Ernie Herrman - President and CEO Debra McConnell - Global Communications Scott Goldenberg - CFO

Michael Binetti - Credit Suisse Lorraine Hutchinson - Bank of America Merrill Lynch Matthew Boss - JP Morgan Paul Trussell - Deutsche Bank Kimberly Greenberger - Morgan Stanley Paul Lejuez - Citi Jamie Merriman - Bernstein Omar Saad - Evercore ISI Daniel Hofkin - William Blair

Ladies and gentlemen, thank you for standing by. Welcome to The TJX Companies Second Quarter Fiscal 2019 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference call is being recorded, August 21, 2018. I would like to turn the conference over to Mr. Ernie Herrman, Chief Executive Officer and President of The TJX Companies Incorporated. Please go ahead, sir.

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

Thank you, Ernie, and good morning. The forward-looking statements we make today about the Company’s results and plans are subject to risks and uncertainties that could cause the actual results and the implementation of the company's plans to vary materially. These risks are discussed in the company's SEC filings, including, without limitation, the Form 10-K filed April 4, 2018. Further, these comments and the Q&A that follows are copyrighted today by The TJX Companies, Inc. Any recording, retransmission, reproduction or other use of the same for profit or otherwise without prior consent of TJX is prohibited and a violation of United States copyright and other laws. Additionally, while we have approved the publishing of a transcript of this call by a third party, we take no responsibility for inaccuracies that may appear in that transcript. We have detailed the impact of foreign exchange on our consolidated results and our international divisions in today's press release in the Investors section of our website, tjx.com. Reconciliations of the non-GAAP measures we discuss today to GAAP measures are posted on our website, tjx.com in the Investors section. Thank you. And now, I'll turn it back over to Ernie.

Good morning. Joining me and Deb on the call is Scott Goldenberg. Let me begin by saying that I am extremely pleased with our second quarter results. Both our consolidated comp store sales growth of 6% and earnings per share of $1.17 significantly exceeded our expectations. We saw a sharp execution of our off-price fundamentals by many of our teams across the company, and comp store sales growth was strong at all of our divisions. Further, customer traffic was up for the 16th consecutive quarter at TJX and Marmaxx. Clearly, our terrific brands, eclectic merchandise mix and great values continue to resonate with consumers around the world. We were especially pleased with the very robust performance of our apparel business. We're convinced that we are attracting new customers, driving more frequent visits to our stores and gaining market share. We are particularly pleased to see that we have been attracting new, younger customers at all divisions, which bodes well for the future. With our very strong second quarter results, we are raising our full year outlook, which Scott will detail in a moment. Looking ahead, the third quarter is off to a very strong start, and we have many opportunities and traffic-driving initiatives planned for the back half of the year. We are confident we will achieve our plans, and as always, we'll strive to surpass them. Before I begin, before I continue, I'll turn the call over to Scott to recap our second quarter numbers. Scott?

Thanks, Ernie, and good morning, everyone. As Ernie mentioned, our 6% consolidated comparable store sales increase was on top of last year's 3% increase and significantly above our expectations. To reiterate, our comp sales in fiscal '19 are compared to a shifted fiscal '18 calendar so that our comps are calculated on a like-for-like basis. Once again, customer traffic was up overall and was the primary driver of our comp sales increases at all divisions. As a reminder, our comp increase excludes the growth from our e-commerce businesses. Second quarter diluted earnings per share were $1.17, excluding an $0.18 benefit from the 2017 Tax Act. Adjusted earnings per share were $0.99, a 16% increase over last year's $0.85. As expected, restructuring costs within our global IT function negatively impacted EPS growth by 3% and foreign currency benefited EPS growth by 3%. Consolidated pretax profit margin was 10.6%, down 10 basis points versus the prior year. Merchandise margin was down, but would have been significant, up significantly without the increased pressure from freight costs. Now to recap our second quarter performance by division. Marmaxx comps increased an outstanding 7%, significantly exceeding our plans. Comp sales were driven by customer traffic, and average ticket was up again this quarter. We were particularly pleased with the consistency we saw across all geographic regions. Further, Marmaxx's apparel business was very strong. Segment profit margin was up 10 basis points. We have many initiative plans planned in the back half of the year that we believe will continue driving traffic and sales. HomeGoods comps grew 3% on top of last year's very strong 7% comp increase. Segment profit margin was down 150 basis points, primarily due to significantly higher freight costs, increased supply chain costs and expenses related to new store openings. We are investing in our distribution network to support our store growth over the last couple of years. Looking ahead, we feel great about the long-term opportunity to capture additional market share in the United States home fashions sector, with both our HomeGoods and HomeSense banners. TJX Canada second quarter comps grew a strong 6% over a 7% increase last year. Adjusted segment profit margin, excluding foreign currency, was up 50 basis points, primarily due to the timing of transactional FX. Expense leverage on the strong comp offset most of Canada's significant wage pressure. We remain very pleased with the overall performance of our Canadian business. We have high awareness of our retail banners in Canada where we continue to attract very loyal customers. At TJX International, comps increased 4% in the second quarter. It was great to see comps accelerate vers the first quarter. Further, we were very pleased with our strong comp performance in the U.K. In Australia, sales continue to be excellent. Adjusted segment profit margin at TJX International, excluding foreign currency, was up 10 basis points. We are confident in our full year outlook for the division and our long-term growth opportunities. In Europe, we believe the gap in comp performance between us and many other major retailers has continued to widen, which underscores our confidence. I'll finish with our shareholder distributions. During the second quarter, we returned $844 million to shareholders through our buyback and dividend programs. We bought back $600 million of TJX stock, retiring 6.4 million shares and paid $244 million in dividends to our shareholders. Year-to-date, we have bought back $1 billion of TJX stock and paid $441 million in dividends. For the full year, we continue to anticipate buying back $2.5 billion to $3 billion of TJX stock. Now let me turn the call back to Ernie, and I will recap our third quarter and full year '19 guidance at the end of the call.

