The TJX Companies, Inc.
Q4 2007 Earnings Call Transcript

Published: 20 Feb 2008

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to The TJX Companies’ fourth quarter and year-end financial results conference call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session. At that time if you have a question you will need to press *1. As a reminder, this conference call is being recorded Wednesday, February 20th, 2008. I would like to turn the conference call over to Ms. Carol Meyrowitz, President and CEO for The TJX Companies, Inc. Please go ahead, Ma’am.

[Carol Meyrowitz:]

Thank you. Good morning. Before I begin Sherry has a statement to make.

[Sherry Lang:]

Good morning. The forward-looking statements (inaudible) 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 10K filed March 28th, 2007, and Form 10Q filed August 24th, 2007. Further, these comments and the Q&A that follows are copyrighted today by The TJX Company. Any recording, rebroadcast, reproduction or other use of the same for profit or otherwise without prior consent of TJX is prohibited and in violation of United States copyright 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. With respect to the non-GAAP measures we discuss today, reconciliations to GAAP measures are included in today’s press release posted on our website, www.tjx.com. The numbers we discuss today are from continuing operations. Thank you, and now I’ll turn it over to Carol.

[Carol Meyrowitz:]

Good morning. Joining me on the call today are Jeff Naylor, Trip Tripathy, Ernie Herrman, and Sherry Lang. Trip will be handling the financial questions today. So let me begin by saying that we did extremely well in 2007 and I am very proud of our performance. I believe the strategies we put in place yielded strong results in a challenging retail environment. Having said that, we believe our strong execution would have lead to even stronger results in a more robust environment. Our adjusted pre-tax profit margin, excluding the intrusion charges, was the highest we have achieved in six years and the highest of all but two years in the company’s history. Merchandise margins were extremely strong and drove virtually all of the adjusted profit margin improvement. With solid expense control we maintained slack SG&A on a consolidated cost that, excluding two percentage points of foreign currency exchange rates, was up 2%.Further, we achieved a flat SG&A despite our planned increase in marketing investment and certain one-time items. All of this leads to our delivering a 17% increase in ETS on an adjusted basis over a very strong increase in the prior year. We achieved these results by keeping to our very focused goal of driving profitable sales. Driving profitable sales has been, is, and will continue to be our number one goal and our mantra. I want to make sure that everyone understands that, while we have a wonderful business model that helps us to combat a weak retail environment, we know that at the end of the day it’s about driving sales. People ask us all the time about how we change our strategies to address the weak environment. The answer is simple

[Nirmal K. “Trip” Tripathy:]

