The TJX Companies, Inc.
Q3 2007 Earnings Call Transcript

Published: 13 Nov 2007

[Operator:]

Welcome to the TJX Companies third quarter financial resultsconference call. (Operator Instructions) I would like to turn the conferencecall over to Ms. Carol Meyrowitz, President and CEO for the TJX Companies.Please go ahead.

[Carol Meyrowitz:]

Good morning. Beforewe begin, Sherry Lang has some comments.

[Sherry Lang:]

Good morning. The forward-looking statements we make todayabout the company's results and plans are subject to risks and uncertaintiesthat could cause the actual results and the implementation of the company'splans to vary materially. These risks are discussed in the company's SECfilings, including without limitation the Form 10-K filed March 28, 2007 and Form 10-Q filed August 24, 2007. Further, these comments and the Q&A that follows are copyrightedtoday by the TJX Companies. Any recording, rebroadcast, reproduction or otheruse of the same for profit or otherwise without prior consent of TJX isprohibited and a violation of the United Statescopyright laws. Additionally, while we have approved the publishing of atranscript of this call by a third party, we take no responsibility forinaccuracies that may appear in that transcript. Thank you. Now I will turn it over to Carol.

[Carol Meyrowitz:]

Good morning again.Joining me on the call today are Jeff Naylor, Ernie Herrman, Trip Tripathy andSherry Lang. Jeff Naylor will be handling the financial questions today andTrip will be answering those questions on our year end call. Let me begin by saying that our third quarter performance isan excellent example of the power of our off-price model when all of theelements of the model are executed well. Despite the pressure on sales fromunseasonably warm weather in many regions of the US,Canada and UKand concerns about a weak consumer, we delivered bottom line results that werein line with our expected range. Further, our 13% EPS increase was achievedover a 50% increase reported in EPS last year, demonstrated our continuedability to deliver sustained earnings growth even with difficult environmentsand tough comparisons. There is so much concern out there about retail, so I wantto be very clear

[Jeff Naylor:]

Thanks, Carol. Good morning, everybody. Before I get intothe guidance, I thought I would provide some additional detail on the thirdquarter, particularly around currency. I think first regarding thismark-to-market adjustment that we talk about, it is a mark-to-market adjustmenton hedges that relate to our inventories. These are routine hedges we enter into to lock inmerchandise margin whenever Winners or T.K. Maxx purchase goods from USsources. We have been doing really for as long as anyone can remember. When thehedges settle, there is a gain or a loss, but this gain or loss is offset inthe cost of the merchandise, so the hedge just really protects our margin. We have these mark-to-market adjustments every quarter, butin the past, they have never been close to the magnitude they have been thisquarter due to the surge in the Canadian dollar at the end of October. As Carolmentioned, this adjustment reverses in the fourth quarter and will positivelyimpact the fourth quarter and we've reflected that in the guidance. In terms of overall currency impact on the third quarter, itwas negative. Foreign exchange rates positively impacted the translation ofWinners and T.K. earnings into dollars by about $0.01; the negative impact ofthe mark-to-market adjustment was about $0.015 so that offset the favorabilitywe had from translation. We also picked up about three-quarters of a penny intax rate favorability, so between currency and the tax rate, the overall impacton earnings and earnings per share from these non-operating items wasessentially neutral. Let me now turn to the guidance. For the fourth quarter offiscal 2008, as Carol mentioned, we raised our expected range for earnings pershare from continuing operations to $0.58 to $0.60 and that represents a 14% to18% increase over the $0.51 per share that we reported in the prior year. Theincrease in guidance primarily reflects the positive impact of reversing thismark-to-market adjustment, which I described earlier, so it's currency-related. Prior year's results included a $0.01 per share chargerelated to the computer intrusion. Excluding that charge, on a comparablebasis, our guidance represents a 12% to 15% increase over last year's adjusted$0.52. In terms of some of the underlying mechanics, we are assuming a fourth quartertop line of approximately $5.5 billion with a comp sales increase of about 4%on a consolidated basis, which includes roughly 2% benefit from foreigncurrency and also contemplates a 2% comp sales increase at Marmaxx. As to monthly comps on a consolidated basis, we expect compsales increases of approximately 5% in November, 3% to 4% in December and about4% in January. For Marmaxx, we are planning on comp sale increases in the rangeof 2% to 3% in November, approximately 2% in December and about 2% in January. Pre-tax profit margins are planned in the 7.8% to 8% range.That is up 20 to 40 basis points over the prior year, excluding the intrusioncharge that we took last year, so again on a comparable basis. Our fourth quarterpretax margin guidance, I should also note, reflects a 10 basis point hitattributable to the T.K. Maxx Germanybusiness. Pretax income is planned in the range of $428 million to$442 million. That is up 11% to 15% over prior year, again excluding theintrusion charge from the prior year results. We are anticipating fourth quartergross margin in the range of 23.2% to 23.3%. That is up 20 to 30 basis pointsover last year and SG&A as a percentage of sales to be about 15.3% to15.4%, which is 10 to 20 basis points favorable to last year. For modeling purposes, we are planning a tax rate of 38.4%and weighted average outstanding shares of 459 million. I should note that thetax rate is negatively impacting EPS growth by approximately 4 percentagepoints because last year's rate included some favorable nonrecurringadjustments. This tax rate, the negative impact basically offset the favorablebenefit we are expecting from currency in the quarter, so again, the non-operatingitems essentially net each other out in the fourth quarter guidance. To keep the call on schedule, we ask that you please limityour questions to one per person. Thank you and we will now open it up forquestions.