Thanks, Scott. With our very strong second quarter performance, what I want to underscore on this call is our confidence and our strong position for today and the future in an evolving retail landscape. First, in a consumer environment, where experiences are increasingly important, we have great confidence in the enduring appeal of our treasure hunt shopping experience. With the vast majority of overall retail sales still happening in brick-and-mortar locations and online retailers of all sizes starting to open physical stores, we are convinced that our 4 decades of experience operating stores and responding to consumer trends is a tremendous advantage. How is our shopping experience differentiated? We aim to inspire and excite our customers every time they shop us. We do this by bringing them curated, rapidly changing selections of great brands and great quality products sourced around the globe at amazing off-price values. It is important to understand that we are delivering excellent value on comparable merchandise versus full price brick-and-mortar and major online retailers. Further, we offer consumers the convenience of shopping multiple categories in a simple, easy-to-shop layout in thousands of locations that they may visit frequently. We have spent 4 decades building consumers' trust with our local and neighborhood stores. We also offer that instant gratification of being able to touch and feel the merchandise and take items home the very same day. Second, we are convinced we will continue to gain market share by growing our customer base around the world and driving more shopping visits. Our marketing strategies are multilayered, and we believe our marketing initiatives are continuing to attract new customers. We have strong plans in place for the second half of the year, and I am very pleased with the various campaigns each of our banners has lined up. We are engaging with customers more than ever. Our loyalty programs are driving more frequent visits, and we are clearly seeing more cross-shopping across our retail banners. We are pleased with the growth of these programs, and are convinced significant opportunity remains to keep growing them in the U.S., Canada and the UK. We are particularly pleased that we have been attracting a significant share of millennial and gen-z shoppers among our new customers at each of our divisions. Importantly, the majority of new customers at Marmaxx are the younger customers, which indeed bodes well -- very well for our future. We continue to see a meaningful opportunity to grow our retail banners around the world. We believe our long-term growth potential is 6100 stores in just our current countries with just our current chains. We target an extremely wide customer demographic, which also gives us great flexibility to open stores in urban, suburban and rural locations. We believe our e-commerce sites are also driving customer traffic to our stores. Although still a small piece of our overall business, we feel great about our differentiation strategies and the growth of both our U.S. and UK e-commerce sites. We continue to increase customer awareness of our online businesses through integrated marketing campaigns and in-store signage. I am also pleased with our overall online metrics, particularly those related to Click and Collect in the UK. The last point I'll emphasize about our confidence, as the retail landscape continues to evolve, is our leadership and flexibility. The most important factor is our opportunistic buying. Our discipline in maintaining inventory liquidity and remaining open to buy allows us to be nimble in the marketplace and maximize the best opportunities for hot categories and hot brands. Further, our vast vendor universe of more than 20,000 vendors afford us tremendous flexibility in sourcing merchandise around the globe. Our flexible store format allows us to respond quickly to changing consumer tastes and offer shoppers a mix of relevant, on-trend quality merchandise. Our inventory turns very rapidly, and the freshness and newness of merchandise encourages and excites consumers to visit our stores more frequently. We have a strong focus on innovation and are constantly testing new ideas within our 4,000-plus stores as well as our online channels. We will learn what does and does not work, and if an idea resonates with consumers, we have the flexibility to roll it out in a meaningful way. These tests have the potential to drive significant growth for us as we have seen throughout our history. We are laser-focused on driving the business today while planning for the future. We target a very wide customer demographic with our portfolio of retail banners across multiple countries and multiple categories, which gives us great flexibility with our growth plans. In an ever-changing retail environment and with the emergence of new types of retailers, we will never be complacent. In closing, we're extremely pleased with our second quarter performance and have many initiatives planned to continue driving sales and traffic in the back half of this year. The marketplace is loaded with quality branded merchandise, and we love the buying opportunities that we are seeing. We believe our great values and differentiated shopping experience continue to set us apart from most other major retailers and highlights the resiliency of our business. We are highly confident that we can gain market share as we continue to leverage our winning retail formula to grow around the world. Now I'll turn the call over to Scott to go through our guidance, and then, we'll open it up for questions. Scott?

