TJX Companies, Inc. (TJX) Q3 2018 Earnings Conference Call Transcript

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TJX Companies, Inc. (NYSE: TJX)
Q3 2018 Earnings Conference Call
Nov. 14, 2017, 11:00 a.m. ET

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Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen thank you for standing by. Welcome to the TJX Company's Third Quarter Fiscal 2018 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 star then one. As a reminder, this conference call is being recorded November 14th, 2017.

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I would like to turn the conference call to Mr. Ernie Hermann, Chief Executive Officer and President of the TJX, Inc. Please go ahead, sir.

Ernie Hermann -- President, and Chief Executive Officer

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

Deborah Holmsen -- Investor Relations

Thank you, Ernie, and good morning.

The forward-looking statements we make today about the company's results and plans are subject to risks and uncertainties that could cause the actual results and the implementation of the company's plans to vary materially. These risks are discussed in the company's SEC filings including, without limitation, the Form-10K filed March 28th, 2017. Further, these comments and the Q&A that follows are copyrighted today by the TJX Company, Inc. Any recording, retransmission, reproduction, or other use of the same for profit or otherwise without prior consent of TJX is prohibited and a violation of United States Copyright and other laws. Additionally, while we have approved the publishing of a transcript of this call by a third-party, we take no responsibility for inaccuracies that may appear in that transcript. Please note that the financial results and expectations we discuss today are on a continuing operations basis. Also, we have detailed the impact of foreign exchange on our consolidated results at our international division in today's press release and the investor's section of our website TJX.com. Reconciliations of the non-GAAP measures we discuss today, to GAAP measures are posted on our website TJX.com in the investor's section. Thank you. And now I'll turn it back over to Ernie.

Ernie Hermann -- President, and Chief Executive Officer

Good morning. Joining me and Jeff on the call is Scott Goldenberg.

I wanna begin our call today by saying that our hearts go out to all of our associates, their families, and everyone who was affected by the recent hurricanes. The personal stories we have heard from our team in the field make it clear how devastating the situation has been to so many people. As an organization, we have extended our help and support to our associates and their families in Texas, Florida, and in Puerto Rico where we opened relief centers in some of our stores. We have made significant corporate contributions to the relief efforts of the American Red Cross and Save the Children. The response to our in-store fundraising campaigns has been tremendous thanks to the generosity of our customers. We know the recovery is ongoing and will be long-lasting. As the CEO of this company, I could not be prouder of how our organization, our associates, and our customers have responded to provide their care and support during such a difficult time.

Moving now to our third quarter results. Third quarter consolidated comp sales were flat versus a strong 5% increase last year. Earnings per share were $1.00 and at the high end of our plan. During the quarter, the hurricanes negatively impacted our top and bottom line results. Additionally, we believe that warmer temperatures in the U.S. during the quarter dampened demand for apparel at Marmax. Beyond this, we believe we could have done a better job in certain apparel categories in Marmax, and therefore left some business on the table. That said, our non-apparel sales were strong. Also, as the weather turned more seasonable in the second half of October, we sales improve at Marmax.

Importantly, I am very pleased with our customer traffic which was up strongly across all four major divisions including up 2% at Marmax for the quarter. Further, merchandise was up again, similar to the strong increases we saw in the first and second quarters. This is a testament to the flexibility of our off-price business model. Our buyers capitalized on excellent opportunities in the marketplace which helped drive mark on. We remained extremely disciplined with our lean inventory levels, and we're very strategic in how we forward merchandise to our stores.

The fourth quarter is off to a strong start, and we see many opportunities. At Marmax we started aggressively shipping more cold weather apparel to start the quarter. We have many initiatives underway to drive sales and traffic this holiday selling season and are in terrific inventory position. We have plenty of liquidity to take advantage of a marketplace that is loaded with quality branded merchandise. We are excited about the fourth quarter and will be offering great gift selections at compelling off-price values, and emphasizing them in our marketing. The entire management team is laser-focused on achieving our fourth quarter plans and will strive to surpass them. We remain confident in our long-term growth strategy and that we can continue to grow successfully in both the U.S. and internationally.

Before I continue, I'll turn the call over to Scott to recap our third quarter numbers. Scott?

Scott Goldenberg -- Chief Financial Officer, and Senior Executive Vice President

Thanks, Ernie. And good morning everyone.

Consolidated comparable store sales were flat versus a five percent increase last year. While sales were below our plan, we were very pleased that customer traffic was strong and up at all four major divisions. While overall traffic and units sold were up, these increases were mostly offset by a lower average ticket. As a reminder, our comp store sales exclude the growth from e-commerce. Also, our comp store sales exclude 37 stores, most in Puerto Rico, that were significantly impacted by hurricanes during the quarter. I also wanted to mention that approximately 400 additional stores were impacted in Florida and Texas for a period of time due to the hurricanes, and are still included in our comp store sales.

Again diluted earnings per share were $1.00 and at the high end of our plan, and over an adjusted $0.91 last year. We believe the combination of lost sales, and other expenses due to the hurricanes, in the third quarter, negatively impacted EPS by about three pennies. The combination of foreign currency and transactional foreign exchange benefited EPS growth by 5%, and the change in accounting rules per share-based compensation benefited EPS growth by an additional 2%. As we anticipated, wage increases negatively impacted EPS growth by about 1%.

As Ernie mentioned, we were very pleased that our merchandise margin increased in the third quarter. Further, our overall pre-tax profit margin exceeded the high end of our guidance despite the below plan sales. This was mostly due to better than expected merchandise margins and expense savings on the flat comp. Again, this speaks to the flexibility of our off-price model and our ability to adjust and react to current trends.

