Investors weren't looking for sparkling quarterly results from TJX Companies (TJX 0.83%) given that most of its stores were closed for a big part of the second quarter. The off-price apparel retailer surpassed those low expectations by posting solid sales results for reopened stores and showing sharply improving finances.
Yet mounting demand and supply challenges convinced CEO Ernie Herrman and his team to issue a cautious outlook for the next quarter, which implies tough selling conditions through the rest of 2020. Executives explained those cross currents in a conference call with Wall Street analysts. Below are some highlights from that chat.
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The strong start didn't last
"Following the wave of strong initial demand, traffic and sales moderated as we moved through the second quarter and into the third quarter. We believe that this was due to a number of COVID-related factors, including the impact on consumer behavior and demand and lighter store inventories than we planned."
-- Herman
TJX saw spiking sales as it reopened its store base roughly one-third of the way through the quarter. That boost helped revenue declines moderate to 32% from over 50% in the first quarter. The chain didn't have to rely on sharp price cuts, either, which helped support profitability.
But sales volumes softened after that initial spike. Management blamed continued COVID-19 outbreaks along with inventory stocking challenges for that shortfall.
Unusually high cash flow
"We generated $3.4 billion of operating cash flow. The primary driver was sales flow through as the merchandise sold in the second quarter was mostly paid for in the first quarter."
-- CFO Scott Goldenberg
The retailer managed to stay cash-flow positive despite a $1.1 billion net loss for the period. That win mainly happened because it paid for almost no new inventory during the quarter thanks to the combination of unproductive stores and supply chain disruptions. That situation won't repeat itself in future quarters, and so TJX should see significant cost pressure through the rest of 2020.
Management is comfortable enough about its cash position that it paid off $1 billion of short-term debt in Q2. However, executives still expect to maintain their pause on the dividend payout given the prospect for significantly reduced sales this fiscal year.
Confidence in an eventual rebound
"The entire TJX management team has great confidence that we will successfully navigate through this environment. And whenever it normalizes, we believe TJX will be an even stronger company."
-- Goldenberg
TJX's short-term outlook isn't bullish, with double-digit sales decreases expected to continue into the fiscal third quarter. Management isn't seeing many attractive buying opportunities in hot categories like home furnishings right now, either, but they say this issue is just a temporary problem.
Executives don't believe any real harm has been done to TJX's big-picture growth potential, as consumers have demonstrated an affinity for its collection of off-price merchandise through past recessions and market shocks. Yet the outlook for the rest of 2020 and early 2021 is still soft, and so investors should keep their expectations low.