Thank you, Carol, and good morning, everyone. Before I outline our plans for fiscal 2009 let me provide some additional detail on our fiscal 2008 and fourth quarter results, which I believe will help you understand our numbers better. First let me discuss the full-year SG&A rate, which was flat to last year on what was a 2% comp increase excluding foreign exchange. We achieved this flat rate despite increased investments in marketing at 10 basis points and another 10 basis points due to the combination of Germany and the Bob’s Stores impairment charge. Without these items we would actually have had 20 basis points of expense leverage for the year. Overall I think we’re very pleased with this expense performance, which reflects our continued focus on cost containment. Second, SG&A for the fourth quarter was up 50 basis points. If you exclude the Bob’s impairment charge, which was 20 basis points, our planned marketing investments at 10 basis points, and 20 basis points that primarily reflect the timing of funding of the TJX foundation, SG&A was essentially flat. We achieved this despite a 1% comp increase at Marmaxx and a 2% comp at TJX, ex foreign currency, from which we would normally expect some deleverage. Third, I would like to provide some colour on the mark-to-market inventory hedge adjustments in the fourth quarter. This had a 30 basis point favourable impact on the TJX gross margin for the quarter which was up 150 basis points in total. It also bumped up the Winners segment margin by 290 basis points during the quarter. You might recall that in the third quarter we took an accounting charge for inventory hedges at Winners in Canada to mark these hedges to market. The benefit to the fourth quarter was about the same as the charge to the third quarter and primarily reflected a reversal of this adjustment. These mark-to-market adjustments are required by accounting rules and recently have been accentuated because of dramatic currency movements. A final comment on the quarter. Overall currency favourably impacted the quarter by about $0.04 per share. This was essentially offset, however, by a $0.02 per share negative impact from a higher tax rate during the quarter and a $0.02 per share negative impact from the combination of the Bob’s impairment charge and timing of the foundation contribution. So overall the impact on EPS from no-operating items was flat. Let me now turn to our fiscal 2009 plan. As Carol indicated, we expect EPS from continuing operations for fiscal 2009 to be in the range of $2.20 to $2.25, which represents a 15% to 18% increase over the adjusted EPS from continuing operations of $1.91 earned in fiscal year 2008. As Carol mentioned, we have a 53rd week in the fiscal 2009 calendar, which we expect will benefit the fourth quarter by approximately $0.09 per share. Excluding this benefit, we expect EPS from continuing operations for fiscal 2009 to be in the range of $2.11 to $2.16, a 10% to 13% increase over the adjusted $1.91 earned in fiscal 2008. This is based on a consolidated top-line sales assumption of about $20.1 billion to $20.2 billion including the 53rd week. For consolidated comp store sales we’re assuming a 2% to 3% increase without the 53rd week. We are planning foreign exchange rates to have a favourable impact of about half a percentage point. So net our foreign exchange our comp store sales assumption is about 2%. For the year we expect pre-tax profit margin to be 7.9% to 8%, up 20 to 30 basis points over the adjusted pre-tax profit margin in fiscal 2008. This guidance includes approximately 20 basis points of benefit from the 53rd week. We expect gross margin to be 24.6% to 24.7%, which is 10 to 20 basis points better than fiscal 2008. We anticipate SG&A as a percentage of sales to be about 16.7%, which is better than fiscal 2008 by roughly 10 basis points. It’s important to note that our guidance calls for profit margin improvement on a 2% to 3% comp. In essence, we continued to build our plans based on a conservative comp, which requires us to control expenses and inventory very tightly. And this in turn positions us well to flow incremental sales to the bottom line as we have done in each of the last two years. To help with modelling, we’re planning corporate expense for the year to be in the $139 million to $142 million range, interest expense to be about $5 million to $6 million, and our tax rate to be 38.5%. From a cash flow perspective for the year we expect capital expenditures to be about $575 million. We’re investing in store initiatives, remodels, and relocations, as well as in-store initiatives to drive sales and continued investments in systems. We expect depreciation to be about $389 million. We’re planning our consolidated inventory levels to be flat on a per store basis. Our guidance is based on an average share count for the year, up approximately 445 million shares, assuming a stock buy-back of $900 million. Moving to the divisions for fiscal 2009. As a reminder, we