Why TJX Companies’ Margins Might Decline in Fiscal 1Q17
Can TJX Companies Continue Its Growth Streak in Fiscal 1Q17?
Gross margin contraction
TJX Companies is scheduled to announce its fiscal 1Q17 results on May 17. In the guidance issued in February 2016, TJX Companies stated that its estimated gross margin for 1Q17 ended April 30, 2016, was in the range of 28.2% to 28.3%. In comparison, the gross margin in 1Q16 was 28.3%.
The company expects its full-year fiscal 2017 gross margin to be in the 28.3% to 28.5% range down from 28.8% last year. The decline in gross margins in 1Q17 and fiscal 2017 is likely to be caused by currency headwinds. Aside from the US, TJX Companies operates its off-price stores in Canada, Europe, and Australia.
Recap of historical margins
The company’s gross margin in 4Q16 ended January 30, 2016, expanded by 50 basis points to 28.7%. For the full-year fiscal 2016, TJX Companies’ gross margin increased by 20 basis points to 28.8%. This improvement was driven by buying and occupancy expense leverage on strong same-store sales growth as well as higher merchandise margin.
The operating margin of TJX Companies in 4Q16 declined by 50 basis to 12% due to the impact of higher wages, an increase in contribution to the company’s charitable foundations, and higher supply chain costs. The company’s full-year fiscal 2016 operating margin declined by about 40 basis points to 12% due to higher store payroll costs and increased costs associated with higher units sold. The iShares Global Consumer Discretionary ETF (RXI) has 1.4% exposure to TJX Companies.
The operating margins of off-price retailers Ross Stores (ROST) and Burlington Stores (BURL) were 13.6% and 5.8%, respectively, in the fiscal year ended January 30, 2016. Nordstrom (JWN), which operates full-line stores as well as off-price Nordstrom Rack stores, reported an operating margin of 7.6% in the comparable fiscal year.
Operating margin under pressure
TJX Companies’ operating margin in 1Q17 and the full year fiscal 2017 might be under pressure due to higher selling, general, and administrative (or SG&A) expenses. The SG&A expenses as a percentage of sales are anticipated to be in the 17.8% to 17.9% range in 1Q17, up from 17.0% in 1Q16. The company expects fiscal 2017 SG&A expenses as a percentage of sales in the 17.2% to 17.3% range, up from 16.8% last year, mainly due to higher wages.
We’ll discuss expectations for TJX Companies’ 1Q17 earnings in the next part of this series.
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