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TJX Companies Inc (NYSE:TJX)
Q2 2018 Earnings Conference Call
Aug. 21, 2018, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to The TJX Companies' Second Quarter Fiscal 2019 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.

(Operator Instructions) As a reminder, this conference call is being recorded, August 21, 2018.

I would like to turn the conference call over to Mr. Ernie Herrman, Chief Executive Officer and President of The TJX Companies Incorporated. Please go ahead, sir.

Ernie Herrman -- President and CEO

Thanks Brad. Before we begin, Deb has some opening comments.

Debra McConnell -- Global Communications

Thank you, Ernie, and good morning. The forward-looking statements we make today about the company's results and plans are subject to risks and uncertainties that could cause the actual results and the implementation of the company's plans to vary materially. These risks are discussed in the company's SEC filings, including, without limitation, the Form 10-K filed April 4, 2018.

Further, these comments and the Q&A that follows are copyrighted today by The TJX Companies, Inc. Any recording, retransmission, reproduction or other use of the same for profit or otherwise, without prior consent of TJX, is prohibited and a violation of United States copyright and other laws. Additionally, while we have approved the publishing of a transcript of this call by a third-party, we take no responsibility for inaccuracies that may appear in that transcript.

We have detailed the impact of foreign exchange on our consolidated results in our international divisions in today's press release in the Investors section of our website, tjx.com. Reconciliations of the non-GAAP measures we discuss today to GAAP measures are posted on our website, tjx.com in the Investors section. Thank you.

And now, I'll turn it back over to Ernie.

Ernie Herrman -- President and CEO

Good morning. Joining me and Deb on the call is Scott Goldenberg. Let me begin by saying that I am extremely pleased with our second quarter results. Both our consolidated comp store sales growth of 6% and earnings per share of $1.17 significantly exceeded our expectations. We saw sharp execution of our off-price fundamentals by many of our teams across the company and comp store sales growth was strong at all of our divisions.

Further, customer traffic was up for the 16th consecutive quarter at TJX and Marmaxx. Clearly our terrific brands, eclectic merchandise mix, and great values continue to resonate with consumers around the world. We were especially pleased with the very robust performance of our apparel business. We are convinced that we are attracting new customers, driving more frequent visits to our stores, and gaining market share.

We are particularly pleased to see that we have been attracting new younger customers at all divisions, which bodes well for the future. With our very strong second quarter results, we are raising our full-year outlook, which Scott will detail in a moment.

Looking ahead, the third quarter is off to a very strong start and we have many opportunities and traffic driving initiatives planned for the back half of the year. We are confident we will achieve our plans, and as always, will strive to surpass them.

Before I begin -- before I continue, I'll turn the call over to Scott to recap our second quarter numbers. Scott?

Scott Goldenberg -- CFO

Thanks, Ernie, and good morning everyone. As Ernie mentioned, our 6% consolidated comparable store sales increase was on top of last year's 3% increase and significantly above our expectations. To reiterate, our comp sales in fiscal '19 are compared to a shifted fiscal '18 calendar, so that our comps are calculated on a like-for-like basis.

Once again, customer traffic was up overall, and was the primary driver of our comp sales increases at all divisions. As a reminder, our comp increase excludes the growth from our e-commerce businesses.

Second quarter diluted earnings per share were $1.17, excluding an $0.18 benefit from the 2017 Tax Act. Adjusted earnings per share were $0.99, a 16% increase over last year's $0.85. As expected, restructuring costs within our global IT function negatively impacted EPS growth by 3% and foreign currency benefited EPS growth by 3%.

Consolidated pre-tax profit margin was 10.6%, down 10 basis points versus the prior year. Merchandise margin was down, but would have been significant -- up significantly without the increased pressure from freight costs.

Now to recap our second quarter performance by division. Marmaxx comps increased an outstanding 7%, significantly exceeding our plans. Comp sales were driven by customer traffic, and average ticket was up again this quarter. We were particularly pleased with the consistency we saw across all geographic regions.

Further, Marmaxx's apparel business was very strong. Segment profit margin was up 10 basis points. We have many initiative plans planned in the back half of the year that we believe will continue driving traffic and sales.

HomeGoods' comps grew 3% on top of last year's very strong 7% comp increase. Segment profit margin was down 150 basis points, primarily due to significantly higher freight costs, increased supply chain costs, and expenses related to new store openings. We are investing in our new -- we are investing in our distribution network to support our store growth over the last couple of years. Looking ahead, we feel great about the long-term opportunity to capture additional market share in the United States home fashion sector with both our HomeGoods and HomeSense banners.

TJX Canada second quarter comps grew a strong 6% over a 7% increase last year. Adjusted segment profit margin, excluding foreign currency, was up 50 basis points, primarily due to the timing of transactional FX. Expense leverage on the strong comp offset most of Canada's significant wage pressure. We remain very pleased with the overall performance of our Canadian business. We have high awareness of our retail banners in Canada where we continue to attract very loyal customers.

At TJX International, comps increased 4% in the second quarter. It was great to see comps accelerate versus the first quarter. Further, we were very pleased with our strong comp performance in the UK. In Australia, sales continue to be excellent. Adjusted segment profit margin at TJX International, excluding foreign currency, was up 10 basis points. We are confident in our full-year outlook for the division and our long-term growth opportunities. In Europe, we believe the gap in comp performance between us and many other major retailers has continued to widen, which underscores our confidence.