will present all of our comp sales increases without the impact of the 53rd week. The division segment margins we are projecting for fiscal 2009 are on a 53-week basis. As I just noted, the 53rd week benefits margins by approximately 20 basis points. We anticipate that Marmaxx will do about $12.6 billion in sales with a comp sales increase of about 2%. Segment profit margin at Marmaxx is planned at 9.9% to 10%, which is 20 to 30 basis points above last year. For the combination of Winners and HomeSense we’re anticipating sales of approximately $2.3 billion US with a comp sales increase of 2% to 3% in local currency. We’re planning Winners segment profit margin in the range of 10.8% to 11%. The year-over-year comparisons for Winners segment margins are negatively impacted by a non-recurring benefit of 50 basis points from foreign exchange rates. At T.K. Maxx in Europe we’re planning sales of about $2.5 billion US with a key to 4% comp sales increase in local currency. We expect segment profit margin at T.K. Maxx in the range of 5.7% to 5.8% including Germany and our new HomeSense business, which combined we expect will negatively impact results by about $20 million or 100 basis points. Excluding Germany and HomeSense, segment profit margin at T.K. Maxx will be in the range of 6.7% to 6.8%. At HomeGoods we’re planning a top line of about $1.7 billion with a 3% comp sales increase. We expect segment profit margin for HomeGoods to be in the 5.5% to 5.7% range. At A.J. Wright we’re planning for sales of $674 million to $679 million with a comp store sales increase of 3% to 4%. From a bottom-line perspective we’re looking for a profit of $1 million to $4 million. At Bob’s Stores we’re planning sales of $321 million to $323 million and looking to reduce its loss to $4 million to $5 million. Now moving to first quarter guidance. We expect earnings per share to be in the range of $0.40 to $0.41 worth $0.34 per share last year on a reported basis. Last year’s results included $0.03 per share of intrusion related costs. So excluding these costs our guidance represents an 8% to 11% increase over prior years adjusted $0.37. The resuming of first quarter top line of $4.4 billion with a 4% to 5% comp sales increase on a consolidated basis and a 1% to 2% comp sales increase at the Marmaxx group. In the first quarter we expect foreign exchange rates to have a favourable impact of two percentage points, so that’s a net comp of 2% to 3% on a consolidated basis excluding foreign exchange. For the month of February we’re planning for a consolidated comp sales increase in the range of 3% to 4%. We’re anticipating a 2% to 3% increase in March and a 6% to 7% increase in April. Easter occurs two weeks earlier this year and in March instead of April. For Marmaxx we’re planning on a zero to 1% comp in February, a zero to 1% comp in March, and a 4% to 5% comp in April. Pre-tax profit margins are planned in the 6.7% to 6.8% range, down 10 to 20 basis points from the prior year on an adjusted basis. We expect the first quarter to be negatively impacted by lower interest income, 10 basis points, and by investment in the new European businesses, another 10 basis points. We’re anticipating first quarter gross margin in the area of 24.2% to 24.3% and SG&A as a percentage of sales to be about 17.5% to 17.6%. I should note that the SG&A guidance reflects a 20 to 30 basis point increase primarily due to our investments in the new European businesses, the timing of certain corporate expenses, as well as initiatives that we expect will generate savings in future quarters. I’ll wrap up with our store growth plans for fiscal 2009. Beginning with Marmaxx, we plan to add 2% in selling square footage to this division, an increase of store base by about 45 stores net of closing, for a total of 1,668 stores by the end of fiscal 2009. In Canada we plan to expand selling square footage by 6% adding a net 16 stores to end the year with a total of 278 stores in that country. In the UK we plan to expand T.K. Maxx’s selling square footage by 9% and add 10 T.K. Maxx stores, as well as five HomeSense stores for a combined total of 236 by the end of the year. We also expect to open an additional five stores in Germany for a total of 10 in that country by the end of the year. At HomeGoods we plan to expand selling square footage by 9% and add a net of 25 stores for a total of 314 HomeGoods stores by the end of the year. As a reminder, with HomeGoods back on the right track we made the decision to re-accelerate our growth strategy at this division last year. We will continue to grow A.J. Wright prudently, as Carol mentioned. In fiscal 2009 we anticipate netting five additional stores for a total of 134 stores by year end. And at Bob’s Stores, as we continue to evaluate this business, we are not planning new store openings in fiscal 2009. To keep the call on schedule, we ask that you please limit your questions to one per person. Thank you and we’ll open it up for questions now.

