Ladies and gentlemen, thank you for standing by. Welcome to the TJX Companies' Third Quarter Fiscal 2022 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded, November 17, 2021.

I would like to turn the conference call over to Mr. Ernie Herrman, Chief Executive Officer and President of the TJX Companies Incorporated. Please go ahead, sir.

Ernie Herrman - Chief Executive Officer and President

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

Debra McConnell - Senior Vice President, Global Communications

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 10-K filed March 31, 2021.

Further, these comments and the Q&A that follows are copyrighted today by The TJX Companies, 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.

Thank you. And now, I'll turn it back over to Ernie.

Ernie Herrman - Chief Executive Officer and President

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

I'd like to start our call today by once again thanking our global associates for their continued hard work and commitment to TJX. As I've said before, I want to give special recognition to those associates who have been physically coming into work in our stores and distribution centers throughout the pandemic. In recognition of their continued efforts, we have awarded a vast majority of them and appreciation bonus, which was the sixth appreciation bonus we have paid during the pandemic. Now, to an overview of our third quarter results.

I am extremely pleased with both our top and bottom line performance in the third quarter. Overall, open-only comp-store sales when compared to fiscal 2023 or calendar year 2019 increased an outstanding 14%. Importantly, our open-only comp sales growth was just as strong at the end of the quarter as it was at the start of the quarter. Once again, we saw phenomenal comp growth in our home categories across each of our divisions, as well as a mid-single digit comp increase in our overall apparel businesses. Clearly, our great brands and amazing values continued to resonate with shoppers. Overall, sales were $12.5 billion, which was over $2 billion more than the third quarter of fiscal 2020. And total segment profit increased by $285 million over the same period.

Our strong results are a testament to our flexible off-price business model and our associates. I truly believe we have the best business model and the best people in retail. Throughout the third quarter and the midst of uncertainty in the marketplace around supply chain delays and consumer behavior, our buying, planning and allocation, logistics and store operations teams all did an outstanding job. They ensured our stores had plenty of merchandise for our shoppers every time they visited.

Our flexible model has been a tremendous advantage in this environment. We have been able to expand and contract categories and merchandise in our stores so that customers have full racks and shelves to shop when they visit. I am very happy with our third quarter pre-tax margin increase. Our excellent sales growth and strong merchandise margin increase more than offset the outsized expense headwinds that we have been facing. Our strategy to surgically raise retails on select items is well underway. And we believe it is working very effectively as shoppers continue to see outstanding value everyday.

Lastly, third quarter earnings per share increased an outstanding 24% to $0.84. As we look to the fourth quarter, overall open-only comps sales are off to a very strong start. We continue to see excellent availability in merchandise in the marketplace and are extremely happy with the mix of good, better and best brands that we are offering consumers.

We are confident that we'll have plenty of great merchandise in our stores and online this holiday season and we will be emphasizing this in our marketing.

I'll talk more about the fourth quarter in a moment. But first, I'll turn it over to Scott to cover our third quarter financial results in more detail. Scott?

Scott Goldenberg - Senior Executive Vice President and Chief Financial Officer

Thanks, Ernie. And good morning, everyone. I'd like to echo Ernie's comments and express our sincere gratitude to all of our global associates for their continued hard work and dedication to our business.

I'll start today with some additional details of our third quarter results. As Ernie mentioned, overall open-only comps sales increased 14% over fiscal '20 and overall sales increased 20% over the same period. This quarter marks the third straight quarter that overall comp sales increased mid-teens or better.

I want to recognize the excellent execution on the part of our teams for managing through the supply chain issues facing all of retail and ensuring a consistent flow of exciting merchandise to our stores to support the outsized comp sales we've seen all year. In the third quarter, we saw consistent strength in our overall comp sales every month. Once again, we saw a very strong increase in our average basket across all divisions, driven by customers putting more items into their carts.

Overall average ticket was flat and improved for the fourth consecutive quarter. Overall customer traffic was up, driven by a mid-single digit traffic increase in the United States. As Ernie mentioned, we believe our pricing initiative is working as we've rolled it out to very select items across categories. We're extremely pleased that sales, inventory turns and the markdown rates in the third quarter remain very strong where we have selectively adjusted our retails. Across each of our divisions, third quarter open-only comps sales increase was also excellent. At Marmaxx, open-only comp store sales increased a very strong 11% and divisional profit dollars were up 21% versus fiscal '20.

Marmaxx's home business continued its outstanding performance posting a comp increase in line with HomeGoods and apparel comp sales were up mid-single-digits. Further, Marmaxx saw an increase in customer traffic, had a very strong average basket and sales across all geographies were excellent.

At HomeGoods, open-only comp store sales increased a phenomenal 34% with consistent strength across all major categories and geographic regions for both HomeGoods and HomeSense. HomeGoods saw outstanding increases in both customer traffic and average basket. We're also very pleased with HomeGoods divisional profit dollars, which were up 52% versus fiscal '20. As a reminder, HomeGoods margin is disproportionally impacted by freight increases due to its product mix.

When looking at Marmaxx and HomeGoods divisions combined versus fiscal '20, total open-only comp store sales for the US increased 16% and profit dollars were up 26%. In Canada, open-only comp store sales were up 8% and at TJX International, comp store sales were up 10%. Comp sales at both divisions were driven by a strong increase in average basket. Further, similar to the US, home sales across all of our Canadian and European divisions were outstanding.

Next, our overall pretax margin for TJX in the third quarter was 11%, up 30 basis points versus fiscal '20. Our pretax margin increase looked like strong expense leverage due to our excellent sales growth. We also saw significant increase in our merchandise margin, driven by strong mark on and lower markdowns despite 160 basis points of incremental freight expense. These increases more than offset substantial investments to expand our distribution capacity, higher incentive accruals and wage costs as well as 50 basis points of net COVID costs.

