TJX Q1 Earnings Call Transcript

123jump.com Staff
24 May, 2010
New York City

Sales rose 15.4% to $5.02 billion and net income rose 58.4% to $331.4 million or 80 cents a share. Consolidated comparable store sales were up 9% on top of last year''s 2% increase. Consolidated pretax profit margin was 10.7%. The gross profit margin was 250 basis points above last year.

The TJX Companies, Inc. ((TJX))
Q1 2011 Earnings Call Transcript
May 18, 2009 11:00 a.m. ET

Executives

Carol Meyrowitz – President and Chief Executive Officer
Sherry Lang – Senior Vice President, Investor and Public Relations
Jeffrey G. Naylor – Senior Executive Vice President and Chief Financial and Administrative Officer
Ernie Herrman – Senior Executive Vice President and Group President

Analysts

Jeffrey Black – Barclays Capital
Todd Slater – Lazard Capital Markets
Brian Tunick – J.P. Morgan
Paul Lejuez – Credit Suisse
Kimberly Greenberger – Citigroup
Evren Kopelman – Wells Fargo Securities
Michelle Clark – Morgan Stanley
Scott Kaufman-Ross – Goldman Sachs
Adrianne Shapira – Goldman Sachs
Jeffery Stein – Soleil-Stein Research
Laura Champine – Cowen and Company
Richard Jaffe – Stifel Nicolaus
David Mann – Johnson Rice & Company
David Weiner – Deutsche Bank
Daniel Hofkin – William Blair
Howard Tubin – RBC Capital Markets
Dana Telsey – Telsey Advisory Group
Marni Shapiro – The Retail Tracker
Stacy Pak – SP Research, Inc.
Patrick McKeever – MKM Partners

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to The TJX Companies'' first-quarter fiscal 2011 financial results conference call. At this time, all participants are in a listen-only mode and later we will conduct a question-and-answer session. At that time, if you have a question, you will need to press star one. As a reminder, this conference call is being recorded Tuesday, May 18, 2010. I would like to turn the conference call over to Ms. Carol Meyrowitz, President and CEO for The TJX Companies, Inc. Please go ahead, ma''am.

Carol Meyrowitz

Thank you. Before we begin, Sherry has a few comments.

Sherry Lang

Good morning. 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, 2010. Further, these comments and the Q&A that follows are copyrighted today by The TJX Companies. 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. Please note that the financial results and expectations we discuss today are on a continuing operations basis. Also we have detailed the impact of foreign exchange on our consolidated results and our international divisions in today''s press release and the investor information section of our website, www.tjx.com.

As a reminder, the comparable store sales numbers that we talk about today are on a constant currency basis. With respect to the non-GAAP measures we discuss today, reconciliations to GAAP measures are included in today''s press release and posted on our website in the investor information section. Thank you and now I will turn it over to Carol.

Carol Meyrowitz

Thanks, Sherry and good morning again. Joining me on the call today with Sherry are Jeff Naylor and Ernie Herrman. Let me start by saying that it''s great to see our strong momentum continue. We delivered another quarter of above-plan results, with earnings per share up 63% over last year. We should note that we achieved these strong results on top of comparisons that were quite a bit more challenging than most other retailers faced.

Our customer traffic continued to increase significantly, which we believe indicates that consumers will remain focused on value regardless of the economic environment. Our strategies to retain new customers and continue growing our customer base are clearly working. I am going to keep my comments brief today and reiterate the reasons for our confidence in our sustainable, profitable growth; then update you on our strong first-quarter results. I will also discuss our outlook for the second quarter and opportunities in 2010.

We will continue to run the business conservatively, keeping inventories lean and reducing costs. At the same time, we are extremely focused on keeping our new customers that we have been gaining and have many initiatives underway across the company to drive results beyond our plan.

We continue to have tremendous opportunities for global growth. Before I continue, let me turn the call over to Jeff to recap the numbers for the first quarter.

Jeffrey G. Naylor

Thanks, Carol. Good morning, everybody. Just to recap the first-quarter results, our net sales reached $5 billion; that''s a 15% increase over last year. Our consolidated comparable store sales were up 9% on top of last year''s 2% increase. Our diluted earnings per share were $0.80; it''s up 63% over last year''s $0.49 per share.

I should mention that foreign currency exchange rates had a slightly positive effect on the year-over-year growth. Consolidated pretax profit margin was 10.7%. That is up 290 basis points over prior year, and that was driven by continued strong merchandise margins, expense leverage on the 9% comp, and solid expense controls. Foreign currency exchange rates did not meaningfully impact our pretax margin comparisons.

The gross profit margin was 250 basis points above last year. That reflects strong merchandise margins and significant leverage on buying and occupancy expenses. SG&A expense improved 50 basis points to 16.4% as a percent of sales, which was well favorable to our plan. This was achieved despite the deleveraging impact from investments in our European businesses as well as a lower average retail, both of which we discussed on our year-end conference call.

SG&A expense on a dollar basis was in line with our plans, despite approximately $170 million in incremental sales above our plan, us we saw very high flowthrough to the bottom line due in part to the expense controls I mentioned earlier. As to inventories, at the end of the first quarter consolidated inventories on a per-store basis including the warehouses were down 12%. That is despite the impact of foreign currency which actually increased inventory levels by 2%. So we were down 12% despite foreign currency pushing up the inventory levels by 2%.

At Marmaxx, our total inventory commitment including the warehouses, stores, and merchandise on order was slightly up versus last year on a per-store basis. As we have discussed on our prior calls, we expect Marmaxx''s inventory commitment to be flat to up slightly throughout the first half of this year given the much stronger pace of our business compared to last year. It is important to note that we continue to run the business with very lean inventories.