I'll finish with our shareholder distributions. During the second quarter, we returned $844 million to shareholders through our buyback and dividend programs. We bought back $600 million of TJX stock, retiring 6.4 million shares, and paid $244 million in dividends to our shareholders. Year-to-date, we have bought back $1 billion of TJX stock and paid $441 million in dividends. For the full year, we continue to anticipate buying back $2.5 billion to $3 billion of TJX stock.

Now, let me turn the call back to Ernie, and I'll recap our third quarter and full year 2019 guidance at the end of the call.

Ernie Herrman -- President and CEO

Thanks, Scott. With our very strong second quarter performance, what I want to underscore on this call is our confidence in our strong position for today and the future, in an evolving retail landscape. First, in a consumer environment where experiences are increasingly important, we have great confidence in the enduring appeal of our treasure hunt shopping experience.

But the vast majority of overall retail sales still happening in brick-and-mortar locations, and online retailers of all sizes starting to open physical stores, we are convinced that our four decades of experience in operating stores and responding to consumer trends is a tremendous advantage.

How is our shopping experience differentiated? We aim to inspire and excite our customers every time they shop us. We do this by bringing them curated rapidly changing selections of great brands and great quality products, sourced around the globe at amazing off-price values.

It is important to understand that we are delivering excellent value on comparable merchandise versus full-price brick-and-mortar and major online retailers.

Further, we offer consumers the convenience of shopping multiple categories in a simple, easy-to-shop layout in thousands of locations that they may visit frequently. We have spent four decades building consumer's trust with our local and neighborhood stores. We also offer that instant gratification of being able to touch and feel the merchandise and take items home the very same day.

Second, we are convinced we will continue to gain market share by growing our customer base around the world and driving more shopping visits. Our marketing strategies are multilayered, and we believe our marketing initiatives are continuing to attract new customers. We have strong plans in place for the second half of the year, and I'm very pleased with the various campaigns each of our banners has lined up.

We are engaging with customers more than ever. Our loyalty programs are driving more frequent visits and we are clearly seeing more cross-shopping across our retail banners. We are pleased with the growth of these programs and are convinced, significant opportunity remains to keep growing them in the US, Canada and the UK.

We are particularly pleased that we have been attracting a significant share of millennial and Gen Z shoppers among our new customers at each of our divisions. Importantly, the majority of new customers at Marmaxx are these younger customers, which indeed bodes very well for our future.

We continue to see a meaningful opportunity to grow our retail banners around the world. We believe our long-term growth potential is 6,100 stores in just our current countries with just our current chains. We target an extremely wide customer demographic, which also gives us great flexibility to open stores in urban, suburban, and rural locations.

We believe our e-commerce sites are also driving customer traffic to our stores. Although still a small piece of our overall business, we feel great about our differentiation strategies and the growth of both our US and UK e-commerce sites.

We continue to increase customer awareness of our online businesses through integrated marketing campaigns and in-store signage. I am also pleased with our overall online metrics, particularly those related to Click and Collect in the UK.

The last point I'll emphasize about our confidence as the retail landscape continues to evolve is our leadership and flexibility. The most important factor is our opportunistic buying. Our discipline in maintaining inventory liquidity and remaining open to buy allows us to be nimble in the marketplace and maximize the best opportunities for hot categories and hot brands. Further, our vast vendor universe of more than 20,000 vendors affords us tremendous flexibility and sourcing merchandise around the globe.

Our flexible store format allows us to respond quickly to changing consumer tastes and offer shoppers a mix of relevant, on-trend, quality merchandise. Our inventory turns very rapidly and the freshness and newness of merchandise encourages and excites consumers to visit our stores more frequently.

We have a strong focus on innovation and are constantly testing new ideas within our 4,000 plus stores as well as our online channels. We will learn what does and does not work and if an idea resonates with consumers, we have the flexibility to roll it out in a meaningful way. These tests have the potential to drive significant growth for us as we have seen throughout our history.

We are laser focused on driving the business today while planning for the future. We target a very wide customer demographic with our portfolio of retail banners across multiple countries and multiple categories, which gives us great flexibility with our growth plans. In an ever-changing retail environment and with the emergence of new types of retailers, we will never be complacent.

In closing, we're extremely pleased with our second quarter performance and have many initiatives planned to continue driving sales and traffic in the back half of this year. The marketplace is loaded with quality branded merchandise and we'd love the buying opportunities that we are seeing.

We believe our great values and differentiated shopping experience continue to set us apart from most other major retailers and highlights the resiliency of our business. We are highly confident that we can gain market share as we continue to leverage our winning retail formula to grow around the world.

Now, I'll turn the call over to Scott to go through our guidance, and then, we'll open it up for questions. Scott?

Scott Goldenberg -- CFO

Thanks Ernie. I'll begin with our full-year fiscal 2019 guidance. For modeling purposes, I'll remind you that fiscal '19 is a 52-week year compared to fiscal '18, which was a 53-week year. As we mentioned in our press release this morning, we are increasing our EPS guidance due to our strong second quarter performance.

On a GAAP basis, we now expect fiscal '19 earnings per share to be in the range of $4.83 to $4.88. We're expecting a benefit of $0.73 to $0.74 due to items related to the 2017 Tax Act. Excluding this tax benefit, we're increasing our adjusted earnings per share guidance range to $4.10 to $4.14. This would be a 6% -- up 6% to 8% versus the adjusted $3.85 in fiscal '18. This EPS guidance now assumes consolidated sales in the $38.2 billion to $38.4 billion range, a 7% increase over the 53-week prior year.

