Ladies and gentlemen, thank you for standing by. Welcome to The TJX Companies First Quarter Fiscal 2026 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. As a reminder, this conference call is being recorded, May 21, 2025. 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.

Thank you, Fran. Before we begin, Deb has some opening comments.

Thank you, Ernie, and good morning. Today's call is being recorded and includes forward-looking statements about our results and plans. These statements are subject to risks and uncertainties that could cause the actual results to vary materially from these statements, including, among others, the factors identified in our filings with the SEC. Please review our press release for a cautionary statement regarding forward-looking statements as well as the full Safe Harbor statements included in the Investors section of our website, tjx.com. We have also detailed the impact of foreign exchange on our consolidated results and our international divisions in today's press release and in the Investors section of tjx.com, along with reconciliations to non-GAAP measures we discuss. Thank you. And now I'll turn it back over to Ernie.

Good morning. Joining me and Deb on the call is John. I want to start by thanking all of our global associates for their ongoing commitment to TJX and to our customers. Our talented associates work hard to bring our business to life and deliver great value to consumers every day. Now, to our first quarter results. I am very pleased with our performance in the quarter. Overall, comp sales grew 3% at the high end of our plan. Every division, both in the U.S. and internationally, drove increases in comp sales and customer transactions. Pretax profit margin and earnings per share both exceeded our expectations. John will talk about our first quarter results in more detail in a moment. During the quarter, our teams delivered an exciting mix of good, better and best brands across a broad range of categories and items to serve our very wide customer demographic. As always, we offered great value to our shoppers every day at each of our retail banners. Looking ahead, we are convinced that our value proposition and the flexibility of our business will continue to be a winning retail formula. The second quarter is off to a strong start, and we are excited about the initiatives we have planned, which we believe will further drive sales and traffic. The availability of merchandise we are seeing is outstanding, and we are in a great position to take advantage of the plentiful opportunities that the marketplace is offering. We are confident in our ability to navigate the current tariff and macro environment in the short term. Importantly, our vision for long-term growth, profitability and market share opportunities remains the same. Now, I'll turn the call over to John to cover our first quarter results in more detail.

Thanks, Ernie. I also want to add my gratitude to all of our global associates for their hard work and dedication to TJX and our customers. Now, I'll show some additional details on our first quarter versus last year. As Ernie mentioned, our consolidated comp sales growth of 3% came in at the high end of our plan. Overall, comp sales growth was almost entirely driven by an increase in customer transactions. Comps in both our apparel and home categories increased with home outperforming apparel. Pretax margin of 10.3% was down 80 basis points and was above our plan. Gross margin was down 50 basis points, primarily due to unfavorable inventory hedges. SG&A increased 20 basis points due to a lapping of a benefit from a reserve release last year in incremental store wage and payroll costs. Net interest income negatively impacted pretax profit margin by 20 basis points versus last year due to a lower cash balance and lower interest rates. Lastly, diluted earnings per share of $0.92 were also above our expectations. Now, to our first quarter divisional performance. Across all of our divisions, customer transactions increased once again. We see this as an excellent indicator of the strength of our value proposition across our retail banners. At Marmaxx, comp sales increased 2% and segment profit margin was 13.7%, down 50 basis points. As we expected, Marmaxx's sales accelerated in March and April as the weather improved. Comp sales in both apparel and home categories were up. Also, we were very pleased with the sales growth at our U.S. e-commerce sites and Sierra stores, which we report as part of this division. We remain confident that Marmaxx, our largest division, can capitalize on the opportunities we see to continue gaining market share and further grow our store footprint across the U.S. Our HomeGoods division delivered comp sales growth of 4% with strength at both the HomeGoods and the HomeSense banners. Segment profit margin was 10.2%, up 70 basis points versus last year. We believe our U.S. Home banners offer consumers a highly differentiated mix of home fashions from around the world. We are convinced that we can continue to grow our share of the U.S. Home fashions market. At TJX Canada, comp sales were up 5%. Segment profit margin on a constant currency basis was 10.6%, down 170 basis points last year, primarily due to unfavorable transactional foreign exchange as we expected. TJX Canada is the leading off-price retailer of apparel and owned fashions in Canada. With well recognized retail banners, we see our Canadian business as well positioned for continued successful growth. At TJX International, comp sales increased 5%. We were very pleased to see continued strength in Europe and outstanding sales in Australia. Segment profit margin on a constant currency basis was 4.2%, up 20 basis points versus last year. We continue to see plenty of opportunities to grow our TK Maxx banner across our existing European countries and in Australia and to bring TK Maxx to Spain next year. I also want to reiterate our excitement for our joint venture with Grupo Axo in Mexico and our investment in Brands For Less in The Middle East. While still early, we're building great relationships with these teams and we see this as a way to participate in the growth of off-price in these geographies. Moving to inventory. Balance sheet inventory was up 15% and inventory on a per store basis was up 7% versus last year. We feel great about our inventory levels and have been taking advantage of the excellent deals we have been seeing in the marketplace. Availability of merchandise remains outstanding and we are set up very well to continue to flow fresh assortments to our stores and online. As to our capital allocation, we continue to reinvest in the growth of our business while returning significant cash to shareholders through our buyback and dividend programs. Now, I'll turn it back to Ernie.