The slight increase in inventory commitments at Marmaxx remains far below the rate of sales and our owned inventories in the stores and DCs are down considerably over prior-year levels. So that is the recap of the first quarter. Let me turn it back to Carol, and I will come back at the end to cover second-quarter guidance.

Carol Meyrowitz

Thanks, Jeff. Moving straight to the key points. First, we remain very confident in our top-line growth and continue to have significant opportunities to drive comp sales. Second, we have great confidence in our ability to sustain strong profit margins. Third, we are growing TJX as a global off-price value Company and have vast opportunities to grow this business over the long term.

I will start with the reasons for our confidence in the top-line growth. First, our strong momentum continued in the first quarter with customer traffic increasing significantly. It''s important to note that on a two- and three-year aggregate basis our comp trends accelerated in the first quarter. Our compelling values continue to attract new customers. In our 33-year history, new customers that discovered us when times were tough have continued to shop us when times improve because they love our value.

Today, we believe that value is more important than ever in customers'' minds across all demographics. Second, we continue to grow our customer base for future. Our customer research tells us that new customers are driving our customer traffic increases and, more importantly, that the vast majority of these new customers intend to shop us again. Our research further shows us that we are pulling customers from a widening customer demographic reach.

We believe that one of the many elements that differentiates us from other apparel retailers is our very broad consumer appeal. With our various concepts and international scope, we reach all income levels from moderate to middle to upper, as well as many age ranges. Third, we believe our investments in marketing and the shopping experience for our customers are helping us attract and retain new ones.

I believe our marketing campaigns are more powerful than ever and are effectively educating consumers about our great fashion and value. We are seizing opportunities to leverage our marketing spend, which means that you will be seeing more of our marketing than ever before and we have skewed this heavily towards the back half of the year when we''re up against tougher comparisons. By the fall we will have 700 of our Marmaxx stores remodeled, a program that began last year. As we are seeing sales lift in our upgraded stores, we believe this too will help us in the back half.

Fourth, we are beginning to see a moderation in our average ticket. That said, we always need to be right on value and maintain the price gap between us and traditional retailers. So while we have said that as the economy improves even a slight increase in consumer spending would be meaningful to our business, we will remain sharply focused on being priced to offer the best value to our customers.

Now, let''s move to our confidence in bottom-line growth. First, our strategy of running with lean inventories continues to work well. Merchandise margins were up again in the first quarter over last year''s very strong performance. I should note that in the last 10 years merchandise margins at Marmaxx have been flat or up on an annual basis.

Looking ahead, we believe we have meaningful opportunities to run even leaner. We are improving our supply chain to run faster and better and become more pointed in flowing merchandise to the stores. Second, we are on track with our cost-reduction initiatives for 2010 which we continue to expect will total $50 million to $75 million this year; and, as always, we will certainly strive to beat that plan. Third, as we discussed in our year-end call, we have significant opportunities to leverage infrastructure costs as we grow the story base of both our younger and more established chains.

Now, I would like to reiterate our confidence in our long-term goals for global growth. With over 2,700 stores today, we are confident that over the long term we have the potential to grow to over 4,200 stores. This represents our potential with just our current concept and just our existing markets alone. It does not include rolling out tests of new concepts, such as our standalone shoe stores in the U.S. or Canada or expanding into new markets in Europe or eventually new continents.

Our growth vehicles are performing well, which underscores our confidence in our plans for accelerated store growth. To recap our plans, we expect to accelerate store growth from 3% in 2009 to 5% in 2010 and then 6% in 2011. We are prioritizing investments and taking advantage of the best real estate opportunities.

Further, we are investing in infrastructure and pursuing top talent on a global level to support our growth. We continue to view TJX Europe as a major vehicle for our future growth. In the first quarter, we believe that unfavorable weather as well as our own execution contributed to a sales miss in the U.K. and Ireland; and segment profit overall was just slightly down.

The first quarter has always been a very small quarter for our European business. And despite the slight miss in Q1, we are confident in our plans for the full year. Germany, Poland, and HomeSense all performed well in line and above our expectation. We have strong confidence in TJX in Europe.

My final point on growth is that, beyond adding new stores, we have many new ideas that we are testing in all of our businesses that could ultimately grow into new concepts or initiatives. We hope to discuss the details of our new chain on our next quarterly conference call.

We continue to test e-commerce in the U.K., which could develop into an important growth vehicle. Developing and testing new seeds for growth is part of our DNA. We have many opportunities to expand in directions that play on our success and what we know best.

Now, to our financial strength, our strong operations generate substantial amounts of cash, which we deploy with a careful balance between reinvesting in our businesses and preserving our financial flexibility and simultaneously distributing excess cash to shareholders.

In terms of share repurchases, we bought back approximately $234 million of TJX stock in the first quarter, retiring 5.5 million shares. We continue to expect to repurchase between $900 million and $1 billion of TJX stock in fiscal 2011. Our Board of Directors approved a 25% increase in our per-share dividend in April, which marks our 14th consecutive dividend increase.

I want to briefly mention that our strong financials stack up very well against our peers. Fortune 500 recently ranked TJX number 119 in its survey for the largest company in 2009, up from 131 last year. Additionally, among all Fortune 500 companies we ranked number 11 in return on assets; number 25 in return on equity; and number 77 for 10-year EPS compound annual growth rate. I will also mention that we were very pleased on behalf of our associates to be named a top-performing company in Massachusetts by the Boston Globe, a ranking just published today.

