The TJX Companies, Inc.
Q1 2009 Earnings Call Transcript

Published: 13 May 2008

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the TJX Company first quarter financial results conference call. (Operator Instructions) I would like to turn the conference call over to Ms. Carol Meyrowitz, President and CEO for the TJX Companies Inc. Please go ahead, Madam.

[Carol M. Meyrowitz:]

Thank you, Melissa. Good morning and before we begin, Sherry Lang has some opening comments.

[Sherry Lang:]

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 March 26, 2008. Further, these comments and the Q&A that follows are copyrighted today by the TJX Companies. 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. With respect to the non-GAAP measures we discuss today, reconciliations to some GAAP measures are included in today’s press release posted on our website, www.tjx.com. Thank you and now I’ll turn it back to Carol.

[Carol M. Meyrowitz:]

Thanks, Sherry. Good morning. Joining me on the call today with Sherry are Trip Tripathy, Jeff Naylor, and Ernie Herrman. Let me begin by saying we are very pleased with our performance in the first quarter. While the unfavorable weather in February and March hurt apparel sales and the challenges of the consumer environment did not help, we achieved these results by sharply executing the key elements of our off price business model and taking a strong strategic approach. We maintained our inventory discipline, which allowed us to mitigate our markdown risks and put us in an excellent position to take advantage of great buying opportunities in the marketplace. When the weather turned seasonable in April, we were ready to do business. We had freshness and excitement in our stores and offered our customers great brands and great value. While we believe that there was pent-up demand, our apparel business came back stronger than we had expected and we saw traffic increase during the quarter. As a reminder, we have always said that our business is weather sensitive because we have a buy-now, wear-now customer. That said, typically the weather evens out over a give year. I want to focus for a moment on the fact that since late 2005, we have delivered quarter on top of quarter of strong performance. We are well beyond the phase of fixing what was not working in the business and have proven the staying power of our strategies. While the numbers speak for themselves, I want to spend some time on this call sharing with you what is harder to see from the outside. As we have been delivering consistently strong performance, we have simultaneously been pursuing new growth opportunities and building and developing our organization to support that growth. First, however, let’s recap the consolidated numbers; net sales for the first quarter increased to $4.4 billion, 6% above last year. Consolidated comp store sales increased 3% over last year, slightly below our plans. Foreign currency exchange rates benefited comp sales by 1.5 percentage points, which was about what we had expected. Fully diluted earnings per share were $0.43 this quarter. This result includes a tax benefit of $0.02 per share, which Trip will discuss in a moment. Last year’s results include a $0.03 per share charge related to the computer intrusion. Excluding these items, our adjusted diluted earnings per share of $0.41 or 11% above last year and at the high-end of our range, despite our slightly reduced comp. Overall, pretax profit was 6.6%, just slightly below plan. Excluding the intrusion charge taken in the first quarter last year, pretax profit margins were 30 basis points below prior year, due to a slightly lower gross profit margin and reduced interest income versus last year. Gross profit margin was 24%, which was 10 basis points below last year. Through solid execution of our off-price fundamentals, merchandise margins increased 30 basis points in a challenging retail environment and over strong increases last year. This would have been even stronger were it not for the increases in fuel costs. In addition, investments in our European business and deleverage from buying and occupancy costs offset the merchandise margin gains. With all of this, we held segment profit margin flat to last year at 7.4% on what was essentially a 2% comp without currency. Trip will provide more details on this later. SG&A expense was flat to last year as we gained leverage on the 2% comp without currency due to effective expense management. In terms of inventories, at the end of the first quarter consolidated inventories on a per store basis were down 3%. We exited the quarter with very clean inventories and more open to buy than at this time last year. We continue to be in an excellent position to capitalize upon a marketplace that is certainly full of opportunities. Now to our divisional results, let’s begin with our domestic concepts. At the Marmaxx group, our largest division, comp sales were up 1%, segment profit was $278 million, up 2% over prior year, and segment profit was 9.9, down 10 basis points from prior year. Marmaxx achieved its 9.9 segment profit despite a 1 comp increase which speaks to its strong merchandise margins and expense control. Merchandise margins increased 10 basis points and were it not for increased fuel costs on freight, would have increased 20 basis points. We attribute our strong merchandise margins to very solid execution by the Marmaxx organization. As much as the cold weather in February and March hurt apparel sales, the warm weather boosted business in April. We navigated through the volatility by maintaining lean inventories, remaining flexible and taking advantage of buying opportunities. In this way, we mitigated our markdown risks and improved mark-on in a challenging retail environment. We are making amazing deals and are very encouraged by the amount and the scope of product, from the high-end to the moderate product. Some quick highlights on categories