We're now assuming a 3% to 4% comp increase on a consolidated basis as a result of our strong performance in the first half of the year. We expect pre-tax profit margin to be in the range of 10.7% to 10.8%, down 40 basis points to 50 basis points versus the adjusted 11.2% in fiscal '18.

We're planning gross profit margin to be in the range of 28.5% to 28.6% compared with the adjusted 28.8% last year. We're expecting SG&A as a percent of sales of approximately 17.7% versus the adjusted 17.5% last year. For modeling purposes, we're currently anticipating a tax rate of 25.9%, net interest expense of about $17 million, and a weighted average share count of approximately 629 million.

Now, to our full year guidance by division. At Marmaxx, we're now planning comp growth of 3% to 4% on sales of $23.5 billion to $23.6 billion and are expecting average ticket to be flat to slightly up in the back half of the year. We now expect segment profit margin in the range of 13.4% to 13.5%.

At HomeGoods, we continue to expect comps to increase 2% to 3% and [ph] sales of $5.7 billion. We're planning segment profit margin to be in the range of 11.4% to 11.5%.

For TJX Canada, we're now planning a comp increase of 3% to 4% on sales of $3.8 billion to $3.9 billion. Adjusted segment profit margin, excluding foreign currency, is expected to be in the range of 14.3% to 14.4%.

At TJX International, we expect comp growth of 2% on sales of $5.2 billion. Adjusted segment profit margin, excluding foreign currency, is expected to be in the range of 5.2% to 5.3%.

Moving on to Q3 guidance. We expect earnings per share to be in the range of $1.18 to $1.20. Excluding an estimated benefit of $0.18 due to items related to the 2017 Tax Act. Adjusted earnings per share will be in the range of $1.00 to $1.02 versus the prior year's $1.00 per share. This guidance assumes that foreign currency will negatively impact EPS growth by 4% and that wage increases will negatively impact growth by another 2%.

We're modeling third quarter consolidated sales of approximately $9.5 billion. This guidance assumes a 2% negative impact to reported revenue due to translational FX. For comp sales, we're assuming a growth of 2% to 3% range on a consolidated basis, and in the 3% to 4% range at Marmaxx. Third quarter pre-tax profit margin is planned in the 10.7% to 10.8% range versus 11.6% the prior year.

We're anticipating third quarter gross profit margin to be in the range of 28.9% to 29% versus 29.8% last year. This gross margin estimate assumes a significant unfavorable year-over-year impact related to our inventory hedges.

We're expecting SG&A, as a percent of sales, to be in the range of 18.1% to 18.2% versus 18.1% last year. For modeling purposes, we're anticipating a tax rate of 26.5%, net interest expense of about $5 million, and a weighted average share count of approximately 627 million.

It's important to remember that our guidance for the third quarter and full year assumes that currency exchange rates will remain unchanged from the levels at the beginning into the third quarter.

Now, we're happy to take your questions. To keep the call on schedule, we're going to ask you to please limit your questions to one per person. Thanks, and now, we will open it up to questions.

Questions and Answers:

Operator

(Operator Instructions) Our first question for today will come from Michael Binetti. Your line is open.

Michael Binetti -- Credit Suisse -- Analyst

Hey guys, good morning. Let me start by congratulating on a really great quarter.

Ernie Herrman -- President and CEO

Thank you.

Michael Binetti -- Credit Suisse -- Analyst

Just on the model, really quickly. Would you mind helping us isolate the comment in the press release that there was some SG&A in the quarter related to the IT restructuring, just so that we can kind of think about that and how much SG&A in the quarter goes away next year?

Scott Goldenberg -- CFO

It's approximately $0.02 to $0.03 due to the restructuring cost in the second quarter. Again, as we put in our original plans and as we guided to in the last quarter. So, no variance to what we both originally guided and what we had put in our guidance for the quarter.

Michael Binetti -- Credit Suisse -- Analyst

And I guess just one more, small model question on freight. I know there was a concern and you were seeing some moving parts through the quarter. Any change to your outlook on freight pressure on the margins for the year?

Scott Goldenberg -- CFO

So largely, on the last quarter call built-in, I would say the majority of the freight pressure, although we did had some additional pressure in the second quarter versus our guidance primarily in the HomeGoods division, and we are seeing some additional pressure in the back half of the year, but I would say, we did include most of that when we did our last guidance. To get that out, it's, on a full year, the incremental pressure when you don't -- not including additional volume, is worth approximately $0.07 on the year and that was largely reflected in our previous guidance. So that's reflected in our full year guidance at this point.

Michael Binetti -- Credit Suisse -- Analyst

Okay. And I guess the more important and probably fun question for you to answer is on the AUR, something you spoken about a lot. This year you said, I think flat to up very modestly I would assume, in a quarter, since you said most of it is transaction driven, but you pointed to flat to positive through the rest of the year. I think that there is some implications for the P&L on that. Would you mind just talking to us a little bit about what's helping drive the AUR, and whether the leverage point on the comp changes through the year as you drive, hopefully some positive AURs?

Ernie Herrman -- President and CEO

So Michael, let me just jump in on some of the dynamics why it's moderating and heading slightly up, and then Scott can jump in on the second part. So as we talked about, similarly to what drove it down with the mix of departments et cetera, and again it is not necessarily a top-down driven strategy to actually bring it back, the way it's coming back, and it's driven down at the merchandise manager, buyer levels and category department levels and the mix within those departments and the brands in there is really what's helping us to moderate the average retail and bring it back. Also, it doesn't hurt that our apparel has been rather healthy over the last quarter as well. And as we look out, if that continues, that will be another tailwind to help us with the average ticket.