Moving to our outlook for the second quarter, we will continue to plan our business conservatively and at the same time try our best and do whatever we can to drive results beyond our plan level, a strategy that has worked successfully over time. In the second quarter we are planning EPS to be in the range at $0.67 to $0.72, a 10% to 18% increase over last year''s $0.61 per share.

For the full year we now expect EPS to be in the range of $3.21 to $3.32, a 13% to 17% increase over $2.84 per share last year. The guidance is based on our planning the business around a slightly negative comp in the back half of the year. Jeff will provide more details in just a moment.

So in closing I will say again that we are pleased to see our strong momentum continue. 2010 is off to a great start. We are very confident that our strong top- and bottom-line performance is sustainable.

We know our comparisons get tougher as this year progresses, but believe we are well positioned to address this. We operate an extremely flexible business model which enables us to capitalize on the value mindset of our consumers. With our no-wall store layout we are able to move inventory purchase dollars between categories and react quickly as consumer tastes change. We are growing our customer base for the future and appeal to a broad and diverse customer demographic.

Additionally, we are investing in marketing, skewing our spending to the second half of the year, and enhancing our stores to attract and retain more customers. We have many new ideas and like the availability and quality of goods we are seeing in the marketplace. We view ourselves as a sourcing machine and lever our global buying presence sourced from 60 countries.

On the bottom line, we believe opportunities remain to run the business with equally in our inventory and we continue to focus on reducing and levering costs to drive profitability. We have accelerated the pace of our growth and are pursuing the many opportunities that this environment is presenting.

We are capitalizing on great real estate deals, particularly in Europe, that we believe will benefit our business long term. Further, we are building our infrastructure and organization to support this growth. We have exciting prospects for the short term and are confident in our long-term global growth potential. Ultimately, as I previously stated, I believe that we will grow TJX to be double the size it is today.

Now, I would like to turn it over to Jeff to go through guidance and then we will open it up for questions.

Jeffrey G. Naylor

Thanks, Carol. So let me provide some details on our second-quarter guidance. As Carol mentioned, for the second quarter we expect earnings per share to be in the range of $0.67 to $0.72. That is a 10% to 18% increase over the $0.61 per share last year. We''re assuming a second-quarter top line of approximately $5.1 billion with a comp sales increase of 2% to 4% on a consolidated basis and 2% to 4% at the Marmaxx Group. As to monthly comps, we''re planning for comp sales increases of 1% to 2% in May; 2% to 4% in June; and 2% to 4% in July. These comp increases are the same for TJX on a consolidated basis and for the Marmaxx Group.

Pretax profit margins are planned in the 8.9% to 9.4% range which represents a 20 to 70 basis point increase on top of last year''s 130 basis point increase. We are anticipating second-quarter gross profit margin in the range of 25.9% to 26.2%, which represents a 30 to 60 basis point increase over last year.

I should note this improvement is on top of significant increases last year and is driven by improved merchandising margins, as we continue to capitalize on the opportunities Carol mentioned earlier. We anticipate SG&A as a percent of sales to be about 16.7% to 16.8%, which is flat to 10 basis points above last year.

The slight decrease in leverage is due to investments in our European business, a lower average retail, and the expense of opening new stores and the extensive remodels that we are doing, most of which also impacted Q1 and all of which were anticipated in our original plan. For modeling purposes we are anticipating a tax rate of 38.6%, which is higher than last year and negatively impacts EPS growth by $0.02.

We are also planning net interest expense in the $10 million to $11 million range; corporate expenses in the $39 million to $41 million range; and weighted average shares of approximately 413 million.

Now, let me turn to the full year. For the full year we are now expecting earnings per share to be in the $3.21 to $3.32 per share range, an increase of 13% to 17% over the $2.84 per share in the prior year. Here are the key changes versus the model we gave you at the beginning of the year.

First, we now estimate consolidated comp store sales growth of 2% to 3%, which is up slightly versus our prior guidance of plus 1% to plus 2%. We now expect pretax profit margins to be 9.9% to 10.2%; that is up 30 to 60 basis points over last year, and it is 40 basis points above our original guidance.

This revised outlook assumes gross profit margins up 20 to 30 basis points over prior year and SG&A rates improving 10 to 20 basis points and again both of these assumptions are favorable to the original guidance that we gave. While we''re not providing quarterly guidance beyond the second quarter, the model assumes flat to slightly negative comps in the back half of this year as we anniversary strong numbers.

As Carol mentioned earlier, we have many opportunities to do better, but believe this is a prudent way to plan our business. We will now open it for questions. We ask that you please limit your questions to one per person and to keep the call on schedule, we are going to continue to enforce our one question limit. After you ask your one question, if you would like to, you can get back in the queue and ask another one. We appreciate your cooperation, and thanks, we will open it up now.

Question-and-Answer Session

Operator

Thank you. At this time for questions, please press star one on your touchtone phone. Our first question today is from Jeffrey Black.

Jeffrey Black – Barclays Capital

Hey, thanks. Congrats on a really, really nice looking quarter. Can you talk, Jeff, about what you are seeing with the lower AUR comment and in the average basket overall and is that improving? What is happening with -- is it lower because of the mix shift, because of units? On the gross margin, that really looks conservative. Is there something in the timing of receipts, mix, anything you are seeing in April that leads you to be a little bit more cautious here? Thanks.

Jeffrey G. Naylor

Well, I think on the average unit retail, we were down low to mid single digits in the quarter. We are seeing that moderate somewhat, but we continue to plan it down slightly. Obviously, with a lower average unit retail you have to move more units to do the same level of sales, which puts pressure on DC and store costs. We have built some of that into the guidance. In terms of the gross profit, we''ve got 30 to 60 basis points of improvement on top of last year''s 130. If you actually look at the gross profit margin over the last three years, so in the first quarter if you look over the last three years we have had 240 basis points improvement in the gross profit margin.

