Ladies and gentlemen, thank you for standing by. Welcome to the TJX Companies' Fourth Quarter Fiscal 2022 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded February 23, 2022.

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, Messi. 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 the call today by expressing my gratitude to all of our global associates for their continued hard work and dedication to TJX. For the past two years, our associates have gone above and beyond to operate our business through unprecedented times, while also adapting to the constantly changing retail environment. I want to give special recognition to those associates who have been physically coming into work in our stores and distribution centers. In recognition of their efforts, we awarded a vast majority of them a discretionary appreciation bonus again this quarter.

Now, to an overview of our fourth quarter and full year results. I want to emphasize on the areas we directly control like buying, store and distribution operations, our pricing strategy and our initiatives to drive traffic and sales. Our execution was excellent due to the monumental efforts of our associates across the company.

Moving to the details. I am extremely pleased with our top line performance in the fourth quarter. U.S. open-only comp store sales increased a very strong 13% when compared to fiscal 2020 or calendar year 2019. U.S. comp sales were trending higher than this before the surge in Omicron cases. This quarter represents the fourth consecutive quarter that U.S. open-only comp sales increased low-teens or better. Comps at our U.S. home banners and in our home categories were excellent and our Marmaxx apparel comp was up high single-digits. Clearly, consumers continue to seek out our retail banners for exciting gifts and amazing values this holiday season.

For the full year, U.S. open-only comp store sales increased an outstanding 17%. Overall, TJX sales of $48.5 billion were almost $7 billion more than in fiscal 2020. We are convinced that we captured significant market share, particularly in the U.S. where our stores were open the entire year and we leverage the strength and flexibility of our off-price business model. I want to highlight the excellent execution and collaboration of our buying, planning, distribution, logistics and store operations teams. They work together strategically to strategically buy goods earlier than we typically do to ensure the consistent flow of exciting merchandise to our stores and online to support our outstanding sales throughout the year. As a result, we offer consumers a great selection of branded quality merchandise at excellent values all year long.

Going forward, we are laser focused on our sales and profitability initiatives and remain committed to corporate responsibility. Again, we feel great about the areas of our business that we directly control and we'll continue to look for ways to mitigate the expense pressures currently impacting our business. Further, in an inflationary environment, we believe more consumers will be seeking out our values. Importantly, I am as confident as ever in the medium and long-term outlook for TJX. We are the off-price leader in every country we operate in and believe, we are in an excellent position to capture additional market share in these regions for many years to come.

Before I continue, I'll turn the call over to Scott to go over and cover our furth quarter and full year results in more detail.

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. I'll start today with some additional details on our fourth quarter results. As Ernie mentioned, U.S. open-only comp store sales grew 13% over a strong 6% increase in the fourth quarter of fiscal '20. Overall, open-only comp store sales increased 10% also over a 6% increase in the fourth quarter of fiscal '20. Open-only comp store sales growth was strongest in November and December. As COVID cases began to surge worldwide, we saw sales trend softened with the largest impact in January. The impact was greatest in our apparel businesses, which is consistent with what we have seen during previous COVID spikes. Additionally, sales were impacted by government-mandated shopping restrictions that were put in place internationally. Overall TJX sales increased by more than $1.6 billion to $13.9 billion, a 14% increase versus the fourth quarter of fiscal '20.

In the fourth quarter, we once again saw a very strong increase in our average basket across all our divisions driven by customers putting more items into their carts. Overall, average ticket was up and improved for the fifth consecutive quarter. I also want to highlight that our U.S. customer traffic was up slightly. Fourth quarter pretax margin was 9%, down 190 basis points versus fiscal '20. Similar to the third quarter, we saw extremely strong mark on and significantly lower markdowns, which include the benefit from our retail pricing strategy. However, merchandise margin in the fourth quarter was down primarily due to the 280 basis points of incremental freight, which was slightly higher than anticipated. We had an 80 basis point negative impact from full year - from a full year true up of shrink expense, which was significantly higher than we expected. Pretax margin includes strong buying and occupancy leverage on our excellent sales, which was more than offset by approximately 160 basis points from the combination of incremental investments to expand distribution capacity and higher wage costs. In addition, net COVID costs negatively impacted pretax margin by an additional 50 basis points similar to the third quarter.

Finishing up on the fourth quarter, earnings per share were $0.78. Now, to our full year consolidated fiscal '22 results. U.S. open-only comp store sales grew 17% and overall, open-only comp store sales increased 15% versus fiscal '20. Overall, TJX sales grew 16% compared to fiscal '20. Full year fiscal '22 pretax margins was 9.1%. Excluding a 50 basis points negative impact from a debt extinguishment charge, adjusted pretax margin was 9.6%. Full year pretax margin benefited from buying and occupancy leverage due to our outsized open-only comp store sales. We are very pleased that our full year merchandise margin was up, despite 200 basis points of incremental freight. Our merchandise margin increase was driven by strong mark on and lower markdowns, which include the benefit from our retail pricing strategy. Full year pretax margin was negatively impacted by approximately 140 basis points from the combination of incremental investments to expand distribution capacity and higher wages and 80 basis points of net corporate cost. Full year GAAP earnings per share were $2.70. Adjusted earnings per share were $2.85, which excludes a $0.15 debt extinguishment charge.

