Earnings Call Transcript
TJX COMPANIES INC /DE/ (TJX)
Earnings Call Transcript - TJX Q1 2025
Operator, Operator
Ladies and gentlemen, thank you for standing by. Welcome to the TJX Companies First Quarter Fiscal 2025 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 22, 2024. I would like to turn the conference call over to Mr. Ernie Herrman, Chief Executive Officer and President of TJX Companies, Inc. Please go ahead, sir.
Ernie Herrman, CEO
Thanks, Cordi. Before we begin, Deb has some opening comments.
Deb McConnell, Investor Relations
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. 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 our website along with reconciliations to non-GAAP measures we discuss. Thank you. And now, I'll turn it back over to Ernie.
Ernie Herrman, CEO
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 for delivering great value to our customers. I especially want to recognize the hard work of our store distribution and fulfillment center associates across the Company. Now to our business update and first quarter results. I am very pleased with our first quarter performance. Overall, comp store sales were up 3%, which was at the high end of our plan. Again, this quarter, the comp increase was entirely driven by customer transactions. We see this as an excellent indicator of the strength of our business. As to first quarter profitability, both pretax profit margin and earnings per share came in well above our plans, which was terrific to see. John will talk to the drivers of this profit outperformance in a moment. Our first quarter results are a testament to the sharp execution of our teams who focused on offering our shoppers excellent value on every item every day. Our results also highlight the benefits of our flexible business model. Throughout the quarter, we flexed our store assortments and leaned into categories that many consumers were looking for. Further, we remain disciplined in managing our buying, inventory and expenses and remain focused on driving profitability. Looking ahead, our value leadership in retail gives us great confidence in TJX. The second quarter is off to a good start, and we are excited about the opportunities we see for our business. We are very happy with our inventory levels and are in a great position to capitalize on the outstanding buying opportunities that we see in the marketplace. We plan to flow fresh assortments to our stores and online in the spring and summer and throughout the year. Longer term, we remain convinced that we are well positioned to grow our global footprint, gain market share in our geographies around the world and increase the profitability of TJX. Before I continue, I'll turn the call over to John to cover our first quarter results in more detail.
John Klinger, CFO
Thanks, Ernie. I also want to add my gratitude to all of our global associates for their continued hard work. Now I'll share some additional details on the first quarter versus last year. As Ernie mentioned, our consolidated comp was at the high end of our plan and entirely driven by customer transactions. Comps in both our apparel and home categories increased, with home outperforming apparel. Pretax profit margin was 11.1%, up 80 basis points. This was 50 basis points above our plan, primarily due to a larger-than-expected benefit from lower freight costs, a reserve release and higher net interest income. Gross margin was up 110 basis points. This was driven by a benefit from lower freight costs and favorable mark-on, partially offset by the timing of capitalized inventory costs and supply chain investments. SG&A increased 20 basis points due to incremental store wage and payroll costs, partially offset by the reserve release. Net interest income benefited pretax profit margin by 10 basis points. Lastly, we were very pleased that diluted earnings per share were up 22%. This was well above our plan due to our pretax profitability outperformance and a lower-than-expected tax rate that benefited first quarter diluted earnings per share by $0.03. Now to our first quarter divisional performance. Across all our divisions, our comp increases were entirely driven by customer transactions, which again is such a great indicator of the strength of our value proposition. At Marmaxx, comp store sales increased 2% and segment profit margin was 14.2%, up 20 basis points. Despite some periods of unfavorable weather, both Marmaxx's apparel and home categories saw positive comp store sales with home outperforming apparel. Further, we were very pleased to see comp sales increases at stores in demographic areas with average household incomes above and below $100,000. At our U.S. e-commerce sites and at Sierra, which we report as part of this division, we were happy with their strong sales performance. HomeGoods comp store sales increased 4% and segment profit margin grew significantly to 9.5%. This was a 220-basis point improvement versus last year. HomeGoods and HomeSense offer customers a differentiated shopping experience for home fashions. Our buyers source products from around the world to bring customers eclectic selections and affordable ways to upgrade their home décor. Moving to our international divisions. At TJX Canada, comp store sales were up 4% and segment profit margin on a constant currency basis was 12.4%, up 110 basis points. At TJX International, comp store sales increased 2% and were up in both Europe and Australia. Segment profit margin on a constant currency basis improved significantly to 3.9%, up 120 basis points. We believe we are performing better than most other major retailers in Canada and Europe. We are confident we will continue to be a leading shopping destination for value-seeking customers in Canada, Europe and Australia. Moving to inventory, balance sheet inventory was down 3% versus the first quarter of last year. Inventory on a per-store basis was down 5% and driven by the lower inventory at our distribution centers. Importantly, in-store inventory was in line with last year's levels. We feel great about our inventory levels and are in a great position to take advantage of the outstanding availability we are seeing in the marketplace. As to our capital allocation, we were very pleased to start another year generating strong cash flow, reinvesting in the growth of our business and returning cash to shareholders through our buyback and dividend programs. Now I'll return it back to Ernie.