Thanks, John. I'd like to start with a few comments on the current environment and the reasons for our continued confidence in our business. We have a very long track record of successfully navigating through many types of challenging economic and retail markets. Each time, we've emerged as an even stronger company with greater market share opportunities. We have a very experienced leadership team that has worked together for multiple decades. While we're not immune to tariff pressure, we are laser-focused on our initiatives to offset them by remaining flexible and executing our opportunistic buying approach. Long-term, we remain as confident as ever in our strategic vision for future growth. Now, I want to reiterate the key characteristics of our business that give us confidence that we can continue to execute on our growth initiatives through the current environment and for many years to come. First is the value proposition we offer to our customers. For us, value is a combination of brand, fashion, quality, and price. Our customer surveys tell us that we have an excellent reputation as a value leader in each of our geographies. As a trusted value retailer, we have historically attracted new shoppers to our stores in many different types of environments. Therefore, we are convinced that we will have an opportunity to gain market share if more consumers seek out value in the current environment. We are confident that our commitment to our shoppers’ great value on every item, every day, will continue to resonate with consumers and drive more shoppers to our stores. Next, our team of over 1,300 buyers source goods from an ever-changing universe of over 21,000 vendors from more than 100 countries around the world. We have a global buying infrastructure and supply chain that has been in place for multiple decades. Further, we have long-standing relationships with many of our vendors and we can offer another avenue for them to grow their business. All of this gives us great confidence that we'll have plenty of merchandise available to support our long-term growth plans. Third, we successfully operate stores across a very wide customer demographic. We offer shoppers a wide breadth of good, better, and best brands to appeal to shoppers across a broad range of income and age groups. We believe this is a tremendous advantage and will continue to allow us to attract a wider shopping audience than many other retailers. Next, all aspects of our business model are driven by flexibility. Our global buying, store operations, supply chain, and systems are designed to support our flexible business model. This allows us to offer an exciting treasure hunt shopping experience with rapidly changing selections across all categories. We are confident that our flexibility will continue to help us to navigate through many types of environments and allow us to react to changing consumer preferences. Lastly, but most important, is our talent. I truly believe that the depth of off-price knowledge and expertise, along with the longevity of our management teams within TJX, is unmatched. We take great pride in being a teaching organization, which is a high priority of our managers throughout the company. This is supported by our TJX University and other training programs. Further, our human resource teams are extremely focused on developing talent and succession planning to ensure we develop the next generation of leaders of TJX. Additionally, I am so proud of our culture, which I believe is a major differentiator. I am convinced that our constant focus on talent and culture have been significant keys to our success and will continue to be going forward. Again, we are confident that the combination of these characteristics is why we have delivered decades of sales and profit growth and gives us great confidence that we are set up very well for long-term success. Summing up, we are very pleased with the overall performance of TJX in the first quarter. I truly believe we have one of the best models in retail and that it will serve us well in today's environment. Longer-term, we continue to see a long runway for growth. As an off-price leader in every country that we operate in, we see plenty of opportunities to further grow our market share in the U.S. and internationally. Lastly, I have great confidence that the flexibility of our business, our relentless focus on value, and very importantly, our talented associates will continue to be major contributors to our success for many years to come. Now, I'll turn the call back to John to cover our full-year and second-quarter guidance, and then we'll open it up for questions.

