Thank you for joining us today. Welcome to the TJX Companies Fourth Quarter Fiscal 2023 Financial Results Conference Call. This call is being recorded on February 22, 2023. I will now hand it over to Mr. Ernie Herrman, Chief Executive Officer and President of The TJX Companies, Inc. Please proceed, sir.

Thanks, Ivy. 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 March 30, 2022. 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 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 that transcript. We have detailed the impact of foreign exchange on our consolidated results and our international divisions in today's press release and the Investors section of our website tjx.com. Reconciliations of other non-GAAP measures we discuss today to GAAP measures are also 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 John Klinger. As we announced last quarter, John has been promoted to CFO. John will be covering the financials on the call and taking your financial questions today and going forward. I'm very pleased that our company will continue to benefit from both of their financial expertise and decades of TJX experience and leadership. I'd like to start today by thanking all of our global associates for their great work in 2022. I am truly appreciative of their continued commitment to both TJX and our customers. I want to give special recognition though to our store, distribution center, and fulfillment center associates for their hard work and dedication every single day. Now to an overview of our results beginning with the fourth quarter. I am extremely pleased with our strong top-line performance. Our better-than-expected U.S. comp store sales increase of 4% was driven by the excellent performance at our Marmaxx division, which delivered its strongest quarter of the year. We also saw positive U.S. customer traffic in the fourth quarter, which was also driven by Marmaxx. Our exciting assortment of gifts and great values resonated with shoppers this holiday season. I believe the freshness of our mix really sets us apart as we shipped ever-changing selections to our stores and online throughout the quarter. In terms of profitability, pretax profit margin increased over last year. Our merchant organization continued to do a great job buying better and retailing strategically, which drove excellent margins. Unfortunately, we had an outsized shrink charge in the fourth quarter that resulted in pretax profit margin coming in below our plan, which John will discuss in a moment. For the full year, total sales were nearly $50 billion. Profitability improved over last year, and adjusted earnings per share grew 9%. I want to again recognize all of our talented associates around the world for the excellent execution of our flexible off-price business model throughout the year. Their collective efforts drove outstanding value on our assortment, excitement in our stores, and the satisfaction of our customers. Moving to 2023, the first quarter is off to a strong start. We are excited about our plans to drive sales and customer traffic and are laser-focused on initiatives to drive profitability this year and beyond. Availability of quality branded merchandise is phenomenal. We are in a great position to take advantage of the opportunities we are seeing in the marketplace. Further, we are convinced that our commitment to value and our treasure hunt shopping experience will continue to serve us well in this environment. Importantly, we continue to see many opportunities to capture market share and improve profitability over both the short and long term. Now before I continue, I'll turn the call over to John to cover our fourth quarter and full-year financial results in more detail.