[Nirmal K. Tripathy:]

Thank you, Carol and good morning, everyone. Before I outline our plans for the second quarter and full year, let me provide some detail on first quarter earnings results. First, a brief comment on the tax benefit of $12 million. This is a reduction in the tax reserves established under FASB interpretation 48 accounting for uncertain tax positions, which we did not anticipate when we entered the first quarter and updated our guidance in April. The benefit to EPS rounded to $0.02. Next, some additional color on our EPS results -- we delivered solid EPS growth despite a tough retail environment and increased cost pressures, notably fuel. Our operating businesses held a flat consolidated segment profit margin despite a comp that ex currency was 2% and increased fuel costs and investments in new businesses, which combined cost us about 25 basis points. These increased costs were offset by other improvements in our merchandise margin, as well as expense control. While pretax profit margin was down 30 basis points, it was just slightly below plan and on a segment basis, is virtually all due to corporate expense and interest income. Corporate expense was up $8 million versus last year, primarily due to the timing of expenses last year. If we look at fiscal years 2007 and 2006, this year’s numbers are very much in line with those levels. Interest income was down this year due to unusually large cash balances last year which, as you will recall, was due to suspension of the buy-back. This year we are buying back stock, have less cash, and therefore less interest income but are seeing a significant EPS lift in the share count which more than offset the lost interest income. So once again, we are very pleased with these results. Now to guidance -- for the second quarter of fiscal 2009, the company expects earnings per share in the range of $0.40 to $0.42, which represents a 5% to 11% increase over the adjusted $0.38 per share in the prior year. We are assuming a second quarter top line of approximately $4.6 billion, which a comp sales increase of approximately 3% on a consolidated basis, which includes approximately 50 basis points due to foreign exchange and a 2% comp sales increase at the Marmaxx group. For the months of May, June, and July, we are planning for consolidated comp sales increases in the range of 1% to 2% in May, 3% in June, and 3% in July. For Marmaxx, we are planning on comp sales increase of flat to 1% in May, 2% in June, and 2% to 3% in July. Pretax profit margins are planned in the 6.5% to 6.7% range, flat to down 20 basis points versus the prior year, primarily due to our investments in new European businesses, which we will begin to anniversary in the third quarter. Excluding these investments, we plan the business down 10 to up 10 basis points on a 2% to 3% comp ex currency. For modeling purposes, we are planning a tax rate of approximately 38.7% and weighted average outstanding shares of $447 million, and interest expense of $3 million this year versus income of $1 million last year, a 10 basis point increase. For the full fiscal 2009 year, as Carol discussed, we are maintaining our EPS range of $2.20 to $2.25, including the benefit of the 53rd week. Excluding the 53rd week impact and the prior year’s intrusion charge, our guidance is in the range of $2.11 to $2.16, a 10% to 13% increase over the adjusted $1.91 earned last year. Again, while the $0.02 tax benefit in the first quarter does flow to the full year, with only one quarter behind us we are not updating our fiscal year guidance at this time. We are confident in our ability to achieve 10% to 13% EPS growth. Again, we have set prudent goals for the second quarter. It is also important to note that again, in the third quarter we will begin to anniversary the investments in our European businesses, which is contemplated in our guidance. And as Carol said, May is off to a good start. To keep the call on schedule, we ask that you please limit your questions to one per person. Thank you and we will take questions now.

[Operator:]

(Operator Instructions) Our first question comes from Brian Tunick. Please go ahead.