At the end of the quarter, consolidated inventories on a per store basis, including inventories held in warehouses, but excluding in-transit, and e-commerce inventories were down 4% on a constant currency basis. We are very comfortable with our liquidity and inventory position entering the fourth quarter and are setup very well to flow fresh merchandise to our stores throughout the holiday season.

Now, to recap our third quarter performance by division. Marmax comps were down 1% versus a 5% increase last year. Again, the hurricanes had a negative impact on third-quarter sales. That said, we are very pleased that customer traffic increased at comp stores across all regions except Florida. Segment profit margin decreased 80 basis points primarily due to expense deleverage on the below-plan comp. Merchandise margin was up significantly which underscores our disciplined inventory, disciplined buying, and inventory management. We were pleased to see sales trends improve toward the end of the quarter, and we have many exciting initiatives underway to drive traffic and sales in the fourth quarter and beyond.

Homegoods delivered another solid quarter. Comp sales increased 3% over last year's 6% increase. We're also negatively impacted by the hurricanes. Segment profit margin was down 60% basis points, this was primarily due to the increased supply chain, and freight costs largely as a result of our new distribution center. We are very pleased with the comp increase in traffic gains we saw at this division.

TJX Canada comps increased a strong 4% over last year's 8% increase. Adjusted segment profit margin, excluding foreign currency, was up 240 basis points. This was primarily due to a benefit from transactional foreign exchange and a strong increase in merchandise margin, as well as lower supply chain cost versus last year. All three of our Canadian chains had great momentum and strong results for the third quarter.

At TJX International, comps increased 1% in the third quarter. We are pleased that customer traffic was up and exceeded the comp sales growth. In Europe, we believe we continued to perform better than most major European retailers, despite a very challenging retail environment. Adjusted segment product margin, excluding foreign currency, was down 220 basis points. This decrease was primarily due to costs related to opening our new distribution center in the U.K, lower merchandise margin, and expense deleverage on the 1% comp. In Australia, TJ Maxx delivered another quarter of very strong sales.

I'll finish with our shareholder distributions. During the third quarter, we bought back 350 million of TJX stock, retiring 4.9 million shares. We continue to expect to buy back 1.5 to 1.8 billion of TJX stock this year. Further, through our dividend program, we returned 197 million to shareholders in the third quarter, representing a 20% increase over last years per share dividend.

Now, let me turn the call back to Ernie, and I will recap our fourth quarter and full year fiscal '18 guidance at the end of the call.

Ernie Hermann -- President, and Chief Executive Officer

Thanks, Scott.

Now, to some of our other business highlights in the third quarter. First, we opened our 4,000th store, a proud milestone for our company. This is a great reflection of our decades of operating expertise both in the U.S and internationally, and our disciplined approach to real estate. Second, we were thrilled with the openings of our first Home Sense stores in the U .S. While still very early, initial customer response has been outstanding. Shoppers are loving the differentiated mix of home fashions at Home Sense. Together with home goods, we offer something for every room of the home.

Next, we opened our first new TK Maxx stores in Australia. The response of Australian consumers to our great brands and values has been outstanding, and we like out long-term prospects in this region of the world.

Lastly, we rolled out two major initiatives at TJX International. First, we are now offering our non-credit loyalty program, Treasure, in all of our stores in the U.K and Ireland. Second, Click and Collect is now available at all of our TK Maxx locations in the U.K. We are confident that both of these programs will help deepen customer engagement with TK Maxx.

Now, I'll move to our fourth quarter opportunities. Most importantly, we are passionate about offering consumers tremendous off-price values on an eclectic mix of merchandise from around the world. We are in a great liquidity position to take advantage of the numerous opportunities we see and plan to buy seasonal product throughout December. We'll be flowing fresh merchandise to our stores, and online multiple times a week so shoppers can expect to see something new every time they visit. I am convinced that our stores will have the best gift-giving assortments out there this holiday season. Furthermore, every year we work to improve how we transition our stores post-holiday which is another opportunity.

Next, we feel great about our marketing campaigns which recently launched. Once again, we're using our tri-branded campaign strategy in both the U.S. and Canada, which has been successful for us in prior years. In Europe, we are leveraging a unique quality campaign across multiple geographies. All of our four major divisions will be actively marketing every week throughout the holiday season with an integrated approach to engage shoppers through television, digital, social media, and mobile. We also continue to grow and promote all of our loyalty programs. We believe they will encourage more frequent visits and cross-shopping of our stores and online.

Moving on, I'd like to recap why we believe consumers love shopping our retail banners. First and foremost, we offer excellent off-price values on a curated selection of merchandise from around the world in both apparel and non-apparel. Our assortments are constantly changing. This newness and freshness is an important part of the treasure hunt shopping experience and encourages more frequent visits. Further, we have been attracting more millennial customers who are often on a tighter budget and looking to stretch their shopping dollars. Second, we are convinced that the touch, and feel shopping experience is not going away. In our stores, consumers choose from a wide variety of branded items across multiple categories in very little time. They can try apparel on, select what they want, and take their items home that same day. This all provides an enjoyable, and efficient shopping experience.

Next, our flexible store format and fast turning inventory allow us to respond quickly to changing consumer trends. Our more than 1,000 buyers source from a universe of over 18,000 vendors globally to offer the best mix of fashion and brands for our customers.

Lastly, we aim to locate our stores in convenient that are easy for consumers to access. In the U.S. and Canada, our stores are generally located in off-mall strip centers or on heavily trafficked popular commuting routes where shoppers may visit weekly or more. As to e-commerce, we view it as complimentary to our very successful brick and mortar business and another way to drive incremental sales and traffic. Our key strategy is to differentiate our merchandise mix from our stores to encourage shopping across channels.

