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Why TJX Companies’ 2Q Margins Could Decline

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Gross margin expectations

TJX Companies’ (TJX) gross margin expanded in fiscal 1Q18 (ended April 29, 2017), but its guidance issued in May 2017 indicates that its gross margin could fall in fiscal 2Q18 (ended July 29, 2017).

For fiscal 2Q18, TJX Companies expects its fiscal 2Q18 gross margin to be in the 28.6%–28.7% range. This indicates a YoY (year-over-year) fall, compared with its gross margin of 29.4% in fiscal 2Q17. Currency headwinds and higher distribution center costs could adversely impact the company’s fiscal 2Q18 gross margin.

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Margins in the previous quarter

TJX’s gross margin grew 20 basis points to 29.0% in fiscal 1Q18. This improvement came from gains related to inventory hedges and increased merchandise margin.

However, the fiscal 1Q18 gross margin was unfavorably impacted by higher supply chain costs and expense deleverage on a tepid same-store sales growth of 1.0%. TJX’s operating margin fell 30 basis points to 10.8% in fiscal 1Q18 due to higher store payroll costs.

Why operating margin might contract

Higher SG&A (selling, general, and administrative) expenses are expected to have a negative impact on TJX’s operating margin in fiscal 2Q18. The company expects its SG&A expenses as a percentage of sales to be in the 18.1%–18.2% range, up from 17.7% in fiscal 2Q17. Higher wages and growth investments are expected to result in increased expenses.

Fiscal 2018 margins

For fiscal 2018, TJX expects its gross profit margin to be in the 28.9%–29.0% range, compared with 29.0% in fiscal 2017. The company expects the 53rd additional week in the fiscal year to add 20 basis points to its gross margin, and it expects its SG&A expenses as a percentage of sales to be in the 17.6%–17.7% range, up from 17.4% in fiscal 2017.

Now let’s look at the analysts’ expectations for TJX’s fiscal 2Q18 earnings.

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