Scott Goldenberg -- CFO

Yes, Michael, in terms of the breakeven from a comp basis, we're not seeing -- we're seeing it, first of all is, at this point, very close to what we originally planned. So with this, I would say there is no significant benefit or pressure due to the average retail versus what we originally planned. At the modest flat to slightly up, it doesn't really change the breakeven point at this point. If it was to go up a couple points, that would be a difference maker.

Michael Binetti -- Credit Suisse -- Analyst

Okay, thanks a lot guys, congrats.

Operator

Our next question will come from Lorraine Hutchinson. Your line is open.

Lorraine Hutchinson -- Bank of America Merrill Lynch -- Analyst

Thank you. I wanted to follow up on the Marmaxx merchandise margin. Was that positive in the quarter if you exclude the freight pressure?

Scott Goldenberg -- CFO

Yes. So, at Marmaxx the merchandise margins would have been slightly up versus LY given the freight pressures, yes. But it has a bigger impact on our HomeGoods division than it was on our Marmaxx division. But yes, overall the merchandise margins would have been up for TJX, if not for the incremental pressure we had just versus plan. So just taking the variance versus plan, we would have been slightly up. So we had this -- I think, maybe Ernie, you could talk about it. What we -- we weren't able to obviously set off -- offset all of it, but as Ernie briefly mentioned, with the great availability, we had a strong mark on it and that's certainly helping.

Ernie Herrman -- President and CEO

So I would say Lorraine, this was not an accident. I give the Marmaxx merchants a lot of credit. Amidst all of what was going on with the freight and the environment, they were able to obviously buy the goods well and at the same time, buy into the hot categories and drive the healthy comp, which they achieved in the third quarter. So obviously, our number one priority has been to gain market share and drive the top line, but that team has been excellent at executing their buys on a very profitable manner. So that's been really strong. And HomeGoods, I would also give some kudos too, because they've been hit with a heavier freight challenge than by -- significantly than what Marmaxx is getting hit with. And so, first of all, we've been seeing their sales get steadily better. They have a markup challenge there in terms of offsetting the freight, but they've been doing a nice job of trying to get at that as well.

Lorraine Hutchinson -- Bank of America Merrill Lynch -- Analyst

Thank you.

Operator

The next question will come from Matthew Boss. Your line is open.

Matthew Boss -- JPMorgan Securities LLC -- Analyst

Great. Nice quarter, guys [ph].

Ernie Herrman -- President and CEO

Thank you.

Matthew Boss -- JPMorgan Securities LLC -- Analyst

Ernie, so you're clearly seeing an inflection in traffic at Marmaxx. I guess, do you believe this is your core consumer with a few extra dollars in their pocket? Is it better product on the shelves and execution? My guess is, probably a little bit of all. But I guess as we look forward, can you also just elaborate on the very strong start that you cited for the third quarter, any specific call-outs by category?

Ernie Herrman -- President and CEO

We thought -- Matthew we thought somebody would read the very strong start. So, I mean, I think it all goes together. When you look at Marmaxx's strong momentum that they have, I think in the script, we were trying to -- and I think it's a great question you're asking, we're trying to get at the fact that we trade very broadly. So we have a core customer, yes. But if you look at -- and also in the script, I think I mentioned a couple of times, we are gaining -- a greater percentage of our new customers are younger customers. So that has been as much as our core customers are perhaps shopping a little more frequently, we are gaining a younger customer in our new customer acquisitions. So that has -- to me is a super, super plus for not only now but for the future. And when we are going after this market share and really, you're talking about the inflection of where we are for like Q3 as well. When you think about, in Q3, some of the younger-oriented departments that happen to make up some of that business, we're happy that we've been gaining a younger customer, and so we look at that as a long-term benefit. So we would have assumed, as you look at the very strong start quotation or just in general how do we keep this momentum going, we don't want it to be just about our core existing customers, we want to trade broadly, capture new customers, capture younger customers, continue to do that. We've been doing that for the last few years. But I think for setting us up for the future that is really integral to what we plan on doing. So, great question.

Scott Goldenberg -- CFO

Yes, Michael, the only thing I'd add to what Ernie said on the new customers is that the majority -- it's all our divisions who're getting over-indexing in terms of the new customers, but at Marmaxx, actually, the majority of our new customers are coming in that 18 to 34 segment.

Matthew Boss -- JPMorgan Securities LLC -- Analyst

Wow. And then, just a follow-up, nice improvement in international comps this quarter. I guess maybe could you just touch on some of the drivers, what you're seeing from a traffic perspective? And I guess longer-term, how you think about the market share opportunity?

