Welcome to the TJX Companies' Third Quarter Fiscal 2020 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. And as a reminder, this conference call is being recorded, November 19, 2019. I would like to turn the conference call over to Mr. Ernie Herrman, Chief Executive Officer and President of The TJX Companies, Inc. Please go ahead, sir.

Thanks, Aelan. Before we begin, Deb has some opening comments.

Thank you, Ernie, and good morning. The forward-looking statements we make today about the company's results and plans are subject to risks and uncertainties that could cause the actual results and the implementation of the company's plans to vary materially. These risks are discussed in the company's SEC filings, including without limitation, the Form 10-K filed April 3, 2019. Further, these comments and the Q&A that follows are copyrighted today by The TJX Companies Inc. Any recording, retransmission, reproduction or other use of the same for profit or otherwise without prior consent of TJX is prohibited and a violation of the United States copyright and other laws. Additionally, while we have approved the publishing of a transcript of this call by a third party, we take no responsibility for inaccuracies that may appear in transcripts. We have detailed the impact of foreign exchange on our consolidated results and our international divisions in today's press release in the Investor section of our website, tjx.com. Reconciliations of the non-GAAP measures we discuss today to GAAP measures are posted on our website tjx.com in the Investors section. Thank you. And now, I’ll turn it back over to Ernie.

Good morning. Joining me and Deb on the call is Scott Goldenberg. Let me begin by saying that I am extremely pleased with our strong third quarter results. Our consolidated comparable store sales increased by 4%, which was well above our expectations and over a very strong 7% increase last year. Earnings per share of $0.68 were also significantly above our plan. I am particularly pleased with the continued strength of our largest division, Marmaxx, as comparable store sales increased 4% on top of a very strong 9% increase last year. Once again, we saw strength in both Marmaxx's apparel and home businesses. In addition, I want to highlight the terrific comparable sales and traffic strength of our European business, which drove the 6% comparable sales increase at TJX International. In the third quarter, customer traffic was the primary driver of our comparable store sales increases at each of our four major divisions. Clearly, our great values and eclectic mix of quality branded merchandise continue to attract shoppers around the world. Further, this quarter marks the 21st consecutive quarter of customer traffic increases at TJX and Marmaxx. With our excellent third quarter results, we are raising our full year outlook, which Scott will detail in a moment. Looking ahead, the fourth quarter is off to a solid start. We are seeing fantastic product availability across a wide range of brands, and we are in a great position to keep flowing fresh merchandise to our stores and online throughout the holiday season. Longer-term, we are excited about our potential to keep gaining market share and continuing the successful growth of TJX in the U.S. and internationally. Before I continue, I’ll turn the call over to Scott to recap our third quarter numbers.

Thanks, Ernie, and good morning everyone. As Ernie mentioned, third quarter consolidated comparable store sales increased 4%, which was over a 7% increase last year and well above our plan. Customer traffic was up overall and was the primary driver of our comparable sales increases at each of our four major divisions. As a reminder, our comparable sales increases exclude the growth from our e-commerce businesses. Third quarter diluted earnings per share were $0.68, up 8% over the prior year’s adjusted $0.63 and well above our expectations. Now, I’ll recap our third quarter performance by division. We were very pleased that every division delivered a comparable increase at or above their second quarter comparison over strong results last year. Further, each division exceeded the profit margin plan. We’re seeing good momentum at all our divisions heading into the holiday season. Marmaxx comparable sales increased 4% over a very strong 9% increase last year, and were driven by customer traffic. Once again, both our apparel and home businesses were strong, which points to Marmaxx’s ability to keep raising the bar. Segment profit margin increased 10 basis points. As we begin the fourth quarter, we are excited about the initiatives we have planned to keep driving sales and traffic during the holiday season and beyond. HomeGoods comparable increased 1% in the third quarter over a strong 7% increase last year. We are very pleased with the HomeGoods two-year stock comparable increase of 8%, which is a significant improvement compared with a 2% two-year stack comparable increase in the first half of the year. Segment profit margin was down 40 basis points, primarily due to expense deleverage on the 1% comparable. Customers love HomeGoods, and we are very confident in its enduring appeal for consumers and the fundamental strength of this division. TJX Canada's third quarter comparable growth of 2% was over a 5% increase last year. Adjusted segment profit margin, excluding foreign currency, was down 180 basis points, primarily due to transactional foreign exchange pressure, higher supply chain costs, and lower merchandise margins. We are excited about the holiday initiatives we have planned in Canada and longer term, are convinced we will continue to gain market share in that country through our three Canadian chains. At TJX International, comps grew a very strong 6% in the third quarter. Again, this quarter we saw strength throughout our UK regions and across Europe. In Australia, comparable performance continued to be strong. Adjusted segment profit margin, excluding foreign currency, was down 20 basis points versus last year. We remain very pleased with the sharp execution of this organization and the terrific results despite the uncertainty of Brexit and the challenging European retail environment. I'll finish with our investment in Familia, which we detailed in our press release. We are excited to have an ownership position in a profitable off-price retailer of apparel and home fashions in Russia. We like Familia's strong financial profile and management team. This investment allows us to gain exposure in a new region of the world with an established off-price retailer that has significant growth potential. We are always looking for ways to increase value for TJX's shareholders and see this as a good use of cash with an attractive return profile. Now, let me turn the call back to Ernie, and I'll recap our fourth quarter and full year fiscal '20 guidance at the end of the call.