Thanks again, Ernie. I'll begin with some color on how we're thinking about tariffs. Let me start by saying that we believe we can navigate through the current tariff environment. While we're not immune to tariffs, we feel great about the components of our business that we can control and remain confident in our long-term growth and profitability plans. We're also realistic that in the short term, we are operating in a highly fluid macro environment. For simplicity purposes, we're making the assumption that the current level of tariffs on imports into the U.S. from China and other countries will stay in place for the remainder of the year. In terms of our guidance, as we noted in our press release this morning, we are maintaining our full-year comp sales growth, pretax profit margin, and diluted earnings per share outlook. This guidance assumes that we can offset the significant incremental pressures we have seen and expect to see from tariffs on both our direct and indirect imports this year. We believe we can do this primarily through our buying process, our ability to adjust our ticket while maintaining our value gap, and our ability to diversify our sourcing. Further, we are focused on cost efficiencies and productivity initiatives. Now to our detailed full-year fiscal 2026 guidance, which remains unchanged versus the previous full-year guidance we gave in February. We expect overall comp sales to increase 2% to 3%. We're planning full-year consolidated sales to be in the range of $58.1 billion to $58.6 billion, up 3% to 4%. With the volatility we've been seeing with foreign exchange rates, we are holding rates at the same level as our previous guidance. We are planning full-year pretax profit margin to be in the range of 11.3% to 11.4%, down 10 to 20 basis points versus last year's 11.5%. Moving to gross margin, we expect it to be in the range of 30.4% to 30.5%, a 10 to 20 basis point decrease versus last year's 30.6%. We expect full-year SG&A to be 19.3% versus last year's 19.4%. We're assuming net interest income of about $98 million, which we expect to deleverage fiscal 2026 pretax profit margin by 20 basis points. Our full-year guidance assumes a tax rate of 25.1% and weighted average share count of approximately 1.13 billion shares. Lastly, we expect full-year diluted earnings per share to be in the range of $4.34 to $4.43. This would represent a 2% to 4% increase versus last year's diluted earnings per share of $4.26. Moving to the second quarter, we expect overall comp sales to increase 2% to 3%, consolidated sales to be in the range of $13.9 billion to $14 billion, pretax profit margin to be in the range of 10.4% to 10.5%, down 40 to 50 basis points versus last year's 10.9%. Gross margin to be 30%, this would be a decrease of 40 basis points versus our last year. This includes incremental tariff costs on the directly sourced merchandise that we were committed to when the additional tariffs went into place in March and April, mostly offset by our mitigation efforts. We are also lapping a benefit from a true-up of a freight accrual last year. SG&A to be 19.7%, down 10 basis points versus last year. This is due to a benefit from lower incentive compensation accruals planned this year. We're also assuming net interest income of about $24 million, which we expect to deleverage second-quarter pretax profit margin by 20 basis points. Our second-quarter guidance also assumes a tax rate of 24% and a weighted average share count of approximately 1.13 billion shares. Based on these assumptions, we expect second-quarter diluted earnings per share to be in the range of $0.97 to $1, up 1% to 4% versus last year's 96%. In closing, I want to emphasize that we are in an excellent position to continue to invest in the growth of our company while simultaneously returning significant cash to our shareholders. Now, we are happy to take your questions. As a reminder, please limit your questions to one per person, so we can answer as many questions as we can. Thanks. And now, we'll open it up to questions.

Our first question is from Lorraine Hutchinson with Bank of America.

I wanted to ask about inventory availability. I think for two decades, I've been asking about inventory availability and you use great adjectives like outstanding, and that's always been the case. But we're in a little bit of a different environment right now. We're hearing about delayed ship sailings, uncertainty around tariff rates for holiday. There's a lot of question marks in the buying offices of the traditional retailers and brands. So, can you just give us a little bit more context on what's changed, how your conversations have gone and what kind of pricing you think you may have to put in place in the back half to offset some of these tariffs?