If you look at what we are guiding to in the second quarter, it would be about 210 to 240 basis points over that same three-year period. So it is not out of line with the historical trend. That said, as Carol mentioned, we always try to set our guidance at reasonable levels and obviously have plans in place to beat it. I think the low inventory levels that we have coming into the quarter certainly set us up in terms of turning faster and having lower markdowns but that is the way we set the guidance.

Carol Meyrowitz

Jeff, one more comment to that. In terms of the average retail, we are seeing it moving in a positive direction. But I want to be very careful here because our job is to always give the best value we can; so we don''t know what that is going to look like going towards the back half. It could be up and it could be down. So we are more focused on value than anything.

Operator

Thank you. Our next question is from Todd Slater.

Todd Slater – Lazard Capital Markets

Thanks very much and congrats.

Carol Meyrowitz

Thanks, Todd.

Todd Slater – Lazard Capital Markets

Your full-year guidance assumes flat to down comps in the second half is you have mentioned. I am curious as to your assumptions on the AUR, on traffic. And also, how should we look at ForEx effect on sales and earnings for the rest of the year? Thanks.

Carol Meyrowitz

You know, in terms of traffic, what we have done is we pushed our marketing plans pretty aggressively in the back half. We also have probably -- we have 110 out of the 400 stores that we are remodeling done, so it is very back-half driven along with many merchandise initiatives that we have in place. So we are being pretty aggressive in the back half and because of the comps -- we had such strong comps last year we are being very prudent in terms of planning it. But I have a lot of confidence in the back half and I think we''re doing all the right things. In terms of ForEx?

Jeffrey G. Naylor

Yeah. In terms of ForEx, I will deal first with sales. It was worth -- our sales were up 15% in the first quarter. ForEx is worth about three points of that. In the second quarter, ForEx is worth about one point -- one point of our revenue growth will come from ForEx in the second quarter at current rates. And in the last six months, it is really a non-issue (inaudible) our sales growth. In terms of EPS, Todd, in the first quarter, ForEx benefited EPS by a penny compared to a $0.02 hit last year. For the second quarter, we''re anticipating a $0.01 benefit this year against a $0.01 hit last year.

And in the second half, we''re anticipating it to be relatively neutral from an EPS standpoint versus a $0.01 benefit last year. So you can see really from an EPS standpoint, it is pretty neutral on the year, pretty much a non-issue and has a slight impact on sales although that moderates as we go through the year. Now again, that assumes that the exchange rates stay where they are today, which is typically how we would forecast our business.

Todd Slater – Lazard Capital Markets

That''s great, Jeff. And just as a follow-up, what is the marketing investment change in the second-half year-over-year that Carol mentioned?

Carol Meyrowitz

We don''t give you the exact number, but we are slightly up.

Jeffrey G. Naylor

Yeah, I think…

Carol Meyrowitz

In dollars, we are up. More importantly, in terms of penetration we are being very aggressive. You are going to see our grips way up in the second half.

Operator

Thank you. Our next question is from Brian Tunick.

Brian Tunick – J.P. Morgan

Hey, thanks and congrats as well. I guess investors seem to be concerned about the ongoing question about the availability of inventory and the mix between the off-price and the makeups. You guys talked about inventory turns and supply chain. I was just wondering if you could maybe give us maybe some more confidence or color, why you think gross margins can continue to head higher? And then the second question is on T.K. Maxx. Can you maybe just give us an idea of how much margin pressure in Q1 came from your new store investments in the other countries versus the sales and execution mix?

Carol Meyrowitz

Yeah. First of all, Brian, our new store investment in the U.K., it''s half the stores and we are up to over 50 stores. Half the stores will be in the first half. You got to remember that even in the first quarter about 80% to 88% of our sales are done in the back half in the U.K. So they are affected more dramatically by the new stores and the remodels in the first quarter in the first half. In terms of the availability of goods, we are very pleased with what we are seeing. We have shut down the team many times through the quarter, so there is certainly not a lack of availability. And I believe that in terms of our inventory levels, we have many divisions that are leaner than other divisions, so that we think we have some still improvements to be made there.

But more importantly, we have invested and continue to invest in our supply chain. That is allowing us to buy closer to need. And it will allow us to continuously do a better job of transitioning the seasons and shifting the right goods to the right stores. So it is not just about bringing the inventory down. It is really about the mix and how the mix hits the stores by region and by zone. So we think still think we have quite a bit of potential.

Jeffrey G. Naylor

If I could just add a little bit to your comment on Europe. Carol mentioned it was a thin quarter from a sales standpoint. From a profit standpoint, we make about 5% of our profits in Europe in the first quarter whereas total TJX is about 20% to 25%. So it is a thin quarter. In terms of you asked about the impact of the new businesses, Brian. In terms of the U.K. and Ireland, our profit dollars and our segment margins were essentially flat year-over-year. We had a miss on sales. Our gross margins are essentially flat because of the flexibility in our business model; we are able to adjust.

If you then look at Poland, Germany and HomeSense, slightly higher levels of WAS/investment versus last year. That was all anticipated though and is in line with our plan. Germany remains very, very much on track to earn a profit this year. Poland and HomeSense, we think will be near breakeven. So we remain confident in those businesses and are really on track with what we''re seeing so far.

Carol Meyrowitz

Also, Brian, in terms of weather in the first quarter, the home businesses and the non-apparel businesses were absolutely exceptional and the same thing in Europe. So we clearly believe that we do have a bit of a weather issue and that did hurt T.K. sales.