Thanks, Scott. Now, I'd like to highlight some of the opportunities we see to keep driving sales and traffic in the fourth quarter. First, we are set up extremely well to offer consumers exciting, compelling brands for their holiday gift giving. We expect our stores to be as branded as ever across most families of business this holiday season. We are seeing fantastic product availability in the marketplace and our buyers are taking advantage of it throughout numerous categories for a wide range of quality, good, better, and best brands. Second, we expect to be flowing fresh merchandise to our stores and online even later this year and multiple times a week throughout the holidays. Regardless of the number of shopping days this holiday season, I am confident consumers will get their shopping done and visit us for exciting gifts for everyone on their list. In addition, post-holiday, we remain focused on being a destination for guests throughout the year. Third, we feel great about our holiday marketing campaigns that started airing earlier this month. I hope you have had a chance to see them. Across our divisions, our campaigns are bold in order to distinctly position us as 'The Shopping Destination' for inspiring gifts at amazing prices. We also are leveraging our campaigns across digital and social media platforms. Each of our four major divisions will be actively marketing every week throughout the holiday season. Next, we're planning to capitalize on the holiday season to promote our loyalty programs. These programs are important vehicles for us to continue to engage with customers and encourage more frequent visits and cross-shopping. Next, we believe our stores provide consumers with convenient and efficient ways to shop this holiday season. Our off-mall locations make our stores very easy to access. Once in our stores, shoppers are able to scan an extremely wide selection of merchandise across multiple categories in a very timely manner. Again, we will have something for everyone's shopping gift list in-store and online where they can shop us 24/7. Lastly, we are well positioned with our gift cards and believe that many consumers will be looking to use them right after the holidays. We feel great about our initiatives and our plans to transition our stores post-holiday and are confident that our fresh and exciting selection of merchandise will entice shoppers when they visit us. At the e-commerce, we were very happy with the launch of marshalls.com in September. We are excited to offer consumers the convenience of shopping both Marshalls and TJ Maxx online whenever they want. As with tjmaxx.com, we are differentiating marshalls.com's offering from our Marhall stores to give consumers a compelling reason to shop both channels. In both our U.S. and UK online businesses, we like the growth and metrics that we are seeing. In closing, we feel great about our momentum heading into the fourth quarter, which is off to a solid start. Long-term, we are confident that we have a significant opportunity to continue growing our customer base and gaining market share around the world. We believe the growth we have seen in Gen Z and millennial customers across all of our major divisions for the last several years bodes well for our future. As always, we remain laser-focused on executing our off-price business model. We believe our unwavering commitment to offering consumers excellent values on great brands and fashions, combined with our treasure hunt shopping experience, will continue to be a winning formula for TJX. Now, I'm going to turn the call over to Scott to go through our guidance. And then, we'll open it up for questions.

