Earnings Call Transcript
TJX COMPANIES INC /DE/ (TJX)
Earnings Call Transcript - TJX Q1 2023
Operator, Operator
Ladies and gentlemen, thank you for standing by. Welcome to The TJX Companies First Quarter Fiscal 2023 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 18, 2022. I would now 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.
Ernie Herrman, CEO
Thanks, Bessie. Before we begin, Deb has some opening comments.
Debra McConnell, Corporate Secretary
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 the United States copyright and other laws. Additionally, while we have approved the publishing of a transcript of this call by a third party, we take no responsibility for inaccuracies that may appear in that transcript. 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 Scott Goldenberg. I’d like to begin the call by reiterating that together with people and businesses around the world, we are united in our condemnation of the war in Ukraine. We have many associates with ties to Ukraine, including those from Ukraine or with family and loved ones living there and associates in the surrounding countries like Poland. We are steadfastly committed to supporting all of our associates impacted by this crisis. We have offered them our support, including financial, legal and mental health resources. Further, we have made significant charitable donations to help with the humanitarian relief efforts. In terms of our business ties to Russia, in early March, we committed to divest from our minority investment and Familia, which operates off-price stores in Russia. Q1 results, moving to our business update. I want to start by once again thanking each of our global associates for their continued commitment to TJX. Thanks to their collective efforts, we continue to offer outstanding merchandise and values to our shoppers every day. Now, to our results. I am very pleased with our first quarter performance. I’m especially pleased that both the first quarter adjusted pretax profit margin and adjusted earnings per share exceeded our expectations. We achieved these results even though comp sales came in a bit lighter than our plans. I also want to highlight the strong performance of our largest division, Marmaxx, which delivered a comp increase of 3% over a 12% open-only comp increase last year. We were especially pleased that Marmaxx’s comp was driven by customer traffic increases, which speaks to the appeal of our values and merchandise. Our first quarter performance highlights the sharp execution and flexibility of the entire organization that once again navigated through an uncertain environment and global supply chain issues to bring an exciting mix of merchandise to our stores and online shoppers. During the quarter, our teams flexed our product mix and categories to respond to consumer trends and preferences. We saw the benefits of our pricing initiative for another quarter, while continuing to deliver our customers’ outstanding value, which is our buyer’s number one priority. With people’s wallets stretched even further in the current environment, our teams did an outstanding job of offering shoppers excellent values every day. Longer term, I am confident about our ability to capture market share and improve the margin profile of TJX. Our goal is to return to our fiscal 2020 pretax margin level of 10.6% within three years. We are convinced that our differentiated treasure hunt shopping experience and outstanding values will continue to resonate with consumers and drive the successful growth of our business in the U.S. and internationally for many years to come. Before I continue, I’ll turn the call over to Scott to cover our first quarter financial results in more detail.
Scott Goldenberg, CFO
Thanks, Ernie, and good morning, everyone. I’d like to echo Ernie’s comments and thank all of our global associates for their continued hard work. I’ll start with some additional details on the first quarter. As Ernie mentioned, we are very pleased with our first quarter profit results. Consolidated adjusted pretax margin of 9.4%, which excludes a 190 basis-point negative impact from a charge related to the write-down of our minority investment in Familia, was up 220 basis points versus last year. This was higher than our plan due to the timing of expenses as well as the combination of expense management and a bigger benefit from our pricing initiative. For the first quarter, the pretax margin increase includes the benefit of our pricing initiatives. Similar to the fourth quarter, we saw a very strong mark-on. However, merchandise margin was down due to 220 basis points of incremental freight pressure. Incremental wage costs also negatively impacted pretax margins by 70 basis points. Our year-over-year margin increase also includes a benefit from a reduction in COVID-related expenses and the annualization of temporary store closures internationally last year. Adjusted earnings per share of $0.68 were above our plan and exclude a $0.19 negative impact from the charge related to our Familia investment. Our U.S. comp store sales growth rounded down to flat over an outsized 17% open-only comp increase last year, and we’re a bit below our planned range. I want to highlight that we are incredibly close to rounding to a positive 1% U.S. comp. First quarter average basket was up, driven by a higher average ticket and U.S. customer traffic was down slightly. As far as the monthly cadence, U.S. comp sales on a three-year stack basis improved in the March-April period. During the quarter, we saw very strong comp sales in our overall apparel business at Marmaxx, which was up 6%. U.S. home comp sales, including our HomeGoods division and Marmaxx home categories, were down 7%. I should note that last year, our U.S. open-only home comp sales increased over 