Ernie Herrman, CEO
Thanks, John. I'd like to highlight the reasons we have great confidence in the near- and long-term growth opportunities for TJX. We have a long track record of success through many kinds of retail and macro environments, and our value proposition has always served us well. Our off-price business model is extremely flexible and resilient, and I believe we are set up for a long runway of exciting growth in our geographies around the world. First is our wide customer demographic reach. We want to sell to everyone. With our flexibility and opportunistic buying, we offer expansive assortments of good, better and best merchandise for shoppers across a broad range of income and age groups. We continue to attract new Gen Z and millennial shoppers to our stores, which we believe bodes well for our future growth. It's truly great when we see multiple generations shopping in our stores together. Second, we are convinced that significant market share opportunities remain across the U.S., Canada, Europe and Australia. Over the long term, we see potential to further expand our store footprint by at least another 1,300-plus stores with our current retail banners in our existing countries alone. Third, with our more than 1,300 global buyers sourcing from a universe of more than 21,000 vendors in over 100 countries, we are confident that there will be plenty of quality branded merchandise available to us to support our growth plans. Throughout our history, the availability of inventory has never been an issue. In fact, in recent years, we have seen availability become even better as vendors look for additional ways to grow their businesses. We've opened thousands of new vendors, which keeps our store assortment fresh and fuels the differentiated treasure hunt shopping experience for our customers. Our stores receive multiple deliveries each week of fresh branded merchandise to surprise and excite our customers. With our rapidly changing assortment, shoppers are inspired to visit us frequently to see what's new. Lastly and most importantly, are the talented associates who do an exceptional job executing our initiatives. I truly believe the level of off-price knowledge and expertise within our organization is unmatched. We have a highly differentiated global business, and we have developed the specialized talent and teams to support it. We have many leaders across TJX with decades of off-price experience. Additionally, we focus on developing newer associates and the next generation of leaders within our organization. We take great pride in our TJX University and other training programs. Our very deep bench gives us the ability to rotate talent between divisions and geographies and to deploy teams where needed. All of this strengthens our company as we pursue our goals for growth and is a tremendous advantage for TJX. I am also very proud of our culture, which I believe is another key differentiator and a major component of our success. For our corporate responsibility update, I'll share more about our culture, which includes supporting our associates and making TJX a terrific place to work. Our associates bring our business to life, and we strive to foster a workplace where they feel welcome, valued, and engaged. A key priority is helping our associates grow and develop at TJX, which we support both through formal and informal training. Our associate resource groups, or ARGs, and our inclusion and diversity committees have played an important role in creating an inclusive workplace. Within the last year, both the number of ARGs and the number of associates participating in them have continued to grow. As always, you can read more about our corporate responsibility work on our website. Summing up, we are very pleased with the overall performance of TJX in the first quarter and that the second quarter is off to a good start. We feel great about our positioning in today's consumer environment and will continue to emphasize our value proposition to consumers through our marketing initiatives. Longer term, I am confident that the characteristics of our business set us up extremely well to capitalize on the market share opportunities that we see out there. Lastly, I want to reiterate that we will not be complacent and are committed to looking at ways to further increase the profitability of TJX over the long term. 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.