Thanks, Ernie. Before I provide our detailed guidance, I want to spend a moment and update you on tariffs. Based on the tariffs in place now, we've started to see some pressure on our margins from the goods we see directly sourced from China. This includes the merchandise that we are committed to and the changes in tariff legislation that were announced after our Q2 call. For Q4, our guidance now includes the negative impact from these tariffs. Now moving on to our Q4 guidance. We expect earnings per share to be in the range of $0.74 to $0.76, a 9% to 12% increase over the prior year $0.68. We're modeling fourth quarter consolidated sales in the range of $11.7 billion to $11.8 billion. For comparable store sales, we're assuming growth of approximately 2% to 3% on a consolidated basis and at Marmaxx. Fourth quarter pre-tax profit margin is planned in the 10.4% to 10.6% range versus the prior year's 10.6%. We're anticipating fourth quarter gross profit margin to be in the range of 27.6% to 27.8% versus 27.8% last year. We're expecting SG&A as a percent of sales to be approximately 17.1% versus 17.2% last year. For modeling purposes, we're currently anticipating a tax rate of 25.8%, $5 million of net interest expense, and a weighted average share count of approximately 1.22 billion. Moving on to our full year fiscal '20 guidance. We are raising guidance for fiscal '20 earnings per share to be in the range of $2.61 to $2.63. This would represent a 7% increase over the prior year's adjusted $2.45. This EPS guidance now assumes consolidated sales in the $41.2 billion to $41.3 billion range, a 6% increase over the prior year. This guidance assumes a 1% negative impact due to translational foreign exchange. We are expecting a comparable increase of approximately 3% on a consolidated basis. We expect a pretax profit margin to be in the range of 10.4% to 10.5%. This would be down 30 to 40 basis points versus the adjusted 10.8% in fiscal '19. We're planning a gross profit margin to be in the range of 28.2% to 28.3% compared with 28.6% last year. We're expecting SG&A, as a percentage of sales, to be approximately 17.8% versus 17.8% last year. For modeling purposes, we're currently anticipating a tax rate of 25.7%, net interest expense of about $12 million, and a weighted average share count of approximately 1.23 billion. Now to our full year guidance by division. At Marmaxx, we now expect comparable growth of 3% to 4% on sales of $25.4 billion to $25.5 billion, and segment profit margin in the range of 13.4% to 13.5%. At HomeGoods, we are planning comps to increase 1% on sales of approximately $6.3 billion and segment profit margin to be approximately 10.4%. For TJX Canada, we expect a comparable increase of 1% to 2% on sales of approximately $4 billion. Adjusted segment profit margin, excluding foreign currency, is expected to be in the range of 12.3% to 12.4%. At TJX International, we now expect comparable growth of 5% to 6% on sales of $5.5 billion. Adjusted segment profit margin excluding foreign currency is expected to be approximately 4.9%. It's important to remember that our guidance for the fourth quarter and full year assumes that currency exchange rates will remain unchanged from the levels at the beginning of the fourth quarter. In closing, we look forward to giving you fiscal '21 guidance on our Q4 earnings call in February. Now we are happy to take your questions. To keep the call on schedule, we're going to ask that you please limit your questions to one per person. Thanks, and we will now open it up for questions.

Thank you. Our first question today is from Alexandra Walvis.

My question is on the investment that you made in Russia. Can you talk a little bit about the decision-making process behind that? Why this market in particular, where you see the growth potential? And how are you thinking about the sort of build versus buy when thinking about new retail formats? Thanks so much.

The first thing is, you know this, like anything we approach we felt this was a terrific opportunity to become a strategic investor in a business that is pretty much what our off-price and apparel and home fashions business is. So it was a great opportunity for us. It allows us, as you look down the road, a strong financial profile where we see a slightly accretive addition to our earnings beginning in fiscal 2021. But when you boil it down, one of the things that really hit us when we were first engaged with looking at Familia is the DNA of that business is very similar to the way they approach the business, very similar to what we do. You have a strong financial profile where they have profitable margins, low cost structure. They have significant store growth potential with more than 275 stores today, including nearly 50 stores opening in 2019, so you start adding all of these aspects, and by the way, we did a tremendous amount of due diligence. So Scott Goldenberg, Doug Mezy, who is our Senior Executive Vice President, and we had Glenn Brenner. We had a whole team that really engaged, did multiple visits. We had Bank of America involved, advising us, PWC. We really were highly engaged on all facets of it, strong management team. I’ll tell you one thing that to the core, which was important to us is the relationships that we established during the process. We could tell that their merchant teams were compatible with our merchant teams. In fact, they had set themselves over there with 100 buyers already in place, and a strong heads of buyers, which we love to see because we’re very merchant-focused. Everything in that model over there as they continue to gain market share in Russia just screams out that it's very much a nice TJX relationship and investment on our part. Scott, I don’t know if you have anything to add…

To reiterate some key points, Ernie discussed significant aspects of merchandising. Many business families are similar, but there are numerous categories where they can expand and explore new opportunities, providing us with great potential ahead. From a finance perspective, I appreciate their strong balance sheet and operating cash flow. They fund all their working capital and store growth from internally generated resources, which is a commendable trait, and they still have the capacity to pay dividends, highlighting their financial strengths. Regarding Russia, Ernie noted the number of stores, and there’s ample opportunity to expand. They are essentially the only effective off-price retailer in Russia.