40%. Importantly, we believe the comp sales decline in our U.S. home businesses was a result of the difficult year-over-year comparison and not driven by our pricing initiative. Another point I want to highlight is that our store inventory turns for every division and overall markdowns were favorable to pre-pandemic levels. Further, our research tells us that customers’ perception of our value gap with other retailers remains strong. Now, to our division results. At Marmaxx, first quarter comp store sales increased 3% over a very strong 12% open-only comp increase last year, and segment profit increased to 13.2%. Again, we are particularly pleased to see an increase in customer traffic at Marmaxx, which is up low single digits. I’ll also reiterate that the comp increase was driven by Marmaxx’s overall apparel business, which was up 6%. In the first quarter, we saw an increase in Marmaxx’s average basket, driven by a higher average ticket, primarily due to our pricing initiatives, as well as apparel sales being a higher percentage of the mix. At HomeGoods, first quarter comp store sales decreased 7% versus a remarkable 40% open-only comp increase last year. Segment profit margin was hurt by nearly 700 basis points of incremental freight costs. I want to highlight that HomeGoods’ three-year comp stack for the first quarter was up 33%. HomeGoods average basket increased driven by a higher ticket and customer traffic decreased in the first quarter. Looking ahead, we see HomeGoods as strongly positioned in the retail environment, and we will be emphasizing our value messaging in our marketing. At TJX Canada, overall sales increased 41% and segment profit margin exceeded their pre-COVID Q1 fiscal '20 level. Year-over-year sales benefited from having stores open all quarter this year versus significant temporary closures in the first quarter of last year. At TJX International, overall sales increased 163% due to the benefit of having stores open all quarter this year, even while there were still some shopping restrictions. Segment profit margin was negatively impacted by freight costs. We are very pleased that all of our stores in Europe are currently operating without restrictions. Moving to inventory. Our balance sheet inventory was up 37% versus the first quarter last year. On a per store basis, inventory was up 37% on a constant currency basis. I want to emphasize that in-store inventories are where we want them to be as we look at more normalized comparisons to pre-pandemic levels. We still have plenty to open buys for the second quarter and second half of the year. We remain well positioned to take advantage of excellent deals we are seeing in the marketplace and flow fresh merchandise to our stores and online throughout the year.
Ernie Herrman, CEO
Thanks, Scott. Now, I’d like to highlight the opportunities that we see that give us confidence that we can continue to capture market share and improve our profitability, both in the near and long term. Starting with the top line. First, we are confident that the combination of our value proposition, our treasure hunt shopping experience and flexibilities will continue to be a winning retail formula. We are convinced that the consumers’ desire for exciting brands and fashions at great values is not going away. Additionally, in today’s highly inflationary environment, we believe our value proposition is as appealing as ever. We serve a wide customer demographic and offer a range of merchandise categories and brands across good, better and best, which we see as a major advantage. This year, we have exciting marketing initiatives planned to showcase our exceptional value and differentiated shopping experience. First, we are sharpening our marketing messages across our outlets to emphasize our value leadership to consumers. Second, we are strategically targeting pockets of opportunity within certain geographies to amplify our messaging even further. Lastly, we are pleased to see that across all our divisions, customer satisfaction scores are strong, and we are attracting new shoppers of all ages, including a large number of Gen Z and millennial shoppers, which we believe bodes well for the future. Second, we continue to see significant store growth opportunities ahead for all of our divisions. As we have seen over the last few years, demand for our exciting and inspiring in-person shopping experience remains strong. We see our flexible buying supply chain and store formats as tremendous advantages that allow us to open stores across a wide customer demographic. All of this gives us confidence in our long-term plan of opening more than 1,500 additional stores in our current markets with our current banners. Lastly, and I can’t emphasize this enough, we are extremely confident that we’ll continue to have plenty of quality branded merchandise available across good, better and best brands to support our growth plans. Our global buying team of more than 1,200 buyers sources goods from the universe of approximately 21,000 vendors in more than 100 countries. In a landscape where we are planning to grow our sales and open new stores, while many other retailers are closing stores, we offer vendors a very attractive solution to clear their excess product. To be clear, overall product availability has never been an issue for TJX. We believe that each of these characteristics of our business set us up as well to deliver sales and market share gains in the U.S., Canada, Europe, and Australia over the long term. Now importantly, to profitability. I am very pleased that for the full year, we now expect an adjusted pretax margin on an adjusted basis to reach 9.6% to 9.8% higher than our original plan, and adjusted earnings per share in the range of $3.13 to $3.20, which at the end is also higher than our original plan.