Moving to the bottom line, third quarter earnings per share of $0.84 were up an outstanding 24% versus $0.68 in fiscal '20. Our balance sheet inventory is up 4% on a constant currency basis versus the third quarter of fiscal '20. We were very pleased that our inventory levels on a per store basis improved in the third quarter versus both the first and second quarters. Again - and we can't emphasize this enough, availability of quality branded merchandise is excellent and we're confident that we have plenty of inventory in our stores and online for the holiday season.

Moving on to our liquidity and shareholder distributions. During the third quarter, we generated $1 billion in operating cash flow and ended the quarter with $6.8 billion in cash. In the third quarter, we returned $1.1 billion to shareholders through our buyback and dividend programs. For the full year, we have increased our range of our buyback by $500 million and now expect to repurchase $1.75 billion to $2.0 billion of TJX stock.

And now, I'll turn it back to Ernie.

Ernie Herrman - Chief Executive Officer and President

Thanks, Scott. Now, I'd like to highlight the opportunities that we see to drive sales in the fourth quarter.

First and most importantly, we will deliver great gifts and value for the holidays. We are in a terrific position to flow fresh product multiple times a week to all of our stores and online this holiday season. Since reopening our stores last year, we have been buying with longer lead times from many of our approximately 21,000 vendors to compensate for supply chain delays. Further, our vast vendor universe is by far the largest in off-price and, as always, allowed us to have quality branded merchandise for our shoppers. Importantly, most of the inventory we need for the holiday season has already been delivered to us or is scheduled to arrive in stores and online in time for the holidays.

This leads me to my second point, which is that we are set up extremely well as a gifting destination for consumers this holiday season. Our store shelves are full with great gifting selections today and we expect them to continue to be that way throughout the holiday shopping season. We expect to have something for everyone on consumers' shopping lists and to offer an exciting and inspiring treasure hunt shopping experience. We also believe that our great values will resonate with consumers as much as ever in an inflationary environment.

Third, our store locations are convenient for shoppers. Our stores are generally an easy to access strip centers and often near other high traffic retailers like grocery stores that consumers visit multiple times throughout the season, making for an efficient shopping trip.

Next, we believe our holiday marketing campaigns, which started earlier this month, will help drive new and existing customers to our banners. This year, each of our divisions will show case our differentiated shopping experience by reinforcing our value leadership, while also highlighting the fresh flow of merchandise throughout the holiday season with messaging such as endless selection, great prices all season long.

In the US and in Canada, we will leverage the strengths of our retail brands together in multi-banner campaigns. In Europe, we have a strong cross channel marketing plan, which includes TV for the first time ever across all of our European markets. At the e-commerce, we launched HomeGoods.com in September and are happy to offer consumers our exciting and eclectic home selections 24/7.

Looking ahead, we plan to bring more home categories to HomeGoods.com. On all of our e-commerce sites in the US and in the UK, we plan to offer exciting gift selections for the holidays that compliment our in-store assortments. Like our stores, new merchandise will be arriving frequently on our sites, making for an exciting online shopping experience.

Okay. Beyond this year, we believe we are set up extremely well to significantly grow our market share and improve our profitability. On the top line, we see tremendous opportunities with our sales in traffic driving initiatives and our global store growth plans. We have gained significant market share this year and we see excellent opportunities to keep attracting more consumers around the world. Giving us confidence is the appeal of our values, great brands and treasure hunt shopping experience. In all of the countries, we have brought our off-price concept around the world too, that has resonated with consumers seeking great brands and fashions at great value.

In terms of profitability, I want to reiterate that we remain highly focused on improving our pretax margin profile over the medium to long-term. We believe our top line initiatives can lead to outsized sales, which is our best opportunity to offset some of the persistent cost pressures we face. In addition, we're very optimistic about the margin opportunity from our strategy to surgically adjust retails, while maintaining our value proposition for consumers.

Turning to our ESG efforts. I'll start by saying that protecting the health and well-being of our associates and our customers remains a top priority as it has throughout the pandemic. I also am pleased to share with you that our 2021 Global Corporate Responsibility Report was published this past quarter and is available on tjx.com. The report summarizes our fiscal 2021 initiatives and progress within our four areas of focus: workplace, communities, environmental sustainability and responsible business.

In addition to our report, we have published an appendix of relative ESG data and frameworks, including our first disclosure that is aligned to select metrics from the Sustainability Accounting Standards Board, or SASB. You can learn more about our efforts in our report, but I'd like to share a few highlights of our latest work with you now.

I spoke on our last call about our commitment to inclusion and diversity and our work to help support a more inclusive and diverse organization. Since that time, we are well on our way to launching a variety of new programs for our associates, including new mentoring programs, associate-led inclusion and diversity advisory boards and expanded partnerships with community-based organizations to support our recruitment efforts. We also recently completed our global associate inclusion and diversity survey, which will help inform our longer-term priorities. Looking ahead, we expect to publish our 2020 EEO-1 data by the end of the year.

In environmental sustainability, we've made progress in our global science-based emissions reduction target. We are pleased to report a 32% reduction at the end of fiscal 2021 in greenhouse gas emissions from our direct operations against fiscal 2017. Our global approach to reducing our climate impact includes emissions reductions actions focused on reducing our energy consumption and expense, also investing in energy-efficiency progress and sourcing low-carbon and renewable energy sources for our direct operations. I look forward to continuing to update you on our progress in this important area. And as always, there is a lot more information on tjx.com.