Operator

Thank you. Our next question is from Paul Lejuez.

Paul Lejuez – Credit Suisse

Hey, thanks, guys. Can you just give us the details on the gross margin for the first quarter? March margin improvement versus the leverage on buying and occupancy? And then also just wondering if you could talk about traffic versus ticket by brand. Are there any of the concepts that you have seen ticket turn positive? Thanks.

Carol Meyrowitz

In terms of the traffic, we''re really up in all divisions. The traffic has been accelerating. It''s actually accelerated since the back half. Jeff, do you want to break up the gross margins?

Jeffrey G. Naylor

Yes, 75% to 80% of the gross -- so 250 basis point improvement in the first quarter, 75%, 80% of that was merchandise margin. The balance was buying and occupancy, Paul.

Paul Lejuez – Credit Suisse

But on the ticket, are there any of the concepts where ticket is running positive right now over the past quarter or so?

Carol Meyrowitz

Not really. We are really slightly down across-the-board. But it has come back since the back half. It is definitely moving in a more positive direction since the back half.

Paul Lejuez – Credit Suisse

Okay. Thanks, guys. Good luck.

Operator

Thank you. Our next question is from Kimberly Greenberger.

Kimberly Greenberger – Citigroup

Great. Thank you. Good morning. I was just trying to understand the differential between the decline in inventory per store relative to your comment that Marmaxx was flat. Carol, I think you mentioned that there are some divisions where you are down significantly. Are there any other factors in there that are influencing that? Is it that Marmaxx is committing inventory further ahead of time relative to when they were doing it last year or what are the dynamics that are influencing that spread between what the reported inventory per store balance is versus what your comments are about Marmaxx commitments? Thanks.

Carol Meyrowitz

Well, remember, Marmaxx is still, again, very high sales in the back half. So the commitments are really pretty lean when you look at it against last year. So I think we couldn''t be in better shape. The turns are faster than they have ever been before. So I am very, very comfortable with our commitment. We came into May. We made a very conscious decision to keep May very, very lean. And we did that as we thought last May was a very hot May; last June was a very cold June. We are starting to see the opposite. And what is beautiful about our business is you can obviously shut it off pretty quickly. So we made a very conscious decision and we decided to strategize to keep May very lean and then go much stronger and ship fresh goods in June. You know, shorts and bathing suits and much more summer product a little bit later this year.

Those are the things that we are learning. We got hurt a little bit in the U.K. because we came into summer and then we kind of came back with a little bit of the wrong transition. And now we are getting ourselves back in line and we''re in great shape. So that is the beauty of the flexibility. So we''re very, very comfortable. I am very happy we are as lean as we are in May. And I think we have made the absolute proper commitments going forward. So I think our flow is going to be terrific.

Kimberly Greenberger – Citigroup

Thanks, Carol.

Operator

Thank you. Our next question is from Evren Kopelman.

Evren Kopelman – Wells Fargo Securities

Thank you. Good morning, everyone.

Carol Meyrowitz

Hi.

Evren Kopelman – Wells Fargo Securities

Hi. Can you give us an update on the remodels at Marmaxx, maybe how much of the comp improvement, if any, in the first quarter is driven by remodels? And are you seeing similar lifts in comps and how we should think about that in the second half.

Carol Meyrowitz

Evren, we really don''t talk about the percentages. We are very pleased. We are also very pleased with the customers'' reaction, so we will continue with this program. We also have tested the remodels across all our divisions, done in slightly different ways and we''re seeing the same type of lift. But I apologize, we really don''t give you that number.

Jeffrey G. Naylor

Yeah. We don''t want to break that too finely, but suffice to say that we get strong returns and paybacks on the investments we’re making. And importantly, most of the remodels are going to be done by the end of the second quarter, so that does help us as we get into the back half in terms of lapping up against the numbers that we are lapping up against.

Carol Meyrowitz

It is part of our whole back half strategy.

Evren Kopelman – Wells Fargo Securities

Okay. Thank you. Then if I could follow up on the home category as well. Clearly, there has been a lot of strength. Can you give us a little bit color of in home, what is working? Is it soft good, is it hard goods, and the drivers of that? And how long do you think we can expect to see double-digit comps in that category? Thanks.

Carol Meyrowitz

Honestly, our home business is very strong across the board. It is really both soft home, gift giving, hard home. We really don''t have too many categories that are soft. I think that home in general out there is stronger. I think there is a weather factor here. But I think more importantly for TJX, I am absolutely thrilled with the mix and I think our values are better than ever. And I think they are going to continue that. We are sourcing in some amazing new countries. There is such an extreme amount of newness that I believe our trends will continue.

Operator

Thank you. Our next question is from Michelle Clark.

Michelle Clark – Morgan Stanley

Yes, thank you. Carol, you had mentioned in your prepared remarks the benefit of new customers. Was just wondering if you can give us some additional color in terms of new customers as a percent of total this year versus last. Where (inaudible) customers are coming from, and what is the benefit to the comp?

Carol Meyrowitz

Again, our increase in customer trend in new customers is continuing. So we really saw a huge lift last year. We are continuing to see that lift going forward. As we have said before, we are doing everything possible to keep all of these new customers and continue it into the back half. So we again don''t divide up our transactions and our number of customers but I can tell you that it is absolutely accelerating.
Jeffrey G. Naylor

Yes, it''s exciting. In our comp as Carol mentioned, the customer count has actually accelerated in the first quarter. So when we look at transaction growth it is accelerating. A big chunk of that is coming from new customers, and they are coming from all over the place. I think we are, as Carol mentioned in her prepared remarks, really broadening the demographic reach. We are also seeing from those customers a very high both intent to repurchase as well as when we look at credit card data. We can actually see those new customers are in fact coming back in, in large, large numbers for a second visit and sometimes more visits. So we are very encouraged by what we have seen in terms of the level of trial we are getting from new customers and the level of repeat business we are getting from those customers as well.