Alexandra, they’re expecting to add a similar number of stores over the next three to five years, which is very exciting. And just so you understand, as we move forward, Scott Goldenberg is actually going to be a Board observer and Doug Mizzi will have a seat on their board. Doug Mizzi again, who is our Senior Executive Vice President, who oversees Canada and Australia. So we will have a continued strong relationship in terms of our investment.

Thank you. Our next question comes from Matthew Boss.

Ernie, I guess, strongest two-year stack in seven years at Marmaxx, again, despite the highly competitive and promotional backdrop that we're hearing from other retailers. Can you speak to some of the wins that you're seeing across both apparel and home that's really driving this consistent momentum? And anything you particularly highlight as opportunity as we look into the fourth quarter and holiday?

Yes, the two-year performance was strong. I would like to emphasize that it might not be as robust as it appears, given that last year's figures for Marmaxx were compared to a relatively weak previous quarter. Nevertheless, even if we combine the last three years, we've performed exceptionally well in our recent third quarters, particularly driven by branded content and opportunistic strategies. As I mentioned earlier, having access to a diverse range of quality brands across various categories has been beneficial, particularly since last year’s third quarter. We've been able to focus on many brands within different business categories, especially in apparel. Our home division has also performed well, and I believe our teams have effectively tapped into category trends. It’s less about specific brands and more about these trends that have helped us achieve consistent increases. Regarding Marmaxx, one key aspect of our branded content initiative has been to differentiate us across all geographic areas. Marmaxx has exemplified this well in the last quarter. Europe has similarly benefited from this push, with great execution in apparel and home categories. Looking ahead to the fourth quarter, we anticipate continued success—especially in apparel and accessories, which are particularly strong holiday gift categories. We've already made significant purchases for the holiday season in these areas and have excellent visibility into the increasingly branded content that will carry us into the fourth quarter. Thank you for your question.

Matt, the only thing I would add to what Ernie said is just the, like we've seen for, when business is very good and we have the higher comps, is the consistency of the comps across almost all of the regions in the United States and the consistency among all of our types of stores, the suburban, ex-urban, et cetera. So I think it's the consistency of the comps as well that bodes well for lifting the overall comp.

And then Scott, maybe just on SG&A. Well, I know you're not providing formal guidance today. Just any puts and takes to consider on the expense line as we look ahead, I think would be really helpful.

Again, no real changes to what we've talked about before. I mean, the supply chain cost, both for this year and going forward is still the biggest one, mostly having to do with building out our infrastructure investments. But no real changes, wage, all the other ones are similar. Wild cards, obviously, are tariffs, FX, et cetera. And the only other one I would talk about would be probably a little better than what we thought is freight costs due to some of our own strategies that we put in place plus the renewal when we had some of our contract renewals that we said would happen at the end of the third quarter were a little better than we would have thought on some of the inbound freight and some of the outbound freight in terms of what we've been trending. So I think the positive news there. But overall, nothing significantly different than what we've talked about and elaborated on last quarter.

Matt, I want to revisit your question because something stood out to me regarding the two-year comparison in Marmaxx. One notable accomplishment is the planning organization, which effectively manages the merchandise according to trends we've been monitoring. The buying and planning teams have excelled at tracking sales trends by region and by business category. Scott mentioned that all regions have performed well, and while sales have been diverse across categories, the planning team in Marmaxx has been exceptional in maintaining momentum above our expectations, which is quite challenging. I commend our buying and planning teams for successfully adapting to a sales trend that exceeded our initial projections.

Thank you. Our next question is from Kimberly Greenberger.

I just wanted to ask about tariffs, Scott, if I could. It seems like the fourth quarter gross margin guidance, which does include tariff impact, is for sort of flat to 20 basis points of declining gross margin. It seems really quite modest. So were there some remediation efforts you were able to put into place? I guess I just would have thought maybe there would be a little bit more pressure, but that you guys seem to be managing through it very nicely so far.