[Operator:]

Your first question comes from Kimberly Greenberger –Citigroup.

[KimberlyGreenberger:]

Very nice way to manage through the third quarter. Carol, ifyou could comment on traffic versus ticket that you are seeing out there? If itis varied by brand that would be helpful. What is your view on those metrics aswe go through the fourth quarter?

[Carol Meyrowitz:]

Our traffic was slightly down and our average basket wasslightly up, but again, I will tell you that when we did see a change in theweather pattern, the traffic started to increase. We hope to see that continueinto the fourth quarter.

[KimberlyGreenberger:]

So is there any wayyou could attribute a percent or two of your traffic to weather or have youdone that kind of analysis on it?

[Carol Meyrowitz:]

We don't analyze it by weather, but I can tell you that as Isaid in the speech, that a very large portion of the A.J. Wright business andthe Marmaxx business was attributed to the cold weather categories being a bigchunk of the sales mix.

[KimberlyGreenberger:]

Lastly on Bob's, it has had one good quarter this year, twosort of mediocre quarters. Can you just talk about what kind of leash Bob's ison at this point?

[Carol Meyrowitz:]

I said that at the end of the year we would talk to Bob'sand again, we are looking for comp over comp. Business really opened up to themin the beginning of the fourth quarter as we saw the weather change, but we aregoing to definitely get back to everybody probably at the end of the year.

[Operator:]

Your next question comes from Randy Konik – Bear Stearns.

[Randy Konik:]

A question on the cost side of the equation. You talkedabout the third quarter costs were reigned in. Can you just talk about whatcosts were most reigned in, in the quarter? If you think about your costreduction programs across the corporation and by division, just let us know howfar along are we from an inning perspective in each division? Finally, can we just get a little clarity on what is drivingthe variability in the general corporate expense? Thanks.

[Carol Meyrowitz:]

I will start and thenI am going to hand it over to Jeff. Obviously, our merchandise margins werepretty strong but in terms of the total cost reduction, the innings continue.It is a long process. It is probably a three-year process of which we areseeing some benefit already. Part of that benefit is baked into our plan. Partof it isn't. It has also helped us pay for some of the additional advertisingcosts, which we think absolutely drive our business. So again, it is anongoing, long-term process. The short-term piece is more on the non-merchandiseprocurement side, which we will see benefits earlier; supply chain and some ofthe other things I mentioned we will see a little bit longer term.