In closing, I want to again thank each of our associates around the globe who helped us achieve outstanding third quarter results. We feel terrific about our overall execution, very strong start to the fourth quarter and our initiatives this holiday season. We are in an excellent inventory position to flow goods to our stores and are confident our associates are in place to meet the sales demand.

I want to reiterate my comments in the future of TJX and our ability to grow our top line and profitability over the medium to long-term. As an off-price leader in every country we operate in, we believe we are in an excellent position to capture additional market share for many years to come and to become a $60 billion-plus revenue company.

Now, I'll turn the call back to Scott for a few additional comments and then we'll open it up for questions.

Scott Goldenberg - Senior Executive Vice President and Chief Financial Officer

Thanks again, Ernie. And just a few brief notes before we move to Q&A.

In terms of the fourth quarter, we are very pleased that overall open-only comp store sales growth to start the fourth quarter is up mid-teens. Keep in mind that comp sales growth in the fourth quarter of fiscal '20 was a very strong 6%. As to our fourth quarter pretax margin, we're continuing to face significant expense headwinds. Specifically, we're currently expecting incremental freight costs to be about 80 to 90 basis points more than the third quarter. This is primarily due to the significantly higher market rates we're paying in order to secure capacity to ensure our stores continue to have plenty of inventory. Further, we anticipate that the combination of investments to expand our distribution capacity, incremental wage and net COVID costs will be similar to the third quarter levels.

Looking to next year, we feel great about our sales and customer traffic opportunities, the buying environment and our merchandise margin and our ability to surgically adjust retails. As a reminder, this year we've been benefiting from the huge expense leverage on our outsized double-digit comp sales. Again, we feel great about our top line and margin opportunities. But it's still too early to forecast comp sales or cost for next year.

I want to reiterate what we said on our second quarter call, which is despite the continuation of outsized expense pressures in the macro environment, we believe our pretax margin can get very close to the double digits next year. To be clear, we expect the level of margin deleverage from the combination of investments in distribution capacity and the incremental freight wage costs to be higher than it was pre-COVID but less than this year.

In closing, we feel great about our execution and strength of the business both operationally and financially entering the fourth quarter. We have a strong balance sheet and we are well positioned to take advantage of inventory opportunities, including packaway that we believe will arise from the disruption in the supply chain, while also continuing to invest in the growth of our business and return significant cash to shareholders.

Now we are happy to take your questions. As we do every quarter, we're going to ask that you please limit your questions to one per person and one part to each question. We respectfully ask that everyone stick with this request to keep the call on schedule so that we can now answer questions from as many analysts as we can.

Thanks. And now, we will open it up for questions.

Question & Answers

Operator

[Operator Instructions] Our first question comes from Matthew Boss. Your line is open.

Matthew Boss - JPMorgan - Analyst

Great. Congrats on another strong quarter.

Ernie Herrman - Chief Executive Officer and President

Thank you.

Matthew Boss - JPMorgan - Analyst

So, Ernie, I think you've made it crystal clear how you feel about availability of product today and through holiday. So I won't touch on that. But my question is, your mid-teens stack comp implies a top-line run rate exiting this crisis. It's nearly double your pre-pandemic trend. Is this new customers? Is this larger basket? Is it a combination of both? And Scott, are you seeing any pushback at all on pricing and how best to think about expansion of the AUR initiative from here?

Ernie Herrman - Chief Executive Officer and President

Yeah, Matt. Good question getting out the foundation of what's going on. Clearly, the run rate we're having is based on numerous things or I think we wouldn't be achieving these outsized comps. So, yes, we're getting new market share, new customers from the data we show, but we're also getting an increased basket. Scott can talk to that a little bit, but that's been happening really consistently. I think we mentioned that in the script.

There's also a conversion thing that's also happening now, where I think when the customers come in, we believe we're converting at a higher rate so they're making the purchase because X - there are certain times you have customers come in and they don't purchase, right? And so, I believe we're running at a successful way in that manner because we have such good brands and great value out there.

And the fact - obviously at the same time, we've been surgically addressing the retail is a great indicator for the future, right. Because if we're getting the new customer, if we're getting increased visits, I would also look at it this way, we have a certain percent of our customers that are more occasional visitors and certain that are more regular visitors and we're getting, we believe, increased visits as well. And again, conversion is at a higher rate. So, all cylinders are hitting. I guess I would caution us not to assume that we will run kind of at more like a triple the rate of where we used to run as you look down the road.

On the other hand, the market share we're gaining now and we think many of these customers are going to stick, right? We're going to - we're capturing - we're obviously making many of them very happy with what they're experiencing when they come in. So that bodes well for - that we're acquiring and we'll be retaining some of these new customers as we go forward, which, again, all is a great indicator.

Your second question, was it around the margin? Or no, on average retail, I guess. Matt?

Matthew Boss - JPMorgan - Analyst

Yeah. So have you seen any pushback to pricing? And where does the AUR initiative go from here?

Ernie Herrman - Chief Executive Officer and President

Yeah, yeah, yeah. Okay. So, no, that's what it was. No pushback to pricing. We have had, I would tell you, a higher set rate of success than we even anticipated. We thought there would be a handful of items here or there that we would run into challenges with, but that has not been the case. It's been very few and far between where we've run into any hiccups on the adjusting of retail, which means, as we continue to go ahead and again, we will not do anything that jeopardizes our mix being at better retail than anyone around us on like-for-like product. And we can't talk to price points obviously on different product.

We're not responsible for the quality or the brands where their retail that we don't carry from other retailers. But on the upstairs brands, so to speak, department store brands, we are feeling there is a lot more room for us to surgically do this well into the next few years. So, feeling very bullish about next year as well. So hopefully that answers your question.