John Klinger, CFO
Thanks again, Ernie. I'll start with our full year fiscal '25 guidance. We're now planning consolidated sales to be in the range of $55.5 billion to $55.9 billion. This is about $200 million lower than our previous guidance due to the impact of foreign exchange. We continue to expect overall comp store sales to increase 2% to 3%. We're increasing our pretax profit margin guidance to a range of 11% to 11.1%. This would be up 10 to 20 basis points versus last year's adjusted 10.9%. We continue to expect gross margin to be in the range of 30% to 30.1%, a 10 to 20 basis point increase versus last year's adjusted 29.9%. We expect this increase to be driven by a higher merchandise margin, which includes a small benefit from freight, partially offset by our supply chain investments. We continue to plan shrink to be flat versus last year. We continue to expect SG&A to be approximately 19.3%, flat to last year's adjusted SG&A. We're planning incremental store wage and payroll costs to be offset by lower incentive compensation costs and a benefit from items that negatively impacted us last year. We're now assuming net interest income of about $156 million, which will have a neutral impact on our year-over-year pretax profit margin. Our full year guidance assumes a tax rate of 25.4% and a weighted average share count of approximately 1.14 billion shares. As a result of all these assumptions, we now expect full year diluted earnings per share to be in the range of $4.03 to $4.09, and this would represent an increase of 7% to 9% versus last year's adjusted diluted earnings per share of $3.76. Moving to our second quarter guidance, we're expecting overall comp store sales to be up 2% to 3%, consolidated sales to be in the range of $13.2 billion to $13.3 billion, pretax profit margin to be in the range of 10.4% to 10.5%, flat to up 10 basis points versus last year. Gross margin to be approximately 29.8%. This would be a decrease of 40 basis points versus last year. This is primarily due to the lapping of a significant freight accrual benefit last year in supply chain investments, partially offset by an increase in merchandise margin. SG&A to be approximately 19.6%, a decrease of 50 basis points versus last year. This is primarily due to a benefit from lapping higher incentive accruals and a reserve related to the write-off of a German COVID program receivable last year, partially offset by incremental store wage and payroll costs. Our second quarter guidance also assumes net interest income of about $42 million, a tax rate of 26.3% and a weighted average share count of approximately 1.14 billion shares. Based on these assumptions, we're expecting second quarter diluted earnings per share to be in the range of $0.88 to $0.90, up 4% to 6% versus last year's $0.85. Lastly, our implied guidance for the second half of the year assumes that overall comp store sales will be up 2% to 3%. Pretax profit margin will be in the range of 11.3% to 11.5% and earnings per share will be in the range of $2.22 to $2.26. In closing, I want to emphasize that we are in an excellent financial position to continue to invest in the growth of our company while simultaneously returning significant cash to our shareholders.
Operator, Operator
Our first question comes from Matthew Boss from JPMorgan.
Matthew Boss, Analyst
And congrats on another nice quarter. So, Ernie, could you elaborate on drivers of the market share gains across both apparel and home that you cited? And just your confidence in the multiyear runway for continued gains maybe near term, have you seen any change in business momentum here in May? And then, John, just speaking of runway, how best to think about merchandise margins multiyear, just given the structural changes on the buying front that you've discussed?
Ernie Herrman, CEO
So, Matt, to start, we don't provide specific information on the categories contributing to our comparable sales. However, I can say that performance was fairly balanced overall and no single area was responsible for our total results more than we anticipated. We did experience some weather-related impacts during the quarter, which varied and were mentioned by other retailers as well. These weather patterns can affect our traffic and apparel, much like they do for others, but our apparel performance was strong for the quarter. Whether it was home goods, apparel, or accessories, everything aligned with our expectations for the period. Regarding your second question about our confidence in future performance, I understand you're inquiring about how we plan to maintain our momentum. Did I capture that correctly, Matt?
Matthew Boss, Analyst
Yes. Continued drivers of market share gains and just business momentum. Have you seen any change?
