Financial Statement Analysis Project (TJX) PDF

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Final project - financial statement analysis on a publicly traded retail company (TJX). 98/100...

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TJX COMPANIES, INC. Financial Statement Analysis Fiscal Years Ended January 28, 2017 and February 3, 2018

Meena Maddali Submitted: November 11, 2018

Tab Table le o off Conte Contents nts 1. HISTOR HISTORYY

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2. FINANCIAL SSTATEMENT TATEMENT AN ANA ALYS YSIIS

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2.1. Comp Comparat arat arative ive A An nalysi alysiss

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2.1.1. 2.1.2.

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Comparative Income Statement – Vertical Analysis Comparative Balance Sheet Statement – Horizontal Analysis

2.2. Ra Ratio tio A Analysis nalysis

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2.2.1. 2.2.2. 2.2.3.

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Liquidity Ratios Solvency Ratios Profitability Ratios

3. RE REFE FE FEREN REN RENCE CE CESS

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4. AP APPE PE PEN NDI DIX X

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TAB TABLE LE 4 4--1: HORIZONTAL ANALYSIS (BASE YEAR 2015) – CONSOLIDATED BALANCE SHEETS FOR FISCAL YEARS ENDED JANUARY 28, 2017 AND FEBRUARY 3, 2018

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TAB TABLE LE 4 4--2: VERTICAL ANALYSIS - CONSOLIDATED INCOME STATEMENTS FOR FISCAL YEARS ENDED JANUARY 28, 2017 AND FEBRUARY 3, 2018

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TAB TABLE LE 4 4--3: METHOD OF CALCULATION FOR PRESENTED RATIOS

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TAB TABLE LE 4 4--4: CALCULATED RATIOS FOR FISCAL YEARS ENDED JANUARY 28, 2017 AND FEBRUARY 3, 2018 AND INDUSTRY COMPARISON

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FIG FIGURE URE 4 4--1: CONSOLIDATED BALANCE SHEET FROM 2017 SEC 10-K FILINGS

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FIG FIGURE URE 4 4--2: CONSOLIDATED INCOME STATEMENT FROM 2017 SEC 10-K FILINGS

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FIG FIGURE URE 4 4--3: CONSOLIDATED BALANCE SHEET FROM 2018 SEC 10-K FILINGS

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Fig Figure ure 4 4--4: Consolidated Income Statement from 2018 SEC 10-K Filings

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1. History Founded in 1987, TJX Companies, Inc. is the parent company of a host of different offprice retail brands which are categorized into four major operational divisions: MarMaxx, HomeGoods, TJX Canada, and TJX international. 1 TJX Companies started when Ben Cammarata was recruited from Marshalls to head Zayre Corporation’s launch of a family of off-price chain retail stores. At the time, Zayre was already a publicly traded company, and under Mr. Cammarata’s leadership, launched the first set of T.J. Maxx stores in Massachusetts in 1977. Ten years later, three brands – T.J. Maxx, Hit or Miss, and Chadwick’s of Boston – were reclassified under TJX Companies. The company then focused on refining their model as an “off-price, value retailer” through each of these brands in the United States, as well as through Winners Apparel, a Canadian brand acquired in 1990. By 1992, TJX Companies entered the home fashions market with its launch of HomeGoods in the United States.2 Throughout the next decade, TJX Companies focused on expanding its presence to the European and Australian markets, many times being the first to introduce the off-price retail concept to a country. In the early part of the 2000’s, they launched their brands’ respective ecommerce sites, which they used to target even more European countries in which they didn’t already have a physical presence. They also consolidated a number of their brands under their well-performing T.J. Maxx, Marshalls, and HomeGoods banners, and in late 2012, acquired Sierra Trading Post, an off-price e-commerce retailer.3

1 2 3

(TJX Companies, Inc. 2018) (TJX Companies, Inc. 2018) (TJX Companies, Inc. 2018)

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Today, the company ranks 85th among the Fortune 500 companies, with annual sales of about $40 billion, derived from over 4,000 stores in nine countries across three continents. Their portfolio of brands includes T.J. (T.K.) Maxx, Marshalls, HomeGoods, Sierra Trading Post, Winners, and HomeSense, which they operate across the United States, Canada, much of Europe and Australia.4 As the single largest off-price retailer in the world, their model is dependent upon providing consumers a fresh, constantly changing supply of merchandise, which they source from designer supply surplus and inventory surplus of other retail stores.5 Self-admittedly, their strengths include their purchasing power and decisions, supply chain, presence, and flexibility. TJX Companies plans to leverage these strengths to drive future growth by focusing on increasing customer traffic and store sales, while also growing the number of stores they operate globally.6