Thank you for your question, Lorraine. I appreciate your concerns about availability, especially considering the current circumstances. Indeed, we're seeing some delays in shipments, particularly before the tariff adjustments, but the situation has improved somewhat since then. There seems to be a general unease within the vendor community regarding future developments, as the outlook remains uncertain. Looking at our inventory levels, we have increased them slightly, reflecting some advantageous purchases made recently. We expect availability to improve as we move into the second half of the year. Although some vendors may cut back or delay their products, we might experience limited availability in certain categories. However, we have the flexibility to pivot to adjacent categories and focus on areas where we can offer better value. Our main commitment to customers is to provide great value on our products, ensuring our prices remain lower than those of traditional and specialty retailers. In terms of pricing, we will adapt to the current market environment. Despite some challenges, we believe there will be significant opportunities for our merchants. To maintain our competitive edge, we will always aim to keep our prices lower than traditional retailers'. If retail prices rise or fall, we will adjust our prices accordingly to maintain that gap. Your inquiry covers many critical points that reflect the concerns of many people right now regarding our purchasing strategy in this business.

Our next question is from Matthew Boss with JPMorgan.

Congrats on the continued consistency.

Thank you, Matt.

So Ernie, maybe first, could you speak to the progression of comp trends that you saw at Marmaxx in March and April maybe relative to the start of the quarter with some of the weather disruption? And maybe if you could elaborate on that strong start to the second quarter. And then one for John. Just gross margin considerations, maybe the balance of the year relative to the contraction in the first quarter.

Sure. Yes. Very good, Matt. Actually, John will start off here.

Yes. So as far as the sales go, we did see weather early in the first quarter. And once the weather improved, we did see our comps improve month-to-month as the quarter went on. And we saw that continue into the second quarter, and that's why we've highlighted a strong start in our prepared remarks.

Yes, Matt, that's a good question. I'm very encouraged by the strong start in Q2 as well. One of the most encouraging aspects, looking back to Q1 and still pleased with Q2, is that every division is contributing to our comparable sales. As John mentioned, Marmaxx improved as the quarter progressed, which made us very happy to see the recent Marmaxx comparisons from Q1. Our business has been incredibly strong for years, and it's great to see that strength reflected in all divisions and geographies, particularly on an international level. Additionally, our home business, especially HomeGoods, is thriving despite trends in the home industry. I'm very proud of those teams and their achievements compared to the industry, as well as their promising start to Q2.

Yes. And then, Matt, to answer your second question, so for Q2, Q2 is really our most impacted quarter for tariff pressures as the tariffs were put in place after we had placed the orders for goods that we directly import. So we have significant mitigation efforts in place for Q2, and we expect those mitigation efforts to continue into the back half. But in addition to that, we've also experienced a negative impact on the mark-to-market of our inventory hedges in Q1, and some of that will reverse in the back half favorably. In addition to that, the front half is negatively impacted versus last year from favorable freight accrual reversals last year. So all that adds up to why you're seeing a headwind in the first half and an improvement in the back half.

Our next question is from Adrienne Yih with Barclays.

Congratulations on your ongoing success. Ernie, I wanted to revisit the period of 2018 to 2019. Do you remember if vendors attempted to pass price increases to you, and how you negotiated with them? As you mentioned earlier, there are two ways you can respond. Firstly, if prices rise, you can maintain your discounts of 20% to 60%, preserving your margins while hoping for comparable sales growth. Alternatively, as you noted in another call, you have the option to absorb some margin loss by holding your prices at a 30% to 70% discount, aiming for sales growth. It seems you have various strategies to achieve success. Could you provide more details on this?

Absolutely, Adrienne. You mentioned some of the options we have. In 2018, we were mostly able to negotiate so that tariffs didn't significantly impact us. Back then, we selectively adjusted retail prices, though it happened less frequently than it does now. The current environment is different, with broader impacts on pricing and inflation starting a few years ago, which has compounded the situation alongside the tariffs. In the past, inflation was not as prevalent before the introduction of those tariffs. To answer your question, yes, adjusting retail prices is certainly an option, but we also have other strategies available. In this environment, we can buy more profitably, and our importance to vendors continues to grow. This strengthens our relationships, enabling us to secure competitive pricing that offers real value to customers, regardless of tariffs. We strive to be a consistent presence for our vendors, which I believe will enhance our collaborations going forward, especially as some competitors have closed stores recently. We're focused on crafting compelling offers that can create a strong impression on customers, making some items feel exceptionally priced. Our goal is for customers to sometimes think an item is "almost too cheap." This unique approach distinguishes us from many other retailers that wouldn’t consider such strategies. For our buyers, rather than relying on a markup system, they determine the best retail price for each item without strictly adhering to costs. They assess value from the consumer's perspective, which sets us apart from other merchants. I hope that clarifies the topic for you. Thanks for asking.