Yes, I'll begin and then Ernie will add to it. Overall, in the fourth quarter, we observed improvements in markdowns due to better sales in the third quarter, and we expect similar opportunities in the fourth quarter. Additionally, we have seen improved buying as we progressed through both the third and fourth quarters. There was an increase in tariff expenses due to recent changes in tariff legislation, particularly because our commitments to goods involved higher tariffs. On the other hand, freight costs have decreased slightly in the fourth quarter compared to the first three quarters of the year. As a result, our margins are expected to improve, although they could have increased even more uniformly had it not been for some foreign exchange pressure internationally. Overall, we believe that buying has improved, and Ernie can elaborate further.

One of the benefits that we had is we believe that a lot of vendors have been bringing goods earlier this year, which has been an advantage for us and has helped us in the third quarter to mitigate tariffs as such. The issue, unfortunately, going forward into 2020 is more challenging than that because we don't have as much visibility as we move forward into next year as to whether or not we can keep mitigating like we have. It remains to be seen what happens with the vendor and competitor pricing. Consumer demand, potential tariff pass-through. And we have so much of fiscal '21 that is not committed to versus currently where we have the visibility for this fourth quarter, so much over the next year. We have just a small portion committed to that, it's kind of up in the air, and we're a little suspect as to what we can mitigate for next year. As well as we also, unfortunately, know that on some of our direct imports, which in the scheme of things isn't a huge number. We know we are getting hit with tariffs on those. So I have to tell you that for next year, it's a bit of a wait and see, again, until we start to get a little closer to that time period and see what happens with the vendors.

Does your commentary, particularly regarding vendors and their behavior with bringing goods in early? Does that relate to your comments at the end of Q2 or on the Q2 call where you talked about the product availability out in the marketplace is basically some of the best that you've even seen? And does that remain the case?

I think that has been helpful, although it's not a major factor. In our European markets and Canada, we have seen a significant increase in goods, especially in categories affected by tariffs. There are areas where tariffs apply and others where they do not, indicating a general oversupply. I believe some of this is linked to e-commerce businesses, which have generally fallen short of their sales projections, resulting in excess merchandise availability. While tariffs may have slightly influenced this early influx, it goes beyond just that factor.

Thank you. Our next question is from Paul Lejuez.

Can you talk about the performance with Homesense, and what you might be seeing in terms of cannibalization of the HomeGoods concepts where those two go head-to-head in the same market? Also, curious how you're thinking now that you've got 20 something the Homesense stores, about the best location for Homesense and where it should play relative to HomeGoods in the market? And any early view on how many you might be opening next year? Thanks.

I'll begin and then Scott can discuss potential store openings for next year. Regarding cannibalization, our Homesense sales had declined slightly and were not as strong as we anticipated. This is partly due to some categories that were performing poorly in HomeGoods also experiencing weakness in HomeSense, which was a setback for us. Overall, the actual transfer sales have aligned with our expectations. We've noticed that nearby stores have seen a slight decrease in transfer, while those further away have performed better, as HomeSense and HomeGoods attract customers from a wider area compared to Marmaxx. Ultimately, our transfer sales after accounting for cannibalization are nearly identical to our initial plans, so I would say we're mostly on track. Scott, would you like to share updates on our store openings?

We really, Paul, haven’t given any guidance at this point in terms of any of the store openings we’re doing next year, so still going to have a healthy number of both overall stores for HomeGoods and all that. I would say that our new store openings, in just general thinking about HomeSense and HomeGoods, is pretty much on our pro forma or better, so we like what we’re seeing, both on our HomeGoods stores. HomeSense stores, I think, the one thing we had to do is still work to be done. One thing we have not seen when we were contemplating the model was the amount of wage, freight, and certainly in tariff impact, as Ernie has mentioned, a little more impacts for home business. So I think those were pressures that were non-contemplated where we first created the model. Having said that, a lot of work has been done too, and we’ve seen the results of improving the operational side of the business in terms of some of the expense management has continued to get better. Our margins are continuing to improve. And I think still work to be done, but all moving in the right direction. I think the differentiation in all that is what we would have expected. So I still, as Ernie said, we still think we have a lot of room we can improve on the sales and still on operating. But overall, feel pretty good about, like I think as we’ve seen recently in just home businesses in those categories, were certainly a little bit hit harder in the HomeSense than even the general HomeGoods business.

Just one follow up on Familia. Do you have an option to buy a larger stake at a certain price as part of this initial investment? Thanks.