Moving to inventory. Our balance sheet inventory was up 22% on a constant currency basis versus the fourth quarter of fiscal '20, primarily driven by higher in-transit inventory. We are very pleased with our per store inventory levels as they once again improved sequentially and were up versus fiscal '20. Availability of inventory is excellent and we are well positioned to flow fresh spring merchandise to our stores and online.

I'll finish with our liquidity and shareholder distributions. For the full year, we generated $3.1 billion in operating cash flow, driven by record net income. We ended this year with $6.2 billion in cash. In fiscal '22, we returned $3.4 billion to shareholders through our buyback and dividend programs, which is the most we've returned to shareholders on an annual basis in our history.

Now, I will turn it back to Ernie.

Ernie Herrman - Chief Executive Officer and President

Thanks, Scott. I'll pick it up with our fourth quarter and full year divisional performance. At Marmaxx, fourth quarter open-only comp store sales increased a very strong 10%. For November and December combined, Marmaxx comp sales increased low-teens. For the full year, Marmaxx delivered an outstanding 13 open-only comp store sales increase and segment profit dollars increased more than $340 million or 10% versus fiscal '20. For the year, Marmaxx' home business posted a comp increase in line with HomeGoods and apparel comps were up high single-digits. Average basket was up significantly throughout the year and customer traffic was up as well. We are very pleased with the performance of our largest division, which delivered double-digit comp sales increases every quarter of the year and offered shoppers an excellent assortment of apparel and home merchandise throughout the year. At HomeGoods, open-only comp store sales increased a remarkable 22% in the fourth quarter and were up high-teens or better every month of the quarter.

For the full year, HomeGoods delivered a phenomenal 32% open-only comp store sales increase and segment profit dollars increased more than $225 million or 33% versus fiscal '20. During the year, we saw consistent strength across all major categories and geographic regions for both HomeGoods and Homesense. Further, both customer traffic and average basket increases were outstanding throughout the year. We are convinced that we captured additional share of the home market in 2021, as our eclectic mix of merchandise and great values continue to resonate with consumers.

In Canada, open-only comp store sales increased 1% in the fourth quarter and were up 8% for the full year. At TJX International, open-only comp sales were down 2% in the fourth quarter, but up 6% for the year - for the full year. Fourth quarter and full year sales and open-only comp sales at both divisions were negatively impacted by significant government-mandated shopping restrictions throughout the year.

For the full year, similar to the U.S., TJX Canada and TJX International's home businesses outperformed apparel and both divisions saw strong increases in their average basket. We remain confident that our international divisions are well positioned to capture additional market share over the long term. As to our e-commerce businesses, we are very pleased with our overall sales growth in 2021. During the year, we added new categories and brands to each of our online banners and launched shopping on homegoods.com. While e-commerce only represents a very small percentage of our overall sales, we are very pleased to offer U.S. and UK shoppers 24/7 access to our great brands and values.

Now, to some additional highlights from 2021. First, we took steps to improve our profitability and offset some of the persistent cost pressures we've been facing. Our primary initiative to raise retails on our merchandise is working very well. We are in the early stages of this initiative, and believe there will be a multi-year opportunity for our business. Importantly, our customers tell us that our value proposition in the marketplace remained very strong and shoppers continued to see amazing values every time they visit. Second, we opened thousands of new vendors in 2021 and continue to source from a universe of approximately 21,000 vendors around the globe.

Our global buying presence continues to be a tremendous advantage. Further, we have strengthened our relationships with many of our existing vendors. With many retailers continuing to close stores and ongoing congestion in the supply chain, we offer vendors an attractive solution to clear excess product. Importantly, and I can't emphasize this enough, availability of quality branded merchandise is excellent across good, better and best brands.

Next, we are confident that our marketing continues to help drive new and existing customers into our stores and online. The team has done an excellent job allocating our advertising dollars to the right mix of media channels in a constantly changing digital environment. Further, our customer satisfaction is strong and we continue to attract new shoppers of all ages, including a large number of Gen Z and millennial shoppers, which we believe bodes very well for the future. In '22, we are launching many new marketing campaigns across the globe that will continue to focus on our exceptional value and an inspirational shopping experience.

Lastly, we made important investments to support the growth of the company. In '21, we opened 117 new net new stores, relocated an additional 50 stores and remodeled over 300 stores. We also made necessary investments to expand our distribution capacity and productivity to support our rapidly growing top line and future growth.

Our 2021 pro forma performance gives us great confidence in the outlook for our business, especially when we get back to a normalized environment. When stores were open with no restrictions, each division saw very strong sales, attracted new shoppers and captured more spend per customer. Further, we see a path to improved profitability once the retail environment stabilizes and some of the expense headwinds begin to moderate. All of this tells us that we have an excellent opportunity to significantly grow our top and bottom lines over the medium and long term.

I want to reiterate that we remain highly focused on improving our pretax margin profile. We continue to believe that our initiatives to drive sales are the best way to offset the current level of cost pressures we're facing. Further, we're very optimistic about our strategy to adjust retails, while maintaining our value proposition to consumers. To be clear, our goal is to approach a double-digit pretax margin in the medium term and to return to our fiscal 2020 pretax margin level in the long term.

Turning to corporate responsibility and ESG. I'll start by saying that the health and well-being of our associates and our customers remains a top priority as it has throughout the pandemic. I am so proud that while navigating the ongoing pandemic, our team hasn't skipped a beat in our other areas of corporate responsibility.