Matthew Boss - JPMorgan - Analyst

It does. Best of luck.

Ernie Herrman - Chief Executive Officer and President

Thank you.

Operator

Thank you. Our next question comes from Lorraine Hutchinson. Your line is open.

Lorraine Hutchinson - Bank of America Merrill Lynch - Analyst

Thanks. Good morning. It sounds like you're really pleased with your inventory position for holiday. But as you look into calendar 2022, is there anything that you're seeing that concerns you around product availability for spring?

Ernie Herrman - Chief Executive Officer and President

Lorraine, nothing. So, we are - the teams - I would like to put in a plug again for our teams where I give them so much credit on the way they manage. I think we had more unknown and volatility given the supply chain ups and downs. And the way our business is trending back and we talked to you and many as we talked back in the first half of the year, right? As you could see, our trend is starting to take place. I give the teams credit for stepping out and buying earlier, as we said in the script. Buying more earlier to time the cadence of when we get the deliveries and then anticipating some of these supply chain obstacles that we're going to be up. Obviously, as we said in the script, we have figured out a way - it doesn't mean we're not getting hit with the paying the rates of moving goods with a decent supply. We're getting hit with all of that, but the teams figured out how to get the goods here.

So, they've established - I give the merchants, the buying teams, logistics, as I said in the script, everyone has participated in making this happen. Planning and allocation, those same teams have - I get to see every week what we're placing for further out, so I get to see the calendar '22 that you're asking about. And I can see the trend that we're on for opening up for first quarter, for example, which is the beginning of what you're talking about next year. And we are already heading to a very good place for February and March from what I can see on the on order. So, yeah, I have no concern.

And then, one of the other things that's happened in COVID is TJX, I believe, when you look at all the branded vendors in the market, we are probably more important today than we've ever been. We're probably more important to the marketplace than we were pre-COVID. When you look at the amount of volume that we're doing with those upstairs brands, I believe that we will continue to be able to leverage those relationships well through '22. So, hopefully that answers your question.

Lorraine Hutchinson - Bank of America Merrill Lynch - Analyst

Great. Thank you.

Operator

Thank you. Our next question comes from Mark Altschwager. Your line is open, sir.

Mark Altschwager - Baird - Analyst

Good morning. Thanks for taking my question. So, understanding that it's too early to talk specifically about sales expectations for next year, just wondering if you could speak more generally to where do you see the incremental opportunity from a category perspective helpful for Marmaxx and HomeGoods as you cycle these big multi-year comps??

Ernie Herrman - Chief Executive Officer and President

Yeah, Mark, great question. So, continuing obviously our home category across the board, based on the behavioral changes that have taken place with COVID and the way people, the workplace, either hybrid situations or more virtual or give you another one, the way people are very and you've probably seen data on this, people outdoors more. Probably that'll continue, which is affecting which type of apparel the world is selling, including us. I expect all of those related categories to continue to stay at a, I guess, disproportionate percent to our business and trend that way, which we're excited about.

Now, the Home business, pre-COVID for us was already trending. If anyone looks back, it's easy to forget about it. It was already trending very strongly. Now we are just trending more off the charts. I do believe that levels off, but leveling off when you're running 30 comps still leaves you in a extremely bullish home trend, I think, for quite a while.

And as we've seen and mentioned in the script, our apparel business has been re-emerging and really some healthy high single-digits here. And I believe we are going to be one of the - when consumers continue to be value-driven especially on apparel, I believe we take more market share there as we look out. So, I would see - but then when you look to more of the, I would call it, more of the active-inspired apparel, will continue to be something that we will, I think, shine in as well as Home. And then there are certain accessory categories, I think, we will tend to outpace in. So, hopefully, yeah, we see a lot of opportunity there. Great question.

Mark Altschwager - Baird - Analyst

Thanks. Best of luck for holiday.

Ernie Herrman - Chief Executive Officer and President

Thank you.

Operator

Thank you. Our next question comes from Paul Lejuez. Your line is open, sir.

Paul Lejuez - Citigroup - Analyst

Hey. Thanks, guys. Ernie, wondering if you could talk about just sourcing of inventory, just maybe how it's different in the current environment relative to a more normal period. Maybe talk in terms of direct source versus in-season versus packaway, maybe the types of vendors you're working with, how that's evolved and maybe even just frequency and size of buys amongst your different vendors. Thanks.

Ernie Herrman - Chief Executive Officer and President

Yeah. That was good, Paul. That's a multiple - you were able to finesse Scott's rule, right? We have like a five-part, but I like it.

Scott Goldenberg - Senior Executive Vice President and Chief Financial Officer

But the same topic.

Ernie Herrman - Chief Executive Officer and President

So, the sourcing, it's quite appropriate based on everything going on. So, direct sourcing, well, we always do - let's start with we're closeout driven, okay. So we in-season, hand to mouth, buy the bulk of what we do. We buy very opportunistically that way. So that work continuing - I would say that will continue the way it's going. And we've had all indications are, again, what I said earlier, that a lot of those key brands by the way, good retail around the board as you've seen the results. Retail is pretty strong out there obviously, right? And what that does create though is, for a lot of the public company brands that are wholesalers, it allows them - they want to keep chasing that business with their more regular price accounts. So it allows them to get bullish knowing that we're always there on the backside for the excess inventory.

So let's start with that dynamic that's happening, which will happen more as - which is why we always like it when everyone's business is good in this environment as we go to next year. I think you're going to see a lot of wholesalers now stepping out to be a little more bullish on their upfront orders for those retailers knowing that they have TJX for the later, for the cleanup, so to speak. So, I think that whole piece, which is probably one of the biggest pieces of our business, is looking forward to a tremendous opportunity as we move forward because of that dynamic.