Scott Goldenberg, CFO
Scott will provide more details, but the key drivers are our strong mark-on, our pricing initiative, and expense management. We continue to believe that delivering strong sales is the best way to offset the cost pressures that we’re facing. We also remain laser-focused on looking at other ways to improve profitability and operate our business more efficiently. As I’ve mentioned on our last few calls, our initiative to selectively raise retails has been working very well, and we continue to believe it will be a multiyear opportunity for us. We are also optimistic that the expense headwinds we’ve been facing for the last three years will begin to moderate going forward. Further, looking ahead to the next few years, we see opportunities to improve divisional margins and deliver continued increases in overall profit margins. I want to reiterate that our goal is to return to our fiscal 2020 pretax margin level of 10.6% within three years.
Ernie Herrman, CEO
Turning to corporate responsibility and ESG. Last quarter, I shared with you that our environmental sustainability teams were developing plans for more aggressive initiatives across several of our priority areas. I am pleased to share that last month, we announced four new global environmental sustainability goals. First, we have set a goal to achieve net zero greenhouse gas emissions in our operations by 2040. Second, we intend to source 100% renewable energy in our operations by 2030. Third, we are working to divert 85% of our operational waste from landfill by 2027. And finally, we are aiming to shift 100% of the packaging for products developed in-house by our product design team to be reusable, recyclable, or contain sustainable materials by 2030. As I’ve shared in the past, we’ve been committed to mitigating our impact on the environment for many years. I’m very excited about these new goals and the plans our teams are putting in place to support them. We look forward to sharing more about our progress as we go forward. As always, we have more information on corporate responsibility at tjx.com. In closing, I want to again thank each of our associates around the globe. We feel great about the health of our business and are confident that the appeal of our exciting merchandise mix and outstanding values will continue to resonate with consumers around the world. Through our 45-year history, and many kinds of retail, economic, and geopolitical environments, we continue to see the advantages and strength of our flexible off-price model. We see many opportunities to capture additional market share and increase our profitability as we look to become a $60 billion-plus revenue company. Now, I’ll turn the call back to Scott for additional comments. And then, we’ll open it up for questions.
Scott Goldenberg, CFO
Thanks, again, Ernie. I’ll start with the full year. As Ernie mentioned, we are pleased to be raising our guidance for full year adjusted pretax margin to a range of 9.6% to 9.8%. This is 10 to 30 basis points higher than our original plan. I’d like to highlight that this contemplates our expectation for better flow-through on lower planned sales, which speaks to the strength of our flexible off-price model. I’ll also note that we’re planning approximately 150 to 160 basis points of incremental freight expense. Again, for full year adjusted earnings per share, we are planning a range of $3.13 to $3.20, which is up 10% to 12% over last year’s adjusted $2.85. This is also $0.04 more on the high end than our original plan for EPS this year. We expect full year U.S. comp sales to increase 1% to 2% over an outsized 17% U.S. open-only comp increase last year. This guidance now reflects the flow-through of our first quarter U.S. comp sales and our second quarter guidance. Our implied back half guidance is for a 4% to 5% increase over a 14% increase in the second half last year. For the full year, we are now planning total TJX sales in the range of $51.3 billion to $51.8 billion. The lower sales guidance is primarily a result of a change in FX rates, which reduced our full year sales forecast by approximately $700 million, as well as our lower-than-planned first quarter sales. For modeling purposes, for the full year, we’re currently anticipating an adjusted tax rate of 25.7%, net interest expense of about $35 million, and a weighted average share count of approximately $1.18 billion. In terms of our year-end cash position, we expect it to be in line with where we originally planned it. We remain committed to returning cash to shareholders. In March, our Board of Directors approved an increase in our quarterly dividend by 13% to $0.295 per share. This marks our 25th dividend increase over the last 26 years. Additionally, in fiscal ‘23, we continue to expect to buy back $2.25 billion to $2.5 billion of TJX stock. Now, to our second quarter guidance. For the second quarter, we are planning U.S. comp sales to be down 1% to 3% over an outsized 21% U.S. open-only comp store sales increase last year. We’re pleased with the start of the quarter with the momentum from the March-April period continuing into May to date. I should note that our second quarter comp plan reflects this acceleration in comp trends we saw in the March-April period and into May. Next, we are