Ernie Herrman -- President and CEO

Yes. We will -- I'll say and I think Scott has a couple of things to jump in with as well. We were thrilled. We have been thrilled with the momentum and when you say international, whether you talk Canada, if we talk Europe or if we talk Australia, we are very happy with all three businesses. I think the biggest change from where we've been has been in our Europe business. If you look at that comp there, that is a big accelerator, especially versus the market. So if you look at what we're performing there and we were already taking market share there. We have really kicked that up a notch. And I would say that really all goes to that team over there. They have put in place some really terrific marketing programs that have been super creative to help drive customers into the store, some really out-of-the-box things that over in the UK play very well. They have executed the flow to the stores, I think in a manner that is at a new level for that division. There -- you got to remember, over there they are dealing with real estate situations tighter. We have like a tighter backroom situation, smaller stores, different types of density, neighborhood locations and all of that sometimes creates operational challenges. So I would say, operationally, they have been really executing very well in the second quarter, and from a merchandise mix standpoint, loaded availability in Europe across some better brands that we haven't seen these type of quantities from them in quite a while. And Louise, who is our Division President over there and her team, I think have been all over that and they have really nurtured those relationships, so it's not just a short-term thing. And when we talk about growing new vendors, those guys have been relentless at opening new vendors in Europe, which I think will allow them the flexibility aspect which, if you guys walk away with nothing else on this call, I would like you to walk away with how important flexibility is in the TJX model and how that is probably the name of the game which separates us from a lot of other brick-and-mortar retailers. And I would say, in Europe, that is even to the Nth degree, because over there, I think a lot of the retailers tend to be a little more pre-planned. And right now our TK Maxx division, I think is operating in a very nimble, flexible manner.

Scott Goldenberg -- CFO

Yes, I think just to add one or two points to what Ernie said is that we've had -- our business continues to be good in mainland Europe, whether it's Poland, Austria, Netherlands, Germany, the big change is really in UK and the difference is that up until this quarter, we've been seeing performance in London that -- in the inside London where we have approximately 60 stores, outperforming the rest of the UK. And what we saw this quarter is pretty much uniform performance between London and outside, whether it's Wales, Scotland or the rest of the English countryside. So a very consistent performance and driven by a couple things, our conversion continues to be -- it was good, when we were seeing traffic on the high street down and now we see the transactions going up significantly across the board. So I think it's the -- similar to Marmaxx, where we saw a consistency among geographies, this was a very flat or consistent quarter throughout all of the UK.

Matthew Boss -- JPMorgan Securities LLC -- Analyst

Great to hear. Congrats again guys.

Ernie Herrman -- President and CEO

Thank you.

Operator

The next question comes from Paul Trussell. Your line is open.

Paul Trussell -- Deutsche Bank -- Analyst

Good morning, and congrats as well on strong 2Q results. I wanted to ask about HomeGoods, accelerated comps there despite a more difficult compare, if you can just touch on the assortment in inventory and outlook on HomeGoods. And then second, I just want to follow up on a question, I believe Matt asked earlier around the strong traffic, you're discussing the millennial customer coming in mass to the stores. Just curious, if their -- of your research or discussions with them is telling you what the most -- what they find to be the most attractive feature driving them to shop with you. Is it the price points, the shopping experience or the brands available? Just curious of how you would rank that and if it differs from other age groups?

Ernie Herrman -- President and CEO

Alright Paul, let me -- let's start with the HomeGoods question. So the outlook, yes, we were very pleased with the acceleration in the HomeGoods business in the second quarter. I mean a lot of it there, I think, had to do with their execution. Again, we can't say it enough that in TJX, we have found, over the years, generally that we, and it applies to HomeGoods or Marmaxx last year, when we had a couple of execution issues, or Europe, eight years ago, 10 years ago whenever that was. Generally, if we have a slowdown, it tends to be our own execution issues. Having said that, in the HomeGoods case, we're up against enormous comps, so I think you said at the beginning when we asked this question, nice to see that on top of a big comp that they were up against next year, because they had a big comp in Q2 last year and so that was a nice performance to see that kick against it. They, I think, had a market improvement in a number of the categories that weren't -- I won't say there were execution issues in the first quarter, but the flow and inventory, which I think we've talked about back in the first quarter, we had an inconsistent flow at kind of not the best timing coming out of holiday into Q1 and so we got past that pretty quickly. Again, I go back to the flexibility of the business model, we're able to address problems rather fast and move forward and correct them. And we have that in first quarter, and I would say one of the biggest reasons we accelerated in second quarter was we got beyond that. The stores were exceptionally fresh going into May and June and we had some great fashion content. I think, we were very happy with some of our seasonal categories and the way they looked and there was a major treasure hunt. We were peaking in terms of our unpredictable treasure hunt which HomeGoods is the best at, I think by the middle of July. So that's really, I think, what helped us there. Millennial customers that you're asking about in terms of -- in terms of what they're going after, first of all there's some information that we don't really give out in terms of specifically where they're buying or what they're buying from us. But I would say that, they are buying some of the key categories and departments and some of our growth areas, certainly lend themselves to continuing to appeal to younger customers. Scott, I don't know if you wanted to add anything.

Scott Goldenberg -- CFO

Yes, I think just to be -- echo what Ernie said is that the flow issues were largely to blame. And as we move through the second quarter, what we had said that, a part of our markdowns that were higher than in the first quarter than the previous year were largely due to those flow issues really in the first part of the February-March timeframe. And our clearance and full price sales were back to normal by the time when you exited the second quarter, and hence, our markdown rate was pretty comparable to last year. So all of which went as we had guided.

Paul Trussell -- Deutsche Bank -- Analyst

Thanks for the color, best of luck.

Ernie Herrman -- President and CEO

Thank you.

Operator

The next question comes from Kimberly Greenberger. Your line is open.

Kimberly Greenberger -- Morgan Stanley -- Analyst

Great, thank you. Really nice performance here. Scott, could I just start with the gross margin. I'm wondering if you could unpack a little bit what look to be kind of the key -- the three key drivers. I think you said merchandise margin would have been up, you may have said, significantly without the higher freight pressure. So is there a sort of any order of magnitude you can help us with on the merchandise margin improvement as compared to the freight cost and then it seemed like the third moving part in there might have been inventory hedges. So, I just wanted to see if you could kind of quantify those. And then, Ernie, I wanted to give you a chance to expand on some of your comments around great availability in the market. And then, I think, you talked about the great mark-on that you're seeing, which would suggest terrific availability kind of broadly speaking. It's not always intuitive, I think, for investors when they see a generally rising tide environment that you're still seeing fantastic availability. So I'm wondering if you can comment on that as well. Thank you.