[Operator:]

Thank you. (Operator Instructions). Our first question today is from Kimberly Greenberger.

[Kimberly Greenberger:]

Thank you and congratulations on a very nice 2007.

[Carol Meyrowitz:]

Thank you.

[Kimberly Greenberger:]

Carol or Trip, can you address what financial metrics you’re looking for A.J. Wright to achieve before you would consider accelerating growth in that division?

[Nirmal K. “Trip” Tripathy:]

Well, I think first of all we’ve put a model out there for A.J. Wright which I believe is in the 8% range in terms of the target we’d like that business to get to. And obviously with A.J. Wright at or close to breakeven we have a little ways to go. One of the key metrics that we look at is store contribution. And typically we would look for a store contribution in the 17% to 18%, mid-teens, basically, Kimberly, range before we would look at the store model and say, yup, this works. So that’s sort of the financial metric we look at, obviously in addition to comp store sales performance at the division.

[Carol Meyrowitz:]

Yeah, Kimberly, we did a lot of work this year with A.J.’s and I think this year is really going to be a year that we see profit. We also understand, we have a better understanding in terms of the real estate and where we want to plant our stores. The progress in the new stores have been terrific. So I think this year’s going to tell us a lot about A.J. Wright. I’m very pleased with their performance in the last several weeks in opening the season.

[Kimberly Greenberger:]

Carol or Trip, where is the current store contribution if you’re looking to get 17 to 18? Can you just comment on where it is now?

[Nirmal K. “Trip” Tripathy:]

Well, I think we’ve got a couple more percentage points to go, Kimberly. And I would say more likely mid-teens is where we would be able to, you know, start thinking about pulling the trigger. So we’ve got a little ways to go still. But we’ve seen improvements in that store contribution number and that’s very encouraging.

[Kimberly Greenberger:]

Great. Thanks and good luck in ’09.

[Carol Meyrowitz:]

Thanks.

[Operator:]

Thank you. Our next question is from Mark Montagna.

[Mark Montagna:]

Hi. Just a question about merchandise availability. For 2007 and apparently probably for the first half of this year you’ve got a lot of great availability. When you look out to the second half of the year do you anticipate having the same level of high quality availability of merchandise?

[Carol Meyrowitz:]

Mark, I can tell you this

[Mark Montagna:]

Yeah. Just to clarify, I’m not so concerned about availability because I know you’re always going to have it, but it’s more over the past year you’ve stepped up the quality or the appeal of a lot of the brands. So you’re going to keep that going?

[Carol Meyrowitz:]

Yes. Absolutely.

[Mark Montagna:]

Okay. All right. So you don’t really see that declining at all.

[Carol Meyrowitz:]

No.

[Ernie Herrman:]

Mark, I’ll jump in here. To Carol’s point, I don’t see in the short term or the longer terms, and we talked about this I think on the calls the last couple of times. I think you’re getting at the branded discussion and quality level and there we don’t see, if anything, there could be more of that availability happening. So we certainly haven’t seen any indication that that would change.

[Mark Montagna:]

Okay. Just lastly. Just say you’ve reduced expenses a lot, would you say that you’ve pretty much picked all the low- and medium-hanging fruit and now you really have to just focus on bigger picture opportunities with expenses?

[Carol Meyrowitz:]

No. Not at all. I think we have mitigated wages, we have mitigated fuel, we have invested in businesses. We have not even brought on a chief procurement officer that we’re getting close to for non-merchandise procurements. We think that this is going to continue. I think we’ve done a fabulous job in ’07 and we are, everyone has stepped up to the plate and we have a great game plan for ’08.

[Mark Montagna:]

Okay. Thanks.

[Operator:]

Thank you. Our next question is from Jeff Black.

[Carol Meyrowitz:]

Hi, Jeff.

[Jeff Black:]

Hey, how’s it going? Congrats on a good strong quarter. I guess my question is on home. We’ve seen weakness start to creep into the story here. What’s got you convinced that we don’t have a longer-term problem at HomeGoods? What’s working there specifically? What’s not? Do we have any regional differences in the performance of the store base? And then in the core business, how long do you think it takes to write the ship in the home business? Thanks.

[Carol Meyrowitz:]

Well, getting to HomeGoods. I will tell you that the issue with HomeGoods is purely an execution issue in the fourth quarter. We were just too mundane and too LY in our seasonal and that hurts in the fourth quarter. This group has spent many hours together and, as I’ve said, we have a completely new strategy for fourth quarter for next year. I’m liking very much what I’m seeing flowing into HomeGoods currently. So I really think this was our own misstep in terms of execution. As far as Marmaxx goes, we are beginning to see some positive results. We have made many changes in terms of people. Ernie, would you like to comment on home?