planning total second quarter TJX sales in the range of $12.0 billion to $12.2 billion. In the second quarter, we’re planning pretax margin in the range of 8.7% to 9.1%. This guidance assumes approximately 250 basis points of incremental freight expense and about 80 basis points of incremental wage costs. For modeling purposes, in the second quarter, we’re currently anticipating a tax rate of 26.3%, net interest expense of about $12 million, and a weighted average share count of approximately 1.18 billion. As a result of these assumptions, we’re planning EPS of $0.65 to $0.69 per share. Again, our second quarter and full year guidance implies in the back half of the year, U.S. comp sales will be up 4% to 5%. Additionally, we expect pretax margin in the back half will be in the double digits. In closing, I want to reiterate that we are laser-focused on driving sales and traffic, improving the profitability profile of TJX. We’re in a great position, both operationally and financially, to take advantage of the opportunities we see to grow our business. Our strong balance sheet and financial foundation continue to give us great confidence in today’s macro environment. Further, we continue to make investments to support our growth initiatives while simultaneously returning significant 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 and one part to each question to keep the call on schedule, and so that we can answer questions from as many analysts as we can. Thanks. And now, we will open it up for questions.
Operator, Operator
Our first question comes from Paul Lejuez.
Paul Lejuez, Analyst
Hey. Thanks, guys. Curious how you would characterize the buying environment in home categories specifically versus apparel? And I also would love to hear how you would characterize the competitive environment you’re operating in. It seems like some large retailers out there have some excess apparel. Curious if you’re seeing any sort of a pickup in promotions that might be having an impact on how you think about pricing in certain categories. Thanks.
Ernie Herrman, CEO
Thank you for the question, Paul. Currently, the buying environment is quite robust across various categories, including home, apparel, and accessories. While we experienced a 7% decrease in home business this first quarter compared to a 40% decrease previously, we remain confident in our healthy home sales. We plan to maintain a steady buying pace and utilize various purchasing strategies, such as packaways, to hold goods for a longer period. Our flexibility in the business model allows us to adjust based on sales levels effectively. Regarding apparel, despite some inconsistencies in the market, our apparel sales have been strong this quarter. I had a detailed discussion with our apparel merchandise manager in T.J. Maxx yesterday, and she shared positive insights on the various opportunities available. Concerning promotions, we are not seeing aggressive promotions in our categories. However, this does not necessarily apply to all retailers, particularly those focused on commodity-driven products like home cleaning supplies. Our fashion-driven approach continues to benefit from a selective pricing strategy, as we observe competitors raising prices while reducing promotions.
Operator, Operator
Our next question comes from Matthew Boss.
Matthew Boss, Analyst
Great. Thanks, and congrats on a nice quarter. So, Ernie, could you speak to drivers of the improvement that you cited in March and April and then the momentum that you cited in May to start the second quarter? Are there any notable categories that you’re chasing into? And just on the positive traffic at Marmaxx, are you seeing a new customer increasing trips from your existing customer? Any signs of trade down that you think we’re seeing just across the board, the March-April improvement and the momentum in May?
Ernie Herrman, CEO
Yes, in terms of the overall picture, our teams are constantly working to exceed sales expectations. We’ve been seeing great comparisons at Marmaxx, especially compared to last year. While we wish we could achieve even more, we're pleased with our current performance and profitability. Regarding categories, I'm happy to report that our apparel business has been doing well. A year ago, we noticed more traffic in home goods than in apparel, but now we’re seeing a revival in the apparel sector, which is encouraging. Our flexible business model enables us to adapt to shifting trends from year to year and season to season, significantly contributing to the increase in the Marmaxx business compared to February. It's worth noting that February faced some weather challenges. Additionally, while the inventory numbers are relevant, they represent just a snapshot in time. Compared to FY20, our inventory levels are similar, and we still have a significant amount of open-to-buy for the year. We are well-positioned to pursue opportunities in various categories for the upcoming third quarter, as we have ample inventory availability. As we enter the second quarter, we’re pleased with our trajectory and the opportunities present in key categories. I hope this clarifies your question, and while I can't provide specifics about categories, I trust this gives you a good overview. Scott will add more details shortly.
