Discount apparel retailer TJX (TJX 74.39, -2.51) trades about 3.3% lower today in reaction to the company’s mixed Q1 report from this morning. Despite also reporting comparable store sales at the high end of guidance, shares are pressured as Q2 earnings guidance and FY18 guidance temper investor optimism.
Taking a look at the report, TJX came in with mixed Q1 results as earnings beat market expectations at $0.82 and revenues missed expectations at $7.78 billion. The company highlighted that diluted EPS was $0.04 above the high-end of the company’s plan primarily due to a benefit from an accounting change in share-based compensation as well as a benefit from foreign currency, which were both higher than expected.
As mentioned, comps came in at the high end of guidance at 1% vs guidance of flat to up 1%. Year-over-year comp comparisons were tough this quarter as TJX is lapping a 7% comp period from 1Q2017 which was aided by a +14% comp in TJX Canada. The company noted that results were at the top end of guidance despite some unfavorable weather compared to last year in the U.S. and Canada. Further, TJX management noted sales trends which were initially slow at the beginning of the period picked up as the period progressed.
Additionally, TJX managed to trim inventory about $0.2 billion to $3.7 billion as of April 29, 2017. Consolidated inventories on a per-store basis as of April 29, 2017, including the distribution centers, but excluding inventory in transit and the company’s e-commerce businesses, were down 9% on a reported basis (down 7% on a constant currency basis) versus a 7% increase on both a reported and constant currency basis last year.
Management also gave some guidance for Q2 and FY18 in the release. For Q2, the company sees EPS in the range of $0.81-0.83 on comp growth of 1-2%, assuming an expected net negative impact EPS growth of about 4% due to the combination foreign-currency and transactional FX and additional and an additional 2% due to wage increases. It also includes a 1% expected benefit to EPS growth due to a change in accounting rules for share-based compensation. Given this, management sees Q2 consolidated sales in the area of $8.2 billion.
FY18 earnings are expected between $3.82-3.89 (up on the low end from $3.80-3.90) on comp growth of 1-2%. Assuming current FX rates, the company also expects the net impact of foreign currency and transactional foreign-exchange will have about a 1% negative impact on fiscal ‘18 EPS growth. This guidance assumes consolidated sales for FY18 in the $35.3-35.6 billion range.
Given the mixed period and the updated guidance, it’s not difficult to see why shares slipped to six-month lows. The earnings and comps were to the delight of investors, yes, but a slightly more favorable tax rate and soft Q2 guidance seem to be keeping the bulls at bay for the time being.