Margins under pressure
Margins of both TJX Companies (TJX) and Ross Stores (ROST) have been under pressure due to higher freight costs and wages. TJX Companies’ (TJX) gross margin declined 30 basis points to 28.6% in fiscal 2019, which ended on February 2. The decline in TJX’s gross margin was caused by higher supply chain costs as the company invested in existing and new distribution centers. Gross margin was also impacted by an unfavorable comparison with fiscal 2018, which included an additional week.
TJX Companies’ operating margin declined to 10.7% in fiscal 2019 from 10.8% in fiscal 2018 despite a flat SG&A (selling, general and administrative) expense rate due to the impact of a lower gross margin.
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TJX Companies’ gross margin was slightly higher than Ross Stores in the previous fiscal year, but operating margin lagged that of Ross Stores. Ross Stores’ gross margin contracted 54 basis points to about 28.4% in fiscal 2018, which ended on February 2, 2019. This decline resulted from higher freight costs, a rise in distribution expenses, higher buying costs, and increased occupancy costs, partially offset by improved merchandise margin.
Ross Stores’ fiscal 2018 operating margin declined about 85 basis points to 13.6%, reflecting the impact of lower gross margin and higher wages. The decline in fiscal 2018 operating margin also reflects an unfavorable comparison with fiscal 2017, in which an additional week benefitted from the operating margin by 20 basis points.
TJX Companies anticipates its gross margin to be in the range of 28.1% to 28.2% in fiscal 2020 compared to 28.6% in fiscal 2019. The company expects its selling, general and administrative expense rate in the range of 17.8% to 17.9% in fiscal 2020 compared to 17.8% in fiscal 2019.
Ross Stores expects its operating margin in the range of 13.2% to 13.4% in fiscal 2019, down from 13.6% in fiscal 2018. The company’s guidance is based on a relatively flat gross margin estimate and expense deleverage if same-store sales growth is in the range of 1% to 2%. Higher wages and freight costs are expected to continue to weigh on the profitability of these retailers.