Moving on to product availability. We see the marketplace loaded with quality desirable brands. Our challenge is holding our buyers back so that we have liquidity to take advantage of opportunities that tend to become better. Our buyers are opening new vendors all the time and expanding existing relationships so that we can offer consumers a constantly changing mix.

In closing, the fourth quarter is off to a strong start. We are excited about our near and long-term opportunities. Again, our key growth drivers are driving comp sales in traffic and global store expansion. We remain highly confident in the fundamental strength of our business and the continued profitable growth of TJX. With our flexible off-price business model we have succeeded in many different types of retail and economic environments over the course of our 40 plus year history. We have built a highly integrated business and developed international teams and infrastructures that, we believe, differentiate TJX. I would be extremely difficult for other retailers to replicate. We have a clear long-term vision for growth and see many opportunities to grow our market share in the U.S. and internationally. We are excited about our future as we continue to grow TJX as the only major international off-price retailer in the world.

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

Scott Goldenberg -- Chief Financial Officer, and Senior Executive Vice President

Thanks, Ernie. Before I begin, I want to remind everyone that both the fourth quarter and the full year include an extra week due to the 53rd week in the fiscal 2018 calendar, which we expect will benefit both periods by about $0.11.

Now to our guidance beginning with the fourth quarter. We expect GAAP earnings per share to be in the range of $1.25 to $1.27. Excluding an approximate $0.11 benefit from the extra week in the fourth quarter. We expect adjusted earnings per share to be in the range of $1.14 to $1.16, an 11 to 13% increase versus the prior year. This guidance assumes an expected negative impact to EPS growth of approximately 1% due to wage increases; it also includes a 1% benefit to EPS growth due to the combination of foreign currency and transactional affects. We're modeling fourth quarter consolidated sales in the range of 10.6 to 10.8 billion. This guidance assumes a positive impact to revenue of approximately 6% due to the extra week, and a 2% positive impact to reported revenue due to translational FX. For comp store sales, we're assuming growth in the 1 to 2% range on both a consolidated basis and at Marmax. The comps exclude e-commerce and by definition the extra week.

Fourth quarter pre-tax profit margin is planned in the 12.1 to 12.2% range versus the prior years 11.6%. The extra week is expected to benefit pre-tax margin by approximately 50 basis points. We're anticipating fourth-quarter gross profit margin to be in the range of 28.9% to 29% versus 28.3% percent last year. The extra week is expected the high end of gross profit margin by approximately 40 basis points. We're expecting SG&A as a percent of sales to be approximately 16.8 up ten basis points versus last year. We do not expect the extra week to have a significant impact on fourth quarter SG&A as a percent of sales. For modeling purposes, we're currently anticipating a tax rate of 38.1%, net interest expense of about $8 million, and a weighted average share count of approximately 639 million.

Moving on to full year guidance. On a GAAP basis, we expect fiscal '18 earnings per share to be in the range of 391 to 393, excluding the approximate $0.11 benefit from the 53rd week, we expect adjusted earnings per share to be in the range of $3.80 to $3.82. This would up 8% versus the adjusted 353 in fiscal '17. We continue to expect that wage increases will negatively impact fiscal '18 EPS growth by about 2%. We now anticipate that the share-based compensation accounting rule will benefit fiscal '18 EPS growth by about $0.05 or 1%. As to FX, assuming current rates, we now expect the net impact of foreign currency and transactional foreign exchange will have a 1% positive impact on fiscal '18 EPS growth. This EPS guidance assumes consolidated sales in the $35.6 to $35.7 billion, a 7% to 8% increase over the prior year. This guidance assumes a positive impact to revenue of approximately 1.5% due to the 53rd week, and a neutral impact to reported revenue to translational FX.

We're continuing to plan a 1% to 2% comp increase on a consolidated basis. Again, the comps exclude e-commerce and by definition the extra week. We're increasing our expectation for pre-tax profit margin to a range of 11.3% to 11.4%; this will be down 10 to 20 basis points versus the adjusted 11.5% in fiscal '17. The 53rd week is expected to benefit the high end of pre-tax margin by approximately 20 basis points. We're planning gross profit margin to be in the range of 29.0, to 29.1, flat to up ten basis points versus last year. The 53rd week is expected to have a 20 basis point benefit to the high end of gross profit margin.

We're expecting SG&A as a percentage of sales, to be approximately 17.6% versus 17.4% last year. We do not expect the 53rd week to have a significant impact on full-year SG&A as a percent of sales. For modeling purposes, we're currently anticipating a tax rate of 37.3%, net interest expense of about $35 million, and a weighted average share account of approximately $646 million.

Now to our full year guidance by division. Sales and pre-tax margin guidance are on a 53rd-week basis. At Marmax we're now expecting comp growth of 1% on sales of 22.1 to 22.2 billion, and segment profit margin of approximately 13.7%. For the fourth quarter, we are assuming that the decline in an average ticket at Marmax moderates.

At Home Goods we expect comps to increase 4% on sales of 5.1 billion. We are increasing segment profit margin guidance to a range of 13.6% to 13.7 %. For TJX Canada, we are planning a comp increase of 4% on sales of 3.6 billion; we're raising our adjusted segment profit margin guidance, excluding foreign currency to a range of 14.7% to 14.8%. At TJX International we're expecting comp growth of 1% on sales of $4.8 billion, an adjusted segment profit margin guidance, excluding foreign currency, of about 4.8%. It is important to remember that our guidance for the fourth quarter and full year assumes that currency exchange rates will remain unchanged from the levels at the beginning of the fourth quarter. Again, our guidance for GAAP EPS for both periods includes a $0.11 benefit from the 53rd week in this year's fiscal calendar.

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

Questions and Answers:

Operator

Thank you. At this time, if you would like to ask a question, please press star, then one. You will be prompted to record your first and last name. To withdraw your request press star, two. Once again, to ask a question press star, then one, now.