Thanks, Ernie. I'll begin with our full year fiscal '19 guidance. For modeling purposes, I'll remind you that fiscal '19 is a 52-week year compared to fiscal '18, which was a 53-week year. As we mentioned in our press release this morning, we are increasing our EPS guidance due to our strong second quarter performance. On a GAAP basis, we now expect fiscal '19 earnings per share to be in the range of $4.83 to $4.88. We're expecting a benefit of $0.73 to $0.74 due to items related to the 2017 Tax Act. Excluding this tax benefit, we're increasing our adjusted earnings per share guidance range to $4.10 to $4.14. This would be a 6% -- up 6% to 8% versus the adjusted $3.85 in fiscal '18. This EPS guidance now assumes consolidated sales in the $38.2 billion to $38.4 billion range, a 7% increase over the 53-week prior year. We're now assuming a 3% to 4% comp increase on a consolidated basis, as a result of our strong performance in the first half of the year. We expect pretax profit margin to be in the range of 10.7% to 10.8%, down 40 to 50 basis points versus the adjusted 11.2% in fiscal '18. We're planning gross profit margin to be in the range of 28.5% to 28.6% compared with the adjusted 28.8% last year. We're expecting SG&A, as a percent of sales, of approximately 17.7% versus the adjusted 17.5% last year. For modeling purposes, we're currently anticipating a tax rate of 25.9%, net interest expense of about $17 million and a weighted average share count of approximately $629 million. Now to our full year guidance by division. At Marmaxx, we're now planning comp growth of 3% to 4% on sales of $23.5 billion to $23.6 billion, and are expecting average ticket to be flat to slightly up in the back half of the year. We now expect segment margin, profit margin in the range of 13.4% to 13.5%. At HomeGoods, we continue to expect comps to increase 2% to 3% and sales of $5.7 billion. We're planning segment profit margin to be in the range of 11.4% to 11.5%. For TJX Canada, we're now planning a comp increase of 3% to 4% on sales of $3.8 billion to $3.9 billion. Adjustment, adjusted segment profit margin, excluding foreign currency, is expected to be in the range of 14.3% to 14.4%. At TJX International, we expect comp growth of 2% on sales of $5.2 billion. Adjusted segment profit margin, excluding foreign currency, is expected to be in the range of 5.2% to 5.3%. Moving on to Q3 guidance. We expect earnings per share to be in the range of $1.18 to $1.20. Excluding an estimated benefit of $0.18 due to items related to the 2017 Tax Act, adjusted earnings per share would be in the range of $1 to $1.02 versus the prior year's $1 per share. This guidance assumes that foreign currency will negatively impact EPS growth by 4% and that wage increases will negatively impact growth by another 2%. We're modeling third quarter consolidated sales of approximately $9.5 billion. This guidance assumes a 2% negative impact to reported revenue due to translational FX. For comp sales, we're assuming a growth of 2% to 3% range on a consolidated basis and in the 3% to 4% range at Marmaxx. Third quarter pretax profit margin is planned in the 10.7% to 10.8% range versus 11.6% the prior year. We're anticipating third quarter gross profit margin to be in the range of 28.9% to 29.0% versus 29.8% last year. This gross margin estimate assumes a significant unfavorable year-over-year impact related to our inventory hedges. We're expecting SG&A, as a percent of sales, to be in the range of 18.1% to 18.2% versus 18.1% last year. For modeling purposes, we're anticipating a tax rate of 26.5%, net interest expense of about $5 million and a weighted average share count of approximately $627 million. It's important to remember that our guidance for the third quarter and full year assumes that currency exchange rates will remain unchanged from the levels at the beginning into the third quarter. Now we're happy to take your questions. [Operator Instructions] Thanks, and now we will open it up to questions.

[Operator Instructions] Our first question for today will come from Michael Binetti.

Just on the model really quickly, would you mind helping us isolate the comment in the press release that there was some SG&A in the quarter related to the IT restructuring, just so that we can kind of think about that and how much SG&A in the quarter goes away next year.

It's approximately $0.02 or $0.03 due to the restructuring cost in the second quarter. Again, as we put in our original plans and as we guided to in the last quarter. So no variance to what we both originally guided and what we had put in our guidance for the quarter.

And I guess just one more small model question on freight. I know that was a concern and you were seeing some moving parts through the quarter. Any change to your outlook on freight pressure on margins for the year?