Thanks, Ernie, and good morning, everyone. I'm pleased to be starting in this new role, and I want to add my sincere thanks to Scott for his guidance and mentorship over the years, and I look forward to continuing to work with them. I would also like to echo Ernie's comments and thank all of our global associates for their hard work and commitment throughout 2022. I'll start with some additional details on the fourth quarter. As Ernie mentioned, U.S. comp store sales increased 4%, exceeding our expectations. Our U.S. comp growth was driven by a very strong 7% comp sales increase at Marmaxx. For the fourth quarter, the average basket was up in the U.S., driven by a higher average ticket, and U.S. customer traffic was up. TJX net sales grew to $14.5 billion, a 5% increase versus the fourth quarter of fiscal '22 and despite a significant impact from unfavorable foreign currency exchange. Fourth quarter consolidated pretax profit margin of 9.2% was up 20 basis points versus last year, and merchandise margin was down slightly. Within merchandise margin, strong mark-on was offset by higher markdowns, which were compared to exceptionally low markdowns last year. Freight was a benefit in the fourth quarter. Further, we had an unplanned shrink charge of 60 basis points versus last year. I want to note that our fourth quarter pretax profit margin guidance contemplated an expected 50 basis point benefit from shrink due to the elevated charge in the fourth quarter of last year. Therefore, the negative impact of shrink versus our pretax profit margin guidance was 110 basis points. Lastly, we're pleased that earnings per share were $0.89, up 14% at the high end of our plans. Moving to our fourth quarter divisional performance. At Marmaxx, fourth-quarter comp store sales increased a very strong 7% over a 10% open-only comp increase last year. Marmaxx's comp increase was driven by apparel and accessory categories, which had a high single-digit comp increase. Further, in the fourth quarter, customer traffic was the main driver of the comp increase and average basket also increased. Marmaxx's fourth quarter segment profit margin was 11.6%. HomeGoods fourth quarter comp store sales decrease of 7% versus an outsized 22% open-only comp increase last year. HomeGoods fourth quarter segment profit margin was 7.3%. Internationally, we're pleased with the performance of both our TJX Canada and TJX International divisions in the fourth quarter. At our Canadian division, net sales were up 10% on a constant currency basis versus last year. Segment profit margin on a constant currency basis was up 12.5%, which exceeded their fiscal '20 margin. And at our International division, net sales on a constant currency basis were up 11% versus last year. Segment profit margin on a constant currency basis was up 7.2%. Now to our full year consolidated fiscal 2023 results. U.S. comp sales were flat versus a 17% U.S. open-only comp sales increase last year. TJX net sales grew to $49.9 billion, up 3% compared to fiscal '22 despite a significant impact from unfavorable foreign currency exchange. Full year adjusted pretax profit margin was 9.7%, a 10 basis point increase versus last year's adjusted 9.6% and merchandise margin was down. Within merchandise margin, strong mark-on was more than offset by 120 basis points of incremental freight costs and higher markdowns, which were again, up against exceptionally low markdowns last year. Shrink expense negatively impacted full year merchandise margin by approximately 30 basis points and was not contemplated in our most recent full-year guidance. Full year adjusted earnings per share were $3.11 at the high end of our plan and up 9% versus last year's adjusted $2.85. Moving to inventory. Balance sheet inventory was down 2% versus the fourth quarter of fiscal '22. We are confident that we are strongly positioned to both capitalize on the abundant merchandise in the marketplace and flow fresh assortments to our stores and online this spring. I'll finish with our liquidity and shareholder distributions. For the fourth quarter, we generated $3 billion in operating cash flow. For the full year, we generated $4.1 billion in operating cash flow. We ended the year with $5.5 billion in cash. In fiscal '23, we returned $3.6 billion to shareholders through our buyback and dividend programs. Now I'll turn it back to Ernie.