[Ernie Herrman:]

Just in line with what Carol mentioned with HomeGoods in the fourth quarter, Marmaxx I think was a lack of newness throughout most of the year. And that was our execution challenge in the home area at Marmaxx. To Carol’s point, we’re seeing signs of light, some healthy signs over the last couple of months. And I think we’re also going to make improvement at driving some of the hotter fashion categories where we’re seeing some of the newness taking place. Again, it was more of an execution issue for Marmaxx, but we seem to be turning the corner. To Carol’s point, I think in the first half here we’ll see an improvement.

[Jeff Black:]

Fair enough, guys. Thank you.

[Carol Meyrowitz:]

I can just also add that, you know, HomeSense I really believe and T.K. executed home very well and their business was very good. I don’t see this as an issue in terms of the economics. I really think it’s definitely an execution issue.

[Jeff Black:]

Great. Good luck, guys.

[Operator:]

Thank you. Our next question is from Paul Lejuez.

[Paul Lejuez:]

Hey. Thanks, guys. Just looking at gross margin. It was up so much in fourth quarter, merchandise margin driven, and it looks like you have fairly easy comparisons coming into the first quarter. So just trying to understand, is that gross margin guidance somewhat conservative? Is there anything that you saw in the fourth quarter from a merchandise margin perspective exceptional buys that you don’t expect to continue? Just trying to get my arms around that a little bit.

[Carol Meyrowitz:]

My answer to that is I hope so. I think we are, you know, it’s the first quarter. It’s our obviously lowest sales quarter in the year. We probably have the most volatile weather. I think we’re being conservative and I think we’re being prudent. Again, I will tell you that the market is very loaded and I do believe we have some opportunity here.

[Paul Lejuez:]

All right. And then just one follow up. Where do you think you’re underpenetrated on the Marmaxx side? You said 400 new incremental stores, 200 more than you originally had planned. Where are you underpenetrated?

[Carol Meyrowitz:]

Well, we don’t talk specifically about our real estate strategy, but we’re very confident in being able to add 400 stores.

[Paul Lejuez:]

Okay. Great. Best of luck.

[Carol Meyrowitz:]

Thank you.

[Operator:]

Thank you. Our next question is from Todd Slater.

[Carol Meyrowitz:]

Hey, Todd.

[Todd Slater:]

Hey, there. Just impressive all around. Well done.

[Carol Meyrowitz:]

Thank you.

[Todd Slater:]

Just given the enormous amount of products and supply out there, when you look at the direction in ’08 where do you see your incremental investment in inventory? If you could just maybe talk broader categories at Marmaxx, and even at A.J. Wright, given that this is maybe an opportunity to upgrade or continue to upgrade. We’re hearing about a lot of bridge inventory out there. What are the sort of areas of opportunity? You’re entering some big dress numbers in the spring and summer; what do you see in that category? Can you still cycle that and comp positively there? What else you might see or we might see tangibly in terms of in the store environment in terms of the product assortment?

[Carol Meyrowitz:]

Well, let me start with A.J.’s and then I’ll make a few comments about Marmaxx and then I think Ernie might have a few comments, too. A.J.’s we are much more focused on the Hispanic and the African-American customer. I think that’s a big piece that we can go after that we haven’t necessarily maximized in the past. The real core drivers of that business is basics, it’s denim, urban, shoes, and juniors, and kids. And we see again tremendous opportunities there. I think we’ve fine tuned it. I don’t think we maximized it by any means last year and I think we are just so much more focused. I’m far from being concerned about availability. I also can tell you that our pack-away numbers are pretty substantial even though we have fairly lean inventory. And that business will thrive very much on pack-aways. And it should be terrific. As far as categories, like dresses, we haven’t even hit the peak dress years that we had a strong dress cycle. We haven’t even gone near those numbers. So I think there’s tremendous opportunity in earnings from the brand perspective.

[Ernie Herrman:]

You know, I think, and again Carol mentioned this earlier in shoes and accessories. I think those two arenas are places, although last year very healthy, I think there’s just more opportunity in this coming year to maximize those businesses. They both have a lot of good brands, but they have a lot in terms of quality in those goods. I would say those would be a couple of areas that will continue to be a push for us in Marmaxx.