[Jeff Naylor:]

Maybe I will broadenthe question a little bit because, as Carol mentioned, we had 20 basis pointsof SG&A improvement and we had a 20 basis point decline in our gross profitmargin and that was on a 3 comp. I'd point out that 2 points of the comp camefrom currency. Typically, you don't leverage on currency because currencyinflates the top line, but it also inflates your expenses. So in terms of thinkingabout the leverage in the model, you would really think of it as more of a 1 comp. Now if I break those elements down, so SG&A, we had 20basis points of leverage on a 1 comp, which we are very pleased with. That isactually even stronger when you look at advertising. Advertising delevered by10 basis points, so we basically had 30 basis points of SG&A leverage on a 1comp and we took 10 of that and we reinvested it in advertising. So that wouldexplain the SG&A. In terms of our gross profit margin, we had a 20 basis pointimprovement in merchandise margin. This hedge that I talked about, themark-to-market, hit us about 30 basis points and then we had slight deleverageon our buying and occupancy costs of about 10 basis points. So that is sort ofpeeling back the onion underneath the gross profit margin. In terms of individual categories, I would say it is reallyspread out across a lot of categories. We are seeing some particular savings ininsurance, we have seen some nice savings there. We have seen some savings, asCarol mentioned, in non-merchandise procurement. We are starting to see some ofthat flow through the P&L and we are seeing good solid cost management fromour divisions as the COOs and directors of stores in those organizations havereally focused on costs and made it a priority. So that has led to a lot ofsmall savings across a lot of different categories. It is really across theboard and pretty widespread in where we are getting the benefit. In terms of corporate, the variability year over year, lastyear we had a contribution to the TJX Foundation of approximately $10 million,so that drives some favorability year over year. I would tell you that thisyear we have had a number of items similar to that that would in essenceneutralize the impact that has on the comparability. In particular, we havemade some investments in computer security that have added costs this year thatweren't in the base last year, and those combined with some other items havemore or less offset the benefit we are getting from not having the contributionrepeat this year.

[Randy Konik:]

Would you expect the general corporate expense to remainabout flattish going forward to model it? Would you expect to just continue toleverage SG&A on a 1% comp going into the future into '08?

[Jeff Naylor:]

I think right now wefeel comfortable that SG&A leverage point for Marmaxx is 2.5% and we feelcomfortable overall for the company in that 2.5% range is where we canleverage. Now obviously, as Carol mentioned, we are doing everything we can todrive a higher level of cost reduction to lower the leverage point even furtherand build margin at that 2.5 points. But I think right now that is based oneverything we know and there is a lot we don't, but based on everything we know,that is where we feel comfortable. In terms of the corporate expense, our guidance in thefourth quarter, let me just quickly look at that. The guidance in the fourthquarter is about flat year-over-year, slightly up. I'd think of that as aninflationary increase year over year as you model it out.

[Operator:]

Your next question comes from Jeff Black – Lehman Brothers.

[Jeff Black:]

I had a question for you on A.J. Wright. It is the firsttime we have heard you talk about 500 stores versus 1,000. I don't know if thatis a goal that's set in concrete, but what should we look for there? I mean wehaven't seen profit. When do you think we would see an operating profit out ofthis business and when do you think we would start to grow this? Can you talkabout the new stores? You said those are performing better. What overall givesyou confidence that we get this A.J. Wright division on better footing as agrowth vehicle longer term? Thanks.

[Carol Meyrowitz:]

Jeff, I am going to say stay tuned to the fourth quarter. Wehave been working really hard at A.J. Wright and we have had many customerfocus groups. We have been testing a lot of marketing ideas. Actually in thethird quarter we did put additional money into marketing I think to the tune ofabout $800,000. We have a lot of tests underway. We are really starting to see progress in the categoriesthat we are focusing on, be it shoes, the kids business. We saw a fairlysubstantial change in home the last three weeks after we did our focus groupsand started to work on these initiatives and change them. The new stores are performing pretty well, which gives us alot of positive feelings about going forward and understanding where thesestores need to be. As I said, highly ethnic areas, highly mixed. We are very,very focused. When we have our campaign, the Real Deal, this is a very pricesensitive customer and very close to need. I think we are getting our arms around this business. Ithink again, in the beginning of last quarter, I started to talk to that and Ithink we are seeing better results now and I think we will start to see verypositive results going forward.