Thanks, John. I'll pick it up with some full year divisional highlights. Before I begin to speak to them individually, I want to highlight the outstanding performance of our teams across each of our divisions in 2022 while they navigated historic levels of inflation and an uncertain retail environment. All year long, each of our retail banners delivered shoppers an excellent assortment of apparel, accessories, and home merchandise and offered great value every day. Beginning with Marmaxx. Full year comp store sales increased 3% and total divisional sales reached $30 billion. Marmaxx's apparel and accessories businesses were very strong all year long with a mid-single-digit comp increase. For the year, average basket was up significantly and customer traffic increased slightly. Marmaxx's full year segment profit margin was 12.7%. During the year, we opened a combined 50 T.J. Maxx and Marshalls stores. Further, we remodeled approximately 225 stores, and the feedback from customers has been terrific. We are extremely pleased with the performance of our largest division and see a significant opportunity to continue growing the top and bottom lines. At HomeGoods, full year comp store sales decreased 11%. It is important to remember that last year, HomeGoods had a remarkable 32% comp sales increase as we saw consumers spend an outsized amount in home-related categories. While HomeGoods customer traffic was down for the year, average basket increased. HomeGoods full year segment profit margin was 6.3%. In 2022, we surpassed 900 stores for this division with the opening of over 50 HomeGoods and HomeSense stores. Long-term, we continue to see the potential for HomeGoods to open over 500 additional stores and for profitability to significantly improve. At TJX Canada, net sales were nearly $5 billion and increased 18% on a constant currency basis. Segment profit margin increased to a very strong 14%. Our Canadian business operates more than 550 total stores and is very well penetrated throughout the country. TJX Canada is one of the top apparel, accessories, and home retailers in that country and a sharper destination for several signature categories. We remain confident that TJX Canada is well positioned to capture additional market share over the short and long term. At TJX International, net sales surpassed $6 billion and increased 22% on a constant currency basis. Segment profit margin improved to 5.7% on a constant currency basis. In Europe, we believe we significantly outperformed many other major brick-and-mortar retailers as our values resonated with consumers in a heightened inflationary environment. In Australia, sales were very strong, and we continued expanding our store footprint across the country. Going forward, we believe that we can grow our market share in each country that we operate in and continue to improve this division's profitability. As to e-commerce, we added new categories and brands to each of our online banners in 2022. While e-commerce only represents a very small percentage of our overall net sales, it allows us to offer shoppers our great brands and values 24 hours a day. As we look ahead, we are convinced that the characteristics of our business and the depth of talent in our organization will allow us to capitalize on the opportunities that we see to further grow our top and bottom lines. First, we are in an excellent position to continue offering consumers great value and freshness every day. We have a team of more than 1,200 buyers who source from a universe of approximately 21,000 vendors last year, including many new ones. Our ability to buy goods across good, better and best categories gives us tremendous flexibility in the vendor marketplace. Again, availability of merchandise is phenomenal, and we are confident that we'll have plenty of quality branded goods going forward. Second, we are convinced that the appeal of our treasure hunt shopping experience will continue to resonate with consumers. Giving us confidence is the continued strength of our customer satisfaction scores. Further, our leadership and flexibility allows us to take advantage of the best opportunities and hottest trends in the marketplace. This allows us to offer our shoppers an assortment of merchandise to surprise and excite them every time they visit. We are also focused on being a gift-giving destination all year long. Third, our convenient, easy-to-access store locations attract consumers across a wide income demographic. Our eclectic mix of good, better and best merchandise across categories allows us to offer a branded, fashionable mix across a wide span of price points. We see these as key advantages as we continue to expand our store footprint. Long-term, we see the potential to open more than 1,400 additional stores across our current geographies, which we believe will attract even more shoppers to our great assortments and values. Next, our marketing has been very effective in targeting consumers with broad reaching and compelling brand campaigns across different channels and platforms where consumers are currently spending their time. Our messaging is continuing to reinforce our value leadership and demonstrate that we are one of the best choices for consumers during the current economic environment. We are particularly pleased that we continue to attract an outsized number of younger customers to our stores, which we believe bodes well for the future. As to our profitability outlook, we are planning an increase in our fiscal 2024 adjusted pretax profit margin to a range of 10.0% to 10.2%. Beyond this year, our target remains to return to our fiscal 2020 pretax profit margin level of 10.6% by fiscal 2025. Giving us confidence are the sales, better buying, and strategic retailing opportunities we see going forward at each division. John will outline the other assumptions embedded in our plans in a moment. Turning to corporate responsibility, we continue to focus our global corporate responsibility efforts under our four key pillars: workplace, communities, environmental sustainability, and responsible business. Last quarter, I noted that TJX published its 2022 Global Corporate Responsibility Report which summarizes the company's ESG efforts and progress across these four reporting areas. And as a reminder, in fiscal 2023, we set expanded and accelerated global environmental goals, including a goal to achieve net-zero GHG emissions in our operations by 2040. We are working hard to make progress toward our goals and help mitigate our impact on the environment. I'd also like to take a moment to speak about the work our teams are doing in our communities. In fiscal 2023, we helped support more than 2,000 nonprofit organizations globally. We're very proud of the impact this has had, including helping to provide more than 25 million meals to individuals experiencing food insecurity and helping with access to educational opportunities for more than 1 million students from under-resourced communities. We also continue to support nonprofits working towards racial justice through new grants to several national organizations. Finally, for the first time since the beginning of the pandemic, we were able to restart our in-person community relations programs and have seen a resurgence in volunteering across our organization. In the past six months alone, our U.S. associates provided more than 2,400 hours of service to their communities. I'm grateful to our teams around the globe for the work they do to support our global corporate responsibility priorities and we are proud to continue to make progress across our many programs and initiatives. As always, we invite you to visit tjx.com to learn more. Summing up, we feel great about our performance in 2022 and our momentum heading into 2023. I am confident that the strength and resiliency of our flexible off-price business model and the depth of expertise and knowledge of our teams, set us apart from many other major retailers and will continue to serve us well. I want to again recognize the exceptional talent we have across the organization. It is their collective efforts and execution of our off-price fundamentals that bring our business to life for our shoppers every day. As an off-price leader in every country we operate in, I'm excited about the market share opportunities we see ahead in both the U.S. and internationally. I am very confident in our plans to grow TJX into an increasingly profitable $6 billion-plus revenue company over the long term. Now I'll turn the call back to John to cover our full-year and first-quarter guidance and then we'll open it up for questions.