Ernie Herrman -- President and CEO

I'll let Scott go first.

Scott Goldenberg -- CFO

Yes. So in terms of the gross profit margin, which on a reported basis, was up 40 basis points. But last year, if you take the ex-FX -- on an ex-FX basis or take out the inventory hedge impact, we would have been flat. So, let's just start with the flat. We would have been -- with the strong sales, we actually flowed 50 basis points better than our guidance on our gross profit. And again, largely that was due to the P&L beat on the above-planned comp. But going to a TY, LY basis, our merchandise margins were in, let's just say, down slightly, just call in the 10 basis point range with a significant freight impact that impacted us, let's just say, by approximately 20 basis points. So we would have been significantly better, and that 20 basis points is just versus plan. So obviously, the freight impact overall is slightly larger than that. So yes, we would have been up -- we would had a strong merchandise margin increase if we didn't have all that significant freight pressure. So again, some of that, as we talked about, was offset by a strong mark-on versus plan, so not much more color to give than that. So I'd say -- the biggest thing I would say is that we are 50 basis points better than our guidance because most of this was reflected in except for some additional freight and that 50 basis points, again, we thought that flow-through is pretty good on the gross profit margin versus our plan.

Ernie Herrman -- President and CEO

So Kimberly, on the availability, the healthy mark on is that's been somewhat of a by-product [ph]. I would say, some of this goes on to things we've talked about for quite a while. The cycle -- the way the cycle goes and to your point, what's counter-intuitive is, you might think when things are getting a little better, there could be less goods in the market. But the same time that it's getting better -- when the economy is getting better or retail is ticking up a notch, what you get there is the wholesalers getting more optimistic. So the pessimism goes down, and they start cutting more goods. So I think that's the cycle that tends to happen. And so if you look out, we've been seeing it now, I would expect, if that continues at the retail level to have a pretty healthy environment, you would see more goods continue to six months, 12 months down the road, continue the cycle, which is why, we say it all the time, which is why this model of businesses is just the best, it just -- it stays even, it stays with constant availability, whether the economy is up or down. The other thing going on and we've talked about this before as well is the e-com business, as it is much at a consumer level there might be competition, it creates indirectly excess inventories. So the e-com retailers, it's a -- it's still in an early stage here, it's a challenge for a lot of the e-com retailers to forecast their needs exactly. Again, most of that product is goods they have to buy in advance. So it literally yields a whole bucket of opportunity closeouts that we haven't seen to the degree that we see it today and that applies to every market. That is not just a US issue; that is UK, Europe, Australia, Canada, US, a fair amount of spill off of closeout opportunities from the online businesses. And then lastly, we are -- as we continue to -- our buying team, which is continuing to grow, we have over a 1,000 buyers, is in more locations to seek out deals throughout the world than ever before and we try to update every now and then, we went from about 18,000 vendors, I think we used to say, we were dealing with 20,000, but we're continuing to open more than that. We're not giving a number, but it's more avenues for more excess inventories. So availability, again, in this quarter would be, absolutely no different than the last couple where we're actually having to control our buyers from buying too much too soon. So I don't see, based on the first two points I made, that changing over the next 12 to 24 months, because it's just the dynamic that's taking place. As the retail environment gets a notch healthier, I think it's going to create more optimism, which will create more merchandise.

Kimberly Greenberger -- Morgan Stanley -- Analyst

Great, thanks, Ernie.

Ernie Herrman -- President and CEO

You're welcome, Kimberly.

Operator

The next question comes from Paul Lejuez. Your line is open.

Paul Lejuez -- Citi -- Analyst

Hey guys. Can you remind us of the easy [ph] comparison that you have at Marmaxx in the third quarter with the down one comp. What is the driver of that from a traffic versus ticket perspective? And I'm curious about the categories that were weak in the third quarter last year, how has they been performing in recent quarters? And then just a follow-up on the home category, can you talk about the performance of HomeSense outside the US and any reads on the new HomeSense stores in US? Thanks.

Ernie Herrman -- President and CEO

Hi, Paul. So -- Scott has got some numbers for you.

Scott Goldenberg -- CFO

Yes, I mean -- just briefly, I mean our traffic was slightly up on the TJX basis last year. So one of the weaker quarters that we had and clearly we had the hurricane impacts largely impacting Marmaxx and HomeGoods last year that were largely responsible for the comp, certainly at Marmaxx for the minus 1 comp that we had. But we also, as Ernie had called out, at the end of the third quarter last year, we had some executional issues across several departments and he is going to speak to that as well.

Ernie Herrman -- President and CEO

Yes. So first of all, Paul, we will not, we can't and nor did we last year give what specifically those categories are, but those were clearly -- we had a weather dynamic certainly, which we kind of called out at the time that that was a piece. But the other piece was our own execution in really three key areas and I believe you asked also just now, how is the performance been since then? Well, we commented back in the first quarter that performance in those categories has gotten steadily stronger to the point that now, Scott and I have looked at it, because part of it is that we're up against tougher numbers, but they are actually outpacing the Marmaxx's chain over the last quarter. So it is --

Paul Lejuez -- Citi -- Analyst

Is that true in 2Q, Ernie?