Let me highlight a few initiatives from Q4. One of the many ways we support the thousands of communities where we operate is through contributions to organizations focused on emergency relief efforts. This past quarter, we supported organizations providing relief for people impacted by the Colorado and British Columbia wildfires and the Kentucky tornado. These contributions are in addition to our annual donations to Save the Children and Red Cross Disaster Relief. In terms of inclusion and diversity, we launched our new mentoring program pilot and our new IND advisory boards have begun meeting regularly. We also continued further our direct support to black communities. This includes making donations to organizations committed to providing professional development for diverse leaders. Finally, as we continue to pursue initiatives that are both environmentally responsible and smart for our business, we are excited to share that we are making progress with plans to pursue additional even more aggressive environmental goals in several of our priority areas. I plan to discuss these in more detail on our next call. As always, we have more information on corporate responsibility at tjx.com.

In closing, I want to again thank each of our associates around the globe who helped us achieve our very strong results. I truly believe the depth of our off-price expertise and knowledge of our teams is unmatched. Going forward, we are excited about the sales and profitability opportunities we see for the business. We are confident in our plans for fiscal '23 and that our value proposition and the flexibility of our business will continue to be tremendous advantages. Our balance sheet is very strong and we are in a great position to invest in the growth of our business and to take advantage of the excellent inventory in the marketplace and return significant cash to our shareholders. We feel great about our market share opportunities and our goal of becoming an increasingly profitable $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?

Scott Goldenberg - Senior Executive Vice President and Chief Financial Officer

Thanks, Ernie. Moving to guidance. First, in fiscal '23, we plan to report comp store sales growth versus fiscal '22 for our U.S. divisions only. As a reminder, we had temporary store closures and numerous shopping restrictions internationally during fiscal 22. Therefore, we do not have a reasonable baseline to report year-over-year comp store sales for our TJX Canada and TJX International divisions in fiscal '23.

As for the first quarter, we are planning U.S. comp store sales to be up 1% to 3% over an outsized 17% U.S. open-only comp store sales increase last year. For the start of the first quarter, we are very pleased that our U.S. comp sales growth is strong, as we are seeing excellent consumer demand for both our apparel and home categories. It's important to note that our guidance takes into account the acceleration of comp sales we saw during the first quarter last year. To start the first quarter, we are currently cycling U.S. open-only comp store sales increases of low to mid single-digits versus the 20%-plus increase we will soon be anniversarying for the March and April period combined.

Next, we are planning total first quarter TJX sales in the range of $11.5 billion to $11.7 billion. In the first quarter, we are planning pretax margin in the range of 8.1% to 8.4%. We feel great about our merchandising margin opportunity and retail pricing strategy, however, we continue to expect elevated expense headwinds versus fiscal '22. We currently expect that level of incremental freight expense in fiscal '23 will be the highest in the first quarter at approximately 220 basis points. We're also expecting incremental wage cost to significantly impact our Q1 pretax margin.

For modeling purposes in the first quarter, we're currently anticipating a tax rate of 25.4%, net interest expense of about $19 million and a weighted average share count of approximately 1.2 billion. As a result of these assumptions, we are planning first quarter EPS of $0.58 to $0.61 per share. As to the full year, we are planning a 3% to 4% U.S. comp sales increase over a 17% U.S. open-only comp increase last year. For the full year, we are planning total TJX sales in the range of $52.6 billion to $53.1 billion. In regards to full year pretax margin, we're currently planning it to be close to fiscal '22's adjusted 9.6% margin. I want to highlight that this estimate implies that pretax margin in the last nine months of the year will be close to double digits.

We feel great about our merchandise margin opportunity and retail pricing initiative, however, similar to other retailers, we continue to see cost increases from freight and wage. We now expect these costs to be higher than we had anticipated when we spoke to you last quarter. Currently, we are planning incremental freight expense of approximately 150 basis points and incremental wage cost of about 100 basis points. That said, our retail strategy is working very well and now expect a bigger benefit this year than we had anticipated. Currently, we expect it to offset a majority of these incremental freight and wage cost in fiscal '23.

Importantly, I want to reiterate what Ernie said a few minutes ago that our goal is to approach double-digit pretax margin in the medium term. Further, on an annual basis, we believe we can deliver flat to increased margins on a 3% to 4% comp once expenses moderate significantly from these elevated levels. Lastly, for modeling purposes, for the full year, we're currently anticipating a tax rate of 25.8%, net interest expense of about $50 million and a weighted average share count of approximately 1.2 billion. We are not providing EPS guidance for the full year at this time, given the uncertainty around the expense trials, but hope the mix we are sharing will be helpful for modeling purposes.

Moving on to our fiscal '23 capital plans. We expect capital expenditures to be in the range of $1.7 billion to $1.9 billion. These include opening new stores, remodels, relocations and investments in our distribution network and infrastructure. For new stores, we plan to add about 170 new stores, which would bring our year end total to 4,850 stores. This would represent a store growth of about 3%. In the U.S., our plans call for - to add about 55 stores of Marmaxx, 60 stores of HomeGoods, including 10 Homesense stores and 20 Sierra stores.

In Canada, we plan to add about 10 new stores and at TJX International, we plan to open approximately 15 stores in Europe and approximately 10 stores in Australia. We continue to feel great about our opportunity to grow our global store base. Long term, we believe we can grow our store base to 6,275 stores, which is nearly 1,600 more stores than today with our current retail banners in our current geographies. Lastly, we plan to remodel 400 plus stores and relocate 50-plus stores in fiscal '23.