Our first question comes from Paul Lejuis. Your line is open.

Paul Lejuis -- Citi -- Analyst

Any quantification about how the fourth quarter is started? And just curious about regional differences throughout the quarter? Maybe help us understand how the weather impacted certain regions, then versus those that were not hurt by the less than seasonable weather out there. Thanks.

Scott Goldenberg -- Chief Financial Officer, and Senior Executive Vice President

So, Paul, I'll just start. Overall we believe that the hurricane and the weather impacts for the quarter both for Marmax and TJX had approximately 2% impact. They would have been 2% higher had it not been for both those two factors.

In terms of the weather, as the weather turned, and I'm speaking more toward Marmax at this point, as the weather turned as we moved through October to the last part of it, we saw the comps increase at Marmax, versus the trend we saw. September was a combination of both weather and hurricane, and in October, in the first half of the month, was a weather story. I'll turn it over, we're not gonna go into the comps by division at this point, but I'll let Ernie.

Ernie Hermann -- President, and Chief Executive Officer

Yeah, Paul, I would just say, I think part of your question was prior to the hurricanes and the unseasonable weather. We were tracking better at the beginning of September, actually. We had high hopes, and then it got derailed with a lot of that weather issue.

I would say besides that, and we didn't talk about it in the script, we did have a couple of areas that was our own execution. And I would say it was really more because of a lack of the lack of the appropriate fashion content, and that really did not help us. That is an opportunity that we have since dug into. We've certainly got the teams together to look at that, and feel that those areas that hurt us in the third quarter are in better shape going into the fourth quarter. That has been something certainly self-inflicted that we, in addition to the weather, have focused on.

Paul Lejuis -- Citi -- Analyst

Ernie, was it a fashion miss? Or was it more of what you wanted to buy wasn't available out there?

Ernie Hermann -- President, and Chief Executive Officer

No, it was absolutely a fashion miss, Paul. It had nothing to do..., This was really on our own part, a selection issue. It had nothing to do with availability out there. That would apply to the three areas that I'm thinking about. All three were a fashion miss from our own execution.

Paul Lejuis -- Citi -- Analyst

Is that already fixed, or when do you expect it to be fixed?

Ernie Hermann -- President, and Chief Executive Officer

I would say it's expected to be fixed. They are not already fixed, they are a work in progress, but they have both the underlying trends relative to this store, and both cases have improved a little bit. That's a good sign. I would say two of them I am feeling will be well improved by the fourth quarter. The third one might take a little bit longer.

Paul Lejuis -- Citi -- Analyst

Thanks. Good luck.

Ernie Hermann -- President, and Chief Executive Officer

The bulk of it will definitely be improved.

Paul Lejuis -- Citi -- Analyst

Thanks. Good luck guys.

Ernie Hermann -- President, and Chief Executive Officer

Thank you.

Operator

Our next question comes from Lindsay Drucker Mann. Your line is open.

Lindsay Drucker Mann -- Goldman Sachs -- Analyst

Thanks, good morning.

I just wanted to clarify on the Marmax merchandise margin which you said was up was up nicely, at the same that it sounds like you said that AUR was down, and you called out some execution issues and a general shortfall for comp trends. Could you help square the favorable merchandise margin behavior with those headwinds to merchandise margin?

Scott Goldenberg -- Chief Financial Officer, and Senior Executive Vice President

I think that in terms versus, I'll talk both on an absolute basis and versus guidance Lindsay. We ended, given that we're always a considerable of open to buy in the quarter, in this case, the third quarter, for the third quarter, and we are able to buy, particularly in our mark on better than what we had guided to. That was largely the uptick. In fact, the average ticket, although weighing on some of the overall costs for the business, was actually moderated a bit from what we originally guided to. So, we had two pickups, the biggest one I would say is in the mark on that we bought that.

Ernie Hermann -- President, and Chief Executive Officer

Lindsay, I would also jump in. Here's the dynamic that happened a little in the third quarter. As we talked about we strategically flowed a little differently. One of the things we did is stay a little bit leaner in the third quarter on out cold weather apparel, flowed it later in the quarter. With that, unfortunately, we might have given up a little bit of top line sales. When you give up the top line sales, they're gonna flow it later into November. That, oftentimes, helps you with the margin even though you've given up some sales. That's one of the benefits of doing that. Having said that, I think we probably waited a little bit too long and gave up a little bit more sales than we like. Now, the market environment that we're in where a lot of the retail traffic is off all around us is going to probably create even more opportunities which we certainly started taking advantage of in the third quarter, absolutely plays to our business model. That's why we're able to hold in the strong merchandise margin even when the sales flattened. Our expectation would be we'll continue to advantage in the fourth quarter, especially in November. In this loaded market with retail traffic across the board being pretty slow, our guys have seen a lot of tremendous growth. I think it's gonna keep that mark ongoing in a strong direction. Just thought that's added color for you in terms of how that dynamic has taken place.

Scott Goldenberg -- Chief Financial Officer, and Senior Executive Vice President

In terms of Marmax overall margins, our entire miss from guidance was due to the hurricane and the deleverage on the low comp at Marmax, which again, was partially offset by the strong merchandise margin improvement we saw.

Ernie Hermann -- President, and Chief Executive Officer

Just to jump in one last thing. It's really the strength. We've talked about it many times over the years; it is the strength of our business model that allows us to be so nimble and react to situations where our sales have slowed down in a business like Marmax. We're able to, then, improve on our liquidity, adjust, and really make up some headway on the margin side of the business, which I don't think a lot of other retail concepts are able to do that as quickly as this concept is.