Ernie Herrman -- President and CEO

I'm sorry.

Paul Lejuez -- Citi -- Analyst

Is that true in 2Q as well?

Ernie Herrman -- President and CEO

No. In Q2, they were gaining on it and getting close to that, yes--

Scott Goldenberg -- CFO

At the end of --

Ernie Herrman -- President and CEO

Oh, I'm sorry, Q2 yes, Q1 that we're getting close to --

Scott Goldenberg -- CFO

By the time we ended Q1 they were equal to slightly better.

Ernie Herrman -- President and CEO

And then Q2, yes. So again, you're going to hear, I will be like a broken record, it goes through the flexibility of the business model, again which is, we were able -- within our business model, when we identify the execution issues, which we talked about, to your point Paul, was the third quarter last year, really, right. And then we started getting some traction by Q4. Q1, those areas were absolutely on track getting close to the chain average. And then, in Q2, as Scott said, they were above the chain average. So in a traditional retailer that would be a tough -- it'd probably take a little longer to get a turnaround like that. So I go back to the flexibility and nimbleness and the short-end timeframe that we buy goods and the way we aggressively markdown goods when they're not the right goods, which is what happened in these cases. I think you also had a question on HomeSense. So was it about HomeSense or was it about home?

Paul Lejuez -- Citi -- Analyst

Yes, HomeSense, the performance outside the US, but also just an update on how the new stores are performing in US.

Ernie Herrman -- President and CEO

I would say all kind of where our expectations would be right now.

Scott Goldenberg -- CFO

Yes, HomeSense, very pleased with the comp performance in the UK of HomeSense, so yes, good performance for the first two quarters. In terms of HomeSense, we're actually not in a comp position but very pleased with the -- at least with the sales. And I think as importantly, pleased with the other large components that, again, we just have a very few stores opened. But like what we're seeing in terms of the operational aspects of both payroll and certainly -- and more importantly, in the continuation of an improvement in our merchandise margin, Ernie --

Ernie Herrman -- President and CEO

Yes, I think we have some work to do on HomeSense in Canada. We've been not as healthy there. So we -- Doug Mizzi, who is our Senior Executive Vice President, as well as Robert Greening who is our new President up there, we've got some movement around. Business overall, by the way, is healthy. It's just not up to the level that we would normally like to see our HomeSense Canada business at. Having said that, more recently, the trend has gotten better and so we're feeling much more bullish about it for the third quarter and fourth quarter coming up on the back half.

Paul Lejuez -- Citi -- Analyst

Great, thanks guys. Good luck.

Ernie Herrman -- President and CEO

Thank you.

Operator

The next question comes from Jamie Merriman. Your line is open.

Jamie Merriman -- Bernstein -- Analyst

Thanks very much. My first question is about the UK in particular, I think you mentioned improvement in availability there and I was just wondering if you're seeing any -- there's been some prominent receivership to some of the department store, one department store there, if you're seeing any change recently either in the consumer or in terms of that availability? And then the second one would just be, can you just comment on the labor picture in the US. I'm just wondering, a couple of quarters ago, you talked about not seeing any signs of labor shortages. Is that still how you feel about the market? Thanks.

Scott Goldenberg -- CFO

I'll talk about the wage pressures. So largely in the first half of the year, we had taken a market-by-market approach, and we're largely on our plans thus far. We're starting to see some pressure in some markets on wage, so we have a little bit more wage build into the back half than originally guided, so that I would say is a change. In terms of -- and obviously, that's market-by-market driven. Sales differences, we're not seeing any sales differences. Attrition has been very good. So it's really just a market-by-market. We're adjusting where we need to be hot where it's becoming a bit more difficult to hire, but no major changes. Just starting to see some pressure and we have some of that built into the back half.

Ernie Herrman -- President and CEO

And Jamie, as far as the UK availability or maybe I think you're getting (inaudible) there a demand shift or whatever at the retail level since some of the closures are -- we have not felt that. So, again, we were gaining market share consistently there, even when we did not have a comp like that division just delivered. So, we've been pretty consistent and what Scott alluded to earlier, we're even little healthier this go around. So for us it's, again, we're a little different than some of the other retailers that have been running into trouble there. We're so much more value and opportunistically driven that it sometimes won't line up. But certainly, the environment, as much as we're saying, we're feeling good about it, the environment there is absolutely -- I don't know what you would call, volatile.

Jamie Merriman -- Bernstein -- Analyst

Okay. Great, thanks very much.

Ernie Herrman -- President and CEO

Welcome.

Operator

The next question comes from Omar Saad. Your line is open.

Omar Saad -- Evercore ISI -- Analyst

Thank you for taking my question, great quarter. Wanted to see if I could follow-up on the comments you made around the apparel industry. It seems -- on the apparel category, it seems like a pretty big inflection overall for the business this quarter. We'll see how it plays out in the coming quarters, but the apparel hasn't been perhaps maybe the strongest category for you guys also the overall kind of soft-line space for the last few years. And maybe you could elaborate on what you're seeing there or how sustainable it is and could this be something that's more multi-year in nature happening within the apparel dynamics? Thanks.