[Todd Slater:]

And how about contemporary? You mentioned contemporary versus, let’s say, the more traditional, you know, the Bridge (sic), the Neal and Tracy’s (sic) of the world. Whatever.

[Carol Meyrowitz:]

It’s really about fashion, Todd. We have a very large group in California. Our job is to bring newness and excitement every day. That’s what they’re focusing on. So we see some pretty good trends happening.

[Ernie Herrman:]

Todd, the good thing is when you have a fair amount of availability like this, which we see no one in sight on, is you get a lot of fashion goods in there too. So with Calsite (sic) we have to kind of manage the amount we buy and the selectivity, but it does yield I think more fashion excitement as we go through that process.

[Todd Slater:]

Perfect. Look forward to it. Thanks.

[Operator:]

Thank you. Our next question is from Brian Tunick.

[Brian Tunick:]

Thanks. Hey, guys. I think the obvious question is, with your number one competitor dramatically slowing down their growth and perhaps delaying their entry into the East, can you maybe talk about what was the reaction in the executive suite regarding your thoughts about real estate expansion, buying, marketing? What usually do you expect to happen when your number two competitor dramatically slows their growth?

[Carol Meyrowitz:]

I don’t even, we don’t put our number to competitor, Brian. We run our own business. We run TJX and we run an off-price business. So we are not concerned. I mean, we have great plans for the future and that’s how we run our business.

[Brian Tunick:]

Thanks.

[Operator:]

Thank you. Our next question is from Marni Shapiro.

[Marni Shapiro:]

Hey, guys. Congratulations on a great quarter and a great year.

[Carol Meyrowitz:]

Thanks, Marni.

[Marni Shapiro:]

Could you talk a little bit about the larger footprint HomeStore? You know, a little bit of problems on the home space. What were you envisioning in the larger store? Is there a specific category that you’d like to add that you’ve tested or is it just a little bit more of everything?

[Carol Meyrowitz:]

Now you’re going to ask me to give the secrets away. Yeah, we’re going to have new categories as well as expansions. We’ve got a lot of new ideas in home goods for the future. So it gives us an opportunity to not only expand the things that are working so well, like in HG Kids, but it gives us an opportunity to test new categories. So we’re pretty excited about this. If anything, in many of our stores we would like a little more room to expand certain areas.

[Marni Shapiro:]

Are they ideas that can translate to the Marmaxx stores as well?

[Carol Meyrowitz:]

Some of them. Some of them will be new categories, but again, some of them will require additional space that you don’t want to necessarily put in Marmaxx because we already have some initiatives in Marmaxx that we think are more suitable for the chain.

[Marni Shapiro:]

Right. I guess that makes sense. Well, guys, good luck. And I just have to make one comment. I love how the New England-based team is so suddenly quiet on the sports front with no commentary about Bob’s business on the Superbowl T-shirts. So maybe next year?

[Ernie Herrman:]

(Inaudible) as we speak, Marni.

[Marni Shapiro:]

Have a good one, guys.

[Carol Meyrowitz:]

Hey, Marni, I’m from New York.

[Marni Shapiro:]

I know, Carol. You’re on my side. Have a good one, guys.

[Operator:]

Thank you. Our next question is from Richard Jaffe.

[Richard Jaffe:]

Thanks very much, guys. Just a follow up. If you could provide some more colour on the pack-away in terms of the quantity and quality and the amount of time you think the product will spend in pack-away. And then if you could talk about the internet business. Thank you.

[Carol Meyrowitz:]

We don’t comment on specific numbers. But part of our strategy with A.J. Wright is to increase pack-aways as part of their total buys. Marmaxx is just opportunistic and we’re all opportunistic and this year particularly was a year that it made sense to do more pack-aways.

[Richard Jaffe:]

And that was just for A.J. Wright, is that correct?

[Carol Meyrowitz:]

No, across the board.

[Richard Jaffe:]

And could you quantify it over prior years?

