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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 1999 and 1998, the Company declared two-for-one stock splits effected in the form of 100% stock dividends. All earnings per share amounts have been restated to reflect these two-for-one splits. Earnings per share amounts discussed herein refer to “diluted” earnings per share unless otherwise indicated.
Effective December 7, 1996, the Company sold its Chadwick’s of Boston mail order operation and accounted for the gain on this transaction as discontinued operations.
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 $433.2 million in fiscal 1999, $306.6 million in fiscal 1998 and $213.8 million in fiscal 1997. Income from continuing operations per share was $1.29 in fiscal 1999, versus $.88 in fiscal 1998 and $.61 in fiscal 1997.
Net sales for fiscal 1999 increased 7.6% to $7.95 billion from $7.39 billion in fiscal 1998. Net sales for fiscal 1998 increased 10.5% from $6.69 billion in fiscal 1997. Fiscal 1998 included 53 weeks while fiscal 1999 and 1997 each included 52 weeks. On a comparable 52-week basis net sales for fiscal 1999 increased 9.0%, and for fiscal 1998, net sales increased 8.9%. Consolidated same store sales on a 52-week basis increased 5% in fiscal 1999 and increased 6% in fiscal 1998. Percentage increases in same store sales, on a divisional basis, are as follows:
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| January 30, | January 31, | |
| 1999 | 1998 | |
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| T.J. Maxx | +4% | +5% |
| Marshalls | +5% | +7% |
| Winners | +13% | +14% |
| HomeGoods | +9% | +13% |
| T.K. Maxx | +12% | +15% |
Consolidated sales results for fiscal 1999 and 1998 primarily reflect the many benefits associated with the Marshalls acquisition, along with new store growth. 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 store operation to that of the T.J. Maxx stores. In addition, the enhanced buying power of the combined entities, combined with strong inventory management, has allowed the Company to offer better values to consumers at both chains.
Cost of sales, including buying and occupancy costs, as a percentage of net sales was 74.9%, 76.8% and 77.7% in fiscal 1999, 1998 and 1997, respectively. The improvement in this ratio is largely due to improved inventory management, the benefits associated with the acquisition of Marshalls and a reduction in occupancy and depreciation costs as a percentage of net sales.
Selling, general and administrative expenses as a percentage of net sales were 16.2% in fiscal 1999, 16.0% in fiscal 1998 and 16.3% in fiscal 1997. The improvement in this ratio in fiscal 1999 and 1998, as compared to fiscal 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 1999 this ratio increased, as compared to fiscal 1998, largely due to certain charges including a $7.5 million charitable cash donation to The TJX Foundation, $3.5 million for the settlement of the Hit or Miss note receivable and $6.3 million associated with a fiscal 1998 deferred compensation award to the Company’s Chief Executive Officer. During fiscal 1998, selling, general and administrative expenses included a charge of $15.2 million associated with the foregoing deferred compensation award and a pre-tax gain of $6.0 million from the sale of Brylane common stock.
Interest expense, net of interest income, was $1.7 million, $4.5 million and $37.4 million in fiscal 1999, 1998 and 1997, respectively. The Company maintained a strong cash position throughout fiscal 1999 and 1998 as a result of cash generated from operations. During fiscal 1997 the Company prepaid approximately $450 million of long-term debt including the outstanding balance of the loan incurred to acquire Marshalls. The impact of the Company’s positive cash flow position throughout fiscal 1999 and 1998 resulted in virtually no short-term borrowings during these two years despite the Company’s purchase of $350.3 million of the Company’s common stock in fiscal 1999 and $245.2 million of its common stock in fiscal 1998. Interest income for fiscal 1999 was $20.5 million versus $21.6 million and $14.7 million in fiscal 1998 and 1997, respectively.
The Company’s effective income tax rate was 38% in fiscal 1999, 41% in fiscal 1998 and 42% in fiscal 1997. The reduction in the fiscal 1999 effective income tax rate is due to a lower effective state income tax rate, the benefit of foreign tax credits and net operating loss carryforwards, and a charitable donation of appreciated property. The Company elected to repatriate the current year earnings of its Canadian subsidiary which favorably impacted the Company’s fourth quarter tax provision for fiscal 1999. The reduction in the fiscal 1998 effective income tax rate is primarily due to the impact of foreign operations.