Lindsay Drucker Mann -- Goldman Sachs -- Analyst

Thank you for that. A quick follow-up on the traffic you called out for Marmax, can you tell how that compares with trends earlier this year?

Scott Goldenberg -- Chief Financial Officer, and Senior Executive Vice President

Hi Lindsay, this is Scott. We didn't really break out that detail, so not gonna go into the comp transaction that we saw earlier in the year.

Lindsay Drucker Mann -- Goldman Sachs -- Analyst

Okay. Thanks anyway guys.

Ernie Hermann -- President, and Chief Executive Officer

Lindsay the only thing I would throw into that is our traffic was up in all regions except for Florida. Of the strong traffic increase. That was encouraging as well.

Lindsay Drucker Mann -- Goldman Sachs -- Analyst

Great. Thanks very much.

Operator

Our next question comes from Mike Baker. Your line is open,

Mike Baker -- Deutsche Bank -- Analyst

Thanks. A couple questions. One, we understand, I think, oversights in hurricanes and weather has impact but what about on a competitive situation, the department stores hung in reasonably well this quarter to affect the GAAP between TJX and an average department store has narrowed, and actually a little bit better than Marmax. Are you seeing department do more promotional or a little more competitive?

Ernie Hermann -- President, and Chief Executive Officer

Mike, I'll jump in on that. That, to us, has really been a non-issue. Again, if you look at the weather half the puzzler here, I would say the other part would be our execution internally. Again, some of it might have been the delay in our cold weather business and how we shipped those, but I really think the fashion component execution in a couple of our bigger areas is really more our own doing and more of what affected us than any external execution by any other retailer out there. We don't really see any indicators. We look at metrics to try to find that, and we see no sign of that. We can kind of look at REA and dollar out and figure out where we've created our own issues, and that seems to be the bulk of it. Along with the weather being a really significant part, obviously

Mike Baker -- Deutsche Bank -- Analyst

Yeah. Yeah. That makes sense. Alright.

Then if I can sort of change directions and talk about the margins, the number of moving parts this year. Is it too early to think about next year or maybe just more [inaudible] [00:35:00] term margins? We've got a couple years of decline. At what point do you think the company pre-tax margin starts to level off and even show some improvement on an annual basis.

Scott Goldenberg -- Chief Financial Officer, and Senior Executive Vice President

Michael, I'll just in. I think in too early we'll go in certainly in more detail on the February call in terms of that. But we would not expect any margins at this point for next year to be flattening out. But, I think we'll address what our expectations are longer term where I think we certainly would be more optimistic. As of right now, the two major factors that are dragging on our business, there's three. I'll address two, and Ernie can address the third.

One is, wages although moderating as we move through the year, this year the USP is still what we would have expected, a slight moderation. A slight headwind next year. Up in Canada in the last couple months, the Ontario province has a very big increase of $11.60 up to about a 20% increase. That will make our wage impact, at this point, slightly down, but close to the same level of a headwind as last year.

The DC, or supply chain cost, although moderating again in this fourth quarter, we are still gonna see impact of that going forward, at least for next year it's gonna be up, a bit lumpy, as we still are..., We're still building out to support the strong store growth that we have.

One of the factors that have impacted us this year is the average retail, and I'll Ernie address that.

Ernie Hermann -- President, and Chief Executive Officer

Yeah, we see that Mike, moderating as we go into the fourth quarter here. We've been talking about that before, and obviously in the past had hoped it would moderate a little bit sooner. This is..., We've also talked about a bottom-up driven dynamic where our merchants really determine where the average ticket is going based on sales opportunities within their own areas. As we look out, and we're getting visibility the more that's bought, our fourth quarter specifically the ticket is moderating. We're feeling very good about that, and that is from an expense standpoint, and also from a ticket going out the door to help drive sales standpoint, it would be a healthy thing. We're feeling good about that.

Scott Goldenberg -- Chief Financial Officer, and Senior Executive Vice President

It's going back to the overall guidance will, again, in the fourth quarter, we still expect it, we've used the word tick up to be slightly higher than the plan we gave this year of the 5%, so no change on that at this moment. Although there are always a lot of moving factors, I'd say, share-based compensation, and tax rates obviously, still up in the air. But overall we do expect our plans to tick up from what this year's plans were.

Mike Baker -- Deutsche Bank -- Analyst

Okay. That's very helpful color. Thank you, appreciate it.

Operator

Our next question comes from Matthew Boss. Your line is open.

Matthew Boss -- JP Morgan -- Analyst

Thanks. On merchandise margins, product availability you talked about being point from your comments. It's interesting because department store inventories actually seem to be more balanced. Can you talk about the margin opportunity if pricing is more rational going forward in the marketplace? How much, if any do you really, actually, rely on the depart stores for product availability these days?

Ernie Hermann -- President, and Chief Executive Officer

So, Matthew, that's a great question, and one we talk about it strategically around here a lot. One of the dynamics that has created the department store relativity to lessen is because there was such a strong e-com business in the world. That includes branded retailers vertically with their own sites, yes, department stores with their own sites, what has happened in terms of availability, the brick, and mortar, rightfully so, they're all trying to lean up their brick and mortar, but now there is now goods, as you can imagine, online. In terms of availability, that's just been a shift for us in terms of creating an umbrella of value that shift is actually a little bit more visible online, so it creates an umbrella of what goods are being sold at. It allows our consumers to really look into that more easily than ever before. That whole dynamic, first of all, the amount of goods in the inventory, I believe, a lot that is a reaction to Internet business because many manufacturers wanna be able to supply an Internet business as well. It's a little bit of left pocket, right pocket which is probably one reason, as we're continually opening thousands of new vendors, we're up to18,000 vendors today, and that, clearly, helps drive that. A long-winded answer to your question, we would continue to think yeah there probably is some margin opportunity given all those dynamics.