We’re not going to discuss any specifics. I believe we could consider buying more over time, but we won't go into any further details at this moment. Clearly, we are pleased with our achievements, and that's all we will say for now.

Thank you. Our next question is from Kate Fitzsimons.

My question is on inventory. Could you just speak to your overall inventory strategies? Inventories were up 13%. Should we think about a greater pack-away number pushing that inventory balance higher year-on-year, just given what you are seeing with the buying environment? And at 9% on a per-store basis, there was a mention of later flows in your prepared commentary. Just any color on how you’re thinking about product flow plans for the fourth quarter, and how we should think about that inventory that would be great. Thank you.

We are very comfortable with our current position for several reasons. Firstly, our inventories have increased. While there is some additional packaway, it's not the main factor and doesn't significantly impact the overall situation. In recent years, our sales growth has outpaced our inventory growth, so we are catching up in that regard. The primary reason for our comfort is that we are capitalizing on the current market trend that is saturated with goods we want to leverage. This is an ideal time for TJX to take advantage of opportunities. We are uniquely positioned logistically as one of the few retailers who can manage goods to stores differently than those owned in distribution centers. Consequently, even though some items weren't originally intended for packaway, we can purchase aggressively if we find the right deal at a favorable cost and retail price, especially with the strong trend in Marmaxx. This is significantly contributing to the inventory levels you mentioned. Additionally, this strategy allows us to maximize sales as we approach the fourth quarter, supported by a strong two-year stack, which helps us maintain positive momentum moving forward. If we do end up with excess inventory, some of these goods may be placed in packaway due to the advantageous purchases we are making. Furthermore, we are considering the compressed holiday selling window, which suggests it is beneficial to have some reserve inventory to support top-line growth, especially since we are able to acquire goods at favorable prices.

Yes. The only thing I'd add to what Ernie said, so we liked what we did last year with a little bit more enhanced flow. And this year, I think, we took a step above that. So, it didn't cause the third quarter ending inventories and to be higher. It's not affecting our operational business. This would be obviously more staged in our distribution centers, waiting to be flowed out to the stores. And as you can see in our third quarter, as we talked about our per store inventories, where we wanted to be, particularly at Marmaxx, and our markdown rates came down. So, we feel good about the overall management and go forward. Obviously, I think, it will come down. But, there will still be more packaways likely at the end of this year, when we end the year than what we had in a prior year.

Our next question is from Jay Sole.

A lot of retailers talked about how maybe August was okay, but September was really tough because of weather. It just sounds like from the comp at Marmaxx that you didn't see that kind of trend. Was that the case? Like, can you talk about maybe what you saw by month and why maybe you weren't impacted by warm weather or whatever was going on in September?

We don't break it down by month, but I can tell you that we had a fairly consistent quarter in terms of sales. It wasn't one of those quarters with fluctuations; it was pretty steady. While we don’t provide monthly breakdowns, the performance was consistent.

Can you share some additional insights on the transportation costs? I understand they performed slightly better. Could you explain how transportation costs changed year-over-year when you renewed those contracts, even if just generally?

Yes. I won't go into all the details, but the main issue for us was that our inbound rates were significantly lower than we had anticipated. There was a decrease in outbound rates as well, although this was less about negotiations and more about a natural reduction in the rate increases. That was the primary factor. Fuel costs haven’t been a major influence. As for the other rates, including ocean and intermodal rates, they still experienced low to mid-single-digit increases, so there wasn't a significant change there. One uncertainty for next year involves ocean freight, which may see some higher rates due to new requirements for low sulfur fuel, though we still need to determine when those regulations will take effect. Overall, the biggest savings came from truckload deliveries on the inbound side. That summarizes the situation, Jay.

Your next question is from Omar Saad.

Ernie, I wanted to ask you a follow-up to one of the comments you made about the inventory availability at the end of the quarter being really good. You made a comment that a lot of it is coming from the e-commerce channel. I'm trying to understand exactly what that dynamic is. Is it traditional retailers' e-commerce businesses that are overstocked in those DCs are ending with too much inventory or are you seeing it from pure e-commerce businesses? Maybe help unpack what you meant by that. I would appreciate it.