Operator

Thank you. Our next question is from Scott Kaufman-Ross.

Scott Kaufman-Ross – Goldman Sachs

Thank you. Adrianne, that is you.

Adrianne Shapira – Goldman Sachs

Hi, congratulations.

Carol Meyrowitz

Adrianne?

Adrianne Shapira – Goldman Sachs

Yes, I''m here. Can you hear me?

Carol Meyrowitz

Yes, okay.

Adrianne Shapira – Goldman Sachs

Hi, a question quick for each of you. Jeff, on the Memorial Day shift, could you quantify that? We appreciate the monthly comps; but give us a sense of what the shift out of May is having an impact into June. Then Carol, just specifically on categories, obviously we''re hearing the home strength, but give us a little bit more color on what else you are seeing. Apparel, accessories, where you are chasing harder, where the strengths are, where you are seeing some encouraging trends from the consumer. Thanks.

Jeffrey G. Naylor

Well, on the shift, it is not as significant for us as it is for other retailers because we don''t have large promotional events that attracts uptick. So it ends up being relatively minor. I think it is -- we would classify it as less than a point, Adrianne. The other thing that benefits June is that we have got a little bit of a shift in the fourth of July where -- with the holiday moving out of June into July that will probably help the June comps, because there aren''t a lot of people that -- traffic tends to be down on the day that people have off as they do -- so it''s a little bit of a benefit to June, but it''s nowhere near as material as what you would expect to see from other retailers who promote heavily around the holiday.

Carol Meyrowitz

Adrianne, our May plan is not based on Memorial Day at all. It is really based on where we see the business. In terms of categories, we continue to -- our accessory business, our shoe business continues to be very strong. Our junior business with The CUBE is absolutely exceptional. Our men''s business is coming around, which last year our men''s business we weren''t as happy with. So we are starting to see some terrific progress there which bodes well for Father''s Day. So we''re pretty excited about that. That is basically this year versus last year what is happening along with a couple of new categories which I won''t mention.

Operator

Thank you. Our next question is from Jeffery Stein.

Jeffery Stein – Soleil-Stein Research

Hi, question for Jeff. Wondering, the provision for incentive comp and how that affected SG&A?

Jeffrey G. Naylor

In which -- in the first quarter?

Jeffery Stein – Soleil-Stein Research

Right, in the first quarter compared to last year. Was there a material basis point shift year-on-year?

Jeffrey G. Naylor

No, not really, because it wasn''t until really into the later part of the second and the third and the fourth when we started booking heavier incentive comp impact. So as I am just looking here, it really didn''t have any basis point impact at all on G&A this year versus last year, Jeff.

Jeffery Stein – Soleil-Stein Research

Okay.

Jeffrey G. Naylor

Because that impact would have come later in the year.

Jeffery Stein – Soleil-Stein Research

Right. As far as your leverage point on buying and occupancy expenses, where is it currently? And where should it be headed as we move deeper into the year and we begin to see an acceleration in new store openings? I would presume that you will require somewhat higher leverage point later on.

Jeffrey G. Naylor

Well, the leverage point -- we look at it for -- we tend to look at the leverage point for total expenses rather than splitting it. The buying and occupancy SG&A split is something we do for the external reporting. Internally, we look at our business merchandise margins and expenses. Our expenses, the leverage point typically is in the low three’s, Jeff, three, three and a quarter in that range. What we have done over the past is that we have enough cost reduction though that we have been able to reduce the leverage point now down to 2.5% or slightly below. And we have done that again this year. As you can see from the full-year guidance we have got some -- we''re getting leverage at two and three comps more than you would ordinarily -- in line -- a little bit than you would expect given 3%, 3.5% inflation rate. In terms of B&O as we go through the year, we do have an impact in the back half from -- then we combine these. Because we''ve got new store openings that in the back half of the year we think have about a 10 to a 20 basis point hit that we are taking. That is primarily from the costs that we incur prior to opening the stores. But that has got about a 10 to 20 basis point impact in the back half of the year.

Operator

Thank you. Our next question is from Laura Champine.

Laura Champine – Cowen and Company

Good morning, guys. As I flow through your gross margin guidance for the year, it clearly indicates a slowdown. Does that -- I understand the occupancy deleverage. But will you also see merch margins decline as you lap those really tough comparisons with your progress in the back half of last year?

Carol Meyrowitz

We are definitely planning in the back half more conservatively. Jeff, do you want to go through?

Jeffrey G. Naylor

Yeah. I mean on the merchandise margin in the back half, it''s essentially flat, Laura, is where we plan the merchandise margin, to LY and that is what is implied in the guidance.

Operator

Thank you. Our next question is from Richard Jaffe.

Richard Jaffe – Stifel Nicolaus

Thanks very much. Could you guys talk about the European businesses, the non-domestic businesses, and how their four-wall contribution is different, U.S. to Canada, Canada to the U.K. and then U.K. to Germany; and if you would comment also on Poland as well?

Jeffrey G. Naylor

Yeah. We are not public on the numbers per se, Richard. But the four-wall profitability in our core U.K., our U.K. business it''s pretty comparable to Marmaxx. HomeGoods and A.J. Wright are slightly below where Marmaxx is, but still at levels that give us very strong returns on invested capital. As we mentioned before, A.J. Wright''s four-wall contribution has increased significantly over the last four years and is actually above the level we need to have a model and have the confidence to roll that business out.