Direct sourcing, I think what you're getting at which is, we all do some business that way. I think that is just a piece where we'll look at - if there's a void and a mix, and we'll do it very selectively. What you talked about on packaways, though you mentioned packaways, I think that is something we very possibly, as we come out of holiday, could see a tremendous amount of packaways based on the supply chain challenges that a lot of the other retailers are going - the whole market is going to run into. And if they end up with some late deliveries that don't make it in for Christmas, which is very possible if they didn't plan their cadence correctly, then I think that is going to spill off a great opportunity for us to have increased packaways for next year - for next fall that we would be buying this January, February. And I'm anticipating that could be a huge benefit to us.

I think I'm missing one. What's the fourth? There was a fourth aspect.

Paul Lejuez - Citigroup - Analyst

The frequency and size of buys. [Speech Overlap]

Ernie Herrman - Chief Executive Officer and President

Yeah. So, the - wow - the challenge we've had is, we're buying very frequently and the sizes of the buys vary by vendor a lot. So what's been an interesting dynamic is, we have some - and obviously we don't talk about them on the call, but we've had some amazing brands. One moment can have an enormous amount of goods and it's interesting because they could be trying to unload the goods now a little early knowing that maybe they're running into trouble later. Then we'll have some other brands that have a lot less and aren't necessarily yielding as much as brands who's typically as comparable as size.

Overall, we're having the - we've had to slow down as we were getting into the time period here because there's still more availability in total than we could handle. I would say, it's the tip of that piece ironically is almost the same as pre-COVID, where you'll read some articles where the brands will say certain brands and I won't mention who they are, will say, we're not going to - we're cutting back on the discount quote off-price channel and - but they've said that for years pre-COVID. And then what happens is, it goes in cycles where all of a sudden they say that for three to six months and then they are more loaded later. And then - so we might do less business with a certain brand for six months, but we're just going to do more with a different brand for that six months. And then the cycle goes back the other way.

And what's interesting on this is, we watch for those situations because typically - and this is better post-COVID since we mean more to the market in general, I think some of those vendors that are saying they're going to go left at discount are actually the ones that are still going to want to, for the future, place some more orders upfront that allow them reorders with some of the hot retailers, which in turn should come back and leave more availability. Hopefully that all makes sense. Probably more than you need to know.

Paul Lejuez - Citigroup - Analyst

Very helpful.

Ernie Herrman - Chief Executive Officer and President

Thank you.

Paul Lejuez - Citigroup - Analyst

Thanks, Ernie.

Ernie Herrman - Chief Executive Officer and President

It's a great question. Great question.

Paul Lejuez - Citigroup - Analyst

Thanks. Good luck.

Ernie Herrman - Chief Executive Officer and President

Thank you.

Operator

Thank you. Our next question comes from Chuck Grom. Your line is open, sir.

Chuck Grom - Gordon Haskett - Analyst

Hey. Thanks a lot. Good quarter. Hey, Scott. Can you just dive into the offsets you expect to see in the fourth quarter to help offset the incremental 80 to 90 basis points of supply chain pressures? And then, any color specifically on where you think pretax margins can land in 4Q specifically?

Scott Goldenberg - Senior Executive Vice President and Chief Financial Officer

Yeah. We didn't - you're probably going be disappointed with my answer. I think it's similar to what Ernie has been alluding to. We feel great about the top line initiatives to drive sales and our merchandise margin and the cost. So I think the biggest thing we called out on the cost is the incremental freight for the fourth quarter in and around that 75 to 100 basis points, yeah, 90 basis points more. And a lot will just depend on what the level of the comps are. We said all the other costs are similar prices we saw the last quarter, so not much more to say in terms of where we'll end up. I think a lot will depend again on that level of comps that we're able to achieve.

Next question?

Operator

Our next question comes from Kimberly Greenberger. Your line is open, ma'am.

Kimberly Greenberger - Morgan Stanley - Analyst

Okay, great. Thanks so much. Fabulous to see the momentum in the business. Ernie, I want to make sure I heard you correctly. I think you said the surgical price increase strategy is well underway. I'm assuming that means you started executing here in the third quarter. It sounds like you've already got a reasonably good kind of level of feedback on how those price increases are being received by consumers with basically no price resistance. I just want to make sure I understand that correctly.

And then, Scott, wanted to ask you about the benefit in gross margin. You talked about a nice expansion in the merchandise margin from higher IMU. Maybe that's a piece of the pricing and strong full price selling. But I'm trying to just sort of unpack the moving parts in that gross margin line to uncover or reveal just exactly how great that performance is in merchandise margins. So, if you could just help us with some of the moving pieces in gross margins, specifically since you saw that nice boost versus 2019, that would be helpful. Thanks.

Ernie Herrman - Chief Executive Officer and President

So, Kimberly, yes. Let me go right to what you thought you heard from me is exactly correct the way you said it and we did start. We started very early actually as we were coming out of second quarter. And going into third quarter, we were starting to do this pretty aggressively but surgically. So, we did it very selectively and that's how we're going to continue to do it. And the merchants are doing a great job at approaching it in an extremely analytical and as well as verifying that, again, our out-the-door retail is significantly below anyone else's out-the-door retail.

Remember, the foundation of this is what's going on in this country, which is that wages and supply chain costs are hitting really like never before all together. And it is forcing retailers around us to either promote less or raise their retail. So, it is just creating a window of opportunity that we - and the wage thing, I have no reason to believe that ends. So, our team is, yes, it started back then. We had a significant amount of the selective adjusting of retails, and we have had very good success during the third quarter.