[Carol Meyrowitz:]

Yeah, no, that’s what I was just saying, Richard. We don’t usually quantify how our inventory is broken up. But we tend in the Marmaxx world to stay under 5% and in A.J. Wright it’s greater than that.

[Richard Jaffe:]

Okay. Any thoughts on the internet?

[Carol Meyrowitz:]

Right now we are using the internet very aggressively, you know, in terms of communicating to the customer, but in the short term we’re not looking to sell product on the internet. We think that we have some ideas in marketing how to better utilize it to drive sales.

[Richard Jaffe:]

All right. Thank you very much.

[Operator:]

Thank you. Our next question is from Dana Cohen.

[Carol Meyrowitz:]

Hi, Dana.

[Dana Cohen:]

Hey, guys. Congrats. Just some clarification here. As you look at Winners and the improvement in operating margin this year versus last year can you just clarify for the year and the quarter sort of all of the noise running through? So, like, what is the real underlying number that we should be thinking of as the go-forward number? And second, on the gross margin, up 150, I think you said it was up 80 at Marmaxx. Were all the other businesses clearly up significantly more than that? Just a little more clarification on the dramatic improvement in gross margin.

[Carol Meyrowitz:]

Okay. I’ll have Trip run specifically through the numbers with you.

[Nirmal K. “Trip” Tripathy:]

Dana, let me first talk about fourth quarter because in the fourth quarter the Winners margin was up 450 basis points from 10.4% to 14.9%. A huge part of that, which was 290 basis points as I’ve mentioned, was the inventory hedge that reversed from the third quarter, as we told you during the third quarter. That hurt their margins in the third quarter and we told you it was going to reverse in the fourth. And it did. But that apart, I think they had excellent, excellent margin performance. Their gross margin was up a total of 160. Their pre-tax profit was up 160 basis points above and beyond that inventory hedge. It came from a combination of merchandise margin improvements, as well as expense leverage. So that’s all the story within the quarter. And then if you look at full year on Winners, you know, Winners’ margin, pre-tax margin was up 110 basis points and once again it was a function of a number of things, including merchandise margin improvement, expense leveraging, etcetera.

[Dana Cohen:]

You mentioned 50 though from FX.

[Nirmal K. “Trip” Tripathy:]

I mentioned 50 from FX and that again goes back to the foreign exchange impact on the hedge. You know, reverting out and not coming into this year. That’s what that was.

[Dana Cohen:]

Okay. So of the 110, there was a contribution of about 50 from the noise of the hedges.

[Nirmal K. “Trip” Tripathy:]

There was roughly about 30 from the hedge and then some FX impacts coming out of that too.

[Dana Cohen:]

So on an underlying basis it’s 60.

[Nirmal K. “Trip” Tripathy:]

Underlying basis is 60 to 70.

[Dana Cohen:]

Okay.

[Nirmal K. “Trip” Tripathy:]

And again, combination of merchandise margin and expense leveraging, which was the same story in the fourth quarter in an even bigger way.

[Dana Cohen:]

Okay. And then merchandising margins for the entire company.

[Nirmal K. “Trip” Tripathy:]

Merchandise margin for the entire company was up 40 basis points. And what we saw, and once again in the fourth quarter, it was up 150 basis points gross margin, merchandise margin was about 120. And I would say it was pretty even across every business. Much stronger in some, for example Canada and the European businesses, but certainly nothing to sneeze at in Marmaxx in terms of very strong margin improvement there as well. So I would say it was across the board, across almost every business.

[Dana Cohen:]

Okay. And most of this from better markdowns?

[Nirmal K. “Trip” Tripathy:]

I think it was a combination of better mark-up performance, as well as better mark-down performance.

[Dana Cohen:]

Perfect. Thanks so much.

[Operator:]

Thank you. Our next question is from Dana Telsey.

[Kristina Westura:]

Hi. It’s actually Kristina Westura for Dana Telsey. Just a question on marketing plans. Your spend going forward in 2008 relative to last year. And maybe you could just give us a little bit more flavour in terms of which divisions are benefiting the most from your marketing investments.