When we look at Germany, it is early days, right? Because we have got five stores in Germany that are two years old, plus, and we''ve got four stores in Germany that are one year old plus; and we''ve got another 15 stores that are just beginning their second year. What''s interesting is we are seeing contribution margins not that far below T.K. Maxx''s U.K. stores. We commented on that. That is one of the things that really makes us excited about Germany, that we have seen sales in an average store in Germany comparable to the U.K.

The stores are a little bit smaller so they tend to be a little bit more productive. We''re seeing turns and gross margins very comparable to the U.K. So the four-wall economics in Germany have really surprised us on the up side, which is why we have gone and we are going as aggressively as we are going. What that matures to is hard to say, because we are dealing with four-wall contributions now that are points below the U.K. but there is still a lot of maturity ahead of us in those stores that could in fact bring that store contribution margin up to the U.K. levels and maybe beyond.

Poland is just too early to say. Our stores in Poland have been open for six months now. We like what we are seeing, but I think it is too early to comment on four-wall contribution margins until they lap their first year.

Carol Meyrowitz

I also might add that HomeGoods'' four-wall contribution has increased significantly. So first quarter it has been tremendous. So we believe that there may be some additional growth in terms of floor count in HomeGoods in the future.

Operator

Thank you. Our next question is from David Mann.

David Mann – Johnson Rice & Company

Yes, thank you. Another question on the merchandise margin, in terms of the initial markup that you are seeing, how do you see that trending going forward?

Jeffrey G. Naylor

Initial markup?

David Mann – Johnson Rice & Company

In terms of the pricing of the goods that are available.

Carol Meyrowitz

David, I mean there is a lot of talk about cotton prices increasing, oil prices increasing. Any increase obviously to us is beneficial in that as your average ticket goes up, it is beneficial to us in terms of cost through our DCs, comps, all of that. I keep combing back to our job is the gap between where everybody else is and where we are. So whether the cost for apparel is finally not deflationary but inflationary, it will certainly benefit TJX. If you are asking about the quality of the goods in the marketplace I think we are feeling very good about it. Ernie is here. Ernie, you want to comment on the merchants?

Ernie Herrman

David, I think we said it before. I think the availability -- we are obviously excess inventory driven. The availability is across all categories. The challenge still is to hold back the buyers mainly in this company. So it goes in waves sometime, but the wave recently has been just like it has every other quarter, which is we are having to hold ourselves back based on the amount of goods out there. So that is always a good sign in terms of market, which I think you were asking about initial markup. I think that bodes well for the future.

Carol Meyrowitz

I mean we are hearing production increasing a bit, so it will be interesting to see what happens in the back half.

Operator

Thank you. Our next question is from David Weiner.

David Weiner – Deutsche Bank

Yes, good morning. Thanks for taking my call. I just had a follow-up on the foreign business, not so much on the contribution but let''s say the pretax margin plan. I think in past calls you have given a long-term 9% to 10% range. Are you still comfortable with that number or do you see upside to it? Thanks.

Jeffrey G. Naylor

This is Jeff. We are very comfortable with that general range, but the U.K. we originally thought that was an 8% to 9% business; that''s a business that was almost at 9% last year with still store growth ahead of it. As we grow U.K., we can leverage the cost in the U.K. against the growth in Germany, Poland, and other countries that we may enter. So with the strong contribution margins we''re seeing out of Germany, yes, I think we continue to feel comfortable with that range, David.

David Weiner – Deutsche Bank

Okay, great. Thanks.

Carol Meyrowitz

And with our investment, we''re still for the year feeling that the European businesses will certainly again have a positive on pretax.

Operator

Thank you. Our next question is from Daniel Hofkin.

Daniel Hofkin – William Blair

Good morning. Just a quick question, I guess, on the near-term comp outlook May to June and then following up on the back half. Specifically, May to June with the weather being unfavorable year-to-year in May, so far I think a lot of companies have talked about that; and then June flipping. Do you think that that June forecast could maybe be meaningfully conservative, being just a point or so higher, especially if you layer in the July 4th shift, too. And then looking at the back half, obviously recognizing that the rate of growth last year was phenomenal, was there anything that you felt was like one-time in nature that would cause you to have -- and recognizing this is your internal plan for budgeting but that would cause you have flat to slightly negative comp expectations internally or for budgeting? Other than just very, very strong results and market share gains last year, anything else that causes you to be incrementally more conservative? Thanks.

Carol Meyrowitz

First of all, for June I guess I will just answer by saying I hope so. Then as far as the back half goes, there is nothing going on, on a one-time basis at all. I think it is very, very prudent to plan the back half conservatively. Our whole goal initially for the year, I think, we are going off of a very aggressive year, not to plan the back half conservatively I don''t think would be a smart thing to do. So, as always we strive to beat our plans. I think we have a lot of initiatives going. I obviously personally would not be happy if we didn''t beat those plans. But I really think it is the right thing to do and it''s the right way to plan the business.

Daniel Hofkin – William Blair

Okay. So it comes down to just the outsize level of growth last year as opposed to anything on a current year (inaudible)?

Carol Meyrowitz

Absolutely. From day one I really wanted to get the back half planned flat to down, and I think we''re in a great place.

Operator

Thank you. Our next question is from Howard Tubin.

Howard Tubin – RBC Capital Markets

Thanks very much. Can you tell -- I think, Carol, you have said in the past that over the last couple years the percentage of your upfront buys versus off-price buys have been shifting more towards off-price buys. Is that true? And is that still the case here in the spring season?