Ernie Herrman, CEO
The momentum is consistent with what we've seen over the past few months. What gives us confidence is that we are currently the only retailer able to combine brands, fashion, and quality in this treasure hunt format. We offer a range of merchandise for different income and age groups, unlike other brick-and-mortar retailers that aren't creating the same level of excitement and entertainment. This sets us apart in the current environment. We're also benefiting from excess inventories across the e-commerce sector, which have provided us with additional stock. Our importance to our vendors has increased, especially compared to pre-COVID and during the pandemic. Vendors are now working with us in more consistent ways. All these factors contribute to our bullish outlook. We're positioned as a leader in value and have become a more popular shopping destination year-round for gift-giving. Our customer traffic increases for occasions like Mother's Day, Father's Day, and Valentine's Day. Ten years ago, we weren't the preferred option for many gifts, but that has changed. I could say more, but I believe this gives you a good sense of why I am optimistic about our continued healthy growth.
Matthew Boss, Analyst
Yes.
Ernie Herrman, CEO
John, did I leave anything for you?
John Klinger, CFO
No. I think right now.
Ernie Herrman, CEO
No, but I think you had.
John Klinger, CFO
What was the question for me, Matt? I think Ernie might have answered it.
Matthew Boss, Analyst
Runway multiyear with merchandise margins, just given the structural changes that you made on the buying front.
John Klinger, CFO
That's back to me probably. Wow, I say we just started to touch on that. So, as you can see from the healthy merchandise margin we just delivered, and we believe there's still an opportunity in our pricing as we go forward to continue to selectively raise our prices as well as what's happened is buy better. It's kind of a 50-50 right now. We're winning on both fronts in terms of buying better in retailing goods, and I have to tell you, one team, our marketing teams measure our perception of value with the consumers regularly, and what they would tell you is that our surveys tell us our customer perception on our values that we offer continues to show us as being stronger than the competition really overall through the business. So, we're always monitoring that in addition to looking at the true numbers, but our customers perceive our values as extremely strong relative to competition, which I believe gives us a merchandise margin to your question, the ability to continue to leverage our pricing and our buying power. I always keep a pulse on that, which our buyers are excellent at monitoring where our retails are versus the competition. Hopefully, that answers that.
Matthew Boss, Analyst
Great color. Best of luck.
Operator, Operator
Our next question comes from Lorraine Hutchinson from Bank of America.
Lorraine Hutchinson, Analyst
My question is around new customer acquisition. Are you still attracting a younger customer to all of the banners? And are you seeing any increased signs of trading down from a higher income demographic?
Ernie Herrman, CEO
Yes, we continue to attract more new customers who are skewing younger, as we have observed over the past several quarters. What was the second part of your question?
Lorraine Hutchinson, Analyst
Signs of trade down.
John Klinger, CFO
Oh, the trade down, no. It's challenging for us to determine specific customer data because our credit card usage isn’t as widespread as that of other retailers. However, when we analyze our sales across various store demographics, we notice that both groups below and above $100,000 in income have shown positive results. This quarter, there was a slight shift towards the lower income customer, but overall, performance was strong on both sides of that $100,000 threshold.
Ernie Herrman, CEO
Lorraine, I would like to add that we believe it is beneficial for us to maintain a healthy approach in our trade strategy, focusing on good, better, best across different age demographics. We have been successfully attracting a younger customer base while also monitoring age and income groups, and we have found a balanced appeal. Our aim is not to excessively focus on younger customers, as we want the customer to make their preferences known. We strive to engage a wide range of income and age demographics, while still emphasizing the importance of younger customers. We continuously keep track of this balance across various age and income levels.
Operator, Operator
Our next question comes from Brooke Roach from Goldman Sachs.
Brooke Roach, Analyst
Can you speak to your outlook for further market share capture and momentum in the HomeGoods segment and the home segment in aggregate? As you begin to cycle the step-up in sales and profit trends from last year, do you think that you can continue the momentum? And where do you see the biggest opportunity for further gains in comp and margin improvement?