So we had largely on the last quarter call built in, I would say, the majority of the freight pressure. Although we did have some additional pressure in the second quarter versus our guidance primarily in the HomeGoods division, and we are seeing some additional pressure in the back half of the year. But I would say, we did include most of that when we did our last guidance. To get that out, it's on a full year. The incremental pressure, when you, when not including additional volume, it was worth approximately $0.07 on the year. And that was largely reflected in our previous guidance. That's reflected in our full year guidance at this point.

Okay. And I guess the more important and probably final question for you to answer is on the AUR, something you've spoken about a lot. This year, you said, I think flat to up very modestly. I would assume in a quarter, since you said most of it's transaction-driven, but you pointed to flat deposits through the rest of the year. I think that there is some implications for the P&L on that. Would you mind just talking to us a little bit about what's helping drive the AUR? And whether the leverage point on the comp changes through the year as you drive hopefully some positive AUR?

So Michael, let me just jump in on some of the dynamics why it's moderating and heading slightly up, and then Scott can jump in on the second part. So as we talked about similarly to what drove it down with the mix of departments, et cetera, in it, again, it is not necessarily a top-down-driven strategy to actually bring it back the way it's coming back. And it's driven down at the merchandise manager buyer levels and category department levels and the mix within those departments and the brands in there is really what's helping us to moderate the average retail and bring it back. Also, it doesn't hurt that our apparel is, has been rather healthy over the last quarter as well, and as we look out, if that continues, that will be another tailwind to help us with the average ticket.

Yes. Michael, in terms of the breakeven and from a comp basis, we're not seeing, we're seeing it, first of all, it's at this point very close to what we originally planned. So I would say, there is no significant benefit or pressure due to the average retail versus what we originally planned. At the modest flat to slightly up, it doesn't really change the breakeven point at this point. If it was to go up a couple points, that would be a difference-maker.

Okay. Thanks a lot guys.

Our next question will come from Lorraine Hutchinson. Your line is open.

Thank you. I wanted to follow up on the Marmaxx merchandise margin. Was that positive in the quarter if you exclude the freight pressures?

Yes. So at Marmaxx, the merchandise margins would have been slightly up versus the LOI given the freight pressures, yes. But it is a bigger impact on our HomeGoods division than it was on our Marmaxx division. But yes, overall the merchandise margins would have been up for TJX if not for the incremental pressure we had just versus planned. So just taking the variance versus plan, we would've been slightly up. So we had, I think, maybe, Ernie, you could talk about it, what we -- we weren't able to obviously set off -- offset all of it, but as Ernie briefly mentioned, with the great availability, we had a strong mark on it, and that's certainly helping.

So I would say, Lorraine, this was not an accident. I give the Marmaxx merchants a lot of credit. Amidst all of what was going on with the freight and in the environment, they were able to obviously buy the goods well and, at the same time, buy into the hot categories and drive the healthy comp, which they achieved in the third quarter. So obviously, our number 1 priority has been to gain market share and drive the top line. But that team has been excellent at executing their buys in a very profitable manner. So that's been really strong. And HomeGoods, I would also give some kudos to because they've been hit with a heavier freight challenge than -- by significantly than what Marmaxx is getting hit with. And so first of all, we've been seeing their sales get steadily better. They have a markup challenge there in terms of offsetting the freight, but they've been doing a nice job of trying to get at that as well, so.

Thank you.

The next question will come from Matthew Boss. Your line is open.

Great. Nice quarter then guys.

Thank you.

Ernie, so you're clearly seeing an inflection in traffic at Marmaxx. I guess, do you believe this is your core consumer with a few extra dollars in their pocket? Is it better product on the shelves and execution? My guess it's probably a little bit of all. But I guess, as we look forward, can you also just elaborate on the very strong start that you cited for the third quarter? Any specific callouts by category?

We thought -- Matthew, we thought somebody would read the very strong start. So I mean, I think, it all goes together when you look at Marmaxx's strong momentum that they have. I think, in the script, we were trying to -- and I think it's a great question you're asking, we're trying to get at the fact that we trade very broadly. So we have a core customer, yes, but if you look at -- and also in the script, I think, I mentioned a couple of times, we are gaining a greater percentage of our new customers are younger customers. So that has been as much as our core customers are perhaps shopping a little more frequently. We are gaining a younger customer and our new customer acquisition. So that has -- to me, is a super, super plus for not only now but for the future. And when we are going after this market share, and really, you're talking about the inflection of where we are for like Q3 as well. When you think about, in Q3, some of the younger-oriented departments that happen to make up some of that business, we're happy that we've been gaining a younger customer, and so we look at that as a long-term benefit. So we would have assumed, as you look at a very strong start quotation or just in general, how do we keep this momentum going? We don't want it to be just about our core existing customers. We want to trade broadly, capture new customers, capture younger customers, continue to do that. We've been doing that for the last 2 years, but I think we're setting this up for the future. That is really integral to what we plan on doing. So great question.

