the HomeGoods aspect Ernie mentioned. The biggest driver was the increase in revenue mentioned by Ernie. A 7% same-store increase will clearly drive profit margin expansion. We have also seen good operational efficiency in this department. Then, the biggest project was an improvement in commodity profit margins, mainly driven by lower tariff costs.
Conference operator:
Michael Binetti (Evercore ISI Institutional Equity Research Division):
A quick question about gross margin. I think after a strong start to this year, before today, some might think that gross margin has potential to rise in the second half of the year. Today, your gross margin for the second half of the year has remained basically the same. Perhaps the low end lowered by 10 basis points or other minor changes.
But could you — maybe just tell us about the changes in the gross margin plan for the second half of the year, and the end result was the same? Maybe this is a bland question, but you've increased shipping costs, and I'm guessing there might be some Marmaxx price cuts. Seems like there might be some new positives we should consider?
John Clinger (Senior Executive Vice President and Chief Financial Officer):
Yes. Michael, if I compare the first half of the year with the second half of the year, the biggest factor is fuel and freight rates, because in the first half of the year we had a favorable impact on the market-by-market pricing of freight hedging — please forgive us — on the market-by-market pricing of our positions.
Again, we have to do market-by-market pricing every quarter. So in the second half of the year, we saw relatively high fuel rates. Freight rates are also rising due to the reduced availability of drivers faced by trucking companies, which is driving up prices. This may be due to young people's reluctance to engage in truck driving, or the fact that we have seen foreign drivers leaving the country. We saw some pressure there.
Of course, the 5% increase in same-store sales in the first half of the year and the 2% to 3% guide for the second half of the year was also one of the influencing factors. Also, we saw a positive impact on product margins in the first half of the year. Therefore, when you consider the implementation of IEEPA tariffs last year, some goods were purchased before the tariffs were implemented, so we had no chance to negotiate tariffs. So we're experiencing cardinality effects. However, the situation is completely opposite this year. We have already negotiated tariff relief on some products, and as a result, tariffs were lifted before the goods arrived ashore. So, these are the three main factors that separate the first half of the year from the second half. OK, does that answer your question?
Michael Binetti (Evercore ISI Institutional Equity Research Division):
Yes, I think so. What I want to ask is if there are any new positives for the second half of the year compared to 90 days ago?
John Clinger (Senior Executive Vice President and Chief Financial Officer):
Our first half and second half — the second half are very similar to the basic guidance we gave in the second quarter, which is why we carried over our excess earnings of $0.05 per share throughout the year. Obviously, there are pros and cons, but basically, we're in agreement.
Michael Binetti (Evercore ISI Institutional Equity Research Division):
OK. Well, if I could ask you one more question about profitability, because you made me think about this year. I was pleasantly surprised to see that Marmaxx was able to maintain the division's profit margin even with 1% same-store growth. Can you let us know if there are any transferable or temporary gains in the second half of the year that require our attention to the model?
John Clinger (Senior Executive Vice President and Chief Financial Officer):
No, no. We mentioned this again in our prepared statement, and we did enjoy lower tariff costs in the second quarter. So I'd like to say what we set out in our guidance is what we believe, and we'll try to surpass this guidance during the quarter.
Jay Saul (UBS Investment Banking Research Division):
Ernie, I'd like to ask you about the long-term goal of 7,500 stores. Can you talk about Sierra and Homesense, and Europe, how are they integrated into this plan? Then, you specifically mentioned within an existing country. Why not talk about the new countries the company may enter over time?
Ernie Hellman (CEO, President and Director):
Yes. First, let me address the last question, which is that we usually -- I say, we're always looking for opportunities in new countries, just like we did before -- and it's not always the same structural arrangement, right? As you know, we entered Mexico, formed a joint venture, and invested in Brands for Less. And Spain, as John mentioned, performed very well. I think, incidentally, part of our new store growth — we are quite optimistic about opening new stores in Spain in the future because the response from local customers was stronger than we expected. That's not included in our data.
John Klinger (Senior Executive Vice President and Chief Financial Officer):
Potential opportunities for the future.
