Margins under pressure
A highly competitive retail environment and incremental investments, including costs associated with TJX Companies’ (TJX) distribution network to support global store growth plans, are likely to pressure the company’s margins. Also, wage increases are expected to weigh on the company’s margins.
A recap of margins in the previous quarter
In fiscal 4Q17, which ended on January 28, 2017, TJX Companies’ gross margin declined by 40 basis points on a year-over-year basis to 28.3%. The company’s gross margin declined as a higher merchandise margin was more than offset by the losses related to the company’s inventory hedges and a rise in supply chain costs.
The company’s operating margin declined by about 30 basis points to 11.7% in fiscal 4Q17 even though selling, general, and administrative expenses were flat as a percentage of sales. This decline in operating margin was a result of lower gross margin.
The guidance issued by TJX Companies in February 2017 indicates a fiscal 1Q18 gross margin in the 28.7% to 28.8% range compared to 28.8% in fiscal 1Q17. The company’s operating margins in fiscal 1Q18 and full-year fiscal 2018 might be under pressure to higher wages and growth investments. Rival Ross Stores (ROST) expects its operating margin in fiscal 1Q17 (which ended on April 29, 2017) in the 14.7% to 14.9% range. This guidance indicates a decline in the company’s operating margin compared to 15.4% in fiscal 1Q16 due to higher wages and freight costs.
For full-year fiscal 2018, TJX Companies expects its gross margin in the 28.9% to 29.0% range compared to 29.0% in fiscal 2017.
We’ll look at the TJX Companies’ earnings expectations in the next part of this series.