2. Financial Statement Analysis The following analysis is based off of the statements from TJX Companies, Inc.’s SEC 10-K filings for 2017 and 2018. The Appendix contains the analysis data referenced in this analysis. Table 4-1 shows a horizontal trend analysis of the company’s balance sheets and Table 4-2 shows a vertical analysis of the company’s income statements, expressed as a percentage of net sales. Table 4-3 describes the calculation methodology used to calculate the key financial ratios presented in Table 4-4. Figures 4-1 through 4-4 are the raw financial statements from which all the ratios and analysis were calculated and derived.

4 5 6

(TJX Companies, Inc. 2018) (TJX Companies, Inc. 2018) (TJX Companies, Inc. 2017)

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2.1. Comparative Analysis 2.1.1. Comparative Balance Sheet Statement – Horizontal Analysis The 2015 fiscal year-end financial data was used as the base year for TJX Companies Inc.’s horizontal analysis. The analysis revealed an overall increase in assets as well as an increase in total liabilities, but still showed a strong increase for both 2016 and 2017 in shareholder’s equity compared to its 2015 numbers. Total assets increased 12.1% in 2016 over 2015, and 22.3% in 2017 over 2015. Total shareholder’s equity increased 4.7% in 2016 over 2015, and 19.5% in 2017 over 2015, demonstrating that over half of the gains to assets belong to shareholders, thereby showing a total increase in the value of TJX Companies of almost 20% in 2017 over 2015. The two most significant contributors to the increase in the value of TJX Companies,Inc. were current assets and net property at cost. For current assets specifically, when compared to 2015 numbers TJX Companies, Inc. reported significant increases from 2016 to 2017 in accounts receivables (30%), merchandise inventories (15%), and prepaid expenses (85%). This, combined with the increase of 10% from 2016 to 2017 in net properties, clearly demonstrates TJX Companies, Inc.’s determination to stick to their identified strategy of driving sales through opening more stores and sourcing fresh merchandise for consumers by capitalizing on their buying power. 2.1.2. Comparative Income Statement – Vertical Analysis Vertical analysis reveals that while cost of goods sold remained a consistent and dominant 71% of net sales in 2016 and 2017, selling, general, and administrative expenses increased from 17% to 18% of net sales, due to income tax provisions declining from 4% to 3%. This shift reflects TJX Companies Inc.’s strategy in allocating more of its budget to marketing expenses as it grew 4

its brands, which it was able to deduct from its tax expense. However, income before tax provisions as a percentage of net sales and net income as a percentage of net sales both remained a consistent 11% and 7% respectively for both 2016 and 2017, so the effectiveness of their marketing strategy is yet to be proven.

2.2. Ratio Analysis 2.2.1. Liquidity Ratios TJX Companies, Inc. demonstrates a solid ability to meet short-run cash demands. It had a current ratio of 1.7 in 2017, up from 1.6 in 2016, due in large part to the increase of its expenditure on merchandise. The current ratio is right on par with the industry standard of 1.7. It also reported an inventory turnover ratio of 6.4 in 2016 and 6.5 in 2017, both above the industry standard of 6.2, demonstrating an increased ability to turn its inventory into cash. Furthermore, although its accounts receivable turnover decreased in 2017 to 122.4 from 133.6 in 2016, TJX Companies, Inc. was able to increase its overall working capital by about $360M, due to its increased sales (as also reflected in its inventory turnover ratio). 2.2.2. Solvency Ratios Although the company’s debt-to-assets ratio is 60% for both 2016 and 2017, its interest coverage grew from 86.5 in 2016 to 123.1 in 2017. However, its debt-to-assets ratio is heavily influenced by the merchandise bought on credit, which, as discussed above, grew tremendously from 2016 to 2017; and considering its increasing and above-average inventory turnover ratio, TJX Companies, Inc.’s ability to pay long-term debt is better judged by its interest coverage. Therefore, the company demonstrates a strong ability for the company to meet its ongoing debt obligations despite relying a bit more heavily on leverage. 5

