TJ Maxx 2006 Annual Report Download - page 42

Cost of sales, including buying and occupancy costs: Cost of sales, including buying and occupancy costs, as a
percentage of net sales was 75.9% in fiscal 2007, 76.6% in fiscal 2006 and 76.4% in fiscal 2005. This ratio for fiscal 2007, as
compared to fiscal 2006, reflects an improvement in our consolidated merchandise margin (0.4 percentage points) as
well as expense leverage due to our cost containment initiatives and the impact of strong same store sales growth. These
improvements in the fiscal 2007 expense ratio were partially offset by increases in some operating costs as a percentage
of net sales, primarily occupancy costs (0.2 percentage points).
Cost of sales, including buying and occupancy costs, as a percentage of net sales for fiscal 2006 as compared with
fiscal 2005 reflects an improvement in our consolidated merchandise margin of 0.5 percentage points. The improve-
ment in merchandise margin was largely due to lower markdowns at our smaller divisions, partially offset by an increase
in fuel related freight costs. In addition, the comparison to the fiscal 2005 expense ratio was favorably impacted by a
$30.7 million non-cash charge ($19.3 million after-tax) in fiscal 2005 to conform our lease accounting practices to
generally accepted accounting principles. See Note A to the consolidated financial statements under the caption “Lease
Accounting.” This charge was included in cost of sales in fiscal 2005 and increased that year’s expense ratio by
0.2 percentage points. These improvements in the fiscal 2006 expense ratio were more than offset by increases in
operating costs as a percentage of net sales, primarily occupancy costs, which reflect the de-levering impact of a 2% same
store sales growth as well as higher cost of sales ratios at divisions other than Marmaxx, which represent a greater
proportion of the consolidated results in fiscal 2006 compared to fiscal 2005.
Selling, general and administrative expenses: Selling, general and administrative expenses as a percentage of
net sales were 16.8% in fiscal 2007, 16.9% in fiscal 2006 and 16.7% in fiscal 2005. The 0.1 percentage point decrease in
fiscal 2007 reflects expense leverage across most categories, partially offset by a planned increase in marketing expense
(0.1 percentage point). The increase in fiscal 2006 compared to fiscal 2005 reflects an increase in store payroll costs as a
percentage of net sales, reflecting the de-levering impact of the low single-digit same store sales increase. The increase
in this ratio for fiscal 2006 compared to fiscal 2005 was also negatively affected by the net impact of third quarter events
including the costs of the executive resignation agreements, e-commerce exit and hurricane related costs, offset in part
by a VISA/Mastercard antitrust litigation settlement.
Interest expense, net: Interest expense, net of interest income, was $15.6 million for fiscal 2007, $29.6 million
in fiscal 2006 and $25.8 million in fiscal 2005. Interest income was $23.6 million in fiscal 2007, $9.4 million in fiscal 2006
and $7.7 million in fiscal 2005. The decrease in net interest expense in fiscal 2007 was due to the increase in interest
income. The increase in interest income in fiscal 2007 was driven by higher cash balances and higher rates of return on
short term investments. The increase in net interest expense in fiscal 2006 was due to higher short-term borrowings and
interest rates. The higher borrowing levels were primarily driven by the timing of inventory purchases, capital
expenditures and repurchase of the Company’s common stock. The additional interest expense from short-term
borrowings was partially offset by reduced interest costs due to the repayment of $100 million of 7% unsecured notes in
June 2005, as well as an increase in interest income due to higher interest rates.
Income taxes: Our effective annual income tax rate was 37.7% in fiscal 2007, 31.6% in fiscal 2006 and 38.3% in
fiscal 2005. The increase in the fiscal 2007 effective income tax rate reflected the absence of one-time tax benefits
recorded in the fourth quarter of fiscal 2006 (described in more detail below) which favorably impacted the fiscal 2006
effective income tax rate by 6.8 percentage points. The fiscal 2007 effective income tax rate benefited through July 20,
2006 from the tax treatment of foreign currency gains and losses on certain intercompany loans between Winners and
TJX. This tax treatment reduced the fiscal 2007 effective income tax rate by 0.2 percentage points. Effective July 20,
2006, we re-designated one of these intercompany loans and the related hedge as a net investment in our foreign
operations, and gains and losses on these items after July 20, 2006 are recorded in other comprehensive income, net of
tax effects. In addition, the fiscal 2007 effective income tax rate was favorably impacted by increased income at our
foreign operations (a portion of which are taxed at a lower rate than our domestic operations) as well as settlement of a
state tax assessment for less than the related reserves. Combined, these two items reduced the effective income tax rate
by 0.6 percentage points as compared to fiscal 2006.
The tax provision for fiscal 2006 includes a fourth quarter benefit of $47 million due to the repatriation of
earnings from our Canadian subsidiary. In addition, during the fourth quarter of fiscal 2006, we corrected our
accounting for the tax impact of foreign currency gains on certain intercompany loans. We previously established a
deferred tax liability on these gains (which are not taxable). The impact of correcting for the tax treatment of these gains
resulted in a tax benefit of $22 million, or $0.04 per share in fiscal 2006. The cumulative impact of this adjustment
through the end of the third quarter of fiscal 2006 was $18.2 million, all of which was recorded in the fourth quarter of
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