John, just a real quick one. From China, are you seeing any redirected China make into the European market yet?

Sorry, are we seeing what? Any re-directive of merchandise into the European market?

Yes. So China that they don't want to come here from other retailers or vendors that are coming to you in Europe, right? Yes.

Yes. So nothing significant that we've seen. I think that the factories were kind of holding off and waiting for a tariff deal to be done or at least lower before shipping the goods. But no, we haven't seen a lot hitting Europe that were destined for the United States.

Our next question now is from Paul Lejuez with Citi.

What percent of your product currently is direct-sourced by you? And how might that change, if at all, in response to the current environment? And also curious if you do less upfront in anticipation of maybe better deals that you expect to come in the second half. And then just would also love to hear about anything you can share in terms of income demographics? Any signs that you're gaining share more so with any one specific income cohort?

Yes. Let's take that.

Yes. John will provide some insights on the income. However, regarding direct sourcing, it constitutes less than 10% of our business. We maintain a balanced approach and aim for a diverse mix of assortments. We avoid over-relying on any specific sourcing channels. While we could adjust our sourcing countries, for example, reducing imports from China, we usually stay around that 10% mark because our focus is on brand strength. We want to ensure this balance is understood. That said, our direct imports help fill gaps and offer excellent quality and fashion, and our approach differs from others. Concerning upfront buying, we view this as a time to be more prudent and to reduce our upfront purchases slightly. This strategy varies by category, department, buyer, item, and SKU, but that is our current tendency. You are correct in your observations; we always prepare for shifts in the market. Historically, there’s often a notion that "this time is different," but I believe we will emerge stronger and leverage the current situation for sales and profitability as the year progresses. John, would you like to add anything?

Yes. Income is down, but we are not measuring the actual customer income. Instead, we are assessing store performance in specific income demographic areas. In the first quarter, we observed strong sales across all income demographic bands, with a slight lean towards the lower-income demographic. This relates to overall sales being driven mainly by transactions, as customers concerned about the economy tend to seek value. TJX stands out as a leader in providing value to these customers.

Yes. I'll also add to what John mentioned earlier, Paul. One of our significant advantages is our deliberate effort to appeal to a wide range of demographics. As John pointed out, we have a good, better, best framework in our business, which we see as an advantage. We are mindful not only of the product mixes we offer in stores but also of how we design our stores to ensure balanced business across various income groups, as John noted. We believe this diversification is a key reason we achieve consistent results, avoiding the fluctuations that some other retailers experience. Additionally, even in our marketing efforts, which I believe are relevant to your questions about leveraging the current environment, our teams are evaluating different programs. For example, in Maxx, we have the "What Makes You You" campaign, and in Marshalls, there's the "Hustlers" campaign that highlights how our buyers work diligently to provide the best value to customers. This reflects our current mindset. Through this marketing, we're aiming to attract customers who haven't engaged with us yet, especially at a time when some competitors may redirect customers to explore new shopping options. Our marketing teams are effectively communicating why customers should consider shopping at Marshalls or T.J. Maxx. Across all income demographics, our marketing efforts target various income groups with thoughtfully placed creative content across digital, TV, radio, and more.

Our next question now is from Alex Straton with Morgan Stanley.

Congrats on a great quarter. I wanted to focus on HomeGoods, which had a nice comp and margin expansion. Can you just talk about how you think about the margin trajectory of that business for the rest of the year? I'm curious in the context of the low-teens margin it's done in the past, if you think that's in reach. And then related to that, we know that home and toys tend to be more sourced out of China, super important for holiday. So with the incremental tariff there, can you just talk about how you're managing those categories both near term and then with respect to the holidays?

Sure, Alex. Yes, as I mentioned before, we're very happy with the HomeGoods comparisons because, similar to your perspective, we are definitely outpacing the current environment. I am incredibly proud of those teams and all the merchants across the corporation; Home has performed strongly for us overall. Regarding margins, while I can't disclose specific numbers, we are feeling very positive about continued improvement, right, John?

Yes.

I believe that would be the way I see things.

Yes. One of the biggest levers we have to pull in order to improve our margins is through the top line sales. And we think there's a lot of opportunity going forward there as well as expense savings initiatives and productivity initiatives that we've got in place.