As to our fiscal '23 cash distribution plans, we remain committed to returning cash to shareholders. As outlined in today's press release, we expect our Board of Directors will increase our current quarterly dividend by 13% to $0.295 per share. Additionally, in fiscal '23, we currently expect to buyback 2.25 billion to 2.5 billion of TJX stock.

In closing, over the last two years, we have successfully navigated our business through an unprecedented retail landscape in an increasingly inflationary environment. We believe the actions we've taken and the initiatives we put in place set us up extremely well to drive both top and bottom line growth for many years to come. I want to emphasize that we are confident about the opportunities for our business going forward. We have a strong balance sheet and continue to generate a tremendous amount of cash flow. We have great position to continue to investing in and to support the growth of our business while simultaneously returning significant cash to our shareholders.

Now, we're going to - we are happy to take your questions. As we do every quarter, we are going to ask you that you please limit your questions to one per person and one part in each question to keep the call on schedule and so we can answer as many questions from as many analysts as we can. Thanks and now, we will open it up for questions.

Question & Answers

Operator

Thank you, sir. [Operator Instructions] Our first question comes from Lorraine Hutchinson. Your line is open.

Lorraine Hutchinson - Bank of America - Analyst

Thank you. Good morning. I wanted to follow up on your comments about the pricing strategy. Does your plan assume acceleration of the initial efforts that you made in the back half, and how quickly do you think these pricing actions can offset the freight and wage pressures?

Ernie Herrman - Chief Executive Officer and President

Great question, Lorraine. Yes. First of all, what happened around us, as you can see even in some of the media, the way outwardly reported, many of the retailers adjusting their prices across the board. I won't name them but you've probably read about certain retailers taking blanket approaches to raising their retails. So, ironically like anything in this business, I'm looking at this inflationary price increase as a major opportunity for us at TJX to get even more aggressive about adjusting our retails than we've been. So, when we started off, as you know, we were taking a very, the word I was using was surgically and then selectively adjusting retails. But we had such strong success and in fact, if you look at the fourth quarter merchandise margin, we had really healthy margins all the way through the back half of the year really driven by a large part by the pricing strategy.

So, now Lorraine, to your question, we are feeling like there is just major, more significant room for improvement as we go over the next year or two and it's a multi-year strategy by the way as we said in the script. We're always monitoring the value about how we stack up against everybody else, but the one thing that's happening is everyone is getting hit with the same cost pressures. So, our merchants are diligent. They are diligent about looking at the - where we - where are out the door retailers relative to the promotional retailer and other retailers and we have just a high degree of confidence in the ability to do a significant amount this coming year to offset really the lion's share, I think of these cost pressures. So, feeling great about that. Don't like again the freight and wage pressures that we're dealing with. They're pretty significant as Scott talked about. Having said that, this pricing strategy is one of the biggest things in TJX, that I think we can do to mitigate it and we are very confident in it.

Lorraine Hutchinson - Bank of America - Analyst

Thank you.

Ernie Herrman - Chief Executive Officer and President

Welcome.

Operator

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

Matthew Boss - JPMorgan & Chase - Analyst

Great. Thanks. So, Ernie, can you speak to market share trends and product availability that you're seeing in the U.S. across…

Ernie Herrman - Chief Executive Officer and President

Yeah.

Matthew Boss - JPMorgan & Chase - Analyst

Both apparel and home? Do you think you exit this pandemic as a stronger model? And then, maybe just Scott near term, on the positive 1% to 3% comp guide for the quarter - for the first quarter, is it fair to say you've seen February reaccelerate back to November's mid-teens comp or just anything that provide you confidence as we head into the 20%-plus March-April on near-term, I think would be helpful.

Ernie Herrman - Chief Executive Officer and President

Sure, Matt. Yeah. So, oh my gosh, the availability. I would say we're seeing over the last few weeks, specifically, a ramp up in availability. Again, as I mentioned on the script, across good, better, and best. Internationally, by the way, we're seeing - even though it's been - as you know, we've been fairly restrained over in Europe, for example. We are specifically seeing more better goods there than we have seen in a long time that the merchants are taking advantage of there. So as we open up, we're highly confident and we have been gaining market share but we're highly confident once we can open up that normal environment levels that we will see significant branded availability and market share gain there.

The market share gain that we clearly have been achieving here has been consistent. So if you look at these open-only comps in the U.S., I mean they're just extremely healthy comps as you know. We're just going to hit with these with wage and freight beyond that - what we have thought about before. But in terms of availability product, the pricing strategy, I think we have all of these levers working for us.

And then I'll give you the biggest thing I didn't get to touch on in the script, and this is where the Q&A is good, and you and I have talked about this in the past is our branded differentiation. Now, so I think you alluded in the question. We are going to be more important to vendors and I think that's what you were getting at with part of your question there. We're going to be more important to the branded vendor community than ever before because of what's happened with a lot of the store closures and the complexion of the online guys that tend to be either vertical-label driven or their businesses have not been that great at the department store level if you really look at the amount of business they're doing. Of course, they're getting better relative to their low volume levels of a couple of years ago, but they're still not doing the volume. And so what's happening is we're becoming I think even more important and as well as our buyers are just great at the way they really partner and deal with these vendors. We're becoming more important as we come out of this.