Thanks again, Ernie. Before I start, I want to remind you that our guidance includes a 53rd week in the fiscal 2024 calendar. Additionally, in fiscal '24, we are returning to reporting overall comp store sales growth versus fiscal '23 as we now have a baseline for our TJX Canada and TJX International divisions. Now to our full year guidance. We are planning overall comp store sales growth to be up 2% to 3%. As a reminder, our comp guidance will exclude sales from the 53rd week. We expect full-year consolidated sales to be in the range of $52.5 billion to $53.2 billion, a 5% to 7% increase over the prior year. This guidance assumes approximately $800 million of additional revenue from the 53rd week. We're planning full year pretax profit margin to be in the range of 10.1% to 10.3%, excluding an expected benefit of approximately 10 basis points from the 53rd week, we expect adjusted pretax profit margin to be in the range of 10.0% to 10.2%. This would represent an increase of 30 to 50 basis points versus fiscal '23's adjusted pretax profit margin of 9.7%. Our pretax profit margin guidance assumes that we will see a benefit of about 80 to 100 basis points from lower freight expenses as well as a continued benefit from better buying and strategic retailing. We're planning these benefits to more than offset continuing headwinds from incremental wage and supply chain costs. Also contemplated in our guidance is that shrink will be similar to last year. For modeling purposes, we're currently anticipating a full year tax rate of 26.1%, net interest income of about $116 million and a weighted average share count of approximately 1.16 billion. We expect full year earnings per share to be in the range of $3.39 to $3.51, excluding an expected benefit of approximately $0.10 from the 53rd week, we expect adjusted earnings per share to be in the range of $3.29 to $3.41. This would represent an increase of 6% to 10% versus fiscal '23 adjusted earnings per share of $3.11. Moving to the first quarter. We are planning overall comp store sales growth to be up 2% to 3%. We expect first quarter consolidated sales to be in the range of $11.7 billion to $11.8 billion, a 3% to 4% increase over the prior year. We're planning first quarter pretax profit margin to be in the range of 9.2% to 9.5%. This guidance includes an expected benefit from freight of 130 basis points in headwinds from a combination of incremental wage and supply chain and the timing of some expenses. For modeling purposes, we're currently anticipating a first quarter tax rate of 26.4%, net interest income of about $29 million a weighted average share count of approximately 1.17 billion. Lastly, we expect first quarter earnings per share to be in the range of $0.68 to $0.71. Moving on to our fiscal '23 capital plans. We expect capital expenditures to be in the range of $1.7 billion to $1.9 billion. This includes opening new stores, remodels and relocations and investments in our distribution network and infrastructure to support our growth. For new stores, we plan to add about 150 net new stores which would bring our year-end total to nearly 5,000 stores. This would represent a store growth of about 3%. In the U.S., our plans call for us to add about 45 net stores at Marmaxx, 50 stores at HomeGoods, including 18 at including 18 HomeSense stores. At Sierra, we're planning to open 18 stores. In Canada, we plan to add 11 new stores. And at TJX International, we plan to open 18 net stores in Europe and 6 net stores in Australia. Lastly, we also plan to remodel 400 stores and relocate approximately 55 stores in fiscal '24. As to our fiscal '24 cash distribution plans, we remain committed to returning cash to shareholders. As we outlined in today's press release, we expect that our Board of Directors will increase our quarterly dividend by 13% to $0.3325 per share. Additionally, in fiscal '24, we currently expect to buy back 2 billion to 2.5 billion of TJX stock. I'll finish by highlighting the assumptions we've included in our fiscal '25 pretax profit margin target of 10.6%. First, our outlook assumes that overall comp store sales will increase 3% to 4%. Secondly, as I just highlighted, we're expecting freight to be a significant tailwind in fiscal '24, with a smaller benefit expected in fiscal '25. Third, we expect that incremental wage and supply chain costs will continue to be headwinds in both fiscal '24 and fiscal '25. Further, our plans assume that shrink will remain similar to fiscal '23 over the next two years. Next, as Ernie highlighted, our plans assume additional merchandise margin opportunities across all our divisions. Lastly, I'll mention that certain macro factors we haven't made assumptions for could change our plans such as geopolitical events, foreign exchange volatility, consumer behavior, or a worsening shrink environment. In closing, I want to emphasize that we have a very strong balance sheet and continue to generate a tremendous amount of cash. We are in an excellent financial position to invest in the growth of our business while simultaneously returning cash to our shareholders. Now we are happy to take your questions. As we do every quarter, we're going to ask that you please limit your questions to one per person so we can keep the call on schedule and answer as many questions as we can. Thanks, and now we'll open it up for questions.