Yes, we're feeling optimistic about ongoing improvements in profitability. Both the home and toys categories are focused on sourcing from China. In the home segment, although there is a significant amount of product involved, we primarily work with third-party vendors for much of it. Our merchants engage in negotiations with these vendors, who are in turn dealing with their factories in China. I believe the availability of products will be adequate since we work with many vendors in the home category, so I'm not worried about empty shelves in these areas. If there are shortcomings, we can simply shift to other categories. We are very focused on fashion and deck-oriented items, which are mostly sourced from China. The situation with toys is a bit more complex, as there are not as many branded toy vendors compared to home vendors, and they also rely on China for sourcing. We need to consider if larger toy brands might decrease their unit availability due to rising costs, which could lead to a reduction in stock on our shelves. We're prepared for such adjustments and confident we can compensate with other popular items. Our flexible approach allows us to adapt to changing circumstances in different categories. Overall, we don’t foresee any significant obstacles in home, and while we are carefully monitoring the toy category, our strong relationships should ensure we maintain good availability.

Our next question now is from Simeon Siegel with BMO Capital Markets.

Ernie, referring to a point you made earlier, I’m curious about whether you can purchase products with little regard for input costs. Is there a portion of your business where you have the flexibility to pay for goods based on the planned average unit retail, while another portion is influenced by input costs? I'm not sure if that addresses the direct and indirect aspects, but I’d like to know your thoughts on this. Also, John, if I missed it, could you provide more details or quantify the mark-to-market inventory adjustment and how it relates to gross margin?

All right. Simeon, let me clarify your question. Are you asking if there is a way for us to adjust the price based on certain developments?

I'm trying to understand how the rising cost inputs affect you, considering that merchants typically purchase based on past trends. I'm interested in your thoughts on this matter and whether there is something more to discuss regarding the impact of these cost changes.

Oh, okay. So how does it impact us? If costs increase, we start by checking the retail prices of those items at other retailers. We then assess the gap between our retail prices and theirs. If we purchased at a certain time and their prices rise while ours remain lower, we might consider raising our retail price for that item. However, if other retailers maintain their prices and we anticipate a slight increase while keeping our prices lower, we would not raise our retail price since our commitment is to maintain a certain gap compared to others. I hope that answers your question. Our buyers are in a strong position because they are operating with a just-in-time approach and can closely monitor what’s happening across various retail formats. They are well-trained and attentive to different formats, and they have good insights from discussions with their vendors about potential cost increases for items in specific categories. This information is valuable as they make purchasing decisions without buying far in advance. It keeps them informed when setting retail prices and ultimately helps us enhance profitability in this market environment.

To address your question about the mark-to-market adjustment in the first quarter, when our divisions make purchases in currencies different from their local currency, we hedge those purchases to lock in the agreed cost. Consequently, when exchange rates fluctuate, we must perform a mark-to-market assessment at the end of each quarter. In this case, the exchange rates improved for those currencies, resulting in a loss on the hedge. The offset will occur when we eventually pay the invoice in the second or third quarter. It's essentially a timing issue between quarters.

Our next question now is from Michael Binetti with Evercore.

So, John, regarding gross margin guidance, you've come in a bit lower for the first quarter compared to 90 days ago, which is understandable based on the press release. Today, you mentioned an incremental tariff for the second quarter compared to previous expectations. However, you're maintaining the annual gross margin outlook. Is there any pricing already considered for the second half of the year? Ernie suggested earlier that you're taking this opportunity to purchase inventory more closely aligned with the market. You might not have a complete picture of your inventory buying for the second half yet. I understand you're keeping some flexibility, but it seems there might be some pricing factored into your model for the second half, so we can understand what is incorporated and what is not, regardless of how things turn out.

Our mitigation efforts involve several strategies, including improved purchasing, taking advantage of market deals, and maintaining flexibility in how we acquire goods. We are also implementing expense initiatives and productivity strategies. These efforts are currently in place for the second quarter, and we expect them to benefit us in the second half of the year as well.

Okay. And then if I can just follow up with one. On customer acquisition, obviously, the growth coming from transaction is always good to hear. I know it's hard to measure real-time share gains from other retailers on a traffic basis. But are there any signs of trade-down in the basket, UPT versus AUR, to be aware of that could maybe give us a little bit of a double-click on what's going on with trade-down or the customer inflows that you're seeing potentially from other retailers?