So another reason with the branded differentiation for us being an eclectic branded mix to continue our treasure hunt format, we feel really good about in this inflationary environment as that's becoming more and more a place of choice to shop. And then you have all the - by the way, you have all the political situations going on out there, inflation and fuel, anytime there's uneasiness, I would say, it's just a great opportunity for our model to accelerate a little bit more. So it will be interesting to see what happens over the next coming weeks but generally, though strangely enough, those environments our good for us. Scott?

Scott Goldenberg - Senior Executive Vice President and Chief Financial Officer

So - yeah. So, Matt, to answer your question, we can't give you specific but I think the most important thing is that - is what I said in the script. It's that we're currently comping against low to mid single digit U.S. comps where then again it accelerates to that strong plus-20% in the mar-pril period. But we've given guidance of 1% to 3%, and what we're seeing on the - our two-year stacks for our start is why we're overall but we are confident in our 1% to 3% overall guidance.

Having said that, we're - we certainly have as we've - Omicron starts to lessen, we've seen apparel has reemerged to being strong again versus the impact that it had in January. We've had a strong basket and positive U.S. customer traffic thus far. So all leading us to when we put it together to that 1% to 3% U.S. comp over an outsized 17% comp.

Obviously, with the international divisions are not - they were closed for a large chunks of last year. So that's why our guidance of the $11.5 billion to $11.7 billion is a - in rough terms, is 14% to 16% increase because as our - and the other thing is we are starting to see some of the restrictions in Europe be less and then hopefully that will give us some room for improvement there as well.

Matthew Boss - JPMorgan & Chase - Analyst

That's great color. Best of luck.

Ernie Herrman - Chief Executive Officer and President

Thank you.

Operator

Thank you. Our next question comes from Kimberly Greenberger. Your line is open.

Kimberly Greenberger - Morgan Stanley - Analyst

Okay. Great. Thanks so much. Good morning. Early in your prepared remarks, you talked about some sort of - some of the expenses you're currently encountering or what you characterized as temporary headwinds, and once these pass, that you feel confident in improving your pre-tax margins. I'm wondering if you can reflect just on the headwinds in the P&L and help us understand which expense items that you're seeing coming through, do you think are temporary and transitory such that perhaps in future quarters or future years, you could get those back.

And when - what do you think is more of a permenant headwind to the expense structure?

Ernie Herrman - Chief Executive Officer and President

Sure. Yeah. Yeah. Yeah. I'll let Scott jump in but let me answer right away what the - the one that we are hoping is transient is the freight and I would say the one that is not would be wage. So wage I believe, and I believe this would be the case for most businesses within the country, it will be built into the base and I think it's hard to reverse that. Freight, and I think Scott had in his prepared remarks, we are hoping that that should start to moderate. And that's what I had referred to - was referring to in my opening remarks.

I have to tell you, so we - you can kind of get out what those two mean because they are the biggest chunks by the way of what we were talking about in expense pressures. There's others but those are really the two headlines. As witnessed by what happened with our margin in the last fourth quarter and Scott talked about, we were able to offset oh my gosh, so much with our pricing strategy and our sales and markdowns and our turn rates that I believe when we got to a normalized environment, when the virus, we don't have anything, if that just becomes totally normal and we have our international divisions opened and we continue to buy and ship the right values at the different retailers that we're talking about and significant categories of goods, I think we're going to offset the lion's share of those expense headwinds in the fairly short-term here, which is as in this coming year, which is why I think we get to approach double digits on our operating margin.

So - and then I think it's a multi - I think we have more retail because everyone is going to be getting hit. So wage and freight hits most retailers and wage hits everybody and it's hitting the whole country. So I just think we have an advantage in our model to continue to raise retails from multiple years because everybody else we'll have to. So I hope that gives color. Scott?

Scott Goldenberg - Senior Executive Vice President and Chief Financial Officer

Yeah. It's - there's a lot of moving pieces here. I think we have better visibility. I'll start with the freight into that. I do think, as you heard on other retailers report that this will persist for much of the year, but we do believe that the first half is - has the higher year-over-year increases or incremental costs and it will moderate as we move through the back and particularly in the fourth quarter where everything peaked due to some of the actions we did. I think our teams did a great job of securing the freight, bringing it in. We did have to pay more cost to do that.

There were other things like demurrage and other costs that due to the longer times that it took to get the goods into our at the port and into our buildings. But I think a lot of that, we would believe will be lessened as we go against it next year, and the ocean freight and all that was really just more - it increased every quarter over the year peaking. We're renegotiating contracts and other things as we move through as we start right now, move through the year. So I think the freight will still be as we called out in my earlier remarks, a big headwind but moderating significantly when you get to the following fiscal year, which I think what Ernie was earning was alluding to.

The wage will I think peak this year but will still be a headwind as Ernie alluded to, but it will moderate next year. And supply chain, frankly, this year has already moderated, we peaked on that. A lot of the wage increases that we're seeing are the annualizations of a lot of the distribution wages that were - we had several with increases that will be impacting us more in the first half of the year, a little less in the second, and then, the store wages. I think, it's still a fluid situation, but we do believe it will decrease. So, overall, we would expect when you get past this year that the sum of all of the expense pressures will be significantly less not back to our pre-COVID levels, but with a level we would need a significantly less average retail increase to be able to cover that compared to what we're seeing this year. But I think as Ernie said, that's still very much a moving target and we haven't bought the goods for the vast majority of the year at this point.

Kimberly Greenberger - Morgan Stanley - Analyst

Very clear and helpful. Thanks so much.

Ernie Herrman - Chief Executive Officer and President

Thank you.