Our first question comes from Michael Binetti from Credit Suisse.

Could you assist us in estimating the variation in incentive compensation dollars for 2022 and what we might expect to see in 2023? Broadly speaking, in terms of margins, as we aim to return to the 10.6% pretax margin of 2019, we recorded 9.7% this year. It seems we may have around 300 basis points or more of cumulative freight costs included in 2022, while shrink only contributed about a 30 basis point challenge compared to 2019. You have introduced leverage pricing as a new factor since then. Could you help us identify any additional headwinds that might limit our recovery to 10.6% next year?

So Michael, you're asking about the challenges of reaching 10.6%.

Starting at 9.7% and considering 300 basis points of freight, you will recover some of that, with shrink being a 30 basis point headwind. It appears there is a chance to exceed 10.6%. However, I would like to hear your thoughts on what we should include in our models regarding this.

I appreciate your perspective. Yes, part of this is about planning, as evidenced this year; we didn't anticipate the impact of shrink. However, our sales in Q4 indicate strong momentum, and we may be planning conservatively on that front. Marmaxx posted a 7% comp in the quarter, which makes us optimistic, and all divisions along with various performance metrics at TJX are quite robust, aside from the unexpected shrink issue. To clarify our current situation, shrink was the only area where our operational performance fell short. In contrast, other metrics like sales, merchandise margin, retailing and goods purchasing, expense management, and distribution are all performing well. Moving forward, we are planning for shrink to be flat this upcoming year. We're taking careful steps with tactics and strategies to achieve this without being overly optimistic or pessimistic in our approach. We feel positive about our position going forward, particularly in retailing and goods purchasing, where there could be some upside. The current dynamics in the vendor community, influenced by store closures and a slowdown in e-commerce, are resulting in an influx of inventory and improved brand options compared to our previous assessments. Throughout our calls, we've noted that the availability of branded content is outstanding right now. This sets the merchandising and top-line outlook. However, we want to avoid an overly aggressive sales plan amid forecasting challenges, as we saw last year. We're still evaluating the national home trend, and the complexity in the home sector, which includes more than just HomeGoods, could dampen our top line for a few more quarters. In Q4, we experienced a 7% decline in HomeGoods, but a 4% increase in TJX, driven by Marmaxx in Canada and Europe. Overall, we are being conservative in our plans, but we believe our approach is prudent given the current market conditions.