John Klinger, CFO
Yes. I'll start with this question, Brooke. Yes. So, when you look at our comps going forward, let's say, on a two-year stack basis, we do have a large fourth quarter. But the one thing to note is that when we came out of COVID, first of all, if you look at the history, it's been somewhat choppy as we've guided towards more of a normalization. But when you look at our comps on a stack versus our last base year, which is FY'20 pre-COVID, you'll see that they are very consistent quarter-to-quarter. The other thing is we're seeing our sales growth through transaction growth, which is very healthy. It's a healthy way to grow your top line. So that, again, gives us confidence that we're still appealing to a lot of customers still picking up a lot of customers that are new to us. So, that gives us the confidence to, again, be confident about the 2% to 3% comp we have going forward for the remainder of the year.
Ernie Herrman, CEO
I believe, Brooke, the industry has experienced significant turmoil and varying results, influenced by interest rates and the overall housing slowdown. Echoing John’s thoughts, there remains a persistent opportunity for market share. When we compare our volume from pre-COVID to now, it helps eliminate the fluctuations and noise from that period. We have maintained very strong comparisons, which is promising for the future. Clearly, the furniture sector has been relatively weak overall. However, our resilience stems from our ability to adapt; our flexible business model has proven effective. In both HomeGoods and HomeSense, we can shift our focus to categories with higher demand. Additionally, we have been targeting consumables that encourage repeat visits to HomeGoods. This strategy suggests we will continue to expand our market share.
Operator, Operator
Our next question comes from Ike Boruchow from Wells Fargo.
Ike Boruchow, Analyst
I guess I wanted to talk about the HomeGoods business. I assume you're not going to give us specifics on the outlook on either comp or margin. But I guess if I'll kind of frame it as a high-level question, how are you thinking about the business as you balance the solid recovery in margin against what seems like it's becoming a little bit more competitive or tougher in the furnishings and furniture space, just as you kind of like look out to the rest of the year. If you want to give specifics on guidance, that's also okay.
Ernie Herrman, CEO
It's very nice of you.
John Klinger, CFO
Look, I think we're confident in HomeGoods as we are in our other divisions. Ernie talked about the replenishment business that we've increased in our home, both in home and Marmaxx and Home & HomeGoods. That gives the customer a reason to come to HomeGoods that's outside of maybe decor and big-ticket items. And when they're in the store, a lot of times, they will find other things that they can put in their cart. So, giving the customers more reasons to shop all of our stores is key to us driving that top line.
Ernie Herrman, CEO
Yes. And I think even given what's going on in the environment, you can see these ups and downs where they don't go picture perfect. But you remember, not long ago, I think it was three quarters ago, we were talking about making incremental improvement and we've exceeded it at times and then we come in now a little bit more kind of in line with where we might have thought we've been and we're not exceeding at the moment. But we always have faith that the model is so different than everybody else, and where fashion and utilitarian driven and the impulse nature of HomeGoods, I'm just not concerned about where we're going to be as we move forward over the next nine months.
Operator, Operator
Our next question comes from Paul Lejuez from Citigroup.
Paul Lejuez, Analyst
Can you talk about the competition for deals and whether you've seen any changes within the good, better and best opportunities and maybe where you're seeing better deals in IMUs within that good, better, best? And then second, just curious how you characterize the promotional landscape that you're playing in now.
Ernie Herrman, CEO
Sure, Paul. So on the competition for deals, you're talking about kind of at the market vendor level could be other retailers competing with us. Is that?
Paul Lejuez, Analyst
Correct. Yes. Overall. Look at the deals.
Ernie Herrman, CEO
Yes, there is competition, but our buyers are exceptionally trained. Part of their training emphasizes the importance of being easy to work with, courteous, and respectful, while still being assertive on pricing to achieve the best value. The market has consolidated somewhat in terms of brick-and-mortar stores, yet we continue to expand our own locations. This growth gives vendors even more incentive to partner with us, as their products are now featured alongside premium offerings and are part of a diverse selection. Our buying team is straightforward, and we have cash to pay our vendors. While competition exists, I believe we are increasingly important to the vendors, and our relationships with them are stronger than ever. Although there may be exceptions given the number of vendors we work with, overall, these relationships are excellent. Some vendors may try to distribute their goods among various retailers, but most prefer to work with us to ensure their products are seen. Regarding the promotional environment, I don't see significant changes. There has been more media coverage about price adjustments rather than promotions, but those discussions tend to focus on categories outside of our business focus. Many retailers are experiencing reduced traffic and transactions, which might lead them to lower prices on certain commodities to attract customers. Fortunately, this trend does not significantly affect the vendors or categories we work with.