Michael, the only thing I'd add to what Ernie said on the new customers is that the majority -- it's all our divisions were getting over indexing in terms of the new customers, but at Marmaxx, actually, the majority of our new customers are coming in that 18 to 34 segment.

And then just a follow-up. Nice improvement in International comps this quarter. I guess, maybe could you just touch on some of the drivers, what you're seeing from a traffic perspective? And I guess longer term, how you think about the market share opportunity?

Yes. We will -- I'll say, and I think Scott has a couple of things to jump in with as well, we were thrilled -- we have been thrilled with the momentum, and when you say International, whether you talk Canada, if we talk Europe or if we talk about Australia, we are very happy with all 3 businesses. I think the biggest change from where we've been has been in our Europe business. If you look at that comp there, that is a big accelerator, especially versus the market. So if you look at what we are performing there, and we were already taking market share there, we have really kicked it up a notch. And I would say that really all goes to that team over there. They have put in place some really terrific marketing programs that have been super creative to help drive customers into the store, some really out-of-the-box things that over in the U.K. play very well. They have executed the flow to the stores, I think, in a manner that is at a new level for that division. There -- you got to remember, over there, they are dealing with real estate situations. Tighter -- we have like a tighter backroom situation, smaller stores, different types of density, enabled with locations, and all of that sometimes creates operational challenges. So I would say, operationally, they have been really executing very well in the second quarter, and from a merchandise mix standpoint, loaded availability in Europe across some better brands that we haven't seen these type of quantities from in quite a while. And Louis who was our division President over there and her team, I think, have been all over that. And they have really nurtured those relationships, so it's not just a short-term thing. And when we talk about growing new vendors, those guys have been relentless at opening new vendors in Europe, which, I think, will allow them the flexibility aspect, which -- if you guys walk away with nothing else on this call, I would like you to walk away with how important flexibility is in the TJX model and how that is probably the name of the game, which separates us from a lot of other brick-and-mortar retailers. And I would say, in Europe, that is even to the nth degree because, over there, I think a lot of the retailers tend to be a little more preplanned, and right now, our T.K. Maxx division, I think, is operating in a very nimble, flexible manner.

Yes. I think just to add 1 or 2 points to what Ernie said is that we've had -- our business continues to be good in Mainland Europe, whether it's Poland, Austria, Netherlands, Germany. The big change is really in U.K., and the difference is that up until this quarter, we've been seeing performance in London that in South London, where we have approximately 60 stores outperforming the rest of the U.K. And what we saw this quarter is pretty much uniform performance between London and outside, whether it's Wales, Scotland or the rest of the English countryside. So a very consistent performance and driven by a couple things, our conversion continues to be, it was good when we were seeing traffic on the high street down. And now we see the transactions going up significantly across-the-board. So I think it's the similar to Marmaxx, where we saw our consistency among geographies. This was a very flat or consistent quarter throughout all of the UK.

The next question comes from Paul Trussell. Your line is open.

I wanted to ask about the HomeGoods. Accelerated comps there despite a more difficult compare. If you can just touch on the assortment and inventory and outlook on HomeGoods. And then second, I just wanted to follow up on a question, I believe, Matt asked earlier around the strong traffic. You're discussing the millennial customer coming in mass to the stores. Just curious, if there, of your research or discussions with them, is telling you what the most, what they find to be the most attractive feature driving them to shop with you? Is it the price points, the shopping experience or the brands available? Just curious of how you would rank that and if it differs from other age groups?

All right. Paul, let me, let's start with the HomeGoods question. So the outlook, yes, we were very pleased with the acceleration in the HomeGoods business in the second quarter. I mean a lot of it there, I think, had to do with their execution. Again, we can't say it enough that in TJX, we have found over the years, generally, that we, and it applies to HomeGoods or Marmaxx. Last year, when we had a couple of execution issues, or Europe 8 years ago, 10 years ago, whenever that was, generally, if we have a slowdown, it tends to be our own execution issues. Having said that, in the HomeGoods case, we're up against enormous comps. So I think you said at the beginning when you asked this question, nice to see on top of a big comp that they're up against next year because they had a big comp in Q2 last year, I mean. And so that was a nice performance to see that kick against it. They, I think, had a market improvement in a number of the categories that weren't, I wouldn't say they were execution issues in the first quarter, but the flow in inventory, which, I think, we talked about back in the first quarter, we had an inconsistent flow at kind of not the best timing coming out of holiday into Q1. And so we got past that pretty quickly. Again, I go back to the flexibility of the business model. We're able to address problems rather fast and move forward and correct them, and we had that in first quarter, and I would say, one of the biggest reasons we accelerated in the second quarter is we got beyond that. The stores were exceptionally fresh going into May and June, and we had some great fashion content. I think we were very happy with some of our seasonal categories and the way they looked, and there was a major treasure hunt. We were peaking in terms of our unpredictable treasure hunt, which Home business the best at, I think, by the middle of July. So that's really, I think, what helped us there. Millennial customers that you're asking about in terms of what they're going after, first of all, there's some information there we don't really give out in terms of specifically where they're buying or what they're buying from us. But I would say that we, they are buying some of the key categories and departments, and some of our growth areas certainly lend themselves to continuing to appeal to younger customers. Scott, I don't know if you wanted to add anything to that.