[Analyst for Brian Tunick:]

Good morning. It’s [Evelyn Copelman] for Brian. Our question is about comp growth at Marmaxx. Looking at the past three quarters, it’s been relatively weak and your guidance for the second quarter at 2% is better than Q1 and the past three quarters, despite tougher comparisons. So if you could talk a little bit about maybe the challenges for comp growth, aside from weather, that you’ve seen over the past three quarters and maybe your confidence about the second quarter comps, that would be great. Thank you.

[Carol M. Meyrowitz:]

Well first of all, Marmaxx, their merchandise margins have been very, very strong and their segment profit has been very strong. We have basically been keeping Marmaxx between planning at a 2 comp for the year, you know, leveraging the bottom line pretty strong. And I’ll have Ernie talk a little bit to it but we are feeling pretty good about Marmaxx.

[Ernie Herrman:]

I think the -- we had a decent fourth quarter I think where the sales were kind of in line with the second quarter guidance here. I think what happens is part of this weather issue that we ran into in first quarter, we anticipate that that kind of comes out of the equation. I think Carol mentioned before that over the course of the year, that always evens out and I think in second quarter, we anticipate that a lot of the exciting deals that also I think Carol mentioned in the release here are going to take place, so that’s one reason we’re feeling like it’s still a prudent guidance, even though we are up against a decent number last year. But I think we are pretty optimistic, given a lot of the buys that we’ve made recently.

[Carol M. Meyrowitz:]

I think we are positioned very well and as you can see in April when the weather broke, Marmaxx had a huge comp and very strong apparel sales. Thank you.

[Operator:]

Thank you. Our next question comes from Dana Telsey with Telsey Advisory Group. Please go ahead.

[Dana Telsey:]

Good morning, everybody. Can you talk a little bit about the levers of merchandise margin improvement? How are you seeing it, how does it vary by division? And also, the strength in Europe, Carol, what are you seeing there in terms of traffic and just the assortment there versus what you have here? How are you looking at it? Thank you.

[Carol M. Meyrowitz:]

Well, in terms of margin, actually we have margin improvement pretty much across the board. Some pretty staggering results in Winners, Marmaxx being very strong, T. K. -- I mean, we can give you -- Trip can give you that specific numbers sort of offline but really very, very strong across the board. So we are, as you can see, very open to buy, very liquid, and truly taking advantage out there. So we are positioned extremely well. I am very happy to say that our traffic for the quarter was up, which bodes very well for the future as well as our transactions being up, traffic being up, and our average basket being slightly up. We’ve also introduced our TJX credit card, which seems to be stimulating additional traffic, which again is going to be very strong for the future. So we are feeling pretty positive about that. Dana, what was your second question? I apologize.

[Dana Telsey:]

The international business, the assortment there, perhaps in Germany and the U.K., how it differs from the U.S. and the buys there?

[Carol M. Meyrowitz:]

First of all, Germany is off to an amazing start. I mean, if I say that we are turning the German business as fast as the U.K. business and it took us many, many years to be able to achieve those kinds of turns. We have a very solid team. We have over 14 people established in Germany that are buying predominantly German product. In addition, that German product is working very well in the U.K. So it’s really helping both businesses. The U.K. buyers buying for Germany and the German buyers buying for the U.K. and they really take the best of the best vendors. So it’s opened many, many doors for us. The other piece that is pretty exciting is the vendor community is very, very open to us and excited about us entering that market, so we haven’t had any barriers there.

[Dana Telsey:]

Thank you.

[Operator:]

Thank you. Our next question comes from Todd Slater with Lazard Capital Markets. Please go ahead.

[Todd Slater:]

Thank you very much. Hello, everybody. My one question is on A.J. Wright, since it has such potential to really move the needle and you have a positive $4 million profit swing there and you’ve done a lot to enhance the management team with a lot of like A level merchants and you targeted a number of areas. I’m just wondering if you could talk about what those targeted investments are yielding, what has to happen next for you to consider this more aggressive rollout? Thanks.