[Carol Meyrowitz:]

Kristina, last year we increased our marketing spend about 17% on top of about 18% the year before. We will be slightly, slightly up in our marketing expense for next year, but more importantly the last two years has given us a lot of information on. As I said, John Gilbert’s been on board for a year, which has really allowed us to look at and analyze our spend a little bit better. So we think we’re much, much more focused for next year in where those dollars go. I think it’s going to benefit all divisions. I think A.J. Wright will be a tremendous, it’ll really benefit A.J. Wright because we’ve learned a lot this year. I also think Bob’s and you can see it that they’ve spent their spend in terms of their marketing tree was very high in the first half, came down fourth quarter, and they were very focused and they really drove the fourth quarter. So truly across the board I think we’re much more pointed and focused this coming year than we were a year ago. I think we’re going to be very happy with what we see.

[Kristina Westura:]

Great. Thanks.

[Operator:]

Thank you. Our next question is from David Glick.

[David Glick:]

Well, I can say good afternoon now and congratulations. Carol, we’re seeing a lot of signs of inflationary pressure in apparel accessories and home goods. Can you give us a sense how this might be impacting the portion of your business that you’re buying up front and is that particularly focused in home? Is it in wool? In leather-based products? Where is it? Is there a way to look at this as a potential opportunity for you guys as you continue to offer greater relative value versus your department store and specialty store competition that obviously doesn’t have the same value proposition?

[Carol Meyrowitz:]

David, you just answered your own question. Thank you.

[David Glick:]

I just want to make sure I’m thinking about that correctly.

[Carol Meyrowitz:]

No, but really, truly it is about the value and it’s always about the gap between us and the department stores and the competition. Obviously if there is inflation and the average ticket goes up, you know, your units through your DCs go down and you can obviously leverage that on the expense side. But having said that, I think the inflation is happening in certain categories and not in others. I’m not so sure we’re going to see so much in apparel as people think this year. They may be a little bit in shoes and I think it depends on the category. We’re really not seeing it in homes. And again, I’ll just keep coming back to our formula, which is really showing the value versus someone else. So inflation isn’t a key factor in our business.

[David Glick:]

Okay. Great. Thanks and good luck.

[Carol Meyrowitz:]

Thanks.

[Operator:]

Thank you. Our final question today is from David Mann.

[David Mann:]

Yes. Thank you. Good morning. My question’s on Bob’s. It’s definitely doing better this past year, but I guess looking back it was supposed to break even in ’05 and we’re still several years later and you’re not forecasting profitability. So can you just give an update on sort of the time table for profitability and your views on Bob’s future?

[Carol Meyrowitz:]

Yeah. Well, I can tell you I’m very pleased with their fourth quarter performance. They did cut their loss in half. Our goal is to keep improving Bob’s and we’re going to continue to evaluate the business.

[David Mann:]

Okay. And then –

[Carol Meyrowitz:]

We don’t have a time frame I can, you know, there’s been vast improvement. I mean, when you look at the fourth quarter and you see really they made $4 million if you take the impairment charge out. Which is a tremendous step in the right direction. So really my answer is we’ll continue to evaluate the business.

[David Mann:]

Okay. And then if I can ask sort of a follow up on that. When you bought Bob’s, being that that was your last acquisition, how are you taking that experience towards your willingness and any criteria for additional acquisitions just given that there seems to be a lot of opportunities, I’m sure, that are being presented to you given your cash flow and your management team.

[Carol Meyrowitz:]

Yeah, David, we are very, I mean, we are wide open. Obviously we are investing in three new businesses for next year, which we really believe in. As I said before, strategically we see ourselves as a global off-price value company that plays in obviously many countries. Having said that, we’re certainly very financially sound and this is a very interesting landscape. So we are looking at everything around us for possibilities.

[David Mann:]

Okay. Great. Thank you.

[Carol Meyrowitz:]

I want to thank everyone for today and I look forward to reporting on our first quarter. Thank you.

[Operator:]

And ladies and gentlemen, this concludes your conference call for today. You may all disconnect. Thank you for participating.