Yes. I think I'd just, to be, echo what Ernie said is that the flow issues were largely to blame. And as we move through the second quarter, what we had said that part of our markdowns that were higher than in the first quarter than the previous year were largely due to those flow issues, really, in the first part of the February, March time frame. And our clearance and full price sales were back to normal by the time we exited the second quarter. And hence, our markdown rate was pretty comparable to last year. So all, which went as we had guided.

The next question comes from Kimberly Greenberger.

Scott, could I just start with the gross margin? I'm wondering if you could unpack a little bit what looked to be kind of the key, the 3 key drivers. I think you said merchandise margin would have been up, you may have said significantly without the higher freight pressure. So is there a sort of any order of magnitude you could help us with on the merchandise margin improvement as compared to the freight cost? And then it seemed like the third moving part in there might have been inventory hedges. So I just wanted to see if you could kind of quantify those. And then Ernie, I wanted to give you a chance to expand on some of your comments around great availability in the market, and then, I think, you talked about the great mark-on that you're seeing, which would suggest terrific availability kind of broadly speaking. It's not always intuitive, I think, for investors when they see a generally rising-tide environment that you're still seeing fantastic availability. So I'm wondering if you could comment on that as well.

Sure. I'll let Scott go first.

So in terms of the gross profit margin, which on a reported basis was up 40 basis points but last year, if you take the x out on an FX basis or take out the inventory hedge impact, we would have been flat. So let's just start with the flat. We would've been with the strong sales, we actually flowed 50 basis points better than our guidance on our gross profit. Again, largely, that was due to the [BNO beep] on the above planned comp. But going to a TYOY basis, our merchandise margins were say down slightly, it was, call it, in the 10 basis point range with a significant trade impact that impacted us let's just say by approximately 20 basis points. So we would have been significantly better and that 20 basis points is just versus plans obviously, the freight impact overall was slightly larger than that. So yes, we would have been up, we would have a strong merchandise margin increase if we didn't have all that significant freight pressure. So again, some of that as we talked about was offset by a strong mark-on versus plan. So not much more color to give than that. So I'd say the big thing I would say is that we were 50 basis points better than our guidance because most of this was reflected in except for some additional freight -- and that 50 basis points again, we thought that flow through was pretty good on the gross profit margin versus our plan.

So Kimberly, on the availability, the healthy mark-on has that's been somewhat of byproduct. I would say some of this boils down to things we've talked about for quite a while. The cycle -- the way the cycle goes and to your point, what's counterintuitive is you might think when things are getting a little better, there could be less goods in the market but the same time, that it's getting better when the economy is getting better, retail is ticking up a notch. What you get there is the wholesalers getting more optimistic. So the pessimism goes down and they start cutting more goods. So I think that's the cycle that tends to happen. And so if you look out, we've been seeing it now, I would expect if that continues at the retail level to have a pretty healthy environment, you would see more goods continue to 6 months, 12 months down the road continue the cycle, which is why we said all the time just why this model of business is just the best -- it stays even, it stays with constant availability whether the economy is up or down. The other thing going on, and we talked about this before as well, is the e-com business. As is -- much as at the consumer level, it might be competition, it creates indirectly excess inventories. So the e-com retailers, it's still in an early stage here. It's a challenge for a lot of the e-com retailers to forecast their needs exactly. Again, most of that product is goods that they have to buy in advance. So it literally yields a whole bucket of opportunity closeouts that we haven't seen to the degree that we see it today. And that applies to every market. That is not just a U.S. issue. That is UK, Europe, Australia, Canada, U.S., a fair amount of spill-off of closeout opportunities from the online businesses. And then lastly, we are -- as we continue to -- our buying team which has continued to grow, we have over 1,000 buyers, is in more locations to seek out deals throughout the world than ever before and we try to update every now and then. We went from about 18,000 vendors I think we used to say we were dealing with to 20,000. But we're continuing to open more than that. We're not giving a number but it's more avenues for more excess inventory. So availability again, in this quarter would be absolutely no different than the last couple where we are actually having to control our buyers from buying too much too soon. So I don't see based on the first 2 points I made that changing over the next 12 to 24 months because it's just the dynamic that's taking place. As the retail environment gets at notch healthier, I think it's going to create more optimism, which will create more merchandise.

The next question comes from Paul Lejuez. Your line is open.