So, Omar, regarding the situation across the board, the good news is that it’s quite widespread. You have your vertical e-commerce players, which are brands with their own online stores. However, they face challenges because almost all of the products they sell are imported and have long lead times. Predicting e-commerce sales by category and item is not straightforward, especially since they don’t have the extensive historical data that brick-and-mortar retailers possess. This makes it more volatile for them to forecast their inventory needs. This issue affects both vertical e-commerce players and those with brick-and-mortar and e-commerce operations. There’s a risk of having excess inventory in certain categories because sales don’t always meet expectations. However, some categories may perform better than anticipated, leading to shortages. With the increasing number of e-commerce players, whether vertical or multichannel, this has resulted in challenges across various categories, including accessories and apparel. A significant portion of our off-price purchases is now sourced from this channel. Spending time in the e-commerce offices reveals the difficulty in forecasting needs and managing inventory placement on their websites, particularly as many of them are experiencing rapid growth, which contributes to their forecasting volatility.

This is really helpful insight. Fair enough. Thank you very much. It's really helpful, Ernie. Thanks. Good luck.

Okay.

Thank you. And our next question is from Mark Altschwager.

You had a nice change in trajectory in the HomeGoods operating margin in the quarter. You raised your guidance there for the year. I was hoping you just a little bit more about the drivers to that performance and the upside to your expectations. And how should we be thinking about the margin trajectory on HomeGoods from here?

I'll jump in, Mark. I believe, similar to what Ernie mentioned about the buying environment, HomeGoods has taken advantage all year, especially in the third quarter, by buying better than planned, even with the higher tariff impacts he noted. We achieved better buying and managed to leverage some markdown opportunities despite one comparable sale, which was more of a technical factor compared to the previous year. Overall, we controlled inventory very effectively, significantly impacting merchandise margins. As mentioned in our first call at the beginning of the year, we anticipated that supply chain and freight costs would be more significant in the first half. The supply chain impact was more pronounced in the first two quarters due to the opening of the new distribution center in New Jersey in the third quarter, which started to show a decline. We expect freight costs to be lower in the latter half of the year than in the first half. These three factors contributed to our performance, and HomeGoods excelled in managing expenses, which was considerably better than we had anticipated. Therefore, the combination of effective expense management, a decrease in supply chain and freight costs, and improved merchandise margins due to better buying primarily accounted for the difference between the third quarter and the first half of the year.

Thank you. Regarding HomeGoods, you mentioned that some of the inventory mix negatively impacted the comparable sales last quarter. Do you believe you have addressed the suboptimal inventory as you approach the fourth quarter?

Yes. Mark, I would say we actually still have work to do on some of those areas and departments that we have not been happy with the execution. So, stay tuned on that. I think, we have a lot of work to do. We have other areas that I think have actually ticked up, and that's where you’re getting the sequential improvement. In those other areas, I would say we’re still not happy with where we are and hoping more by the first quarter that we would have those more straightened out. So, yes, still more work to be done. I’m very happy with the way we’re entering the quarter in total in terms of better momentum than where we were six months ago, but not really specifically in those categories.

Thank you. And our next question is from Lorraine Hutchinson.

Thanks. Good morning. Do you see any opportunities to take price to offset some of the tariff pressure next year, or should we model tariff offsetting any easing of freight costs, as we look to fiscal 2021?

Hi, Lorraine. We do not anticipate any changes for next year. Regarding tariffs, we haven't experienced any movement in retail prices. We are likely to be the last retailer to make any retail adjustments. We have not observed any shifts in our categories or among our competitors. Surprisingly, we haven't seen retail prices increasing. Some categories, particularly in home goods affected by tariffs, are facing value pressures, making it unlikely for us to raise prices. Ideally, we would like to increase prices, but that's not the reality. Consequently, as we look to next year, we are hesitant to claim that we can offset the tariffs due to the current lack of visibility. This situation keeps us in standby mode, and we are not ready to commit to any mitigation strategies at this time.

Yes, I'll take this one, Lorraine. So, fundamentally, since we haven't purchased the majority of the goods, it's still too early to provide clarity. There's a lot of volatility affecting pricing, and we should be able to offer more insight during our next call in a few months when we expect to have a better understanding of our purchasing situation. I know this isn't the answer you were hoping for, but we're not in a position to explore various scenarios or provide any guidance at this time.

Thank you.

Thank you. Our next question is from John Kernan.

Good morning, guys. And thanks and congrats on all the momentum as we head into next year.

Thank you.

Scott, a question on SG&A. You’ve made quite a few investments in supply chain this year, both on the SG&A as well as CapEx. Just wondering how that affects your ability to leverage SG&A as we go into next year and just how we should thematically think about SG&A as a source of long-term margin upside?