[Jeff Black:]

Any thoughts on whatkind of margin this business can deliver if the new stores worked in the areasyou are talking about?

[Carol Meyrowitz:]

Well long term, we are looking at about an 8% business.

[Operator:]

Your next question comes from Dana Cohen – Banc of AmericaSecurities.

[Dana Cohen:]

Jeff, you went through so many numbers, just aclarification. You said something about marketing offsetting some of theSG&A and then something about a charity contribution last year. Could youjust clarify that quickly?

[Jeff Naylor:]

Yes, I will gothrough it slowly. We had a 10 basis point improvement in our pretax margin.Let me just walk through some elements. In terms of the gross profit margin, acomponent of that, we had merchandise margins improved 20 basis points yearover year. We had a 30 basis point negative impact from the mark-to-marketadjustment on the hedge that I described. We had 10 basis points of deleverageon buying and occupancy, again on a comp currency of 1%, levered by 20 basispoints. We had a 10 basis point increase in advertising expense thatgets baked in there. So if you back that out, everything else was 30 basispoints better, if you will, in the SG&A line. So 20 basis points ofimprovement in SG&A.

[Dana Cohen:]

Despite advertising?

[Jeff Naylor:]

-- advertising. And then interest and corporate expensebetween them were worth 10.

[Dana Cohen:]

What was the impact to T.K. specifically for the hedge?

[Jeff Naylor:]

There was actually no impact at T.K. It was really primarilyan issue with Winners because of the run-up in the Canadian dollar. In the lasttwo weeks, the Canadian dollar went from mid-90s to almost 1.06. As that ranup, two things happened. One is we have losses in the underlying hedges but wealso have cheaper goods that we are buying because they are using a highervalue Canadian dollars to pay for US goods. So it all offsets itself in theinventory.

[Dana Cohen:]

It's just a timingissue?

[Jeff Naylor:]

It's just a timingissue and it will reverse in the fourth quarter. There is no impact to T.K., itis just very modest. In the case of Winners, it is about a 210 basis pointimpact.

[Dana Cohen:]

So the impact on T.K. was really the 90 from Germany?

[Jeff Naylor:]

Yes. With T.K. we had 90 from Germany.Excluding that, it was a 20 basis point improvement.

[Dana Cohen:]

Carol on the environment, there is always a lot of goods. Soon a scale of one to 10, where are we right now in terms of availability? It isjust I had never heard you guys say there are no goods, so on a relative scale?

[Ernie Herrman:]

I would say given the whole weather pattern that most of thecountry experienced, it is on the higher end of availability. How's that, withoutputting a number on it? So more than we typically see and I think Carol haseven mentioned before how one of my biggest challenges is controlling theliquidity situation so we were able to do that through the third quarter, justrealizing what we were up against with this weather and there just continues tobe just a lot of goods and to answer your question, more than in the past.

[Carol Meyrowitz:]

Dana, moreimportantly, Ernie really strategically ramps his inventories down at the endof the third quarter to really take advantage of it. I think they have done a fabulous job inmanaging that and again, I said they are really poised to go forward in thefourth quarter.

[Dana Cohen:]

We are waiting because there is probably going to be moretomorrow than there is today?

[Ernie Herrman:]

That is correct.

[Operator:]

Your next question comes from Todd Slater – Lazard CapitalMarkets.

[Todd Slater:]

You guys are really knocking the cover off the ball domestically.As you invest in your German platform, can you just talk a little bit aboutproduct sourcing for Europe? You're going to have I amsure accelerated product needs as you continue to grow that store base. Justgive a sense of what the market challenges and opportunities are there and howthat compares to the USin terms of sourcing product for those businesses and even as you expand thehome business across the pond, as you said?