Scott Goldenberg - Senior Executive Vice President and Chief Financial Officer

Yeah. I'd just echo on what Ernie - we do a lot of customer surveys, marketing group and everything. And first, one of the things in the surveys are value perception remains just as strong as ever. So, whatever we're doing selectively, the retails have had, to the best we can determine, no impact from a customer perspective. And I think we've said multiple times, we're looking at the turns, the sales, the categories and everything has been consistent and strong, similar to the first and second quarter. So we can't see any impact. And so that's just from that perspective.

In terms of the merchandise margin, we've seen similar - again, to the second quarter, half of our benefit is coming from reduced markdowns due to the strong sales and the other is buying increased mark on. We are seeing some cost increases. But we're having retailing increases that are upsetting some of that. I think one of the benefits to having our average retail come down or improve over the last couple quarters is as that happens, our costs, it helps us on our cost structure as well as it takes - you'll have fewer units to move in our stores, DC and freight. So we're seeing some of the benefit on that as well. But to answer your question, it's about half of our benefit is coming from mark on and half of it is coming from markdowns. In total, we offset a bit - even with the higher freight costs, we went up slightly in our merchandise margin this quarter versus last quarter.

Kimberly Greenberger - Morgan Stanley - Analyst

Nice. Thanks so much.

Operator

Thank you. Our next question comes from Simeon Siegel. Your line is open, sir.

Simeon Siegel - BMO Capital Markets - Analyst

Great. Thanks. Good morning, everyone. Congrats on the great results.

Ernie Herrman - Chief Executive Officer and President

Thank you.

Simeon Siegel - BMO Capital Markets - Analyst

Ernie, just to your comment earlier about the importance of the upstairs brands, are you seeing any difference in concentration of the top brands now versus historically? And then, sorry if I missed it, did you say what percent of inventory was on hand versus in transit? Thank you.

Ernie Herrman - Chief Executive Officer and President

Simeon, interesting question. On the concentration of vendors, while I would say it varies by [Indecipherable] - varies by family of business, but yes, I would say, there is a little shift in just like the environment has shifted. So, certain categories are performing a lot better, which includes certain brands. So what's happening is, in those categories that represents certain brands, we're ending up with more brands there.

And this won't surprise you. Overall, I would say in the store, Simeon, we're ending up with some of the more, I guess you'd call it, casual brands because that's the way the market has kind of gone if you know what I mean. Having said that, as apparel has kicked back in, we do have some dressier parts of apparel where some of the more traditional brands are still, I would say, they've ramped back up a little bit. But if you looked overall, I would say, the casual brands have shifted to make up a greater percent of our mix and less dressy, which, again, that's a behavioral issue going on. And probably that type of trend continues for a while.

And then, I'm not going to give you actual categories, but in Home, as you can imagine, that's a greater percent of our business. So we have some Home labels that I think we're doing more business with today than we were a couple of years ago that have ramped up. And the complexion looks that way. And what we do, Simeon, is at the end of the day, no matter who the brand is, the buyers are - their first focus is to make sure we're at the right value. So it's interesting. We won't force - we try not to too much predetermine which brands we're going to emphasize based on just what the brand is. We kind of do it based on how we're deciding is the value.

I'll let Scott jump in on the second question.

Scott Goldenberg - Senior Executive Vice President and Chief Financial Officer

Yeah. So, Simeon, on the inventory, good question. The in-transit on order is up. It's up about a little more than 5% in terms of contribution of that total inventory that we have on our balance sheet. But it was up - it's similar to what we were up in the second quarter over fiscal '20. So, yeah, it is in that 5% range more as a percent of the total than it would have been total than two years ago.

Having said that, as we've said, our - both store and distribution on a per-store basis versus '20 was improved versus the second quarter where we ended at the end of the third quarter versus the second quarter, which also had improved versus the first quarter. So even despite our sales increases, we've been continuing to improve that inventory position both in the stores and DCs.

Given that we have a fair amount of inventory coming in, it should bode well for the fresh flow of inventory as a lot of this - the vast majority of this inventory, will be coming in over the next several weeks. So feel good about the fresh flow. I don't know, Ernie, if you have anything.

Ernie Herrman - Chief Executive Officer and President

Yeah. I mean, I agree with everything that Scott just said. And we're bullish on - we are just bullish on the way we can flow and availability as we look forward, as we addressed on the other question.

Simeon Siegel - BMO Capital Markets - Analyst

Great. All right. Guys. Congrats again and best of luck for holiday.

Ernie Herrman - Chief Executive Officer and President

Thank you.

Scott Goldenberg - Senior Executive Vice President and Chief Financial Officer

Thank you.

Operator

Thank you. Our next question comes from Dana Telsey. Your line is open, ma'am.

Dana Telsey - Telsey Advisory Group - Analyst

Good morning, everyone. And congratulations on the nice progress.

Ernie Herrman - Chief Executive Officer and President

Thank you, Dana.

Dana Telsey - Telsey Advisory Group - Analyst

Two quick things. As you think about real estate, remodels, relocations, what are you seeing and how is that looking for each of the banners? And you mentioned TV and marketing for Europe. How are your planning and marketing budget this holiday compared to last year? Thank you.

Ernie Herrman - Chief Executive Officer and President

All right. I'll have Scott talk on the real estate. And then I'll jump in on the marketing.

Scott Goldenberg - Senior Executive Vice President and Chief Financial Officer

Yeah. Again, I think we're extremely bullish on the real estate both what we've seen this year. First, in terms of our new store openings, we've been experiencing significant - as good as ever in terms of beating our - both our pro formas across our division, so that's exciting. As we said, we expect approximately the ability to open up 170 plus stores next year and then historically get back to that 4% growth where we were over 200 stores a year for many, many years, averaging on that. As you know, very three to five closings a year, so we love that aspect.