Matthew Boss -- JP Morgan -- Analyst

Great. Best of luck.

Operator

Our next question comes from Daniel Hofkin. Your line is open.

Daniel Hofkin -- William Blair -- Analyst

Good morning.

Just a quick follow-up. If there's a way on the execution front, I don't know if you specifically quantified what impact you think that had. You talked about weather and on the execution front. Then I was just curious; you talked about the wage outlook, but given the announcement by one of the large discount retailers to bring their bottom of the scale up to 15 bucks within three years. How does that affect what you think of as the wage trajectory the next few years?

Scott Goldenberg -- Chief Financial Officer, and Senior Executive Vice President

I'll start out on the wage. We have no comment in terms of what other retailers are doing in terms of our adjustment. As I said, I think, at this point, we'll have a similar level of headwinds this year. And wage next year given the Canadian adjustment I talked about on the earlier question, so that's about all I think we're gonna talk about on wage at this point.

Ernie Hermann -- President, and Chief Executive Officer

And quantifying on things, that's not just something we give out, we don't break down the misses like that or what the dollars are the percent of the business is.

Scott Goldenberg -- Chief Financial Officer, and Senior Executive Vice President

The only thing we think, they implied is that we have the two points in on top of that, what Ernie said, we gave up, we think we left additional business on the table.

Daniel Hofkin -- William Blair -- Analyst

Okay. Then, I guess, maybe, regarding the recent pickup in the business, is there any way to tell whether some of that is pent-up demand or early replenishment purchases following the impact of the storms.

Ernie Hermann -- President, and Chief Executive Officer

I would say on that, the good news with the recent trend is, it's wide-spread across the businesses. It's not just the cold weather business, which I talked about before, that is not the only, by any means, businesses driving our increasing trend that we're seeing. We're seeing it across all the families of business which is very encouraging. We start to go from here and to our major gift-giving posture for holiday, which obviously we're excited about..., Every year we do a, I think, a really good job as we get to fourth quarter in terms of going after gift giving it's a place, I think, have executed better year after year. We have also done a better job in our marketing year after year. Our goal there is just get them in the store, and because we deliver a lot of impulse buying throughout the store, we don't go after anyone category any more disproportionately than we do the year before unless it's a hot trending category. I would say the trends that we're seeing over the last couple weeks would bode well for the Christmas holiday.

Scott Goldenberg -- Chief Financial Officer, and Senior Executive Vice President

Another way to talk on the sales to address the pent-up demand is that the raw number is good and it's also better than what we had planned, which we do take into consideration at the beginning of a month what our plans are gonna be for the next month. I can't go into any more level of detail.

Daniel Hofkin -- William Blair -- Analyst

Understood. Okay, thanks very much.

Scott Goldenberg -- Chief Financial Officer, and Senior Executive Vice President

Thank you.

Operator

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

Omar Saad -- Evercore ISI-Analyst

Thanks. Good morning.

I was wondering if you could talk a little bit more about what you're seeing in the marketplace with brands doing some of their own, doing clearance online through their own websites, and retailers, and how that affects your business? It feels like something that's been going on for a couple years, but maybe now some of these brands are starting to realize that you can't clear effectively in online channel and maintain your full price umbrella. Is that something you're seeing? Are you seeing that affect your business in any way? How do you think about that dynamic and context of the role of TJ Maxx in the broader fashion apparel marketplace? Thanks.

Ernie Hermann -- President, and Chief Executive Officer

Great question Omar.

We're seeing that it's really supplemental to what's available on the market, it is not a market pie taker from us. It actually creates additional opportunities, and we actually believe that's one of the pockets of business because liquidating goods that way for some retailers online it's way more tedious than it is for them to sell the goods to somebody like us where we can ship it and sell it invisibly across 2,200 stores, and they get to hang with other brands in a very conducive atmosphere that's actually a benefit to them in terms of their image and their brand. We have been finding, and I think that's the nature of some of the increased availability, is that more and more of those guys are realizing, the brands are realizing, that they'd be better off liquidating with us than to trying to liquidate on their own off their websites. Does that make sense?

Omar Saad -- Evercore ISI-Analyst

Yeah, that's helpful Ernie. Thank you.

I just also wanted to ask, and you guys often display the flexibility of the business model and the buying, keeping that open to buy open as late as possible. Was that an issue this quarter with the lack of the right fashion content? Or is somewhere where the flexible model broke down, or is it some decisions that were made that shouldn't have been?

Ernie Hermann -- President, and Chief Executive Officer

Yeah. I wish, believe me, I wish I could say yes to the first way you asked that, that it was a process breakdown and not available in the market. In these couple of cases, it was absolutely a strategy and a fashion execution entirely under our control. It had nothing really to do with the execution of the model. It was really a fashion misstep of our own doing. I wish I could answer you the other way; I would rather. Unfortunately, I can't. I would say this is just our own execution, or lack thereof.

Omar Saad -- Evercore ISI-Analyst

Okay, thanks guys.

Ernie Hermann -- President, and Chief Executive Officer

Thank you.

Operator

Our next question comes from Marni Shapiro. Your line is open.

Marni Shapiro -- The Retail Tracker -- Analyst

Hey everybody.

Best of luck with the holiday season, by the way.

Ernie Hermann -- President, and Chief Executive Officer

Thank you, Marni.

Marni Shapiro -- The Retail Tracker -- Analyst

Can you talk a little bit, you focused a little bit on AUR, but is anything impacting AUR as far as shift in the stores for the third quarter and going into the fourth quarter.? Or is this a markdown conversation? If you could just clarify that as well. Because I know it's been a conversation all year that you were trying to lower some of your prices. I'm curious just for the third quarter and the fourth quarter what the story is.