Yes. I'm not going to provide too much commentary on next year's guidance. We have made significant investments in remodeling our stores, opening new locations, and establishing new distribution centers in the short to medium term. The addition of new distribution centers is still a factor that affects our leverage, and it should remain at a similar level. That's about all I can share at this time regarding the longer-term outlook. I prefer not to speculate on what may transpire in the years ahead. For now, I will reiterate what I mentioned in the last call: we anticipate a similar level of deleverage, particularly concerning supply chain issues.

Can you provide any insights on CapEx regarding its direction for next year? It has increased somewhat this year, likely due to some supply chain investments.

It's still too early to provide a definitive answer. We increased our capital spending this year by a couple hundred million, but it currently appears to be less than we initially anticipated. We believe our cash position will turn out to be slightly better than what we expected, influenced by a variety of factors. Therefore, I don’t foresee much change in our capital expenditures compared to what we had planned for this year. Ultimately, I expect this year’s spending to be lower, which means we will adjust the timing of capital for projects that were postponed to next year. However, we won't be disclosing a specific figure. I can say that this year's expenditure is a reliable indicator for what we plan to do next year.

And we do have time for one final question. Our last question today is from Bob Drbul.

Just wondering if you could comment on TK Maxx in the UK and what's happening there. And I'm not sure, if you gave this, but the mix for the Russian investment in terms of the merchandise mix, vendor overlap in terms of apparel, just sort of how that shakes out versus where you guys are today? Thanks.

Certainly, Bob. We are extremely pleased with the TK Maxx business. One aspect that I wish I could emphasize more is the market share we continue to capture, which has been remarkable when considering the retail landscape there. Our teams have done an outstanding job across all functions, from logistics to flow and planning, much like I mentioned about Marmaxx earlier. It's been challenging to maintain sales growth against comparable figures, especially since we approach planning conservatively. However, our current performance is exceeding those conservative expectations. This success stems from the collaboration of our buying team, merchandise planning, store execution, logistics, distribution centers, and marketing, with finance playing a crucial role as well. This collective effort has driven the robust trend we are experiencing. Regarding the merchandise mix you inquired about, it boils down to our ability to provide an increasing selection of high-quality branded goods across nearly all categories. I was just in the stores a week ago, and I noticed the exceptional range of branded products, which impressed me more than I have seen on any of my previous visits. Scott has visited recently too and has observed the same excellent situation. Scott?

Yes. I will jump in. I'm not going to comment on the merchandise content. However, regarding the overall performance, we are pleased to see great conversion rates across all of our markets. The performance of Marmaxx has been consistently strong in all the countries where we operate. Our new stores are doing well, and we are bringing on many vendors, as Ernie mentioned. Some of this can be attributed to e-commerce growth. We appreciate the market share gains we've achieved, especially in the UK, where our performance stands out as significantly better than both UK and European retailers. We have successfully maintained our margin over the past two years compared to many other European retailers who have faced pressures from Brexit, wage increases, and currency fluctuations. We feel very positive about how we have managed to hold up under these circumstances. As Ernie noted, the most important factor is our strong top line sales. So, we are confident about our business heading into the holiday season.

Regarding your question about Familia's mix, we cannot comment on the overlap at this moment. However, as Scott mentioned earlier, they operate a full line store, similar to ours, and have a home division with various business areas. Some vendors likely overlap, but many do not. Nonetheless, we believe it's a positive relationship.

Yes, I want to add two points on that. There is plenty of merchandise availability both with us and our competitors, and the same goes for Europe. Additionally, I want to highlight that our e-commerce business in the UK is particularly strong alongside our brick and mortar stores. We have reached over 7% of UK sales from e-commerce, complemented by robust physical store performance, which is very encouraging for us in both segments. Almost 50% of goods ordered are through Click and Collect, which sets our e-commerce business apart.

And one of the pluses, as you know, we talk about here is our e-com business, we purposely keep it differentiated, so that we don't cannibalize our stores as much. So, over there, maybe not as differentiated as here, but still differentiated with the goal of having the customer shuffle. So, I think that was our last question. And we've enjoyed the call. Thank you all for joining us today. We look forward to updating you on our fourth quarter earnings call in February. Thank you, everybody.

Ladies and gentlemen, that concludes your conference call for today. You may all disconnect, and thank you for participating.