Operator

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

Paul Lejuez - Citi - Analyst

Hey, thanks, guys. Curious, on the 3% to 4% U.S. comp expectation for the year, how much of that is pricing versus unit volume and any breakdown you can provide between Marmaxx versus HomeGoods on that 3% to 4%? And I guess related to that, I'm kind of curious where the increased confidence comes from in terms of being more aggressive on taking price? Is that all on the home side of the business or you're going to be moving apparel in lockstep with home prices moving both higher? Thanks.

Ernie Herrman - Chief Executive Officer and President

Good questions, Paul. So, let me start with the increased - let me start with the pricing - our pricing strategy first. No, it's actually not - even though we would all - at a high level, you would expect, since in the home product area some of it's more unique or a little bit more blind per se that you'd have more there, we are getting the price increases across the board. Marmaxx, very significant. Yes, HomeGoods significant, but every division - and as you can imagine, we monitor what's going on with each division consistently, pretty much weekly actually, and every division is participating in it.

Proportionately, as you can imagine, the dollars are big because we've been open in the state. So, your dollars are bigger in Marmaxx and HomeGoods, but I would say every division, we can see directionally the pricing strategy is working. Again, we also get feedback on what's happening. So, we monitor how are we doing with the goods that we've adjusted price on and that's across every division and it's extremely successful. No problems at all. And again, I give my - the merchants a lot of credit, because they are the ones that do all the work of really making sure when we do it, we're doing it strategically. We're looking at what the out the door retail is at the item, whether it's a HomeGoods or Marmaxx. Canada and U.K. as we're opening up are going to be more and more doing that. Sierra who was by the way our CRM business has those same opportunities and they tend to trade from a moderate to very high-end, so they can find pockets of it.

As far as the unit breakdown, I'll let Scott jump in here a little as well, but on that 3% to 4% comp, it's going to - everyone participates a little on that. We could have some average retail driving that really in a Marmaxx, for example, and we could actually be down slightly in units by driving our comp with ticket based on what's going on in the environment and the mix of goods within the store that we're going into.

Scott, I don't know if you want to…

Scott Goldenberg - Senior Executive Vice President and Chief Financial Officer

Yeah. I don't think much more to say on that. I think, and as Ernie said, is that by having - this is really start - opposite of what we've seen for many, many years where our average retails were going down over a multi-year period. And I might have Ernie jump back in there. With our average retail going up, we're still finding an overall unit base average retail significantly below what we were right, Ernie…

Ernie Herrman - Chief Executive Officer and President

Yeah.

Scott Goldenberg - Senior Executive Vice President and Chief Financial Officer

A couple of years ago. So - but I think - so, I think the piece of your - with your average retails going up, and as Ernie alluded to, potentially less units, that's what's driving us to be offsetting a lot of these costs, not just the mark-on, but by having less units…

Ernie Herrman - Chief Executive Officer and President

Less processing cost…

Scott Goldenberg - Senior Executive Vice President and Chief Financial Officer

Less processing cost that was sourced…

Ernie Herrman - Chief Executive Officer and President

In our distribution centers.

Scott Goldenberg - Senior Executive Vice President and Chief Financial Officer

In distribution centers and all that. And I think, that's a significant benefit versus prior years when it was going the other direction. The other thing that, again Ernie alluded to, on the value equation, which is obviously important to us. We do a lot of marketing and other surveys, and our customers are telling us they're highly satisfied with the overall store experience, which is great, continues to go up, but they're also - we're not seeing any degradation at all in our value perception at all. So, I think, we obviously stay on it - important - all the metrics, but also we try to get as much indicators from talking to our customers as much as possible.

Paul Lejuez - Citi - Analyst

Got it. Thanks, guys.

Ernie Herrman - Chief Executive Officer and President

Paul, one other thing I'd point out on the 3 to - as we say every year, and this is - we believe we want to plan prudently, right, but you can imagine that the merchants in our business here, their goal is always to exceed their plan. So, you can be sure that the management teams here would like to exceed those plans, but when you look at the stack that we're up against last year as we talked about, we feel this is what we should plan. We don't really come up and tell the big - the enormous comps we start coming up against our - in pretty much mid-March through April. So, we're watching to see what happens there. So, we are tracking strongly right now. We want some more information as we get to the middle of this quarter to the end of this quarter, and we'll probably have a little bit more clarity of our feel for the trend line on our next call.

Paul Lejuez - Citi - Analyst

Great. Thanks, guys. Good luck.

Ernie Herrman - Chief Executive Officer and President

Thank you.

Operator

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

Omar Saad - Evercore ISI - Analyst

Thanks, good morning. Thanks for taking my question. Ernie, I was hoping maybe you could talk about how we should think about cycling the stimulus. You mentioned mid-March the comps get harder.

Ernie Herrman - Chief Executive Officer and President

Yeah.

Omar Saad - Evercore ISI - Analyst

I think, that's kind of when stimulus drops off. Maybe remind us the sensitivity you saw from stimulus benefits during the pandemic and how we should think about that in our modeling process? Thanks.

Ernie Herrman - Chief Executive Officer and President

So, Omar, you have done right to the really crux of the matter. When we look back at that last year, we could not read exactly when we were kicking in. We felt that was a combination of stimulus pent-up demand because you have to remember, people who had been cooped up, we are one of the more entertaining brick-and-mortar retailers to - coming out of that, right, we're such an appealing format for people to destress and go shop from when they were a little cooped up. So, we think - and the stimulus check, I think it might have been a little piece for sure. I think, it was more of the other of the pent-up demand, etc. because our trend line, as you know from our results, continue for quite a while.