Hey guys. Can you remind us of the easy comparison that you have at Marmaxx in the third quarter with the down 1 comp? What was the driver of that from a traffic versus ticket perspective? And I'm curious about the categories that were weak in the third quarter last year, how have they been performing in the recent quarters? And then just a follow-up on the home category. Can you talk about the performance of HomeSense outside the U.S. and any reads on the new HomeSense stores in the U.S.? Thanks.

Hi, Paul, so Scott has some comments for you [ph].

Yes. I meant just briefly, our traffic was slightly up on a TJX basis last year. So one of the weaker quarters that we had and clearly, we had the hurricane impacts largely impacting Marmaxx and HomeGoods last year that were largely responsible for the comp at -- certainly at Marmaxx for the minus 1 comp that we had. But we, also as Ernie called out, at the end of the third quarter, last year, we had some executional issues across several departments and he is going to speak to that as well.

Yes. So first of all, Paul, we will not -- we can't, nor did we last year give what specifically those categories are but those were clearly, we had a weather dynamic certainly, which we kind of called out at the time that, that was a piece but the other piece was our own execution and really, 3 key areas and I believe you asked also just now how has the performance been since then? Well, we commented back in the first quarter that performance in those categories has gotten steadily stronger to the point that now Scott and I have looked at it because part of it they're up against tougher numbers but they're actually outpacing the Marmaxx chain over the last quarter. So it is...

Was that true in 2Q, Ernie?

I'm sorry?

Was that true in 2Q as well?

No. In 2Q, they were gaining on it and getting close to the -- I'm sorry, Q2, yes, Q1 they were getting close to the [indiscernible].

By the time we ended Q1, they were equal to slightly better.

And in Q2, yes. Yes. So again, you're going to hear -- I will be like a broken record, it goes to the flexibility of the business model again, which is we were able, within our business model, when we identified the execution issues, which we talked about -- to your point Paul, was the third quarter last year really, right? And then we started on getting some traction by Q4, Q1, those areas were absolutely on track getting close to the chain average. And then in Q2, as Scott said, they were above the chain average. So in our traditional retail, that would be a tough, probably take a little longer to get a turnaround like that. So I go back to the flexibility and the nimbleness and that shortened time frame that we buy goods and the way we aggressively markdown this, when they not like the goods, which is what happened in these cases. I think you also had a question on HomeSense. So about HomeSense or was it about home?

HomeSense, the performance outside the U.S. but also an update on how the new stores are performing in U.S.?

Oh. I would say all kind of where our expectations would be right now.

Yes, HomeSense, very pleased with the comp performance and in the U.K. of HomeSense. So yes, good performance for the first 2 quarters. In terms of HomeSense, we -- we're absolutely not in a comp position but very pleased with -- at least with the sales and I think as importantly, pleased with the other large components that again, we just have very few stores open, but like what we're seeing in terms of the operational aspects of both payroll and certainly and more importantly in the continuation of an improvement in our merchandise margin. I'll let Ernie add.

Yes. I think we have some work to do in HomeSense in Canada. We've been not as healthy there. So we, Doug Mizzi who is our Senior Executive Vice President as well as Robert Greening who is our new President up there, we have had some movement around. Business, overall by the way is healthy, it's just not up to the level that we would normally like to see our HomeSense Canada business at. Having said that, more recently, the trend has gotten better and so we're feeling much more bullish about it for the third quarter and fourth quarter coming up on the back half. Okay?

The next question comes from Jamie Merriman. Your line is open.

My first question is about the UK in particular. I think you mentioned improvement in availability there and I was just wondering if you are seeing any, there's been some prominent receivership system in a department store. One department store there. If you're seeing any change recently either in the consumer or in terms of that availability? And then the second one was just the, can you just comment on the labor picture in the U.S.? I'm just wondering, a couple of quarters ago, you talked about you're not seeing any signs of labor shortages. Is that still how you feel about the market?

I'll talk about the wage pressure. So we're largely in the first half of the year, we had taken a market by market approach and we're largely on our plans thus far. We're starting to see some pressure in some markets on wage. So we have a little bit more wage built into the back half than originally guided. So that I would say is a change. In terms of, and obviously, that's market by market driven, sales differences, we're not seeing any sales differences. Attrition has been very good. So it's really just a market by market where we're adjusting where we need to be hot, it's becoming a bit more difficult to hire but no major changes. Just starting to see some pressure. We have some of that built into the back half.

And Jamie, as far as the UK availability or maybe I think you're getting at is the demand shift or whatever at the retail level since some of the closures or, we have not felt that. So again, we were gaining market share consistently there even when we did not have a comp like, that division just delivered. So we've been pretty consistent and what Scott alluded to earlier. We're even a little healthier this go around. So for us, again, we're a little different than some of the other retailers that have been running into trouble there. We are so much more value and opportunistically driven that it sometimes won't line up. But certainly, the environment as much as we're seeing, we're feeling good about it. The environment there is absolutely, I don't know what you would call it, volatile. Volatile.