In terms of the remodels, we're doing over 300 this year. We don't have a number for next year, but it's going to be significantly higher across our divisions. Part of that is that's something that's very important to us as one of the things that we have just continually seen in this - all this year, we've seen the same thing where there's very little difference when you go from a store that's 10 years old to 20 years old to 30 years old. Part of that is we're just keeping these stores look fresh and that's why I think our ability to run the comps has been as good as it's doing.

And then, I think, we've also in the lease rates on both the hundreds of stores that we come to renewal period, our teams have done a great job across the board in getting lease renewals at lower rates than what we had contracted at. And that's continued all year long and it's starting as you get over time to being some meaningful dollars. So feel real good about that. And then, the availability for the sites and what we're seeing, we expect to see that for years to come given the amount of store closures that have happened in the past two years.

Ernie Herrman - Chief Executive Officer and President

Yeah. And on the marketing, great question. Our marketing spend - I mean, we're going after it this holiday in terms of driving to - continue to gain market share. So our marketing spend is planned up significantly in Q4 versus FY '20 with the idea that it allows to be top-of-mind for consumers during the holiday season when, as you know, Dana, it gets very noisy around marketing and we want to break through.

Our campaigns are designed to break through as best they can with the budget in terms of our creative campaigns, the way we execute them. By the way, more than half of our marketing dollars are going to be allocated to digital advertising, which is where the consumers are. And we're really - I think I briefly mentioned it we're really laser-focused on capturing the market share and drive customer traffic and we'll be reinforcing. And a lot of the messages are really built around the competitive advantages on value that we show our unique selection. We do that by showing certain product categories to remind the customer that we're going to be in these categories for gift giving.

I think that's always key for us, because sometimes customers forget that we have such a wide assortment of categories. And our goal is really to win discovery shopping occasions, which is roughly half of all shopping occasions where people are seeking inspiration, and a bit of our treasure hunt retail therapy that I think we can provide for the customer. And then we're leveraging the power of influencers and brand fans and we're giving her a choice via multichannel messaging. And we're just - this is how we're spending the money. And I just think we are so well positioned to - let's start with well-positioned with our store execution, our merchandise and then our marketing to help drive them into the stores.

Dana Telsey - Telsey Advisory Group - Analyst

Thank you.

Ernie Herrman - Chief Executive Officer and President

You're welcome.

Operator

Thank you. Our next question comes from Michael Binetti. Your line is open, sir.

Michael Binetti - Credit Suisse - Analyst

Hey, guys. Thanks for taking our question. Let me add my congrats on a great quarter, guys. Scott, a couple - I want to ask you, I know, on your comment about the pretax margin getting very close to double-digit next year, I think is how you phrased it. I know pre-COVID, it's a little too early to plan, but pre-COVID, you always planned the business around a 2% to 3% comp. Is that how we should orient ourselves related to your comment? And then we flex our model up and down with our own assumptions on comps, but is that a fair assumption?

And then, I'm just trying to think through the puts and takes on how you're thinking about it. You said deleverage on the combination of investments and distribution capacity, but your COVID costs were a pretty big burden this year. Your store volumes will be much higher than 2019. I would think freight would be a net benefit to the whole year next year. And I know on the last call you said you thought it would be - freight would be worse in the second half, gets a little better next year, and then you have some pricing. So I'm just trying to think through the puts and takes that would end us below double-digits next year as you think about it?

Scott Goldenberg - Senior Executive Vice President and Chief Financial Officer

Yeah. Again, too early to make the call. Again, as Ernie said, we feel great about the top line. We haven't made a definitive call yet on what we think the comp sales will be over this year, but we…

Ernie Herrman - Chief Executive Officer and President

I would jump. I think we're thinking it will be slightly above a 2% or 3%, I would say, Michael, because with this type of momentum and the amount of customer acquisition, I think we'll be a notch above that.

Scott Goldenberg - Senior Executive Vice President and Chief Financial Officer

So, I guess, that means 3% to 4%. In terms of the other costs, Michael, one thing I'd say is that the combination of freight, although not going be at the outsized deleverage that we're seeing this year of north of 150. We still expect because of, at least the visibility to the first half and to be determined on the second to have more than the normal amount of freight deleverage. So it's still going to be a lot less, but still more than what we would have seen pre-COVID.

Ernie Herrman - Chief Executive Officer and President

Only in the first half. We're hoping in the second half, Michael, to your point, that we level off on that.

Scott Goldenberg - Senior Executive Vice President and Chief Financial Officer

Yeah. So, overall though for the year, still would expect it to be more. So the combination of the supply chain wage and freight, yes, less COVID but we would still expect to see those to be more than what we are seeing pre-COVID. Now, as we get closer and to the end of the year and we see with the retail strategies and how we're buying and with the benefit we're going get from a higher retail, but yeah, we expect the margin to go up what would it be over this year. The question is what we'll be able to offset in terms of to drive the margins even higher.

Longer-term, we again feel real good. [Indecipherable] we had some level of stabilization. As we said that we would expect if we have headwinds that are closer to what we saw pre-COVID that we would - 3 to 4 comp, as Ernie just said on a go-forward basis, we would expect to be flat or leverage our business in longer term from wherever we end up at the end of next year.

Michael Binetti - Credit Suisse - Analyst

Okay. Thanks a lot, guys.

Scott Goldenberg - Senior Executive Vice President and Chief Financial Officer

You're welcome.

Operator

Thank you. Our next question comes from Laura Champine. Your line is open, ma'am.