Now, the stimulus checks, it gets a little gray. They are out there for quite a long. So yes, we believe that was a factor, but what percent of our huge double-digit comps was it? We, to this day, really don't know exactly, I think, it's a small percent, but part of it. So, all the more reason why, again, we want to see this mid-March to - through end of April. I think, we're going to have a good read then. Having said that, we are tracking very healthy right now and it has been a strong beginning to this quarter when you look at how we've planned at all and what our expectations are for the quarter. So, sorry, I can't give you the exact on that - we - again, we don't have it internally ourselves.

Omar Saad - Evercore ISI - Analyst

No, that's great color. Thanks, Ernie.

Ernie Herrman - Chief Executive Officer and President

Pleasure.

Operator

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

Michael Binetti - Credit Suisse - Analyst

Hey, guys. Thanks for all the detail on the call here today. Very helpful. I have a couple for you. So, I guess, you're saying back to margins from fiscal '20 levels in the long term, freight normalizing being the big help there, but your sales are 20% higher now. You called sales out is the best thing you can do to fight the margins, you have pricing power. So, I'm wondering why longer-term margins wouldn't reset above '20 levels - above 2020 levels in that scenario?

And then, Scott, I just wanted to try to get into your head a little bit. You said annual flat to increased margins on a 3% to 4% comp once expenses moderate. It's a little higher than the flow-through rate you've spoken to in the past, so maybe help us think about what kind of a cost algorithm you're baking in as you think about that longer-term?

Ernie Herrman - Chief Executive Officer and President

Yeah. Again, it's good. So, to give some color as - although the sales are substantially higher there through the roof. The costs over the course of several years are several billion dollars higher on a like-for-like basis as well. So that's why if this at all flowed through, we would be a lot higher than the 9.6 we printed. We'd be hundreds of basis points higher, but we had this, so the costs aren't necessarily wage and others going down. So that's - they don't reset. You just start and now go forward, what's your incremental cost right now. I mean, our old algorithm pre-COVID was comps that were slightly less but we still had a deleverage of 30, 40 basis points. Now, we're seeing on a 3% to 4% comp, we would expect to either be flat or leverage on our comp. And I think again, as Ernie indicated a lot of that has to do with the pricing initiative, which obviously, if cost moderate and there's still room for pricing more, but will flow through then maybe we've anticipated, but the cost pressure, which used to be 30 to 40 basis points of incremental pressure, we expect to moderate, but not down to that level at least over the mid term. Longer term that ever not moderated down to something close to 20 to 40 basis points like was even a moderate level of average retail initiative and a 3% to 4% comp. We would probably do better and that's why I think over the longer term, Ernie indicated we get back to the fiscal '20 levels or better.

Michael Binetti - Credit Suisse - Analyst

Okay. Let me ask one more, you mentioned that even with the average retail going up, we're still at an average retail below where we were a few years ago. I know, you guys watch the competitive environment very, very carefully. Do you have any competitive work you've done to inform you on where the mainline department stores are today versus their AURs a few years ago or where you stand on a relative spread basis today versus history?

Ernie Herrman - Chief Executive Officer and President

We can. Michael, good question. We don't get it at high, because we wouldn't know how to put it all together from high, but our merchants at a department level would have an idea of where categories have moved and the feeling is that they have gone up, but we wouldn't be able to get an exact average unit retail increase per se, but directionally, we can tell they moved up in many areas of the store.

Michael Binetti - Credit Suisse - Analyst

Okay.

Ernie Herrman - Chief Executive Officer and President

And the pressure - again, the pressure continues there as well. They're getting the exact same cost. Everybody is in retail, so it would only make sense that that's happening but we are verifying that really weekly, but can't get an exact number across the whole store.

Michael Binetti - Credit Suisse - Analyst

Okay. Thanks. Very helpful guys.

Ernie Herrman - Chief Executive Officer and President

Yes. Welcome.

Operator

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

Marni Shapiro - The Retail Tracker - Analyst

Hey guys. Congrats. Earnie, I loved how you described your stores as a place to relax it's like…

Ernie Herrman - Chief Executive Officer and President

Thank you, Marni.

Marni Shapiro - The Retail Tracker - Analyst

Pleasure. Can you just talk - can you just talk a little bit about on pricing and just the promotional environment. We're coming off what was a very unique industry year with low inventories, very low promotions in 2021 across the board and now the 2022 is going to be back to normal, but there is some hope that will be a little bit more back to normal and the expectation is we'll see a little bit more promotional creep. At the same time, you guys are raising prices and the consumers being hit with cost at home and is looking for better value. Can you just talk a little bit about how you balance that and how you're paying attention to all of the promotional creep that's anticipated for this year or are you not seeing that at all?