Ernie Herrman -- President and CEO

Yes, Omar, we are pleasantly, I wouldn't say, surprised; hopeful that it will continue, but we were a little surprised that it did exceed our expectations in the quarter. But it wasn't just as recent, because if we go back to really in Marmaxx and in Winners and T.K. our apparel businesses have been pretty healthy. But for sure here it's been just -- it's just been getting stronger and stronger. And first of all, I think a fair amount of -- I'd say, our branded mix is better than it's been in a long time in terms of the balance of brands that we have. You've heard us talk in the past about if our fashion is out-of-kilter, which we talked about last year, when fashion was not healthy in terms of the way our content of fashion. So we try to have a mix and not have a pendulum swing. And that is in a very good place right now. And so, when our merchandise mix of fashion is -- of apparel I mean, is balanced with fashion and basic goods in the right type of balance, we tend to perform well. There are some fashion items which we won't call out that have been executed very well by our merchants, our buyers and the merchandise managers and that, I think, as we continue to go into third quarter, where we had some misses in some of those areas, remember we're up against some of those execution misses last year, we think we're feeling pretty bullish that we think we should be able to run some good increases in those areas, specifically in those apparel areas. So it's a great question on the other part. We do think it's sustainable because some of that is, we've got some more experienced buyers and management that have been in the positions now a little bit longer, which is always a challenge when they're not. So we sometimes went into a little bit of a hiccup when we have a new team in place, especially in an apparel area. So we are pretty solid and we don't have much movement over the next year in those areas, which I think will bode well for our -- at least continued apparel there. And I really didn't talk about Marmaxx. We had similar dynamics going on in Winners. If you look at our Canada division, they've been performing very well in apparel and I would say similar dynamics there and in Europe as well. So it's good -- apparel can be an up and down type business, but certainly right now, we seem to be in the sweet spot.

Omar Saad -- Evercore ISI -- Analyst

Perfect, Ernie. Thanks, great execution.

Ernie Herrman -- President and CEO

Thank you, Omar.

Operator

Thank you. Our last question comes from Daniel Hofkin. Your line is open.

Daniel Hofkin -- William Blair -- Analyst

Good morning, guys. Just quickly, thinking about the second quarter and especially Marmaxx; was there anything like advertising that you felt like help drive this degree of comp strengths above your expectations? And then, thinking about the fact that you have an easier comparison in the third quarter, I know you guys are always trying to be conservative, but is there anything that would cause comps to slow kind of on a one- and two-year basis aside from just conservatism, anything unique in 2Q? And then, I guess lastly, you talked about many kind of initiatives for the second half, anything that you can elaborate on there? Thanks very much.

Ernie Herrman -- President and CEO

So Daniel, you're good at asking a lot of questions that we aren't allowed to answer, but that's good questions. First of all, yes, marketing was integral, I think, in one of our -- there isn't one thing, I think. We executed on numerous fronts, but things that you would call the fundamentals of the business, and certainly our marketing team, I think, continue to get across the surprise. And the messaging, if you look at our creative, in the second quarter, and it was very oriented toward like Maxx Life and Marshall Surprise and we really went after the treasure hunt messaging and education messaging why should they -- why should she shop us, and that has resonated well with consumers. We can't tell you the strategy on how we waited the advertising or what vehicle; that's something we keep in-house. But we had done some shifting there how we approached our media buys and I was thrilled with that as well. By the way, we have similar approaches going on across all divisions in terms of how we are approaching our media buys and the creative that we're using, which in most cases, has been new and we're finding pretty effective. Again, it's not any one component, but yes, we think marketing was integral to the -- and will be to the second half of the year. As well as our spend in marketing is going to continue to be slightly up as the year moves on. Daniel can you refresh, what was the next question on the --

Daniel Hofkin -- William Blair -- Analyst

Yes, the initiatives, you just cited quote-unquote many initiatives, many opportunities for the second half, just--

Ernie Herrman -- President and CEO

Yes. So the initiatives that -- yes, those are the things we can't talk about that's why -- but Scott was smiling. The initiatives we can't talk about are based on things that we've tried though more close-in. They're not like initiatives that we've been testing from like a year or two ago. They're things that in a Marmaxx or in a Winners, they would be testing like in the first quarter and second quarter, and tend to be in categories that we will now look to aggressively go after. So if you remember, back in the script, again, I talked about the flexibility of our model allows us to ramp up very fast in a key category, which is certainly part of what's been driving our business over the last six months in a strong way is, there are some of these initiatives and tests that are panning out pretty well that we will be and we can -- again, I apologize that we can't give you that information, but that's what we'll be going after in the second half. So, good question. And again, it's kind of how we operate, no different, and we've done that for years that way. It's just this time, I think, we have a couple more categories up our sleeves, so to speak.

Daniel Hofkin -- William Blair -- Analyst

Alright, appreciate it. Best of luck.

Ernie Herrman -- President and CEO

Thank you. All right. So, thank you all for joining us today. And we look forward to updating you on our third quarter earnings call in November. Thank you.

Operator

Ladies and gentlemen, that concludes your conference call for today. You may all disconnect. Thank you for participating.

Duration: 60 minutes

Call participants:

Ernie Herrman -- President and CEO

Debra McConnell -- Global Communications

Scott Goldenberg -- CFO

Michael Binetti -- Credit Suisse -- Analyst

Lorraine Hutchinson -- Bank of America Merrill Lynch -- Analyst

Matthew Boss -- JPMorgan Securities LLC -- Analyst

Paul Trussell -- Deutsche Bank -- Analyst

Kimberly Greenberger -- Morgan Stanley -- Analyst

Paul Lejuez -- Citi -- Analyst

Jamie Merriman -- Bernstein -- Analyst

Omar Saad -- Evercore ISI -- Analyst

Daniel Hofkin -- William Blair -- Analyst

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