Laura Champine - Loop Capital - Analyst

Thanks for taking my question. I wanted to talk about availability on the luxury brands because we've seen fewer of those in stores. And I know that it's tough to check a material number of stores, but it looks like there's something changing in closeouts for true luxury. Is that - am I seeing something that's consistent across the chains or is that more e-buying towards trend and the trend is not on the luxury brands anymore?

Ernie Herrman - Chief Executive Officer and President

Laura, very good question. I think it's a combination of both. And I think it's a fair observation. I would say, in your traditional categories where you might have seen us have a little bit more luxury brands, we have a little less of that right now. But as I mentioned earlier, it's also not where the action is, so to speak, of where all the trends are, which is much more casual, not luxury brands, more active, but we do have less. I don't think it's a - I don't think this is a long-term situation. I think this starts to go away as we get into next year. On the less luxury brands - also as the apparel cycle, the more traditional, slightly dressier apparel cycle comes back, I think we'll see more of the luxury brands I know you're referring to. And I think it's an accurate observation on your part.

In terms of total brands, and best brands as we would call it, by category, varying by category, yeah, we're in great shape there. The luxury brands are definitely a little less, but I would not think it's a long-term issue.

Laura Champine - Loop Capital - Analyst

And If I can follow-up on with that, obviously it's not a material part of sales and obviously your traffic is great right now. But is there any concern on your part that you might lose some of that treasure hunt customer traffic towards the holidays because it's not there on the luxury side?

Ernie Herrman - Chief Executive Officer and President

No. Well, no, because that side of the business, the true luxury side was very small to begin with as a percent to our business. And it also becomes more of the self-purchase, not a gift on the true luxury goods. Yeah, there are some gift giving there but we have a lot of the gift giving categories and items in-depth. So, no concern at all on that. And again, no really concern is a medium-term thing because I think the cycle is back as you go to next year. I could tell you - so that's one that you've noticed. I could give you a few other departments so we actually also have a lot less of right - here's the beauty of our model. There's a few other departments right now that are a bigger deal than say luxury vendors that we are actually very low on but we're running 15 comps.

So, the stores are flexing. And as we mentioned in the - we're able to flex the entire store and go after where the exciting value is. And also what I mentioned earlier is, again, our contract to our customer is to have - what we have in the stores to have exciting value and get ready for gift giving season. And we do that, even though we are at times going to run into pockets of either certain brands or certain departments or categories like I just said, that were not actually - that we're under on. So, yes, there's just other things beside that. We're actually light on and we believe it won't impact our performance over holiday.

Laura Champine - Loop Capital - Analyst

Great. Thank you.

Ernie Herrman - Chief Executive Officer and President

Thank you.

Operator

Thank you. The final question of the day comes from Omar Saad. Your line is open, sir.

Omar Saad - Evercore ISI - Analyst

Good morning. Thanks for squeezing me in. I appreciate it.

Ernie Herrman - Chief Executive Officer and President

Hello?

Scott Goldenberg - Senior Executive Vice President and Chief Financial Officer

Did we lose you, Omar?

Omar Saad - Evercore ISI - Analyst

Hey. Can you hear me?

Scott Goldenberg - Senior Executive Vice President and Chief Financial Officer

Now we can hear you.

Omar Saad - Evercore ISI - Analyst

Hey. Sorry about that. I wanted to ask the follow-up on some of the discussions you've been having around the pricing actions you've taken given the inflationary environment. Maybe especially around the term surgical, does that mean only a certain banner? Did you do it across banners? Did you try international or is it only certain products and categories? And also fill us kind of strategically, are you thinking differently about how you price your goods? Do you your merchants maybe used to use a cost-plus mentality and now you're approaching it more from a value perspective, especially given the inflationary environment? Any kind of philosophical change in how you think any price and value would be helpful to understand. Thanks.

Ernie Herrman - Chief Executive Officer and President

Yeah. No, again, very good questions, Omar. So, let me - there's two key questions you're asking. Let me go at both. They're interesting. No, we did not isolate the strategy to any one banner or any category. So, the selective retailing goods applies to Maxx, Marshalls, HomeGoods, every division we have in Canada, Europe, every banner, Australia. So it is not a - by any means. We have all the merchants in every marketplace looking at this.

And the approach to your second question, and I'm glad you asked this because you could think that we actually don't approach a cost-plus. That is a formula we don't do. That is the formula that a traditional retailer does. And what our buyers do is, they determine the retail first and almost we say forget about what the cost is, what's the exciting value retail? And then, we work it back from there. And so that's where - and how do you determine the value of retail? You take your fashion and your branding, you look at where it's being sold at other retailers. And from there, we determine the significant retail gap we need to have between us and the other retail. And that's how we establish the retail, not at what the cost is.

And that philosophy I just discussed just now, that is what is being utilized, I guess, you would say, in every division that is doing this. And again, it is international, it's everywhere. And that is what allows us to make sure that the retail is still providing tremendous value, because we're using a comp shopping of what is the retail on that item other retailers. What is it selling for? And that's how we do it. We don't do what the cost is to us - that's what we refer to as a markup wheel, which traditional retailers do that. We do not do that.

And it's a great question though, because you want to do one with - I like the way you asked it, because you want one without - you don't want to go around surgically addressed to retail as if we were doing off of cost. That you could run into trouble. So this, again, a good question.

Omar Saad - Evercore ISI - Analyst

Thanks, Ernie. Great work, guys.

Ernie Herrman - Chief Executive Officer and President

Thank you, Omar. And I believe that was our - Missy, that was our last question for the group. Thank you all for joining us today. And we'll be updating you again on our fourth quarter earnings call in February. Let me just say, from the team here at TJX, we hope you all stay well and we wish you good health and happy Thanksgiving.

Operator

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TJX COMPANIES INC

Q3 2022

Earnings Transcript

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