D i s c o n t i n u e d O p e r a t i o n s a n d N e t I n c o m e : Net income for fiscal 1999 includes an after-tax charge to discontinued operations of $9.0 million for lease related obligations, primarily for the Company’s former Hit or Miss stores. Net income for fiscal 1997 includes a gain on the sale of Chadwick’s discontinued operation, net of income taxes, of $125.6 million and also includes the fiscal 1997 operating results of Chadwick’s prior to its sale measurement date, which amounted to net income of $29.4 million. In addition, in each of the fiscal years 1998 and 1997, the Company retired certain long-term debt instruments prior to scheduled maturities, resulting in extraordinary losses, net of income taxes, of $1.8 million and $5.6 million, respectively.
Net income, after reflecting the above items, was $424.2 million, or $1.27 per share in fiscal 1999, $304.8 million, or $.87 per share, in fiscal 1998 and $363.1 million, or $1.04 per share, in fiscal 1997.
C a p i t a l S o u r c e s a n d L i q u i d i t y
O p e r a t i n g A c t i v i t i e s : Net cash provided by operating activities was $642.8 million, $385.5 million and $664.5 million in fiscal 1999, 1998 and 1997, respectively. The increase in cash provided by operations in fiscal 1999 reflects increased earnings and strong inventory management. The decrease in cash provided by operating activities in fiscal 1998 is primarily the result of an increase in merchandise inventories versus a decrease in fiscal 1997. Inventories as a percentage of net sales were 14.9% in fiscal 1999, 16.1% in fiscal 1998, and 15.8% in fiscal 1997. Strong sales volume, coupled with tight inventory control, resulted in faster inventory turns, all of which were favorable to cash flows and inventory ratios for fiscal 1999 and 1998. Working capital was $436.3 million in fiscal 1999, $465.0 million in fiscal 1998 and $425.6 million in fiscal 1997.
The cash flows from operating activities for fiscal 1999, 1998 and 1997 have been reduced by $16.6 million, $23.2 million and $62.9 million, respectively, for cash expenditures associated with the Company’s store closing and restructuring reserves, which relate primarily to the Marshalls acquisition, and for obligations relating to the Company’s discontinued operations.
The initial reserve established in the acquisition of Marshalls for the fiscal year-ended January 27, 1996 was estimated at $244.1 million and included $44.1 million for inventory markdowns and $200 million for a store closing and restructuring program. The initial store closing plan included the closing of 170 Marshalls stores during fiscal 1997 and fiscal 1998. The Company reduced the total reserve by $85.9 million in fiscal 1997 and by an additional $15.8 million in fiscal 1998, primarily due to fewer store closings and a reduction in the estimated cost of settling the related lease obligations. This reserve was a component of the allocation of the purchase price for Marshalls and the reserve adjustments in fiscal 1998 and 1997 resulted in a corresponding reduction in the value assigned to the long-term assets acquired. The adjusted reserve balance included $70.8 million for lease related obligations for 70 store and other facility closings, $9.6 million for property write-offs, $44.1 million for inventory markdowns and $17.9 million for severance, professional fees and all other costs associated with the restructuring plan. Property write-offs were the only non-cash charge to the reserve.
In connection with the Marshalls acquisition, the Company also established a reserve for the closing of certain T.J. Maxx stores. The Company recorded an initial pre-tax charge to income from continuing operations of $35 million in fiscal 1996 and a pre-tax credit to income from continuing operations of $1.8 million in fiscal 1999 and $8 million in fiscal 1997 to reflect a lower than anticipated cost of the T.J. Maxx closings. An additional charge to continuing operations of $700,000 was recorded in fiscal 1998. The adjusted reserve balance includes $13.8 million for lease related obligations of 32 store closings, non-cash charges of $9.8 million for property write-offs and $2.3 million for severance, professional fees and all other costs associated with the closings.