TJ Maxx 2015 Annual Report Download - page 43

The following table sets forth our consolidated operating results as a percentage of net sales:
Percentage of Net Sales
Fiscal Year 2016 Fiscal Year 2015 Fiscal Year 2014
Net sales 100.0% 100.0% 100.0%
Cost of sales, including buying and
occupancy costs 71.2 71.5 71.5
Selling, general and administrative
expenses 16.8 16.1 16.3
Loss on early extinguishment of debt —0.1 —
Interest expense, net 0.1 0.1 0.1
Income before provision for income taxes* 11.8% 12.2% 12.1%
Diluted earnings per share $ 3.33 $ 3.15 $ 2.94
* Figures may not foot due to rounding.
Impact of foreign currency exchange rates:Our operating results are affected by foreign currency
exchange rates as a result of changes in the value of the U.S. dollar in relation to other currencies. Two ways in
which foreign currency exchange rates affect our reported results are as follows:
—Translation of foreign operating results into U.S. dollars: In our financial statements, we translate the
operations of TJX Canada and TJX International from local currencies into U.S. dollars using currency
rates in effect at different points in time. Significant changes in foreign exchange rates between
comparable prior periods can result in meaningful variations in consolidated net sales, net income and
earnings per share growth as well as the net sales and operating results of these segments. Currency
translation generally does not affect operating margins as a percentage of net sales, or affects them only
slightly, as sales and expenses of the foreign operations are translated at approximately the same rates
within a given period.
—Inventory-related derivatives: We routinely enter into inventory-related hedging instruments to mitigate the
impact on earnings of changes in foreign currency exchange rates on merchandise purchases
denominated in currencies other than the local currencies of our divisions, principally TJX Canada and
TJX International. As we have not elected “hedge accounting” for these instruments as defined by U.S.
generally accepted accounting principles (GAAP), we record a mark-to-market gain or loss on the
derivative instruments in our results of operations at the end of each reporting period. In subsequent
periods, the income statement impact of the mark-to-market adjustment is effectively offset when the
inventory being hedged is received and paid for. While these effects occur every reporting period, they are
of much greater magnitude when there are sudden and significant changes in currency exchange rates
during a short period of time. The mark-to-market adjustment on these derivatives does not affect net
sales, but it does affect the cost of sales, operating margins and earnings we report.
We refer to the impact of the above two items throughout our discussion as “foreign currency.” This does
not include the impact currency exchange rates can have on various transactions that are denominated in a
currency other than an operating division’s local currency. When discussing the impact on our results of the
effect of currency exchange rates on such transactions we refer to it as “transactional foreign exchange.”
Cost of sales, including buying and occupancy costs: Cost of sales, including buying and occupancy
costs, as a percentage of net sales was 71.2% in fiscal 2016 compared to 71.5% in both fiscal 2015 and fiscal
2014. The improvement in this expense ratio was driven by leverage on buying and occupancy costs as a result
of the 5% same store sales increase along with an increase on our profit margin on merchandise sold
(merchandise margin). Together these two items benefitted the fiscal 2016 expense ratio by approximately 0.5
percentage points. Merchandise margin improved despite the negative impact transactional foreign exchange
had on the cost of merchandise for Canada and Europe this year versus last year. The change in exchange rates
increased the cost of merchandise purchased by Canada and Europe that were denominated in currencies other
than their local currency, primarily the U.S. dollar. This expense ratio was also negatively impacted by increased
freight and distribution costs associated with moving more units through our supply chain and the mark to
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