[Carol Meyrowitz:]

Germanyis presently driven, a large percentage of German product and we believe thatwe are more than able to get our hands on 200 to 300 stores worth in thefuture. So we are seeing a very, very positive response to this product that isspecifically bought out of Germany. Product categories like home, the UKproduct is doing very well and the product from the States is doing well, so itreally does differ by category. But we are feeling very positive about beingable to source what we need for the German customer predominantly out of Germanyand again, we have had such a terrific response. We are seeing some things. Apparel is very, very strong. Theshoe business is very, very strong. The outerwear business is a much higherpercent than it is in the UK.So we are clearly seeing some signals and some real clarity in terms of thecategory. But we feel pretty good about the sourcing and we have got severalpeople on the ground. We have a buying office in Germany,so I think we are in a really good position there.

[Todd Slater:]

Carol, you talked about some new merchandising ideas for thefourth quarter. Are these new relative to what we already know about? Are yousurprised? Care to share anything there on what those might be?

[Carol Meyrowitz:]

You will see some new categories, just shop our stores. Wehave elevated our gift giving to a more luxury level. I'd say we have reallyraised the bar. Our shoe initiative is just phenomenal and the guys have reallystrategized how to flow that through the fourth quarter. Last year, we did notflow shoes that dramatically in December and we will this year. Our gift card program, we have ramped up and if you walk inour stores this holiday, I think you'll be really surprised at some of thethings that you are going to see. So we are pretty excited. You will see a lotof new things and you will see a lot of ramping up of some of the things thatwe have already tested and are working.

[Todd Slater:]

So the availabilityof product you are seeing out there has also included or increasingly includedthe luxury category?

[Carol Meyrowitz:]

Yes.

[Operator:]

Your next question comes from Brian Tunick – JP Morgan.

[Carol Meyrowitz:]

It is hard to pick at anything, but we were just curiousabout your views of why HomeGoods is doing so well and why home at Marmaxxcontinues to be weak? How long do you think we should start to see some of yourchanges happen there? A second question on how we should think about the marketingbudget plans for next year versus this year and talk a little about how theloyalty credit card launch has gone so far? Thanks.

[Carol Meyrowitz:]

I am going to startwith the marketing and the loyalty and then I will get back to HomeGoods. Ithink marketing in the fourth quarter we are probably going to again plan for thebusiness to equal sales between that 9% and 10% range. I think for next year, Ithink I mentioned John Gilbert has been on board for a while. We areunderstanding some places where we probably didn't need to spend money andplaces where we can do a better job and be more focused. I really don't think our marketing budgets will have thekind of increase that they have this year. They will probably be slightly up,but again, I think we can do a better job with that next year. So we arelearning a lot. We are pretty excited about that. In terms of our credit program, our private label program,we have a soft launch going on right now. We are offering the in-store credit,instant credit in stores in a test mode. We are very happy with the resultsthat we are seeing and I'm going to talk more to that probably at year end andgive you a real view of what that can mean to us because I think it can mean alot to next year. So we are in test mode right now. As far as HomeGoods goes, , again, it is what we are allabout. I can say it 100 times. It is execution, it's excitement. It is nothaving last year fever; it is about risk taking and they have done a terrificjob. Marmaxx we believe is a fix. It is very fixable. I am goingto have Ernie talk to that in a moment, but I think it just comes right back toexecution and we know that when we focus on something, we know how to fix it.

[Ernie Herrman:]

I would say, Brian, that the focus in Marmaxx home right nowis on, and Carol alluded to it a little there, lack of newness. So what wedidn't have and I won't get into the specifics on the categories, but innumerous categories, we looked too much like last year or like we did three tosix months prior to that and it is just not the way we like to run our home business.So HomeGoods I think did a much better job on that end and it really is whatCarol is saying, execution on our part. I think if you look a few months out, I think you had asked,when do you think it is going to be better? I would say 60, 90 days I think weare going to see some turnaround here, but affecting that business is a littledifferent because some of that business is a little further out. Newness isreally what we are going to attack and I think that is where we stubbed our toeon execution.