Ernie Hermann -- President, and Chief Executive Officer

Yeah, I think, Marni, it's a combination of a lot of things. One of them being a mix issue. Some of the departments that we are going after happen to be high ticket, and it doesn't mean we were forcing going after those, that's just the way it was working out. Those departments were high ticket, some of the departments themselves have their tickets going up. That was in a department last year, in a couple departments we evidently hit bottom last year, so we're seeing improvement in like for like departments. Believe me, part of it is the mix of departments. We're going up in some departments that are a greater percent, that happens to be higher in ticket. I do believe that the nature of the availability of goods and some better goods in the market is also creating our ticket going up. And that is happening in numerous families of business where we're finding some better-branded goods to a greater degree than we would have had last year. As that flows in, that also is, I think, contributing to our average ticket moderating for the fourth quarter. The good news is we've got visibility to it, and we can see that it's heading that way over the next 30, 45 days.

Marni Shapiro -- The Retail Tracker -- Analyst

That's on the apparel side for the most part, correct?

Ernie Hermann -- President, and Chief Executive Officer

It is. It is on the apparel side for the most part. Yeah.

Marni Shapiro -- The Retail Tracker -- Analyst

And men's and women's?

Ernie Hermann -- President, and Chief Executive Officer

Well, it varies by department in men's and women's, but we'll just leave it at mostly apparel.

Marni Shapiro -- The Retail Tracker -- Analyst

Excellent. Congratulations. Best of luck for the holidays.

Ernie Hermann -- President, and Chief Executive Officer

Thank you, Marni.

Operator

Our next question comes from Ike Boruchow. Your line is open.

Ike Boruchow -- Wells Fargo Securities -- Analyst

Hi. Good morning everyone.

I guess Scott, my question for you was going to be..., I'm sorry, Ernie I'll start with you. The fashion miss I understand and appreciate you probably don't wanna get into too much detail, but could you help us with maybe what category it was in, did you buy too shallow, did you buy too deep? Just trying to understand the dynamic there.

Ernie Hermann -- President, and Chief Executive Officer

What I can't tell you is what category it's in, and by the way, it's in a few categories, not just one. It wasn't about deep, it was about it's when fashion can be the wrong fashion, or it can be the right fashion. Liquid self can be too much fashion, then if you have too much of that, that applies to a couple of areas. I can't tell you the areas, but it was really about that. The goods themselves were too much on the edge and too great a proportion of the areas. Do you know what I mean? Like too big a proportion of the departments.

Ike Boruchow -- Wells Fargo Securities -- Analyst

Got it. Got it. That's helpful.

Then Scott, a quick follow-up to a comment you made earlier about we shouldn't really expect margins to flatten out next year. I assume you're talking about a 52 week to 52-week basis. I mean you're gonna have a margin. Everything I said was adjusting for the $0.11 out and adjusting at the benefit we got the 20 basis point benefit we got on 53 weeks.

Ike Boruchow -- Wells Fargo Securities -- Analyst

Got it. Thanks so much.

Ernie Hermann -- President, and Chief Executive Officer

You're welcome.

Operator

Our next question comes from Kimberley Greenberger. Your line is open.

Kimberley Greenberger -- Morgan Stanley -- Analyst

Great. Thank you so much.

Scott, I wanted to ask about inventory. I'm wondering if you can help me close the gap between the 4% decline that you talked about in inventory, excluding in-transit, e-commerce, I think you said was on a per store basis, that 4% decline versus what we're seeing on the balance sheet it looks like about a 7.8% increase in total inventory. Can you just help us understand how to get from the plus 7.8 to the minus 4%?

Scott Goldenberg -- Chief Financial Officer, and Senior Executive Vice President

Yes, you're exactly right. I'll just take it on a constant currency basis, it would still be the same delta 7% on the balance sheet versus the second quarter, where we'd be on a constant curve minus one, that 8%, and that's why we did the excluding. When you do that on a per store basis where the variance between the second and the second and the third quarter is a bit less, it's 2% or slightly less, where we're down six versus down four on a per store. It's entirely, virtually due to the change just in transit. The in-transit was up significantly in the end of the third quarter versus being down in the second quarter. The definition of in-transit is those are goods that are arriving, that are not booked in but are arriving within the week, into your DC. A lot of fresh goods coming into the DCs at the end of the third quarter, obviously flowing out to the stores right now. Entirely due to the in-transit inventory. That's why I think the better metric is looking at the all-in, excluding in-transit and e-commerce inventories on a per store basis.

Kimberley Greenberger -- Morgan Stanley -- Analyst

Great. Thanks so much, Scott.

Scott Goldenberg -- Chief Financial Officer, and Senior Executive Vice President

You're welcome.

Operator

Our next question comes from Oliver Chen. Your line is open.

Oliver Chen -- Cowen -- Analyst

Hi. Thank you. Good morning.

I was curious about the nature of the opportunities in apparel, what's the framework for which ones will be easier and quicker to course correct versus longer-term in nature? And then another topic of customer engagement and loyalty. What's your vision for where the opportunities are here and how you want to pursue it in a way that's unique to you and the off-price business model? I'm just curious about where you see that going over time and what customers want and how you balance engagement versus value versus deliver what customer want with those programs. Thank you.

Ernie Hermann -- President, and Chief Executive Officer

Okay. Great.