Yes. So Michael, regarding the 10.6%, for FY '25, we expect a 3% to 4% comparable sales growth and continued benefits from improved buying in average retail. We anticipate some freight benefits in FY '25, though lower than what we are experiencing in FY '24, primarily due to the timing of our domestic contract renewals. There will be some year-over-year advantage as we fully realize the savings from freight, along with the measures we are implementing to lower our shrink rate, wage, and supply chain costs, which we expect to stabilize in FY '25. Additionally, we are adding a distribution center for all our brands this year, leading to some year-over-year changes in annual costs for FY '25, but we still expect those costs to decrease. We also foresee shrink remaining flat over the next two years. Beyond FY '25, we expect to maintain or slightly increase our pretax margin on a 3% to 4% comparable sales growth, assuming some improvement from better buying in average retail, with no significant expense challenges and some positive trends in shrink. Overall, we remain confident in the fundamentals of the business.

Next, we'll go to the line of Omar Saad.

A couple of follow-ups. Maybe Ernie, you could talk a little bit about the comment you just made about e-com, that as a source of that channel slowing down across the board as a source of inventory. And then maybe also talk about the fact, at least on a multi-year basis, it seems like your HomeGoods business is stabilizing, and you're seeing a little bit maybe more of a predictable pattern at home. At the same time, as apparel and accessories accelerate, we talk about that dynamic. And you have kind of both the pandemic winner and the post-pandemic winner working at the same time, both those kind of two sets of categories.

Omar, those are great questions. I'll start with the e-commerce point. I agree with you, and I think you were beginning to hint at it. It definitely creates sales opportunities for us, especially as the entire e-commerce sector has slowed. Our e-commerce business is complementary and adds to our overall profile, but it only makes up a small 2%. We're not a significant player in that space, but it enhances our branding and resonates with both our younger and older customer bases for our physical stores. We are optimistic about our e-commerce performance. However, larger external competitors have been facing challenges, as you know, with some in home goods and others in apparel experiencing slowdowns due to inflation, which has led to saturation in specific market segments. This situation inadvertently provides us with additional inventory supply, which we have been utilizing. When I previously mentioned our strong positioning, I indicated that a part of our available stock comes from e-commerce spillover from other players, which has become a valuable source for us, including some good brands. Many niche e-commerce players have found it difficult to predict their sales, leading to excess goods, which is why we are optimistic about the quality of our mix, especially at the higher levels. We have some fluctuations, but we believe that consistently offering a range of good, better, and best merchandise across all categories is crucial, and e-commerce has been an excellent supplier for that. Regarding HomeGoods, it's quite interesting. We've noticed some decline in Q4, though it seems to be improving slightly. As we look ahead, we are monitoring the next few quarters to see how that business evolves. Speaking of store closures and e-commerce declines in that space, our strategy is simply to weather the storm while keeping HomeGoods and related areas in our Marmaxx business strong. We believe we will emerge on the other side as a more significant player in the home fashion sector than anticipated. The key challenge is that everyone is experiencing a temporary dip in demand, but this could lead to a market shakeout. While we aren't seeing that light just yet, HomeGoods is still down 11% for the year and 7% for the quarter. However, it’s worth noting that TJX as a whole still posted a 4% increase even with HomeGoods down, thanks to our diverse portfolio allowing us to adapt. This flexible business model is particularly beneficial during challenging times. When faced with the ups and downs in the home category, we can mitigate those fluctuations through our other business segments. Great question.

I'll just add on that. So it feels like sales are getting close to stabilizing. Q1, as Ernie mentioned, is up against really strong sales from previous years. It's actually the highest 3-year stack of the year that we're going into. So we feel like Q2 we'll probably start to see more clearly where we are with that. But we feel really good about the value proposition, which is still strong. We're attracting new customers. We're opening new stores, and we're likely to benefit from other home store closures. So we still feel very positive about the HomeGoods business.

Our next question comes from Lorraine Hutchinson.

I wanted to get your updated thoughts on pricing. Was there any change to the customer reaction to your price increases in 4Q? And then what are your plans for prices this year?