[Carol Meyrowitz:]

Brian, in addition tothat, we have tested a new home prototype that we have in a few stores and weare seeing very positive results. Ernie has given me a plan that looks veryimpressive on rolling that out for next year. We are pretty excited about thatand the turns are a lot faster than they are in the other stores. So that saysa lot also.

[Operator:]

Your next question comes from John Morris – Wachovia CapitalMarkets.

[John Morris:]

A little bit more color on the marketing. Carol, you talkedabout marketing at A.J. Wright, so I'm curious to know a little bit more colorthere. If you step back and you look at it, you started to allude to it in yourprevious response, but what have you learned so far by the marketing that youhave seen that you're going to change for next year? In other words, you talkedabout John Gilbert and team probably looking to spend more efficiently or in alittle bit different places. So if you can kind of elaborate there. Thanks.

[Carol Meyrowitz:]

John, I will try toanswer that but I really don't like to talk about our marketing strategy. Ireally can't go into detail. When I talk about what works and what doesn'twork, there are places where we have spent a fair amount of money on directmail where today we realize we may not be getting the response. There are otherthings that we have focused on in terms of our initiatives that are workingvery well, so that gives you a little bit of places where we see some shift. We also have a couple of things up our sleeve that I reallydon't want to talk about, but they are very, very exciting in terms ofinteraction between the customers and so we are quietly experimenting on somethings that could be really exciting going forward. In terms of A.J. Wright, we just started really some testsat the end of October and we are reading those results and we are seeing somevery positive things from it. The Real Deal is our concept at A.J. Wright andit is definitely resonating with the consumer and this customer, so we sort ofhave our arms around a key focus and now we are going to build on that campaign.We understand, again, I will come back to how important price is and time ofneed and this campaign is going to be based around that for that customer.

[Operator:]

Your next question comes from Richard Jaffe – StifelNicolaus.

[Richard Jaffe:]

Thanks very much, guys and my congratulations as well. Pullingout a strong quarter out of a tough, tough environment. If you could just commenton cost savings, what you've achieved this quarter and its sustainability, howmuch of it is in response to a tough market? Is it really a one quarter sort ofsavings? How much of it could we look forward to continuing through fourthquarter and through 2008?

[Carol Meyrowitz:]

Richard, in terms ofour cost reductions this is a pretty big, long-term project, so it is not justgoing to be a quarter and as I said, we are just starting our non-merchandiseprocurement. We will actually be looking for a chief procurement officer. Todaywe are a bit siloed in how we spend our dollars, so we see a fairly substantialopportunity there to leverage across all of the divisions. As I said to you,some of the other projects we're working on are a little bit more long term,but what is happening is the divisions are meeting together and all theoperators, they are working on things such as even just store cleaning, verysimple things, but big savings. So this is going to be an ongoing process. It is under anSEVP; that is how important it is to our business. Jeff, do you want tocomment?

[Jeff Naylor:]

Year to date, we have driven 20 basis points of improvementon a 3% comp, so we are encouraged by that and then last year, we also had a 20basis point improvement. As we look forward, Richard, we have planned Marmaxxflat on a 2.5% comp for them to really hold the margins. When I say flat, theirsegment margins. For them to hold that margin flat on a 2.5% comp, they reallyhave to generate $25 million, $30 million in cost savings. So there are some cost savings already implied in our modeland what we hope to do with all the projects, the cost-savings projects that wediscuss, as well as the focus of the people at the divisions, which frankly iswhere we are getting a lot of the savings today, we would hope to be able to dobetter than what we have in the model. But 20 basis points two years ago, 20basis points this year and our hope is that we can continue to keep it going. But going forward, it gets harder because we do have toidentify ways to go after some of the more structural costs. There are fewerquick hits and low-hanging fruit.