John Klinger, CFO
And just to add on to what Ernie was saying, in the promotional environment, the fact that we buy so close to need, our buyers oftentimes are able to react to those promotional times in price to goods competitively.
Operator, Operator
Our next question comes from Michael Binetti from Evercore.
Michael Binetti, Analyst
Congrats on the quarter. I have a few I guess, John, I know you guided on pretax margin, but the implied EBIT margin you expect for the year is up about 10 to 20 basis points. It's a little better than it was 90 days ago, that's 10. So, it's moving up, but you said a few times you need 4% comp to lever the business. You've held the 2% to 3% here, but the margins keep getting better. Any reason to think you're having some successes in moving the leverage point down into this comp range, if this is the new normal for a while? And then I'm curious, California has had some very good changes fairly recently in the hourly wages over on the restaurant side. I mean I assume your teams there are thinking about that and how we will radiate out to your hiring and retention and hopefully, comps. Any thoughts you have in early days on the changes in California?
John Klinger, CFO
Yes, I'll begin by discussing the two to three leverage point, which remains stable to an increase of 10 basis points with no significant expenses. Our guidance reflects some one-time benefits from last year, including incentive accruals and a German reserve write-off. Additionally, we closed homegoods.com last year, which also helps us leverage the business. In our first quarter, we outperformed our guidance, particularly in freight efficiency, positively impacting our operations. Moreover, the mark-on in the first quarter also contributed favorably to our leverage, even with a lower comp than the three to four range. Regarding wages, we are observing increases in California and other regions. However, we are not planning for blanket wage hikes. Instead, we have allocated funds to make market-specific adjustments as necessary. We closely monitor our attrition rates and hiring capabilities, allowing us to make targeted wage increases where needed, as reflected in our guidance.
Operator, Operator
Our next question comes from Adrienne Yih from Barclays.
Adrienne Yih, Analyst
Great. Ernie, I want to follow up on something you mentioned earlier. Last year, you implemented strategic pricing focused on specific categories. The market doesn't seem significantly more promotional, but there has been a noticeable increase in activity during April and May, along with the recent announcement about adjusting price points. My question is, how are you approaching your pricing strategy given this new information and the changing environment? And John, can you maintain negative low to mid-single-digit inventory per store while still achieving a positive comparable sales growth?
Ernie Herrman, CEO
Thank you, Adrienne. Regarding your first question, it's essential to remember that we operate in a dynamic pricing environment. Our buyers consistently compare our out-the-door retail prices with those of similar SKUs from other retailers to ensure we maintain a competitive edge. We will not be undersold, which is a fundamental principle for our merchants. While we might match prices with off-price retailers or similar formats, we ensure we are not undercut. We closely monitor the pricing gap for the items we sell, and our merchants are trained to respond quickly if necessary. From what I know about the categories in question, the adjustments retailers are discussing are not likely to affect the areas we're involved in. Therefore, I feel confident about our overall business performance across all categories. However, if we encounter specific items or SKUs that require adjustments, we will respond accordingly. Unlike promotional sales at department stores or e-commerce platforms that offer percentage discounts, we remain competitive with our out-the-door prices, so increased promotional activity from competitors doesn't diminish our value. Additionally, we statistically assess our store performance to ensure we are turning inventory effectively, which reflects our value proposition. At this time, there are no signs of impact, but we will make adjustments if needed.
John Klinger, CFO
Inventories are down 5% on an average per-store basis compared to last year, which is an important point to highlight. Our distribution center inventory levels in fiscal year 2023 were higher than desired due to quicker logistics and the previous year's exceptional comparisons. In fiscal year 2024, we set aside a significant amount of inventory, which we started to utilize in fiscal year 2023. In the first quarter, we had more inventory than we would typically carry. When we adjust for that extra inventory, our total average store inventories align with last year's levels. It’s mainly about the timing of the inventory set aside from the prior year.