Scott Goldenberg, CFO
Yes. One notable change we've observed from the first quarter to May, which differs from recent years, is that more than 75% of our HomeGoods and Marmaxx stores are in higher income demographics, specifically those making over $75,000, compared to those under that threshold. The stores in these higher demographics have performed better than the lower income ones. We believe we are well-positioned to serve these customers, especially with the quality of goods we offer. This trend has continued into the start of the quarter, indicating a shift. Since most of our stores are in these higher demographic areas, we see this as a positive sign for us. While we are not entirely shielded from a challenging environment, we are somewhat more resilient, particularly among customers who have a bit more disposable income compared to lower income demographics.
Ernie Herrman, CEO
I’ll jump in, Matt, as this has sparked some discussions we've been having for years. One of the advantages at TJX with T.J. Maxx, Marshalls, HomeGoods, and even Sierra or online is our broad trading approach. We’ve always aimed to avoid segmenting our offerings into moderate, better, or high-end categories; instead, we want to sell to everyone. Right now, having higher demographics in HomeGoods, Maxx, and Marshalls compared to some other retailers is beneficial, especially considering the trends Scott mentioned. Our merchants have consistently targeted good, better, and best products. As I highlighted in my script, this strategy is a blend of our merchandise, store locations, atmosphere, and the treasure hunt shopping experience that enables us to attract a wide range of customers.
Operator, Operator
Our next question comes from Kimberly Greenberger.
Kimberly Greenberger, Analyst
Okay, great. Thanks so much. And love to see the margin inflection you guys are delivering here, both in the quarter and for the year. So, well done to you on that. I wanted to ask about the pricing initiatives. It’s obviously one of the drivers in this margin inflection story. Can you talk about where you have seen the most success in your pricing initiative? And are there any areas where you might be seeing some pushback on those pricing initiatives? And then, I just wanted to follow up on an earlier thread, if we could, and sort of ask the question a different way. It seems like this is an environment right for trade down. We’re starting to hear from some of the food retailers, and I think others, that they’re starting to see signs of trade down. I don’t know, Ernie or Scott, if you’ve got data from years and years and years ago, maybe during periods of consumer stress in the past. How many quarters has it typically taken for you to see a traffic benefit from trade down where shoppers might be trading down from higher cost retailers into the TJX banners? And are there any signs of that happening yet? Thanks.
Ernie Herrman, CEO
Yes, great question, Kimberly. I'll turn it over to Scott to address that, and then we'll come back to your first question.
Scott Goldenberg, CFO
Yes. I'll address the first part at a high level and let Ernie provide the details. From a big picture perspective, our sales and turns are better across all divisions than they were before COVID. Overall, we feel that merchandise is moving through well due to our pricing strategy, and our markdown rates are lower than before. We're not seeing any negative trends in our key financial metrics; in fact, they are all improving. Regarding your question about what happened in the past, looking back to the recession in 2008 leading into 2009, we experienced two soft quarters. If you recall, the third and fourth quarters of fiscal 2009 were challenging for us. However, in the first quarter of that year, we saw a slight increase in comparable transactions, which then accelerated. It's difficult to say it's directly comparable, but we did experience two quarters of softness before starting to rebound. I believe we saw a lot of trade down during that time, and we were also renovating many stores, which Ernie can elaborate on further.
Ernie Herrman, CEO
Yes, Kimberly, you're right about the dynamics we're seeing. We’ve noticed some trade down or trade over behavior from various mass market retailers and department stores, but it’s happening from multiple directions. Interestingly, we're also seeing it from some e-commerce players. Customers have shown a renewed interest in visiting our stores, which has become quite appealing to them, especially as shopping has resumed post-COVID. This creates an engaging experience, particularly in locations like HomeGoods, T.J. Maxx, and Marshalls, where shoppers enjoy the eclectic and valuable offerings. This trend encourages many to choose us for their shopping needs, motivated by value, which leads to your earlier question about our pricing initiatives. Overall, we’ve had a positive experience across the board with pricing; we’ve faced minimal issues, with success rates above 90%. We’re in the early stages of this initiative, and our business model gives us an edge over many other retailers, particularly since we operate in fashion-driven and brand-focused categories that allow for this flexibility. We’re really excited about our results and how we compare against others in the retail space regarding retail pricing and promotional strategies. Many competitors have had to increase their prices or reduce promotions, which positions us favorably. We see significant opportunities for margin expansion over the coming years as our average ticket rises, contributing to improved efficiencies by reducing the number of units processed. We expect this positive momentum to continue for several years. Our recent performance and outlook for the year confirm this optimism, and we are confident in our ability to enhance TJX's margins over the next three years.