[Carol M. Meyrowitz:]

Well, as I said before, this is really the first time that we are sort of opening the door to looking at some additional markets and as we said, we are -- our performance, our four-wall performance has increased dramatically over 200%, so we are starting to look at that right now. The areas that we focus on -- accessories, shoes, juniors, young men’s, and kids, are all very, very strong. Our customer count is way up, our turns are better, so we are starting to feel pretty good about this business and are evaluating it and are expanding and looking at some additional markets. Again, we will be very opportunistic in terms of the real estate, which I think today is very interesting because there are a lot of doors shutting, which may give us some opportunities that we may not have had a year or two ago, so we are wide open for this.

[Todd Slater:]

Okay. Thank you.

[Operator:]

Thank you. Our next question comes from Kimberly Greenberger with KCIT.

[Kimberly Greenberger:]

Good morning. It’s Kimberly Greenberger from Citigroup.

[Carol M. Meyrowitz:]

I thought you were from Citigroup, Kimberly.

[Kimberly Greenberger:]

Fuel costs, you mentioned some initiatives to offset rising fuel costs. When do you expect those to kick in and secondarily, Trip, if you could give us a little bit more detail on the breakout on the gross margin, how much did buying and occupancy delever, what was the deleverage due to the European investment and then the fuel cost component? That would be great. Thanks.

[Carol M. Meyrowitz:]

First of all, Kimberly, we’ve really been able to mitigate the fuel. As you can see, we’ve done a great job in terms of managing expenses. We have -- we are looking at many areas in terms of fuel and our network, how we deliver to the stores, the timing of the way we deliver to our stores, so I think we will see a little bit of -- we’ll have a little bit of an advantage in the second quarter in terms of mitigating it and I think in the back half, we’ll see a little bit more, especially in home goods where there are very strong initiatives in place, and Trip will go through the numbers with you.

[Nirmal K. Tripathy:]

So Kimberly, you asked about gross profit and buying and occupancy, deleverage, et cetera. So first of all, gross profit was down 10 basis points through last year as we mentioned, and between buying and occupancy deleverage and investments in the new businesses, you are looking at about 25 basis points there, along with some other expenses, which obviously drove it to almost 40 basis points. But that was more than offset by 30 basis points in merchandise margin improvement and I would just point out that the merchandise margin number included the impact of fuel costs, so frankly the merchandise margin performance was even better and helped to offset the fuel costs. So overall, I think we are very pleased with our offsets that we’ve been able to achieve on the cost lines on gross profit in particular, and then in addition, SG&A was flat to last year which once again, we are very pleased about. We talked earlier about segment profit being flat, once again very pleased about that, and interest went the other way once again as we mentioned, about 10 basis points. So that helped us, although we were 30 basis points below last year we were just slightly below plan and overall, that’s the reason we are feeling good about the quarter.

[Kimberly Greenberger:]

Great. Thanks and good luck here in the second quarter.

[Operator:]

Thank you. Our next question comes from Dana Cohen. Please go ahead.

[Dana Cohen:]

If you could just clarify a bit on the corporate expense, the timing issue and how we should think about it as we move through the year.

[Nirmal K. Tripathy:]

If you go back to ’06 and ’07, as I mentioned, you’d see we are about in the $30 million range on corporate expense. And then what happened in ’08 was we had a number of things going on, some of it timing of some corporate expenses and that’s primarily the reason why we had about a $10 million swing in that year. You will see we are back to -- I hate to call it a normal level but we are certainly up to a more normal level this year at $31 million, and that’s after making various investments in talent and training and other things that Carol had talked about. And then you will see in our second quarter guidance, we are really back to a year ago. So I would just call it out as an anomaly, if you would, last year and a reduction because of various factors but I think we are just back to a more normal level right now.

[Carol M. Meyrowitz:]

Dana, in addition we had several high level openings that we again, you know, filling in our talent -- a director for Germany, two GM [mems] in HomeGoods, relocations, our Chief Procurement Officer, so we had a lot of that spread out through the year but of course we -- again, we were able to find some terrific talent that really came in in the first quarter and those positions are filled, and that is also part of the corporate expense.

[Dana Cohen:]

Thank you.