Ernie Hellman (CEO, President and Director):
Yes. Other aspects you asked about, Sierra's growth rate is disproportionate, much higher than 4%. The same goes for Homesense. So both are well above the 4% increase because they both performed well. And we're always watching the potential of new markets, and you know, as Australia has proven, any new market we enter, as long as we bring TJX tips and leadership from TJX's senior colleagues, will do a great job.
So let me say again, I'm glad you asked this question about our international performance. What we're showing internationally is that I think we're better than ever before to prove that our model can grow in any international market where there is a market. I can't tell you where the next country is, but you can rest assured that we're looking.
Mani Shapiro (The Retail Tracker):
I'd like to ask, can we talk about some other Marmaxx categories? I know you don't want to reveal too many details. You mentioned that some products are missing. Are these fashion items? Yes--you mentioned impulsive products. When it comes to how well beauty products are performing, I think they're more like impulsive products. And you mentioned how well the HomeGoods line is performing well across the board, including those everyday essentials that need regular replenishment. I remember talking about it when I visited the store that people bought ingredients for dinner at HomeGoods to cook that night. Are consumables still performing well? Can you talk about the situation in non-clothing categories and non-traditional household categories?
Ernie Hellman (CEO, President and Director):
OK. Well — Marni, obviously I can't tell you what Marmaxx is — I can't tell you if it's fast fashion or anything else; this is somewhat mixed, and I can't specify which category or family it is. Due to the competitive environment we face and the impact of disclosing this information to the outside world, I can only say that it is not a dimensional, but a combination of factors in Marmaxx. At the same time, as evidenced by Marmaxx's growth of 1% rather than negative 3%, we have many categories that are performing well.
So, we have a few areas that have been impacted, lowering us from the possible 2% or 3% to 1%, and this is what happened, because at Marmaxx, as you know, apparently the market also believes that the gap between 1% and 3% is — that's what we're talking about here, not negative 3% to positive 4% — so you can have a few execution mistakes in a few areas, which will take you away a little bit from 2% same-store growth.
At HomeGoods, the whole line is fine. I shouldn't just focus on those consumables, because they're actually not just consumables, but a full range, including many decorative items, and even some high-priced categories perform very well.
I'm talking about everything from lighting to wall decoration, to — I can't go into details — I think they've implemented almost every category to a very high level. Furthermore, I think the buyer, planning, and store execution and distribution of HomeGoods are working very well together, and all aspects are running efficiently. On the marketing side, they provide customers with an experience that's hard to find at other retailers; it's a different kind of treasure hunt shopping.
Also, some items are very unique; only HomeGoods offers them in a unique way, and when it comes to clothing, the clothing we sell at T.J. Maxx, Marshalls, or Sierra can also be found elsewhere, but we have a better value. I think at HomeGoods, you have some unique product categories that create another shopping experience. So — this is innovation in my opinion — I don't think any other company in the home furnishing industry can do that; I'm not just referring to the US, but to Europe and Canada.
As you know, in Canada, we have a very high market share. It's one of the geographical regions where our company has the largest market share. Now with stores like Bay closing, we continue — Canadian buyers are doing excellent work at Homesense, Winners, and Marshalls Canada. I don't think we talk about Canada very often, but they also continue to seize a lot of market share there, similar to how HomeGoods performs domestically, and Canada is doing the same thing.
Mani Shapiro (The Retail Tracker):
I have a follow-up question about HomeGoods. Your back-to-school display was unbelievable and made me stop and amazed. I was wondering if you guys saw an increase in HomeGoods traffic and trends when that display launched?
Ernie Hellman (CEO, President and Director):
Yes. They are very happy with it. I don't have specific data at hand, but I know the team talked about their back-to-school display, and the results were very healthy. Yes, I think you're right, the timing is perfect, and it looks better than ever. Glad you noticed it.
Mani Shapiro (The Retail Tracker):
It was amazing and breathtaking. Congratulations to that team.
Ernie Hellman (CEO, President and Director):
Yes. No, congratulations. And — by the way, Marni, they would really appreciate your comments.
Owen Boruccio (Wells Fargo Securities Research Department):
Ernie, I want to ask — my first question is about shipping costs, and I think you've already told Michael. But are shipping expectations for the second half of the year changing from three months ago? Or is this basically what you expected before?