Operator, Operator
Our next question comes from Michael Binetti.
Michael Binetti, Analyst
Hey, everyone. Congratulations on a strong quarter, and thank you for the detailed information. I’m trying to understand how you expect demand to remain strong or even improve with the anticipated comp growth of 4% to 5% in the second half, considering you have a lot of great merchandise available. Ernie, you mentioned that you feel good about the long-term opportunity to gain market share. I have a similar question regarding your business model, which closely ties inventory with sales. How can you be sure that this situation isn't just a result of department stores or specialty retailers overordering temporarily, especially with the upcoming fall and holiday seasons? What reassures you that we won't quickly revert to a scenario with less inventory sooner than anticipated? How do you assess the long-term sustainability of this situation?
Ernie Herrman, CEO
Well, okay. So, let’s take your first question, and I’ll let Scott actually talk. It’s fairly clear why we’re seeing those sales trends based on our current trajectory when you examine the data. Scott, do you want to discuss that?
Scott Goldenberg, CFO
Yes. I’ll let Ernie address the long-term aspect. Looking at the first half of this year, we are comparing it against a total U.S. stack of 19%, and we have demonstrated results close to that between the two quarters, with minimal to slightly negative comparable results, reflecting a two-year stack from 2019. We have not seen any increase on that stack as we are facing a three-year stack that is five points lower than the latter half of the year. I’ll allow Ernie to discuss the opportunities further.
Ernie Herrman, CEO
Well, if I could jump in, Michael, what that means is we’re assuming that we will continue with our current activities and we expect a trend rate of 4% to 5%, based on the existing trend.
Scott Goldenberg, CFO
At the beginning of the year, we provided guidance prior to the Ukraine invasion. We experienced a slight slowdown globally for about three to four weeks. After that, despite the ongoing concerns about inflation and rising gas prices, we returned to the trend we had initially guided for the year, which we are still using moving forward. This has not deterred customers from visiting our stores, although we have not seen any improvement in that trend; we expect it to remain consistent for the remainder of the year. I’ll allow Ernie to discuss inventory management, but we believe we can adapt to different categories in the second half of the year to leverage current market conditions.
Ernie Herrman, CEO
Yes. So, we’re in a strong position for the back half of the year. To address your question about whether this trend is only temporary, we are looking strategically at our past performance and analyzing market share opportunities resulting from store closures and other reports. We have become quite adept at predicting trends in this environment. Before COVID, we had a solid understanding of our trends, which continued for several years. We are revisiting that long-term trend while considering current conditions. Availability is likely better now than it was pre-COVID due to fluctuations in the market, making it challenging for many vendors to forecast accurately. If we take that into account, we might see a more attractive mix of branded products, potentially outperforming our usual trends. We're analyzing our past multi-year trends alongside current data while also paying attention to brand availability and how we're retailing our products. One key lesson learned during COVID is that our merchants have become much better at communicating quickly, whether through virtual means or technology. This has led to faster-moving strategies in some categories, which have improved compared to a few years ago. I believe that addresses your question.
Operator, Operator
Our next question comes from Omar Saad.
Omar Saad, Analyst
I have a couple of follow-up questions. Did I understand correctly from your prepared remarks that you believe the expense headwinds are easing going forward? I wanted to clarify what you meant by that. Is this about the current rates or looking ahead? It sounds like Europe and the Ukraine war significantly impacted demand this quarter. Was the cold, wet spring also a factor in your business during this period?