[Nirmal K. Tripathy:]

And Dana, just to talk to timing, if you look at full-year last year, you will see we were about flat to the prior year.

[Dana Cohen:]

Got it. Okay.

[Nirmal K. Tripathy:]

-- it’s a timing issue in the first quarter last year.

[Operator:]

Thank you. Our next question comes from Jeff Black. Please go ahead.

[Jeff Black:]

Thanks. Good afternoon, everybody. I guess just a couple of longer term questions on Europe, since you called it out so much. On sales, how fast are we talking about ramping Europe up? I mean, what do we look like in terms of percent of sales contribution in 2010, 2011 for example? On expenses, I know you just talked short-term but is there going to be an impact longer term as we look at ramping up that division? And finally on the operating margin, is there anything structural over there that would lead us to a lower operating margin than we are used to at the Marmaxx division, or do you think that sort of 10-ish rate is possible over in Europe over time? Thanks.

[Carol M. Meyrowitz:]

Well, first of all with Europe, and I’m going to say that we are surprised at the response in Germany and in HomeSense. We weren’t expecting that to happen quite as quickly. We have put out there and we have thought in our model that we would start to break even or make money in year four. We probably see that happening earlier than that. We are obviously because of this going to sit down and strategically looking at it as we are building in a shared service structure that is going to answer number two, which we think is really going to leverage the combination of HomeSense, Germany, and the U.K. So are we going to hit a 10%? You know, I don’t think we’ll hit a 10% but I can tell you that we are probably in the 8 range and we are also seeing some interesting things happening on the rent side of the business, where we are seeing -- where we used to have caps. We are taking advantage of some situations in the U.K. now and German real estate is less costly than the U.K. real estate. So we will probably look to get more aggressive in terms of adding stores and we do see the profit bottom line probably accelerating faster than we had thought previously.

[Operator:]

Thank you. Our next question comes from John Morris. Please go ahead.

[John Morris:]

Thanks. Congratulations on a great quarter. A question relating to advertising, Carol, in terms of your marketing approaching. You all have been doing some pretty creative things in the past and I’m wondering if you can update us on some of your marketing and advertising initiatives on a go-forward basis and if there is a change year over year in spending there.

[Carol M. Meyrowitz:]

In dollars, we are slightly up. We think again we are using our dollars more wisely. Each division is a little bit different and in A.J. Wright, we have dramatically changed. Last year we were on television and this year we are not, but we found a great approach to get to our consumer and it’s really working. I really cannot go into detail because these are really obviously trade secrets. And in Marmaxx, we’ve been testing again targeting a little bit different and we are pretty excited about it and we are going to be rolling out some things in the back half that we are finding are working in the first half, so we’ve taken a group of markets and we are experimenting. And as I’ve said before, with John Gilbert on board, he is really helping us to target a lot better. So we’ve been pretty aggressive but the first half and really the first quarter was about learning are these things going to work. We are finding some things that are working and then we will start rolling it out in the back half.

[Operator:]

Thank you. Our next question comes from Paul Lejuez. Please go ahead.

[Tracy Cogan:]

It’s Tracy [Cogan] filling in for Paul. I was hoping you guys could give us a little more color on the SG&A line. How were you able to do better than plan this quarter? And if there are initiatives in place or continuing initiatives as the year progresses, if you could detail those. Thanks.

[Carol M. Meyrowitz:]

I’ll have Trip talk to the SG&A but we have many, many initiatives. Again, our Chief Procurement Office is on board and we’ve probably seen non-merchandise procurement as one of the earlier quick ways of us finding some low hanging fruit -- supply chain, in-store labor, and markdown optimization will probably be a little bit longer term but I think we’ll have some quick wins earlier on. And Trip, the SG&A.

[Nirmal K. Tripathy:]

So SG&A first quarter, as I mentioned, was flat to last year and we are sort of expecting that in the second quarter as well. And I would just say I think the divisions are doing a great job of controlling expenses. It’s a combination of short-term, tighten-the-belt stuff but also as we’ve talked previously, both short-term and long-term, more programmed initiatives, like the non-merchandise procurement fees, like store payroll, the longer term initiatives around supply chain. So I think what you are seeing is some of those programmed initiatives kicking in and helping to offset risings costs but also short-term as you would expect, tighten-the-belt stuff taking place at the divisions and corporate, and that’s what generate the SG&A results.