The next question comes from Omar Saad. Your line is open.

I wanted to see if I could follow up on the comments made around the apparel industry. On the apparel side category, seems like a pretty big inflection overall for the business this quarter. We'll see how it plays out in the coming quarters. But apparel hasn't been perhaps maybe the strongest category for you guys or for the overall kind of softline space the last few years. And maybe you can elaborate on what you're seeing there or how sustainable it is? And could this be something that's more multi-year in nature happening within the apparel dynamic?

Yes, Omar, we are pleasantly, I wouldn't say surprised, hopeful that it will continue but we were a little surprised that it did exceed our expectations in the quarter but it wasn't just this recent because if we go back to really in Marmaxx and in Winners and in TK, our apparel businesses have been pretty healthy. But for sure, here, it's been just getting stronger and stronger. And I first of all, I think a fair amount of, I'd say our branded mix is better than it has been in a long time in terms of the balance of brands that we have. You've heard us talk in the past about if our fashion is out of kilter, which we talked about last year when fashion was not healthy in terms of the way, our content of fashion. So we try to have a mix and not have a pendulum swing and that is in a very good place right now. And so when our merchandise mix of fashion is, of apparel, I mean, is balanced with fashion and basic goods and the right type of balance, we tend to perform well. There are some fashion lines, which we won't call out, that have been executed very well by our merchants, our buyers, our merchandise managers and that I think as we continue to go into third quarter where we had some misses in some of those areas. Remember, we are up against some of those execution misses last year, we think we're feeling pretty bullish that we should be able to run some good increases in those areas. Specifically, in those apparel areas. So it's a great question, on your part. We do think it's sustainable because some of it is we've got some more experienced buyers and management that have been in positions now a little bit longer, which is always a challenge when they're not. So we sometimes run into a little bit of a hiccup when we have a new team in place, especially in our apparel area. So we're pretty solid and don't have much movement over the next year in those areas, which I think will bode up well for our at least continued apparel there. And I really have been talking about Marmaxx, we have similar dynamics going on in Winners. If you look at our Canada division, they've been performing very well in apparel. And I would say similar dynamics there and in Europe as well. So it's good. Apparel can be an up-and-down type business but certainly right now, we seem to be in the sweet spot.

Our last question comes from Daniel Hofkin.

Just quickly thinking about the second quarter and especially Marmaxx, was there anything like advertising that you felt like helped drive this degree of comp strength above your expectations? And then thinking about the fact that you have an easier comparison in the third quarter, I know you guys are always trying to be conservative but is there anything that would cause comps to slow kind of on a 1 and 2 year basis aside from just conservatism. Anything unique in 2Q? And then I guess lastly, you talked about many kind of initiatives for the second half, anything that you could elaborate on there? Thanks very much.

So Daniel, you're good at asking a lot of questions that we aren't allowed to answer. But good questions. The -- first of all, yes, marketing was integral I think in one of our -- there isn't one thing I think, we executed on numerous fronts but things that you would call the fundamentals of the business and certainly, our marketing team I think continued to get across the surprise and the messaging. If you look at our creative in the second quarter and it was very oriented towards like MaxxLife and MarshallsSurprise and, we really went after the treasure hunt messaging and education messaging, why should she shop us? And that has resonated well with consumers. We can't tell you the strategy on how we weighted the advertising or what vehicle. That is something we keep in house but we have done some shifting there, how we approach our media buys and I was thrilled with that as well. By the way we have similar approaches going on across all the divisions in terms of how we are approaching our media buys and the creative that we're using, which in most cases has been new. And we're finding pretty effective. Again, it's not any one component but yes, we think marketing was integral to the -- and will be to the second half of the year. As well as our spend in marketing is going to continue to be slightly up as the year moves on. Then we can refresh. What was the next question on the

Yes, the initiatives you just cited. Many initiatives. Any opportunities for the second half?

Yes. So the initiatives, those are the things we can't talk about. That's why -- but Scott was smiling. The initiatives we can't talk about are based off of things that we've tried though more close in. They're not like initiatives that we've been testing from like a year or 2 ago. They are things that in a Marmaxx or in a Winners, they would be testing like in the first quarter and second quarter. And tend to be in categories that we will now look to aggressively go after. So if you remember back in the script, again, I talked about the flexibility of our model allows us to ramp up very fast in a key category, which is certainly part of what's been driving our business over the last 6 months in a strong way. It is -- there are some of these initiatives in test that are panning out pretty well that we will be and we can't -- again, I apologize that we can't give you that information but that's what we'll be going after in the second half. So good question. And again, it's kind of how we operate. No different -- and we've done that for years that way. It's just, this time, I think we have a couple more categories up our sleeve so to speak.

Thank you. All right. So thank you all for joining us today. And we look forward to updating you on our third quarter earnings call in November. Thank you.

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