Scott Goldenberg, CFO
It's challenging to discuss weather patterns, especially since they negatively impacted us early in the quarter. However, by February, our trends were aligning more with our expectations after a couple of weeks following the onset of the war. We observed an increase not only in the U.S. but also in Canada and Europe, including both Mainland Europe and the U.K., suggesting a consistent performance across all regions. Regarding freight costs, which have been significant, they matched our initial projections for the first quarter. Looking ahead, we've accounted for the current conditions regarding freight, primarily influenced by rising diesel and oil prices. We anticipate additional costs in the range of $40 million to $50 million, which we have included in our plans. We believe we have adjusted for higher ocean freight and demurrage costs, but these factors are compared against larger previous figures. Specifically for HomeGoods, we expect a decrease in both our deleverage and overall rates in the latter half of the year, largely due to the efforts of our team in negotiating new contracts and improving goods mix. They've successfully optimized port utilization, particularly focusing on ports with fewer issues, which should benefit us. Furthermore, as Ernie mentioned, we foresee long-term advantages in reducing costs that will positively impact our margins in 2023 and 2024. We are also taking steps to stabilize freight costs while enhancing service levels. Over the past two years, we've dealt with extended lead times, which, although less than our competitors, have still been longer than usual. However, we are beginning to see improvements in lead times both domestically and internationally, which should enhance our flexibility in responding to market trends. In summary, our wage and other costs are in line with our expectations, and our current guidance remains unchanged, as we believe our projections are adequately covering our future expenses for the time being.
Ernie Herrman, CEO
So, Omar, just to make sure you understand, to your point, it’s a great question on the monitoring, Scott, I think it’s fair to say in Europe, for example, we’re thinking because of what’s going on with the pricing strategy and some of the headwinds moderating that we could approach potentially an 8% profit margin in the next three years there, which I think, as all of you know, is not where we’ve been. And I think that would be a significant inroad to profitability there. So, we have sat with that management team and looked at all these different aspects from pricing to the freight discussion Scott was just talking about, and where we think that’s going, understanding the post-Brexit headwinds on that. And we think we can get from the 6 and change to approach 8% really in the next three years. And then, in HomeGoods, which is obviously more directed by these freight issues in terms of the cost. I think that’s where we’re feeling we can get a chunk of that margin back, as Scott was saying in the nearer term. So, feeling good about that, Scott.
Scott Goldenberg, CFO
Yes. In the second half of the year, we expect to see one more peak in freight costs, with the most significant impact occurring in the second quarter, notably affecting HomeGoods. However, in the latter part of the year, as we've mentioned, the freight situation along with our expectations regarding sales will mean we won't have to manage the same level of complications as last year. Last year, we experienced unusually low markdown rates at HomeGoods during a significant competitive period. Looking ahead to the second half, we anticipate a considerable increase in our pretax margins at HomeGoods, although not necessarily reaching double digits, but still significantly higher than before. This represents a notable change.
Omar Saad, Analyst
Got it. That’s really helpful color. And what it’s worth, your ability to forecast and manage your inflationary expenses, including freight, is certainly distinguishing yourself in the market.
Ernie Herrman, CEO
The teams have worked really hard, Omar. I’m glad you noticed that. We are trying, as you can tell, to discuss our progress quarter by quarter and give everyone a clear understanding. As evident, we've been quite consistent with our predictions on performance. The good news we have to share on this call is that we believe we have a good grasp of some of these costs, and we are going to start leveraging that knowledge to reduce costs while also continuing to enhance our pricing strategy. Both aspects are positive.
Scott Goldenberg, CFO
Yes. So, again, it goes back to what Ernie was saying about the pricing strategy and the mark-on, we see continued strong mark-on both equal and better than planned for the back half of the year. And that, along with the pricing strategy…
Ernie Herrman, CEO
The average.
Scott Goldenberg, CFO
The average is what’s allowing us to raise our guidance. It’s obviously not due to the sales because we’re actually losing several pennies due to that, but we’re more than offsetting it by those two components, that along with some expense management. So, those are why we’re raising the full year.
Operator, Operator
Our next question comes from Ike Boruchow.
Ike Boruchow, Analyst
So, I guess, my question is kind of, Scott, to what you were just saying, the U.S. comps coming down, the margin is going up, clearly, more of an issue of HomeGoods. I guess, my question is bigger picture. Internally, how do you guys identify that the pricing initiatives that you’re taking are not somewhat responsible for the negative comp reaction that you’re seeing in the U.S., and specifically at HomeGoods? I’m just trying to understand how you kind of balance the pricing you’re taking against potentially some of the lost revenue you might get. Just trying to understand how you guys think about that internally.
Ernie Herrman, CEO
I can jump in.
Scott Goldenberg, CFO
Yes, we do not see any difference between the products that have had price increases or changes in prices and those that didn't. Additionally, we haven't experienced any changes in our markdown rates or inventory turnover.