2.2.3. Profitability Ratios TJX Companies, Inc. showed a slightly lower-than-average gross profit rate of about 29% in both years, compared to the industry average of 30%, an increase in their earnings per share of 0.59 from 2016 to 2017, and a lower-than -average price-to-earnings ratio of 20.9 in 2016 and 18.2 in 2017 (compared to the industry average of 23.75). This decrease in the company’s priceto-earnings ratio can be attributed to its increased investment in marketing and store development, and although their gross profit rate is just under industry average, their increased earnings per share is a direct result of strong management decisions resulting in growth in equity for its shareholders. Most strikingly, TJX Companies, Inc.’s return on equity was a strong 53.13% in 2016 and 54.00% in 2017, which was just under the industry average of 55.00%. This was despite the company’s above-average reliance on leverage as discussed above, and a lower-than-average return on assets of 18.86% in 2016 and 19.36% in 2017 (industry average is 21.04%). The return on assets was influenced by a lower-than-average profit margin of 6.93% in 2016 and 7.27% in 2017 (industry average is 8.08%), but also reflects a higher-than-average asset turnover ratio of 2.7 in both years (compared to an industry average of 2.6). In conclusion, although limited in scope this analysis demonstrates consistent and strong financial performance for TJX Companies, Inc. for the years analyzed, with trends forecasting continued strong performance for the future. This analysis shows that TJX Companies, Inc. is a stable business with strong investment potential for a long-term holding strategy when compared to industry standards.

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3. References MSN Money. 2018. TJX - Research and Analysis. November 8. Accessed November 8, 2018. https://www.msn.com/en-us/money/stockdetails/analysis/fi-126.1.TJX.NYS. TJX Companies, Inc. 2018. What is "Off-Price" Retailing? Accessed November 8, 2018. http://www.tjx.com/company/what-is-off-price.html. TJX Companies, Inc. 2018. Company. Accessed November 8, 2018. https://www.tjx.com/company/. TJX Companies, Inc. 2018. Our History. Accessed November 8, 2018. https://www.tjx.com/company/history.html. TJX Companies, Inc. 2017. TJX Growing Around the Globe: For Today and the Future. Annual Report, Framingham: TJX Companies, Inc.

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4. Appendix TABL TABLE E4 4--1: HORIZONTAL ANALYSIS (BASE YEAR 2015) – CONSOLIDATED BALANCE SHEETS FOR FISCAL YEARS ENDED JANUARY 28, 2017 AND FEBRUARY 3, 2018

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TABL TABLE E4 4--2: VERTICAL ANALYSIS - CONSOLIDATED INCOME STATEMENTS FOR FISCAL YEARS ENDED JANUARY 28, 2017 AND FEBRUARY 3, 2018

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TABL TABLE E4 4--3: METHOD OF CALCULATION FOR PRESENTED RATIOS

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TABL TABLE E4 4--4: CALCULATED RATIOS FOR FISCAL YEARS ENDED JANUARY 28, 2017 AND FEBRUARY 3, 2018 AND INDUSTRY COMPARISON

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FIGURE 44-1: 1: CONSOLIDATED BALANCE SHEET FROM 2017 SEC 10-K FILINGS

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FIGURE 44-2: 2: CONSOLIDATED INCOME STATEMENT FROM 2017 SEC 10-K FILINGS

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FIGURE 44-3: 3: CONSOLIDATED BALANCE SHEET FROM 2018 SEC 10-K FILINGS

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FIGURE 44-4: 4: CONSOLIDATED INCOME STATEMENT FROM 2018 SEC 10-K FILINGS

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Table 4-1: Horizontal Analysis (Base Year 2015) – Consolidated Balance Sheets for Fiscal Years Ended January 28, 2017 and February 3, 2018 Consolidated Balance Sheets USD in Thousands

Increase (Decrease) in 2016

Increase (Decrease) in 2017

Jan. 30, 2016

Jan. 28, 2017

Amount

Percent

Feb. 03, 2018

Amount

Percent

2,095,473

2,929,849

834,376

39.8%

2,758,477

663,004

31.6%

352,313

543,242

190,929

54.2%

506,165

153,852

43.7%

238,072

258,831

20,759

8.7%

327,166

89,094

37.4%

3,695,113

3,644,959

(50,154)