Ernie Herrman - Chief Executive Officer and President

So, we are not seeing promotional creep yet. We are reading about it as you are. It's a great question. It's - we're ultra sensitive to promotional creep, but we've been seeing things go the other way. So, regardless of inventory levels, inflation is hitting everybody so dramatically, again back to wage and freight, they want - they can have leaner inventories, it won't matter. They are still going to have to raise the retails because of the inflationary pressures on too many of their cost lines. I'll give you another one. We don't talk - we're talking about wage in the stores or whatever most of these businesses, if it's in a DC, if it's an e-com business, those wage rates and their DCs as you've probably seen what some of those online guys have even announced that they have to pay. If you go to the mass market merchants what they've had to raise their wages to. If you go to central offices throughout all of retail, so all the corporate offices just as we have here. And you take the study of what's going on on merit increases across the country. Everybody is going up at a higher rate than ever before, so I just think, no matter how lean their inventories are, I just think everyone's a little boxed in that they have to - I can picture them promoting more. If they promote more, there is the - in a department, what you can do is you can promote. You can look like you're promoting more but the promotional price of the book is raised. Do you know what I mean?

Marni Shapiro - The Retail Tracker - Analyst

Yeah, yeah.

Ernie Herrman - Chief Executive Officer and President

So we are simple with our buyers, where we say, you've got to look at what is the out the door price and compare that out the door price to what our price is, even though they could say they're on sale. So, there could be some of that happening, where some of the retailers that have the customer base that expect sales right? We all know how that works and they expect the high-low game. I think, that could happen to a degree, but I just think on the actual retail that they sell from, it's going to be up from where it was, even though it could look like they are promoting more.

Marni Shapiro - The Retail Tracker - Analyst

So even if it looks like they are promoting, your pricing will still be better anyway and it shouldn't have an impact? Okay.

Ernie Herrman - Chief Executive Officer and President

We do not - we're pretty simple internally here. We flex on many things. We do not flex our merchants, so there was no flexibility on us being close to the out the door price of any other retailer.

Marni Shapiro - The Retail Tracker - Analyst

And if I just follow up on that one last thing. Are the price increase is across the board or are there certain segments that are more amenable to those price increases?

Scott Goldenberg - Senior Executive Vice President and Chief Financial Officer

Amenable, I like that.

Ernie Herrman - Chief Executive Officer and President

I might have to use that - I'm going to use some of that language with some of my team. I would say, yeah, there are - absolutely, there are categories that are a little more sensitive where I think it's more dangerous for us to play out, because we're already there and if around us say it's a certain branded category and they're already be kind of a known commodity retail there, our merchants buyers have to kind of stay away from that and there are decent amount of those throughout the store. There is just - what we have found in the last quarter or two, there are more categories where we can really adjust retails on more product than we thought six months ago, so we are just feeling really good about it. And I get - literally every week, I can see on a report what's happening at a high level across all the divisions and that - so we're able to monitor, all the senior teams all the way down to merchandise managers and buyers and the planning organization. We can kind of keep our hands around this to also make sure that we're not swinging the pendulum as they say.

Marni Shapiro - The Retail Tracker - Analyst

Yeah. Fantastic. Best of luck you guys.

Ernie Herrman - Chief Executive Officer and President

Thank you, Marni.

Operator

Thank you. And our last question comes from Robert. Your line is open.

Robert Drbul - Guggenheim Securities - Analyst

Hi. I just wanted to touch on something you mentioned on good, better, best in terms of just sort of product availability, is this an environment where you would actively adjust the sort of good, better, best? And I guess, the second question I have is around product availability. I think, you mentioned seeing some stuff the last few weeks, is your expectation that as we get through this year, the environment will get even better from like a product availability or what you're seeing and hearing from your vendor base? Thanks.

Ernie Herrman - Chief Executive Officer and President

Thank you, Bob. Two great questions or actually types of things that we ask ourselves all the time, so we don't adjust - we don't specifically adjust good, better, best going in, but I do have to say that based on what's out there our merchants kind of strategize, because we buy a lot of different ways. So if they see we're going to be overloaded and say good and not enough, better and best, they will lean in to trying to balance those areas, but we don't - how do I put it? We don't get real definitive on that, so we don't mind if there has been more exciting buys in one of those areas. We don't have to have it be so exactly balanced, so if you had and you're sitting in the men's shirt area, if we were kind of imbalanced on certain brands and certain looks to good and we're - we would try to move it to be more balanced, because we try to appeal to a broad customer base and we don't want to be just in one price point or one look in any category. So, it's a great question that we could spend a couple of hours on this on how we - you do a mix, but we really - we adjust but we don't adjust to as much as a traditional store, what I'd say, to answer your question. And then, the second, can you remind me on the second question? Was it…

Robert Drbul - Guggenheim Securities - Analyst

It was just more on product availability. I think, you mentioned you're seeing some better product the last few weeks. Do you foresee the next six months being materially better than you saw over the last 12 months? I'm just trying to understand when you look at the environment and supply chain.

Ernie Herrman - Chief Executive Officer and President

Yeah. So here's what's good as retail gets better typically, remember the wholesale market is mainly imported products, so they tend to buy more aggressively when retail gets better and there tends to be more access. So, I think in theory, there is going to be more availability over the next - as everybody - if things normalize, people will tend to cut goods a little more aggressively. There's just been so - there is a lot of availability right now, particularly coming out of holiday going into first quarter but I would assume that even ticks up some more as things normalize. So yeah, great question. We talk - again, we talk about those type of things consistently here, so you're touching on some of the big rocks, for sure.

Robert Drbul - Guggenheim Securities - Analyst

Thank you.

Ernie Herrman - Chief Executive Officer and President

All right. Thank you all for joining us today. We enjoyed our discussions. We will be updating you again on our first quarter earnings call in May. And let me just say from the team here at TJX, we hope you all stay well and talk to you soon.

Operator

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TJX COMPANIES INC

Q4 2022

Earnings Transcript

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