[Operator:]

Your next question comes from Jeff Stein – KeyBanc CapitalMarkets.

[Jeff Stein:]

Carol, I am wondering if you could differentiate for us thedifference between the customer at HomeGoods and the home customer at Marmaxx?I am wondering with your no walls approach, don't these divisions talk to eachother a little bit and I would think that by now perhaps they could share someof the benefits with the successes you are seeing at HomeGoods and maybe seethe results a little bit sooner rather than later?

[Carol Meyrowitz:]

Jeff, right on. Actually, we have made quite a few changesin home in Marmaxx and they are basically living together right now. TheHomeGoods group and the Marmaxx group, as well as HomeSense. So talk aboutleveraging. Winners and HomeSense are helping Marmaxx with home and Marmaxx isreally helping Winners with men’s. They are spending a lot of time together. Ido think that we will see the benefit of this fairly quickly. Winners has also I think done a very good job ofdifferentiating HomeSense from Winners home and I think again, Marmaxx willleverage that knowledge. So it is a great question and the answer is yes and itis presently being done.

[Operator:]

Your next question comes from Patrick McKeever – MKMPartners.

[Patrick McKeever:]

A question about the overall apparel industry right now. Is thereany concern that it is just so bad out there in the apparel space and there isso much inventory and whatnot that the promotional environment could be veryintense over the holidays and maybe offset some of the incremental buyingopportunities that you are seeing?

[Carol Meyrowitz:]

Ernie, do you want totalk to that?

[Ernie Herrman:]

Patrick, goodquestion. I think it is why we very strategically and consciously wait laterand later each year and in this environment, we specifically went back intoOctober and September knowing that there was going to be more goods, we havebeen holding off later and later so that we buy the goods accordingly and thatwe keep our gap in terms of value between us and the other stores out there,because that is really the critical issue. The customer has no reason to cometo us unless we show a significant value relative to the other retailers outthere. So a great question. We are staying very cognizant of that situation andwe are buying later because of it.

[Patrick McKeever:]

How late can you buymerchandise for the holidays?

[Ernie Herrman:]

I mean we are buyingas we speak, so we have been buying all the way through and with our DCs, wehave a very flexible situation. We can also ship the goods the way we need toship the goods. I would say we arebuying later than ever before. We will be buying into really late November,beginning of December.

[Carol Meyrowitz:]

Note that we havedone a week before Christmas and we have actually been able to get them inbecause we can feed it through very quickly at the end.

[Patrick McKeever:]

Are you buying any more merchandise these days, let's saythis year versus last year, directly from the department stores and specialtyretailers?

[Carol Meyrowitz:]

Pretty much the sameI would say.

[Patrick McKeever:]

Same as usual?

[Ernie Herrman:]

Same, maybe a little bit more, same to a little bit more Iwould say; kind of with everything else.

[Operator:]

Your next question comes from William Keller – FTN Midwest Securities.

[William Keller:]

Coming back to the foreign exchange and looking at theimpact on the cash flow statement. It seems to be more negative this quarterthan previously. Is that related to the mark-to-market? Thank you.

[Jeff Naylor:]

Can you maybe expand a little bit on that, because I am notseeing it on the cash flow statement?

[William Keller:]

Cash flow from foreign exchange. I know it's a year-to-datenumber.

[Jeff Naylor:]

On cash was $2 million positive this year and it was $7million positive last year, so it's not really a big swing year over year. Thebigger thing as we look at the cash flow statement is that we have a strongincrease in cash from operating activities that is a function largely of lowerinventories year over year because we have done a great job. Inventories, lastyear, we had $470 million of net cash outflows. This year, it is $310 millionin terms of the change in those inventory balances. So that has been asignificant contributor to cash, the fact we have lower inventories. We have taken that favorability or that higher cash, some ofit has gone into CapEx and then of course in the cash flow statement, you cansee we have a higher buyback than we did in the past and that was all planned,so I think an opportunity to buy our stock at prices that we consider to bepretty favorable.