Operator, Operator
Our next question comes from Jay Sole from UBS.
Jay Sole, Analyst
Great. Ernie, I heard you mention in the prepared remarks that you see a lot of store growth potential just in your existing banners in existing countries. I was just wondering if that was sort of a that maybe there's even potential to grow outside of your existing countries. I'm just wondering if there's anything any new developments over the last 90 days that you see in terms of TJX's potential to grow beyond maybe where you are today?
Ernie Herrman, CEO
So, Jay, that’s a great question. Unfortunately, we don’t discuss this externally until we feel ready to announce. We are always exploring opportunities, and I believe you are referring to potential markets, correct? Yes. We are consistently looking, but at this time, we can’t specify which markets, as that has generally been our approach.
John Klinger, CFO
We are confident in our plans for store growth in our existing markets. We continue to see opportunities to expand our store base in both the U.S. and Canada. Additionally, in Europe, especially in Germany, we also see potential for growth in our store base.
Jay Sole, Analyst
Got it. And maybe can you give us an update then on HomeSense and Sierra how those performed in the quarter?
John Klinger, CFO
We're pleased with how they performed.
Operator, Operator
We have one more question. Our next question comes from Aneesha Sherman from Bernstein.
Aneesha Sherman, Analyst
My question is a follow-up on the comments on international. International has been growing slightly in the mix in the last two years, but the margins remain pretty low. It was 4% this quarter. I know a couple of years ago, you talked about high single digits as being the kind of long-term target for margins. Is that still the case? Or has that view evolved? And then a quick follow-up, John, on the gross margin comments you made earlier. You talked about freight becoming more efficient, which sounds different from kind of recapturing the headwinds that you've had in the last two years, and you also talked about mark-on. Would you say it's fair that you think there's going to be a structural improvement in gross margins beyond the kind of recapture of headwinds for the last two years? Is the business actually becoming more efficient?
John Klinger, CFO
I'll begin by addressing that question. Regarding freight, when the freight rates were unfavorable, we experienced a drop of 300 basis points. Last year, we managed to recover $200 million. Looking ahead, we are noticing a persistent increase in freight costs due to higher driver salaries and additional benefits stemming from a trained strike. These cost increases appear to be long-lasting, and we don't expect them to diminish. In the first quarter, we shifted some of our inbound products toward intermodal transport instead of trucking, as it is more cost-effective. Our goal moving forward is to enhance efficiency in how we transport goods both inbound and outbound. Regarding our international segment, we remain confident in our target of approaching 8%, and that division is working diligently to achieve it.
Ernie Herrman, CEO
Yes, Aneesha, I think you had pointed out that the first quarter was a four.
John Klinger, CFO
Yes, but that was up from last year. So, we continue to…
Ernie Herrman, CEO
I just saw your point. Traditionally, the first quarter internationally is always a low quarter. This first half is low, but you can see it's incrementally up from a year ago. So, we're heading in the right direction as we look toward the second half.
Operator, Operator
Our next question comes from Laura Champine from Loop Capital.
Laura Champine, Analyst
We thought the execution was so strong that you might comp up better than 2% in Marmaxx in this quarter. So, I'm wondering, if you could comment on what you think the macro backdrop is that you face now? And whether or not you actually do see any pressure on market share from the Chinese discounters like Temu and Shein?
John Klinger, CFO
Yes, I'll start with this one. So, in Marmaxx, we did round down to a 2% comp. But when we look at the business itself, the departments that aren't weather dependent performed much better. And the regions that didn't experience as much unfavorable weather also performed better. So that tells us that where we saw the regions in the departments that were strong, that tells us that, okay, that's leaning more towards weather. And I'm very confident on our comps from Marmaxx going forward.