The pricing strategy has been extremely effective, and there have been very few instances where it hasn't worked. When it doesn’t, we adjust the pricing quickly, and it typically doesn't affect any SKU for long. We achieve success in about 95% of the cases. Looking ahead, as I mentioned, this strategy is crucial for improving our margins, which comes from both purchasing better and strategically retailing our products. One of our key strengths is offering a good, better, best selection, unlike many competitors who have a narrower focus. They might offer good products and perhaps some better options, but they generally do not have the full quality range we do, from well-known household brands at moderate prices to higher-end designer products. Our ability to balance these categories enables us to execute our retailing strategy more effectively than those who are more limited in their offerings. Additionally, our business model benefits from the extensive experience we have at TJX across all departments. This longevity in buying, planning, logistics, and other areas helps us manage pricing without taking unnecessary risks that other companies might face due to less experienced teams. In terms of customer perception, we have not faced any issues; our sales indicate that our value perception continues to rise according to customer surveys.

Our next question comes from Paul Lejuez from...

I think you mentioned higher markdowns in the fourth quarter, which affected merchandise margins. Can you explain what caused that? Do you believe it was specific to the fourth quarter, or could it extend into the first quarter? Also, I'm interested in the breakdown of inventory units by segment.

Yes. Thank you, Paul. Markdowns were higher compared to fiscal year 2022, but that year was exceptionally low. When we compare our markdowns to fiscal year 2020, the situation is actually more favorable. Most of the markdown increase is due to the comparison with that exceptionally low year.

In inventory?

I'm sorry, what was your question on inventory?

I am curious about the unit breakdown by segment. Additionally, is the markdown issue expected to continue into the first quarter? Are there particularly challenging comparisons for the first quarter of 2023?

In the first quarter, we expect markdowns to be roughly flat compared to the previous year. For our Q4 inventory levels, we finished the year about 1% higher on a per store basis. We do expect inventory levels to increase slightly into Q1. We had planned to reduce our inventory levels, and while we did bring them down, we may have ended up slightly lower due to the shrink impact we experienced in Q4, which we are addressing in Q1. Overall, we feel very comfortable with the inventory levels in our stores.

Yes, Paul, I’d like to add to that. Regarding the inventory levels, as John mentioned, they are slightly lower than we anticipated. On the sales front, we've seen stronger performance, which has contributed to the reduced inventory. We are very pleased with our current position, and this could positively impact our markdown rate since we are starting the first quarter with a fresh inventory and a strong sales beginning. This sets us up to pursue even greater sales results. For instance, we didn't initially plan for a 7% growth in Marmaxx during the fourth quarter, but we were able to adjust and achieve that. Similarly, in 2021, we had a plan for a 4% overall growth in TJX, and we exceeded it, hitting around 15%. We weren’t expecting those results, but we adapted because the market had the products available, and we currently have more goods available than before. I’m confident in our inventory position and our sales momentum, making for a promising start to the new year.

Next, we'll go to the line of Brooke Roach.

Ernie, you framed the opportunity from strategic retailing buying better and your pricing initiative and driving margin improvement as you track towards 10.6% pretax profit margins. Can you talk to the sustainability of this better buying environment and the key levers for continuing to expand that buying margin even if industry inventory overhangs begin to ease or the consumer continues to shift towards value?

Sure. Let me start with the last point. The consumer continues to gravitate towards value, which is a key factor in our robust top line performance, and we believe this trend will persist for several years, particularly in an inflationary context where consumers face rising household costs. This presents a favorable situation for us. Regarding improved purchasing, it involves several elements. One aspect is the strategic retailing of products, which differs from just better purchasing. The sustainability of this improved purchasing is largely due to many retailers experiencing closures and slowdowns, including permanent store closures. As a result, we are becoming increasingly vital to our vendors compared to a year ago, and certainly compared to three years ago. We are just starting to tap into our potential with our vendors. While we work with 21,000 vendors, we have critical relationships with the leading brands in the industry. Most of these partners would agree that we hold greater importance for them now than ever before. This will support our purchasing advantages for a long stretch, as it’s not merely about the current availability of goods but about long-term relationships with key brands, given our focus on branding. Unlike other retailers, we are not heavily reliant on private labels, which limits their benefits because they are managing their own imports and facing their own challenges. In terms of retailing our products, we have significant potential ahead. Our shopping reports indicate there is still considerable room for us to enhance pricing strategically as other retailers are compelled to do so due to inflation, making this a long-term opportunity. We are likely one of the few retailers positioned to take full advantage of this trend. We are enthusiastic about this being a sustainable opportunity rather than a temporary one due to these factors. Thank you, Brooke, for raising this important question.