[William Keller:]

Not to beat a dead horse, but understood that cash flow fromforeign exchange is not that different year-to-date, but looking at the changefrom the end of the second order this year versus the end of the third quarterthis year, that is the difference that I was referring to.

[Jeff Naylor:]

We will have to look into that and get back to you. Itshould not be a significant item on our cash flow statement though, relative tothose larger components that I just discussed. So maybe we can just follow upwith you offline on that if that's all right.

[Operator:]

Your final question comes from Dana Telsey – Telsey AdvisoryGroup.

[Dana Telsey:]

Good afternoon,everyone and congratulations. Can you talk a little bit about Runway at Maxx,The Cube, some of the other departments that you have been working with latelyand what you're seeing there? Jeff, can you just talk about your thoughts on operatingmargins by division in terms of this year, if they have changed at all in termsof what you are looking for? Thank you.

[Carol Meyrowitz:]

Dana, first of all,the results on The Cube are very strong. I think we are probably going to berolling out 300 plus next year. Runway, we love The Runway, but we love TheRunway more because it is opening doors and we are tending to spread again thatnext level of specialness to our stores. Our plans are not to expand TheRunway, our plans are to really continue buying for it and then spreading someof those categories. As we see fit, such as in Winners, we are expanding a fewstores and T.K. is probably going to test a version of it going forward. Shoes have been exceptional. We rolled out over 200 thisyear. We are going to continue next year to roll out another 200 and we havesome other things up our sleeves for next year that again we will talk about aswe get into the year end and start talking about next year.

[Jeff Naylor:]

Dana, in terms of the operating margin, you are referring tothe operating margin potential of the business?

[Dana Telsey:]

The divisions,because at the beginning of the year you gave out your thoughts on what youthought the operating margin targets would be for this year. Any differences tothat given that we are nine months through the year? Also, yes, an operating margin target potential if there areany adjustments?

[Jeff Naylor:]

If you look at the trend last year, the pre-tax marginimproved 80 basis points from 6.4% to 7.2%. This year, Q4 implies full-yearguidance of 7.5% to 7.6%. So we are looking to 30 to 40 basis points ofimprovement this year. A piece of that, a smaller piece is gross profit. Mostof it we are getting in SG&A through some of the cost reduction focuses andinitiatives that we have. As we look by business, Marmaxx this year we have at 9.5%.That is up 10 basis points over last year on a 1% comp, so we are seeing greatexpense controls at Marmaxx. We have always said Marmaxx we saw as a 9% to 10%potential business, but over the last several years, we have seen that marginimprove. So I think as we plan it going forward, we are going to plan it at a2.5% comp and a flat segment profit margin and then hope to beat that througheither higher comp or through improvements in cost and cost reduction. Winners this year we have at 10.5% against 10.4% last year,so we are seeing improvement at Winners. That business we see as a 10% to 11%business. That remains unchanged, Dana. T.K. this year, excluding Germany,we have got it at 6.1% to 6.2%. We continue to see T.K. as having the potentialto deliver 8% as it gets closer to its full complement of stores. HomeGoods, huge progress over the last year. Last year, wewent from 2.5% to 4.5% segment margins. This year, we have it pegged at 5.2%,so we have seen a 70 basis point lift and again, HomeGoods is barely halfway toits full store potential, so with the leverage of additional units, we can seethat business getting to 8%. A.J., that business is just slightly below breakeven iswhere we have it currently forecast for the year. As Carol mentioned, that is abusiness that we could see getting as high as 8%. The key there is really twothings. One is getting the store contribution margin up about 100 to 200 basispoints over where they are now, which we think is very achievable with theright mix driving comp. Once we have got that model correct, then we will startrolling out stores, which is where we really start getting the leverage andmoving towards that 8%. So that is just kind of a little snapshot business bybusiness.

[Carol Meyrowitz:]

Thank you, everyone. We look forward to reporting our fourthquarter and year end. We will see you soon.