Ernie Herrman, CEO
The teams there, including John's, conduct analysis to examine control groups to understand the situation better. It seems that the weather impacted us, leading us to adjust our expectation down to two. Regarding the online players you mentioned, we view them similarly. They are commodity-driven and not the type of brands we carry, as we focus on a better quality mix. We don't see them posing a significant threat to our market share. I can see how their business model might overlap with some other brick-and-mortar or online businesses, but we don’t believe they will affect our customer base or end use significantly.
Operator, Operator
Our next question comes from Dana Telsey from Telsey Group.
Dana Telsey, Analyst
As you think about the pace of remodels, I think you mentioned 450 remodels this year on the last call. How are they going? What are you seeing? And any details on any of the banners and how the performance is different? And then also on shrink, are you still looking at shrink being flat this year? Or any changes to what you're seeing in shrink?
John Klinger, CFO
Yes. Regarding the remodels, they focus on ensuring that our stores maintain an excellent appearance and functionality. Older stores can perform comparably to stores that are significantly newer, so it's crucial to keep up with maintenance to prevent sales from declining, which would require substantial investment to recover. Our priority is to create a pleasant shopping experience for customers at all locations. In our remodels, we aim to incorporate fixtures that enhance shopping convenience. For example, in the beauty department, we are improving lighting and aesthetics, which we believe contributes positively to sales. We remain highly focused on shrink, aiming for it to remain stable year-over-year. It's important for us to strike a balance between protecting merchandise and allowing customers to shop comfortably and safely. Last year, we began equipping our loss prevention associates with body cameras. This has a de-escalating effect, as individuals are less likely to engage in theft when they know they are being recorded. At the end of the year, we analyze our shrink results to inform our strategies for the following year. We assess what was effective and what was not, and continue to implement successful strategies while being prepared to provide guidance.
Operator, Operator
Our final question of the day comes from Marni Shapiro from Retail Tracker.
Marni Shapiro, Analyst
Congratulations on a great quarter. The stores look impressive. Could we discuss the younger shopper for a moment? You’ve been mentioning efforts to attract them for a few years, and it seems to be working with increased traffic. I'm curious, do these younger shoppers open credit cards, and is that something you're encouraging? Are you noticing that they shop across different brands? Are you marketing to promote shopping across these brands? A shopper who frequents both T.J. Maxx and HomeGoods may be more loyal to the company overall. Can you provide some insights into what the younger shopper demographic looks like for your business?
Ernie Herrman, CEO
Yes. So, Marni, let me start and John will chime in as well. We're both involved in opening credit cards and loyalty programs. You are right that when we successfully build loyalty with customers, especially younger ones who open a TJX rewards account, we ideally want them to also open a credit card, which leads to increased cross-shopping, right, John?
John Klinger, CFO
Yes. However, our credit card penetration is not as high as that of many of our competitors. Much of our insight into customer preferences comes from surveys we conduct, and we also obtain credit card information through partnerships with organizations that compile this data. This is where we gather most of the feedback regarding our appeal to younger shoppers.
Ernie Herrman, CEO
So that has been a pretty much a steady increase over the last handful of years, attracting a larger percent of our new customers in the lower age demographic.
John Klinger, CFO
So, we are looking at a large data pool when we're making those comments. That's beyond just our credit card.
Marni Shapiro, Analyst
Do you notice that customers are already exploring different departments? What are you doing on the marketing side to encourage this? It seems like a significant opportunity as new customers engage with your brand. It's a different experience for someone like me, who's been shopping here for years, compared to someone new who may have come with their parents and is now purchasing their first home or apartment.
Ernie Herrman, CEO
We utilized our digital marketing strategies to engage with customers directly through email, which also helps promote our other brands. Additionally, we’ve implemented various initiatives in-store. However, measuring the effectiveness of these efforts is challenging, and both John and I feel that we lack adequate metrics for assessment. All right. In closing, I want to emphasize that we are really in an excellent financial position to continue to invest in the growth of our company while simultaneously returning significant cash to our shareholders. Now, we will thank you for joining us today, and we look forward to updating you again on our second quarter earnings call in August. Thank you, everybody.
Operator, Operator
Ladies and gentlemen, that concludes your conference call for today. You may all disconnect. Thank you for participating.