(1.4%)

4,187,243

492,130

13.3%

391,589

373,893

(17,696)

(4.5%)

706,676

315,087

80.5%

6,772,560

7,750,774

978,214

14.4%

8,485,727

1,713,167

25.3%

4,137,575

4,532,894

395,319

9.6%

5,006,053

868,478

21.0%

13,831

6,193

(7,638)

(55.2%)

6,558

(7,273)

(52.6%)

193,911

195,871

1,960

1.0%

100,069

(93,842)

(48.4%)

Other assets

372,554

398,076

25,522

6.9%

459,608

87,054

23.4%

Total Assets

11,490,431

12,883,808

1,393,377

12.1%

14,058,015

2,567,584

22.3%

2,203,050

2,230,904

27,854

1.3%

2,488,373

285,323

13.0%

2,069,659

2,320,464

250,805

12.1%

2,522,961

453,302

21.9%

129,521

206,288

76,767

59.3%

114,203

(15,318)

(11.8%)

4,402,230

4,757,656

355,426

8.1%

5,125,537

723,307

16.4%

881,021

1,073,954

192,933

21.9%

1,320,505

439,484

49.9%

285,102

314,000

28,898

10.1%

233,057

(52,045)

(18.3%)

1,615,003

2,227,599

612,596

37.9%

2,230,607

615,604

38.1%

Current Assets Cash and cash equivalents Short-term investments Accounts receivable, net Merchandise inventories Prepaid expenses and other current assets Total current assets Net property at cost Non-current deferred income taxes, net Goodwill

Current Liabilities Accounts payable Accrued expenses and other current liabilities Federal, state and foreign income taxes payable Total current liabilities Other long-term liabilities Non-current deferred income taxes, net Long-term debt

(continued below)

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Consolidated Balance Sheets (Continued) USD in Thousands Shareholders’ Equity Preferred stock7 Common stock8 Additional paid-in capital Accumulated other comprehensive income (loss) Retained earnings Total shareholders' equity Total Liabilities and Shareholders’ Equity

Increase (Decrease) in 2016

Increase (Decrease) in 2017

Jan. 30, 2016

Jan. 28, 2017

Amount

Percent

Feb. 03, 2018

Amount

Percent

663,496

646,319

(17,177)

(2.6%)

628,009

(35,487)

(5.3%)

0

0

0

0

0

(667,472)

(694,226)

(26,754)

4.0%

(441,859)

225,613

(33.8%)

4,311,051

4,558,506

247,455

5.7%

4,962,159

651,108

15.1%

4,307,075

4,510,599

203,524

4.7%

5,148,309

841,234

19.5%

11,490,431

12,883,808

1,393,377

12.1%

14,058,015

2,567,584

22.3%

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Authorized 5,000,000 shares, par value $1, no shares issued Authorized 1,200,000,000 shares, par value $1, issued and outstanding 628,009,022 and 646,319,046, respectively 8

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Table 4-2: Vertical Analysis - Consolidated Income Statements for Fiscal Years Ended January 28, 2017 and February 3, 2018 Consolidated Statements of Income Shares in Thousands USD ($) in Thousands Net sales Cost of sales, including buying and occupancy costs Selling, general and administrative expenses Impairment of goodwill and other long-lived assets, related to Sierra Trading Post ("STP") Loss on early extinguishment of debt Pension settlement charge Interest expense, net Income before provision for income taxes Provision for income taxes Net income

Jan. 28, 2017

% of Net Sales

Feb. 03, 2018

% of Net Sales

33,183,744

100%

35,864,664

100%

23,565,754

71%

25,502,167

71%

5,768,467

17%

6,375,071

18%

99,250

0%

51,773

0%

31,173

0%

43,534

0%

31,588

0%

3,723,043

11%

3,856,588

11%

1,424,809

4%

1,248,640

3%

2,298,234

7%

2,607,948

7%

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Table 4-3: Method of Calculation for Presented Ratios Topic Liquidity Ratios Current Ratio Working Capital Inventory Turnover Accounts Receivable Turnover Solvency Ratios Debt-to-Assets Ratio Times Interest Earned (Interest Coverage) Profitability Ratios Return on Assets Asset Turnover Return on Equity Gross Profit Rate Earnings per Share Price /Earnings Ratio Profit Margin Ratio

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