Carol Meyrowitz

We''re pretty flat. We''re pretty flat in terms of percentages and we are in a pretty good place.

Howard Tubin – RBC Capital Markets

Got it. Thank you.

Operator

Thank you. Our next question is from Dana Telsey.

Dana Telsey – Telsey Advisory Group

Good afternoon, everyone, and congratulations. Can you talk a little bit more, any more color on the operating margins by division? As you had such good progress this quarter, do you see going forward in the forecast, is it gross margin? Is it SG&A? And is it different by division where you get the leverage points? Just lastly, the marketing spend. What are you seeing there and magnitude of change as we look to the second half of the year? Thank you.

Jeffrey G. Naylor

I think as we look at on a full-year basis, so aren’t providing a lot of specific guidance. But I think in terms of color TY versus LY, this year versus last year on a full-year basis we continue to -- we believe that the segment margins will be at Marmaxx. We will be -- believe they will be up in Canada. Canada, you recall, we had a currency hit last year, so we would expect that to be up. We''re expecting Europe to be flat to slightly up full year, and that is with the investments we''re making in the three new businesses. HomeGoods clearly up, and A.J. clearly up. And as I mentioned for the total company for the full year the pretax margin up 30 to 60 basis points. That is really coming from a mix between the gross profit margin and some SG&A leverage for the full year. So that is a quick snapshot of how the full-year guidance looks.

Carol Meyrowitz

Yes. Then marketing spend is slightly up, but the impressions are very aggressively up for the back half. So you will be seeing a lot of us.

Operator

Thank you. Our next question is from Marni Shapiro.

Marni Shapiro – The Retail Tracker

Hey, everybody. Congratulations. Great quarter. I know there is obviously plenty of inventory here in the United States. But with a stronger dollar, is there an opportunity to buy overseas? Does it make sense at all to buy overseas more aggressively and ship some of those goods back here? Are their pockets across the fleet and across the categories that make more sense to do this? So maybe it is not apparel, but maybe it is home or handbags or something like that, maybe if you could talk a little bit about that?

Carol Meyrowitz

Well, Marni, first of all we have a huge office in Italy. We have people on the ground in India. We have people in China. We have people in the U.K. We have over 100 people in Germany and everybody does buy together. So we leverage the Corporation. So we are absolutely -- which is part of what we talk about when we say we are really a supply chain company. We take advantage of all of it. If we have to pay in euros, in pounds, or dollars we do it. Whatever is advantageous. So we absolutely are taking full advantage of that.

Operator

Thank you. Our next question is from Stacy Pak.

Stacy Pak – SP Research, Inc.

Hi, guys. Question on Europe. Just wondering if you would comment what you are seeing there currently with all the mess over there. Have you seen a change in momentum in your business there? I guess just circling back to what you said about T.K. for Q1, can you repeat how you know it was weather in addition to your own execution? I am just obviously zeroing in on the economy there. Jeff, can you explain -- did you say it is top-line and bottom-line neutral FX in the back half.? Then lastly, just on May, you are not expecting any real shift from Memorial Day. Then is the decline you are forecasting in May on the two-year, is that really all the weather you are seeing now? Or are you also being conservative there? Thanks.

Carol Meyrowitz

First of all, last May was our highest comp in the quarter that we''re up against, so between that and the shift I think that is the way we should be planning it; and we are. In terms of the U.K., I mean you can always ask the question -- is it weather or is it execution? The U.K., obviously the economy was pretty bad a year ago. They got hit as dramatically as the U.S. did. So, I really -- I hate to use that as an excuse. There is very clearly categories that are working that read to weather. We know what the mix was. We know how we transitioned, and it was completely the opposite weather pattern of a year ago.

We also know the things that we do in terms of execution and what we can fix. Having said that, they did have a drop in sales in the U.K. to plan,. But their margins were pretty much the same, so they did a pretty good job of that. And that is by keeping lean inventories. So my answer to that is that I think that some of it is our own doing and some of it is the weather.

Operator

Thank you. Our final question is from Patrick McKeever.

Patrick McKeever – MKM Partners

Thanks. Good morning, everyone. Jeff, you mentioned that 75% to -- I think you said 80% of the gross margin improvement in the quarter was merchandise margins. Wondering how just that differential has changed over the past few quarters. If you look back to the back half of last year, for example, how much of that growth -- the gross margin expansion that you saw was due to merchandise margin improvement? Thanks.

Jeffrey G. Naylor

Yes, I don''t have those numbers here in front of me, Patrick. I apologize. Last year given the strength of the comp in the back half, I would have expected we would have had more buying and occupancy leverage than we are showing right now. We had a 10 comp in the back half, which would have -- in particular the 12 comp in the fourth quarter. We would in all likelihood have seen more buying and occupancy leverage than we are seeing right now. But I apologize -- I just don''t -- you stumped me with the one question where I don''t have the numbers in my book. So we will have to respond to that; I think we can respond to that off-line.

Patrick McKeever – MKM Partners

Sure, sure. Then just another real quick one. You talked last year a fair bit about opening up new vendors at a nice clip. I am just wondering if that same thing is true today. I know you are always opening up new vendors, but do you feel like that momentum that you saw with opening up new vendors last year has continued into 2010? Thanks.

Carol Meyrowitz

Yes, it has. As a matter of fact, we are hitting a lot of new countries. So we are seeing that. Again I just think it is making the mix very, very eclectic and interesting. So that continues to happen. We are very pleased.

I want to thank everyone and we look forward to giving you the Q2 results. Thank you again.

Operator

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