[Operator:]

Thank you. Our next question comes from David Glick. Please go ahead.

[David Glick:]

Good morning. Congratulations on the quarter. Carol, just to follow-up on Marmaxx, the home business, it seems like the turnaround of that business is really key to sustaining the momentum in that division and you’ve made some progress over the last couple of months. Can you give us a little more specifics on what’s working, what’s not working, the mix changes there? Does that help you or hurt you from a margin perspective in terms of the mix of those business? Because you can see some variation within the home store. Just some color on that would be helpful.

[Carol M. Meyrowitz:]

Okay, well, David, I’ll have Ernie comment. Just overall, they have brought their inventories down as we strategized it and the turns in our home are a lot stronger. They are very, very focused on bringing fresh new product and I think if you walk the stores today, it’s a lot more exciting and there are certainly places that we are seeing it working. We will start to strategically invest more inventory. We’ve also tested our new home prototype and Ernie can talk a little bit more about that.

[Ernie Herrman:]

Yes, David, as Carol was saying, I think one of the keys has been we’re a little more eclectic in the mix today than we were. We are more assorted. We are not -- really we don’t have a lot of looks that we had a year ago and that was one of our problems with the execution. So we are seeing better turns obviously on less inventory and that’s really the first sign of help we wanted to see. I think, as Carol also mentioned, we are surgically going in at certain categories and putting back some more inventory and buying more goods where we are having success. So there are some categories there, which I wouldn’t want to give you specifics on, but that we are going to chase over the next quarter because we are getting some good reads. As far as the new prototype goes, we’ve tried that in a few stores and a little early to read results but that combined with the mix seems to be like it’s a positive direction for us, and so I think we will continue on that path. The first primary mission here is to make sure the mix is more exciting than it has been in the path and we’re feeling pretty good about it.

[David Glick:]

What’s a reasonable amount of timeframe to get this business back to break-even, flat comp and hopefully moving into positive territory?

[Ernie Herrman:]

Well, I would tell you, David, that actually what we are seeing now -- in this business, when you are seeing turns kick in the way it is, the customer is voting that they are liking now what they see out there. We’ve had less inventory so I’m seeing right now the sign of heading already in the right direction. By the way, we talked about this last fall, we were hoping to get to this point and I would say over the next six months-ish, I think we will be getting better comps out of the area.

[David Glick:]

Great. Thanks very much. Good luck.

[Operator:]

Thank you. Our next question comes from Richard Jaffe. Please go ahead.

[Richard Jaffe:]

Thanks very much. A follow-on question, I guess, about Europe; in the past, we’ve heard about what Europe has taught you, particularly the U.K. business and bringing footwear into Marshalls, some other learnings. Are there other things that we can -- that you guys have gleaned from Europe that will apply to the Marmaxx business to help that grow and are there other initiatives within the Marmaxx box like Runway and Cube that we can look forward to in the current year?

[Carol M. Meyrowitz:]

Well, I think we have quite a few initiatives in Marmaxx in place now and I think as far as initiatives go, the go both ways across the ocean. The U.K. is just getting into jewelry and their accessory business is huge. Marmaxx has many, many tests underway and are in process of a new home prototype, the Cube, which is going to be over 300 and hasn’t even launched yet, which we are seeing positive results. And there are many other categories that we are testing new things in and Ernie, you want to comment? Because I think there’s a lot of new things going on in Marmaxx.

