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The TJX Companies, Inc.
M A N A G E M E N T ' S D I S C U S S I O N A N D A N A L Y S I S
O F R E S U L T S O F O P E R A T I O N S A N D
F I N A N C I A L C O N D I T I O N
During fiscal 1998, the Company declared a two-for-one stock split effected in the form of a 100% stock dividend, and, beginning with the fourth quarter of fiscal 1998, began to report earnings per share pursuant to Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings per Share." SFAS No. 128 requires the presentation of "basic" and "diluted" earnings per share. All earnings per share amounts have been restated to reflect the two-for-one stock split and the impact of SFAS No. 128. All earnings per share amounts discussed refer to diluted earnings per share unless otherwise indicated.
Effective December 7, 1996, the Company sold its Chadwick's of Boston mail order operation. The gain on this transaction was accounted for as discontinued operations in the Company's fourth quarter reporting period ending January 25, 1997. The operating results for Chadwick's for all periods prior to the sale have been presented as discontinued operations for comparative purposes. Discontinued operations for the fiscal year ended January 27, 1996 and prior periods also includes the results of the Hit or Miss division prior to its sale, which was sold by the Company effective September 30, 1995, along with the loss incurred on the sale.
On November 17, 1995, the Company acquired the Marshalls off-price family apparel chain from Melville Corporation. Under the purchase method of accounting, the assets and liabilities and results of operations associated with the acquired business have been included in the Company's financial position and results of operations since the date acquired. Accordingly, the results of operations for fiscal 1998 and 1997 are not directly comparable to the financial position and the results of the operations of the Company for fiscal 1996. The following discussion should be read in conjunction with the consolidated financial statements and notes thereto contained elsewhere in this report.
R e s u l t s o f O p e r a t i o n s
C o n t i n u i n g O p e r a t i o n s : Income from continuing operations before extraordinary item ("income from continuing operations") was $306.6 million in fiscal 1998 versus $213.8 million and $51.6 million in fiscal 1997 and 1996, respectively. Income from continuing operations per share was $1.75 in fiscal 1998, versus $1.22 in fiscal 1997, and $.29 in fiscal 1996. The results for fiscal 1996 include a $35 million pre-tax ($21.0 million after-tax) charge for closing certain T.J. Maxx stores in connection with the acquisition of Marshalls. Excluding the $35 million pre-tax charge, income from continuing operations for fiscal 1996 would have been $72.6 million, or $.44 per share.
Net sales for fiscal 1998 increased 10.5% to $7.39 billion from $6.69 billion in 1997. Net sales for fiscal 1997 increased 68.3% from $3.98 billion in fiscal 1996. These consolidated sales results include Marshalls for periods subsequent to its acquisition on November 17, 1995. Fiscal 1998 included 53 weeks while fiscal 1997 and 1996 each included 52 weeks. Consolidated same store sales, on a 52-week basis, increased 6% in fiscal 1998 and increased 7% in fiscal 1997. Percentage increases in same store sales, on a divisional basis, are as follows:
|Fiscal Year Ended|
|January 31,||January 25,|
Consolidated sales results for fiscal 1998 and 1997 primarily reflect the many benefits associated with the Marshalls acquisition, along with some improvement in apparel sales industry-wide. Following the acquisition of Marshalls, the Company replaced Marshalls frequent promotional activity with an everyday low price strategy and also implemented a more timely markdown policy. These changes conformed the Marshalls operation to that of the T.J. Maxx stores and were significant factors in the Marshalls same store sales performance for fiscal 1997. In addition, the enhanced buying power of the combined entities has allowed the Company to offer better values to consumers at both chains in fiscal 1998 and 1997 as compared to fiscal 1996.
Cost of sales, including buying and occupancy costs, as a percentage of net sales was 76.8%, 77.7% and 79.1% in fiscal 1998, 1997 and 1996, respectively. The improvement in this ratio in fiscal 1998 and 1997, as compared to fiscal 1996, is largely due to improved inventory management and the benefits associated with the acquisition of Marshalls, as well as a reduction in occupancy and depreciation costs as a percentage of net sales due to the strong sales performance. Fiscal 1998 depreciation costs were also reduced as a result of the revised purchase price allocation for the acquisition of Marshalls. See Note A to the Consolidated Financial Statements.
Selling, general and administrative expenses as a percentage of net sales were 16.0% in fiscal 1998, 16.3% in fiscal 1997 and 16.9% in fiscal 1996. The improvement in this ratio in both fiscal 1998 and 1997 reflects the stronger sales performance as well as expense savings provided by the consolidation of the Marshalls and T.J. Maxx operations. During fiscal 1998, selling, general and administrative expenses included a pre-tax gain of $6 million from the sale of Brylane common stock and included a charge of $15.2 million for costs associated with a deferred compensation arrangement with the Company's Chief Executive Officer.
The Company recorded an estimated pre-tax charge of $35 million in fiscal 1996 for the closing of certain T.J. Maxx stores in connection with the acquisition of Marshalls, which consists primarily of estimated costs associated with subletting stores or otherwise disposing of store leases and non-cash costs associated with asset write-offs of the closed stores. During fiscal 1997, the reserve requirement was reduced by $8 million as the actual cost of closing stores was less than anticipated. This savings, however, was more than offset by a $12.2 million impairment charge on certain T.J. Maxx distribution center assets relating to a restructuring and realignment plan of the T.J. Maxx and Marshalls distribution facilities. The net impact of these items is reflected in selling, general and administrative expenses.
Interest expense, net of interest income, was $4.5 million, $37.4 million and $38.2 million in fiscal 1998, 1997 and 1996, respectively. The Company has maintained a strong cash position throughout fiscal 1998 and 1997 as a result of cash generated from operations and funds obtained from the sale of Chadwick's. During fiscal 1997, this allowed the Company to prepay approximately $450 million of long-term debt including the outstanding balance of the loan incurred to acquire Marshalls. The impact of this positive cash flow position throughout fiscal 1998 resulted in virtually no short-term borrowings during fiscal 1998 despite the Company's purchase of $245.2 million of its common stock. Interest income for fiscal 1998 was $21.6 million versus $14.7 million and $2.8 million in fiscal 1997 and 1996, respectively.
The Company's effective income tax rate was 41% in fiscal 1998 and 42% in both fiscal 1997 and 1996. The reduction in the fiscal 1998 effective income tax rate is primarily due to the impact of foreign operations. The difference in the U.S. federal statutory tax rate and the Company's worldwide effective income tax rate in each fiscal year is primarily attributable to the effective state income tax rate.
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