Next, we'll go to the line of Matthew Boss.

Congrats on a nice quarter. So a couple of things, Ernie, a key inflection this quarter, I think, was U.S. traffic turning positive for the first time in over a year. Could you speak to the traffic inflection and drivers behind the material acceleration that you saw at Marmaxx? And then, John, just to summarize on gross margin. So I think you cited freight up 80 to 100 basis points, shrink flat in the AUR strategy accretive. So is gross margin for the year up 100 basis points or so? Is that fair? Or how best to quantify the components? And then just multiyear to Ernie's comments, is there any ceiling on gross margins relative to the 29% that we saw in 2017?

Go ahead. You can go on the margin on that.

Yes. So gross margin, we are planning it up to 140 basis points. So freight is a major component of that. Also, mark on an average retail is another piece of it. So those are the drivers for why we are expecting gross profit margin to be up. Now on the other side of it, obviously, we have minimum wage and other things that are in SG&A going the other way. That's on a full-year basis.

Does that answer that, Matt? Or yes?

Yes. And then just maybe, Ernie, on the traffic and...

Yes, the traffic is indeed experiencing a turning point, and I appreciate your description of it. We hope to see this trend continue as we enter the new year. We're optimistic about our start. However, in terms of our sales strategy, we want to identify a longer-term trend for more aggressive planning. We're in a favorable position due to this turning point. The average basket size has significantly increased, and while customer traffic has only slightly risen, this is still positive. We're hoping for a longer trend in that area. Overall, we are pleased with the health of our average baskets. If we can consistently boost traffic, we will really see sales take off, although we already sense there is potential for growth.

Our final question comes from Marni Shapiro.

Congratulations on a strong quarter and a successful year, along with a promising start to this year. I have a quick question. You've mentioned a slight increase in traffic and a small rise in the average basket size, but are you noticing any changes in how customers are shopping at your stores? Are they purchasing more items or merely responding to some price increases? Are you still attracting new customers? It feels like everyone in the U.S. is already a part of your customer base, but I know that's not the case. Could you share your insights on this?

Well, Marni, we want to express our gratitude to every individual. Surprisingly, a significant portion of the population still isn’t shopping with us, which makes us optimistic about our prospects. In this environment, the ongoing store closures around us will likely increase our traffic. Even if only half of those stores align with our categories, that's still a substantial opportunity, especially considering the numerous stores that are now slowing down or shutting down. This will certainly benefit us because, regrettably, not everyone shops with us yet, and there's still a lot of potential. Our market share has been steadily increasing each year, and as evidenced by our performance, a notable percentage of our sales comes from new customers, which we are actively monitoring. This growth results from a combination of new customers and increased spending from existing ones, with some of that additional spending driven by extra visits, rather than just larger baskets.

Yes, I mean I would say we break down the fourth quarter is probably half transactions and half basket, probably leaning a little bit more towards transactions.

We believe that we are starting to set ourselves apart even further due to the variety of brands we offer. We cater to different fashion styles and quality levels, ensuring we provide a wide range of pricing options. This allows us to appeal to a broader customer base compared to typical retailers, and we think this strategy is proving effective.

I think it's happening automatically on TikTok, you guys are cool, which is really hard to do when you're this bigger retailer. And for this generation, you're a cool place to shop. I can't believe I'm saying that, but it feels like something has changed.

We have some marketing studies that show we are becoming a gifting destination all year long. This trend indicates that we are perceived as cool, as gifts are usually not bought from retailers that are seen as uncool. In the past, we weren't a strong candidate for gifting, but now we are throughout the year, which suggests we've improved our image. I appreciate all the time with everybody. And I think that's the end of our call. And thank you for joining us. We will be updating you again on our first quarter earnings call in May. So thank you all for your time.

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