Ernie Herrman, CEO
We can track this by SKU, comparing the actual SKUs that had price adjustments to those without adjustments, and we observe no difference in the turnover rate of the goods. Our turnover rates are as good, if not better than they were before COVID, which is a significant point. Additionally, we conduct qualitative studies. When we raise retail prices, we do not do so in isolation; we often consider what other retailers are doing with their prices. So, although it may seem like we just raised prices, we are actually responding to surrounding price increases in that item or category. We may have been priced too low initially or adjusted based on competitive pricing. As you can imagine, we have been monitoring this closely. Regarding HomeGoods, they were facing 40 comparisons, and when they experienced a drop, they still maintained a solid growth stack.
Scott Goldenberg, CFO
Yes. And the thing is that they were remarkably similar last year at the home in Marmaxx and the home increase in HomeGoods, and they’re remarkably similar this year, our home within Marmaxx. So, it’s a similar result happening in both places, so.
Ernie Herrman, CEO
I have a quick follow-up. I'm trying to understand why the lowered outlook for U.S. comps is not attributed to the pricing initiatives. What do you believe is causing the weakness compared to three months ago when you first provided that guidance? That's really my question. So, first of all, part of that is we didn’t anticipate the war happening before fuel prices increased even further. That was all after the initial period. We discussed that we would have made our best estimate based on a year of significant growth. So, we’re slightly off by a point or two, but we never really knew. We made our best estimate early on regarding where we would be, and then other factors surrounding us had an impact. The good news is we’re still looking at a 4% to 5% increase in sales in the second half, which is a solid sales growth as planned, driven by a more normalized environment. What are we up against in the second half, Scott?
Scott Goldenberg, CFO
Yes. We’re going down from a U.S. comp of 19% in the first half to 14% — it is at the high end of 14%, it’s closer to the similar high end where we were running pre-COVID for 2 out of 3. So, it feels...
Ernie Herrman, CEO
What happens, Ike, is that if we hadn’t had that plan in place and we started with a lower plan, we would have made our best estimate for a conservative plan. In this situation, we are actually performing better than expected in terms of profit and sales. Overall, this is really good news.
Scott Goldenberg, CFO
We didn’t get a true run rate or at least a run rate that’s now about two months in the making from a post-war period. And all we’re doing, it’s not a crystal ball here. We’re just holding at the high end of that three-year stack.
Operator, Operator
And our final question of the day comes from Adrienne Yih.
Adrienne Yih, Analyst
Good morning. Very nicely done in such a tough environment. Ernie, my question for you is…
Ernie Herrman, CEO
Thanks.
Adrienne Yih, Analyst
You’re welcome. You deserve it. At Marmaxx, do you perceive that with positive traffic that the comp was tapped by a lack of inventory? And then, can you help us within HomeGoods, what categories within that are up trending and down trending? And how quickly can you shift the mix, a, within HomeGoods, but b, and more importantly, within Marmaxx, out of home and into more apparel? Thank you.
Ernie Herrman, CEO
Yes, that’s a great question. First of all, there isn't a lack of inventory at Marmaxx. The situation is primarily influenced by a decrease in traffic that hasn’t returned to normal levels, possibly due to rising fuel costs. We were pleased with the 3% comparable sales at Marmaxx compared to last year's 12%. Marmaxx is performing strongly entering the second quarter. Regarding your last question, they have already adjusted their home business operations. They’ve been flexible in shifting between different business areas almost weekly. As for how quickly we can adapt our buying in response to these adjustments, it generally takes about a month for buying and planning to realign inventory. However, we can respond more swiftly because we turn over that business quickly, allowing us to adjust store inventory and manage shipments effectively. Our planning and allocation teams strategically determine the volume and timing of shipments. So, if the home category slows down slightly, we can reduce shipments there and increase them in apparel. Marmaxx has been doing an excellent job of this. Although I can’t provide specifics on which categories are trending up or down, I can share that our HomeSense business, which includes many higher-priced items, has been performing exceptionally well. We're pleased with that segment and plan to open more locations in the future. In HomeSense, for example, half of the store features furniture, lighting, and rugs, which are traditionally bought online. What sets our home business apart is that customers can purchase these items and take them home the same day. This is a significant advantage over online home retailers, and we anticipate that these categories will continue to perform well. That’s the high-level overview I wanted to share. Thank you, Adrienne. That concludes our call. Thank you all for joining us today. We appreciated the discussion. We will provide updates during our second quarter earnings call in August. Take care, everyone. Thank you.
Operator, Operator
Ladies and gentlemen, that concludes your conference call for today. You all may disconnect. Thank you for participating.