Yes. No sign, Michael, of trade-down per se.

Yes.

It's interesting because overall, our average retail prices are quite balanced and we're experiencing sales across the board.

Yes. I mean it's really hard for us to read that. But I think the thing to just take away is that the sales are driven by our transactions, which means that we're getting foot traffic through the stores from our customers. So whether they are giving up a purchase at a different retailer for one for us, it's hard for us to read that.

Yes, Michael, one thing I would emphasize is that as we look ahead, common sense suggests that what we have seen over the past couple of years, including store closures and reduced traffic in other stores, makes it difficult to pinpoint the exact sources of these changes. However, we believe that, for instance, in our home business, which is focused on fashion along with a good amount of consumable products, we are attracting repeat visits. We can't measure it precisely, but we suspect that this interest is coming from a variety of other retailers. This is likely due to the new categories we have ventured into and the consistent performance of our home business, which is trending quite differently from many others. Therefore, a combination of store closures and our unique approach to certain categories like home goods seems to be influencing our sales.

Our next question now is from Aneesha Sherman with Bernstein.

So I want to focus on margins. I'm curious, John, on your gross margins for the quarter. You had already anticipated some of the inventory hedging headwind. You talked about it last quarter. Did that end up being a bigger effect than expected? And could you talk through some of the other moving parts in the margin, for example, product margin or supply chain investments and how they might have hit gross margin through the quarter? And then a follow-up on your margin guide on Q2. If I can clarify, is the Q2 margin guide net of the mitigation efforts that you've described? Or is it more that those mitigation efforts are starting in Q2 and it will take some time for them to fully roll out into the back half?

In Q2, our gross margin forecast accounts for the mitigation efforts we mentioned earlier. Regarding our Q1 gross margin, the variance compared to last year was primarily due to the hedge and its timing between Q1 and Q2, as well as Q3, which will reflect more favorably when we pay the invoices. So, the differences in Q1 gross margin largely stem from the hedge affecting this year's comparison to last year.

Could you clarify my question about mitigation for Q2? You mentioned that there are goods already committed that will arrive in Q2, impacting costs. Will this situation change in Q3? Are there orders expected to arrive after July in the second half?

The situation after Q2 is that the goods arriving in Q2 were ordered before we were aware of the tariffs, which left us unable to negotiate. Going forward, we will factor in the assumption of a tariff in our deals.

So, Aneesha, combining what John said, there isn't that direct import we were discussing because we were unaware of it at the time we were making those decisions. Additionally, with other favorable factors at play, we are not significantly affected by that in Q3 and Q4. We understand the current tariffs, and that's when the other elements come into play—not just starting now, but we are actively leveraging the available resources as we selectively adjust retailer relationships and navigate the uncertainties that could lead to cancellations from various vendors. Hence, this is another reason why Q3 appears quite different from Q2.

Our next question is from Jay Sole with UBS.

John, you mentioned that some of the mediation efforts include expense initiatives, likely related to cost of goods sold. Can you provide more details on the opportunities for savings in specific line items within cost of goods sold? Additionally, are you considering any SG&A cost savings for the rest of the year to help maintain the EBIT margin guidance you provided?

Yes, the changes in gross margin will primarily focus on distribution center initiatives, while SG&A will be related to store initiatives.

Is there any way to quantify the impact of the expense initiatives on the overall performance?

At this point now, we're not quantifying the impact by category.

Our next question is from Ike Boruchow with Wells Fargo.

Congrats. I guess, John, I was hoping you could elaborate a little bit more on freight. What exactly you kind of have been seeing in 1Q and then your forecast for 2Q? And then what's kind of embedded in the outlook, both domestic and ocean? Just kind of your bigger picture thoughts on how to think about the P&L.

Yes. So our freight rates are based on what we know today. And again, just to clarify, our ocean freight rates are approximately 20% to 25% of our overall freight. So we're not as impacted on the ocean freight. We have not seen, to the point, costs go up. But again, it's early. The tariffs were just low. We've got excellent relationships with our shipping providers. And we believe that from what we know today our freight is accurately reflected in our forecast.

As time is restrictive right now, I would like to turn it back to management for closing remarks.

Okay. Thank you all for joining us today. We look forward to updating you again at our second quarter earnings call in August. Thank you, everybody.

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