[Ernie Herrman:]

Yeah, I think within the business, we still feel very good obviously about our accessory business. I think that was mentioned earlier, so we’re looking at different ways to accelerate that. As far as some of the other little test, I would hesitate to comment on any specifics at this point, as some of the results are too early to talk about, I think. Certain ends of the fashion business obviously -- you know, we’re feeling pretty good about our men’s business and there were certain pockets of opportunity there. And I think the shoe mega rollout we will continue with aggressively. I think you guys are already aware of that. So as Carol would say, it’s marketing -- I think one of the big takeaways, I don’t know if Carol touched on this a little earlier, is one of the big attitudes, the strategies we have in Marmaxx right now is looking at marketing where we actually get the results. And John Gilbert, who is on board right now, is really helping us with our finance area to determine where we get a pay-back, you have to be a little careful on this front because there is a bit of an art-form involved in marketing, but that to us is an initiative in itself, which is taking the marketing spend that we already have in place and being more efficient and more productive with it. So I think that could be a key -- a key [change] for us really down the road here this year and I think we can get some big payback.

[Carol M. Meyrowitz:]

I think the other piece is in terms of home, the divisions are all working very close together and that is really terrific shared knowledge, which I think is helping Marmaxx get back on track in home. You know, Winners’ business is very strong and HomeGoods has a lot going on, so they are spending a lot more time together, which I think is helping all the businesses.

[Richard Jaffe:]

Great. Thank you very much.

[Operator:]

Thank you. Our next question comes from Michelle Clark. Please go ahead.

[Analyst for Michelle Clark:]

It’s actually [Chi Li] calling. Two quick questions on Germany, the first is can you quantify what the negative margin impact was from the German stores in the quarter? And second, in order to break even in Germany, how many stores do you need? Thanks.

[Nirmal K. Tripathy:]

Germany was about 10 basis points impact on margin. And for the second quarter, we expect that to be about the same, a little more. What was your other question?

[Analyst for Michelle Clark:]

The second question was how many stores in Germany do you need to start to break-even.

[Nirmal K. Tripathy:]

Oh, I see. Okay. Well, right now all I can tell you is we have a three-year plan that projects, with the addition of about five stores a year, projects a break-even at the end of year three. That’s the model we have out there. Obviously we will do our best to outperform that.

[Analyst for Michelle Clark:]

Great. Thank you.

[Operator:]

Thank you. Our next question comes from David Mann. Please go ahead.

[David Mann:]

Thank you. In terms of gross margin, can you update your full year guidance for gross margin and also provide what you expect the gross margin range to be for Q2? And then in light of that, can you just also talk about the prospect for continuing merchandise margin growth as your compares get a little tougher in the rest of the year?

[Nirmal K. Tripathy:]

Well, the full-year guidance right now, which obviously we haven’t changed, is still at 10 to 20 basis points above last year, so we’ve got a gross profit right now in the plan which is a low of 24.6 to 24.7, versus 24.5 last year. So since we are just -- we’re not changing our guidance. That’s what the numbers are at this point in time. And as far as merchandise margin goes, we will just continue to be focused on driving that as we have been for many quarters now.

[Carol M. Meyrowitz:]

David, some of the opportunities we still have, obviously now and in the back half and even coming up against a stronger second quarter, is we are much more liquid. We are very strategic seasonally and transitioning our businesses, and we see opportunity there. In addition, we are getting better and better on the supply chain in terms of customization and what goes to what stores and how we transition each store. So we still see some pretty good opportunity on the merchandise margin side of the business.

[David Mann:]

And the second quarter gross margin expectation?

[Nirmal K. Tripathy:]

Second quarter gross margin right now what we’ve got is a flat to minus 10, and keep in mind -- and the actual numbers are 23.9% to 24% versus 24% last year. And I would just ask you to keep in mind that we are continuing to face to a greater degree in the second quarter than the first the impact of fuel costs on merchandise margin, as well as the investments in the new businesses and buying and occupancy deleverage. So I think at the high end, a flat gross profit would be -- is what we are shooting for with all these [cons to the upset].

[Carol M. Meyrowitz:]

And our goal is certainly to beat that.

[Nirmal K. Tripathy:]

Absolutely.

[David Mann:]

Thank you.

[Operator:]

Thank you. That was our last question and that does conclude today’s conference call. Please go ahead and disconnect at this time.

[Carol M. Meyrowitz:]

Thank you very much and we look forward to the second quarter call.