Oliver, on the apparel areas in terms of course correcting, again the other advantage to our business model is nothing takes very long. The few areas we're talking about, two out of the three are fairly fixable in close order. We buy so much so soon and close in on those areas, and then even the third one, relatively speaking might take an extra month or two, but nothing is long. Nothing will drag past the fourth quarter at all. I think most of it gets corrected and over the next 30 days actually. That's just the nature of the way we buy; it's another advantage when we stub our toe, we are able to fix things pretty quickly. As I said, there isn't even one of them, even though the other one I'm thinking about could take an extra 30 days beyond that, but the two out of the three are being fixed as we speak. We will see improvement in them over the next few weeks. We're feeling really good about that. That would apply, by the way, for more than just apparel. Even in some of our accessories or hard-line business or home area, we can generally react and fix execution issues pretty close in. It's really just an apparel thing.

Loyalty has been. Obviously, we had it in the script, that's been a very positive program which we've been pushing in every division. Even in the divisions where we don't have the hard credit care, our soft rewards programs there have been growing aggressively. Our customer's growth in loyalty is actually up significantly this year. We continue to be pleased with the metrics, by the way, that we look at the metrics associated with our U.S. credit card program. Loyalty will be going on our apps at varying times over the next year, which is gonna be interesting because many customers have been asking about that. We've been in the mobile space really trying to institute a global mobile app, roadmap. We currently have mobile apps for Maxx, Home Good, and STP, whereas you know from all the retails around us, whether it's coffee shops, or traditional retailers, the ability to interact and connect mobile marketing to reach consumers, is continuing to become greater in importance as we move forward. We are putting a strong push on that in every one of our divisions. But, we're really trying to get the loyalty program on our apps over the next year that we have in place because we think that'll be our next surge that we can really look forward to and driving our loyalty programs.

Scott Goldenberg -- Chief Financial Officer, and Senior Executive Vice President

Yeah.

I just add a little color about it. As Ernie said, the loyalty program, or the credit card program in the United States is very healthy that we offer to Marmax, Home Goods, and Sierra Trading Post we started in the third quarter a loyalty program in the U.K. early days, but they added hundreds of thousands of people signing up for that. Too early to talk about the results but I think it's something that will benefit us as we go forward to the fourth quarter and beyond. We feel good about the overall marketing campaigns both for digital and TV on the broadcast, and what we're doing in digital in the fourth quarter across the board.

Oliver Chen -- Cowen -- Analyst

And Ernie and Scott, you've always done a great job with gifting. Every year I've been very impressed. Do you have any rough thoughts on what will be incremental this year versus last? That's our last question; I'm just curious about these catalysts because I'm sure you're gonna do a really good job as well. But I'm curious about what might be different.

Ernie Hermann -- President, and Chief Executive Officer

When you talk, Oliver, in terms of different for gifting, are you talking about impact at the store level or...?

Oliver Chen -- Cowen -- Analyst

In terms of what you're most encouraged about as you look to fourth quarter, and what we should focus on as key catalysts in addition to what sounds like impactful marketing programs around social..., The statement around gifting, or other initiatives that are different versus last year.

Ernie Hermann -- President, and Chief Executive Officer

It's one of the areas I am most proud of our teams on because they work at our holiday gift giving in an extremely team approach. It's from our merchants, our supply chain, our marketing team, and the field..., Our store guys are phenomenal about this. What happens is the merchants, I would say one of the big pushes on their end is to deliver freshness even later into December which we do every year a better sell. We've done it the last Decembers, and it's very successful. That applies to Marmax, Home Goods, Europe, Canada, every division has a mission to flow freshness later. Secondly, internal execution, signing packages, customer service, turning customers through the registers, and as expedient a format as possible, also a big push for us. Thirdly, I would just suggest the supply chain; we are all over. I think we've talked about this at various investor meetings; we've improved on our ability with our supply chain to process goods and get them from the vendor to the stores significantly faster than we ever have before. What that has allowed us to do, is when we keep some our open buy for the holiday gift-giving open, and there's great gift giving buys in the marketplace we can actually get them in pre-Christmas for that late shipping better than we have been able to do before. The marketing what I'm pleased about, and this is also for holiday gift giving; I guess you would call this incremental like you called it Oliver, is we're gonna, obviously, continue to emphasize our stand out values. We stay the course. We stay the course on going after a diverse customer base; we don't try to pigeonhole and go too narrow. Every format we're gonna try to talk about the many ways that we're gonna provide value. We talk about our model in the marketing, which is to get away from a less chaotic shopping experience and have authentic value. You know, indirectly in all of our marketing will be basically explaining that we don't do a high-low in our business and we're gonna provide a true value to consumers. Three out of the four big businesses I know how to campaign that will continue to educate consumers. Then lastly, one thing I'm very happy about is we're gonna continue, obviously spend a lot more in digital which is, yes, the younger audiences but more people, in general, are watching digital, and there's no impact there. We're pleased because a lot of our growth has been with younger customers under the age of 34. A lot of those things are in play for the fourth quarter for the gift giving time period; we're thinking we have the guns loaded, so to speak.

...

Operator

And thank you. At this time, I'd like to now turn it back to our hosts for closing remarks.

Ernie Hermann -- President, and Chief Executive Officer

Okay. We would like to thank all of you for joining us today. We look forward to updating you on our year-end earnings call in February. Thank you, everybody.

Operator

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

Duration: 63 minutes

Call participants:

Deborah Holmsen -- Investor Relations

Ernie Hermann -- President, and Chief Executive Officer

Scott Goldenberg -- Chief Financial Officer, and Senior Executive Vice President

Paul Lejuis -- Citi -- Analyst

Lindsay Drucker Mann -- Goldman Sachs -- Analyst

Mike Baker -- Deutsche Bank -- Analyst

Matthew Boss -- JP Morgan -- Analyst

Daniel Hofkin -- William Blair -- Analyst

Marni Shapiro -- The Retail Tracker -- Analyst

Ike Boruchow -- Wells Fargo Securities -- Analyst

Kimberley Greenberger -- Morgan Stanley -- Analyst

Oliver Chen -- Cowen -- Analyst

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