Then, the follow-up questions were not about August and the back-to-school season, but in the fourth quarter, there were more and more red flags about the effects of Super El Niño weather. You've performed well in the past few Super El Niño events, going back to the pattern of the past. Just curious if this is starting to affect the way you plan your products and plan your product portfolio? Although I know it's still too early what do you think of the holiday season?
Ernie Hellman (CEO, President and Director):
I'll let John...
John Klinger (Senior Executive Vice President and Chief Financial Officer):
I'll answer the shipping questions first. Yes, this is in line with our expectations. Obviously, at the beginning of the year, when we did market-by-market pricing for fuel hedging in the first quarter, we knew it had significant benefits, so by the next three quarters, it would have a negative impact. So yeah, that's exactly what was expected.
Ernie Hellman (CEO, President and Director):
Yes. Ike, when it comes to weather, our approach is to try not to make too specific plans for the weather, but with mobility — and I think you've said that before — we often “get through” these situations very well, right? Because we maintain liquidity and have better control over shipping from warehouses than traditional retailers.
If we think an area will experience abnormal weather patterns, our products don't have to be delivered directly to the store; we can make flexible adjustments. This is an advantage of our model. We stock products in warehouses, and most physical retailers must ship their goods as soon as they are in the warehouse. We have shelves that can be operated flexibly, and our planning organization is very good at dealing with extreme weather fluctuations, natural disasters, or any of these warning signs. I think that's what you're referring to.
So yeah, I think they're just being alert at the moment. As we get closer, we can be flexible. Once again, we are more able to respond flexibly than most physical retailers.
Anisha Sherman (Bernstein Institutional Services Research Division):
Well, you've seen the unit price increase for regular customers for most of last year and this year now. You have a better portfolio of high-quality products, and a higher proportion of higher-end brands than a few years ago. Do you think there is more room for growth in customer unit prices and average unit retail (AUR) in the current consumer environment?
Then a quick follow-up question, Ernie, about your “aggressive” comments on marketing. You've been very active in digital and social media marketing for the past few years. Has there been any significant change in the type of marketing or marketing budget as a percentage of sales this year?
Ernie Hellman (CEO, President and Director):
OK, Anisha. Yes. First to answer your first question, which is...
Anisha Sherman (Bernstein Institutional Services Research Division):
AUR and customer unit price.
Ernie Hellman (CEO, President and Director):
Yes, we've seen growth. I want to tell you that in the current environment, as you said, I think we will tend to moderate. I think it's likely to keep growing by a few percentage points, which is currently being tracked, but I don't think this is a long-term trend. It might be slightly milder, which is our best judgment.
The reason I'm saying this — I think we've talked about it before, is that it's a bottom-up decision of our organization. So we don't set the customer unit price from the top down. Therefore, if some exciting category or supplier deals appear, including some better brand deals, this may surprise the customer unit price in the short term, and we may get some large deals from better brands, causing the customer unit price to rise in the short term.
Then there's the effect of category combinations. As we've talked about in the past, changes in the combination of certain categories throughout the store can sometimes increase our customer unit price. This is not an increase in retail prices for similar products or categories, but rather a shift in store combinations to higher average retail categories. As a result, I think the increase in our customer unit price is likely to moderate. This is just an educated guess about the next 6 months.
John Klinger (Senior Executive Vice President and Chief Financial Officer):
Then answer your questions about ad spend. Our plans are the same every year. Then, during the year, if the performance is strong, we usually invest more money in advertising to reinforce the message and continue to fuel the momentum.
Ernie Hellman (CEO, President and Director):
Anisha, though, to give you an idea. The current situation is that in the first half of this year, we received 1.1 billion video views on Facebook, Instagram, TikTok, Pinterest, and YouTube, which shows that this hasn't been the case in the past few years, which indicates — by the way, HomeGoods alone has surpassed 300 million times.
So, the total number of video views on Facebook, Instagram, Pinterest, and YouTube was 1.4 billion, and in the first half of the year, this is where our customers are. Interestingly, we saw that the TJX brand's video completion rate on TikTok and YouTube was significantly higher than industry benchmarks, which really showed that our content was highly appealing to customers.
So, they stay there to watch most of the video content. Unlike many of our competitors, they may also count as watching it all at once, but customers won't necessarily watch it all; our customers will.
Thanks for asking. I think this is our last question. Thank you all for participating today. We look forward to another update on progress during the third quarter results conference call in November. Thank you all.