TJX Companies, Inc. (The)

Ladies and gentlemen, thank you for standing by. Welcome to the TJX Company's first quarter fiscal 2026 financial results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. At that time, if you have a question, you will need to press star 1. As a reminder, this conference call is being recorded May 21, 2025. I would like to turn the conference call over to Mr. Ernie Herman, Chief Executive Officer and President of the TJX Companies, Inc. Please go ahead, sir.

Thank you, Fran. Before we begin, Deb has some opening comments.

Thank you, Ernie, and good morning. Today's call is being recorded and includes forward-looking statements about our results and plans. These statements are subject to risks and uncertainties that could cause the actual results to vary materially from these statements. including, among others, the factors identified in our filings with the SEC. Please review our press release for a cautionary statement regarding forward-looking statements, as well as the full safe harbor statements included in the investor section of our website, TJX.com. We have also detailed the impact of foreign exchange on our consolidated results and our international divisions in today's press release, and in the investor section of TJX.com, along with reconciliations to non-GAAP measures we discuss. Thank you, and now I'll turn it back over to Ernie.

Good morning. Joining me and Deb on the call is John. I want to start by thanking all of our global associates for their ongoing commitment to TJX and to our customers. Our talented associates work hard to bring our business to life and deliver great value to consumers every day. Now, to our first quarter results. I am very pleased with our performance in the quarter. Overall comp sales grew 3% at the high end of our plan. Every division, both in the U.S. and internationally, drove increases in comp sales and customer transactions. Pre-tax profit margin and earnings per share both exceeded our expectations. John will talk about our first quarter results in more detail in a moment. During the quarter, our teams delivered an exciting mix of good, better, and best brands across a broad range of categories and items to serve our very wide customer demographic. As always, we offered great value to our shoppers every day at each of our retail banners. Looking ahead, we are convinced that our value proposition and the flexibility of our business will continue to be a winning retail formula. The second quarter is off to a strong start and we are excited about the initiatives we have planned, which we believe will further drive sales and traffic. The availability of merchandise we are seeing is outstanding and we are in a great position to take advantage of the plentiful opportunities that the marketplace is offering. We are confident in our ability to navigate the current tariff and macro environment in the short term. Importantly, our vision for long-term growth, profitability, and market share opportunities remains the same. Now, I'll turn the call over to John to cover our first quarter results in more detail.

Thanks, Ernie. I also want to add my gratitude to all of our global associates for their hard work and dedication to TJX and our customers. Now I'll show some additional details on our first quarter versus last year. As Ernie mentioned, our consolidated comp sales growth of 3% came in at the high end of our plan. Overall, comp sales growth was almost entirely driven by an increase in customer transactions. Comps in both our apparel and home categories increased with home outperforming apparel. Pre-tax margin of 10.3% was down 80 basis points and was above our plan. Gross margin was down 50 basis points, primarily due to unfavorable inventory hedges. SG&A increased 20 basis points due to a lapping of a benefit from a reserve released last year in incremental store wage and payroll costs. Net interest income negatively impacted pre-tax profit margin by 20 basis points versus last year due to a lower cash balance and lower interest rates. Lastly, diluted earnings per share of 92 cents were also above our expectations. Now to our first quarter divisional performance. Across all of our divisions, customer transactions increased once again. We see this as an excellent indicator of the strength of our value proposition across our retail banners. At MarMax, comp sales increased 2% and segment profit margin was 13.7%, down 50 basis points. As we expected, MarMax's sales accelerated in March and April as the weather improved. Comp sales in both apparel and home categories were up. Also, We were very pleased with the sales growth at our U.S. e-commerce sites and Sierra stores, which report as part of this division. We remain confident that MARMAX, our largest division, can capitalize on the opportunities we see to continue gaining market share and further grow our store footprint across the U.S. Our home goods division delivered comp sales growth of 4% with strength at both the HomeGoods and HomeSense banners. Segment profit margin was 10.2%, up 70 basis points versus last year. We believe our U.S. home banners offer consumers a highly differentiated mix of home fashions from around the world. We are convinced that we can continue to grow our share of the U.S. home fashions market. At TGX Canada, comp sales were up 5%. Segment profit margin on a constant currency basis was 10.6%. down 170 basis points last year, primarily due to unfavorable transactional foreign exchange as we expected. TJX Canada is the leading off-price retailer of apparel and own fashions in Canada. With well-recognized retail banners, we see our Canadian business as well-positioned for continued successful growth. At TJX International, comp sales increased 5%. We are very pleased to see continued strength in Europe and outstanding sales in Australia. Segment profit margin on a constant currency basis was 4.2%, up 20 basis points versus last year. We continue to see plenty of opportunities to grow our TK Maxx banner across our existing European countries and in Australia and to bring TK Maxx to Spain next year. I also want to reiterate our excitement for our joint venture with Grupo AXO in Mexico and our investment in Brands for Less in the Middle East. While still early, we're building great relationships with these teams and we see this as a way to participate in the growth of off-price in these geographies. Moving to inventory. Balance sheet inventory was up 15% and inventory on a per store basis was up 7% versus last year. We feel great about our inventory levels and have been taking advantage of the excellent deals we have been seeing in the marketplace. Availability of merchandise remains outstanding and we are set up very well to continue to flow fresh assortments to our stores and online. As to our capital allocation, we continue to reinvest in the growth of our business while returning significant cash to shareholders through our buyback and dividend programs. Now I'll turn it back to Ernie.

Thanks, John. I'd like to start with a few comments on the current environment and the reasons for our continued confidence in our business. We have a very long track record of successfully navigating through many types of challenging economic and retail markets. Each time, we've emerged as an even stronger company with greater market share opportunities. We have a very experienced leadership team that has worked together for multiple decades. While we're not immune to tariff pressure, we are laser focused on our initiatives to offset them by remaining flexible and executing our opportunistic buying approach. Long term, we remain as confident as ever in our strategic vision for future growth. Now, I want to reiterate the key characteristics of our business that give us confidence that we can continue to execute on our growth initiatives through the current environment and for many years to come. First is the value proposition we offer to our customers. For us, value is a combination of brand, fashion, quality, and price. Our customer surveys tell us that we have an excellent reputation as a value leader in each of our geographies. As a trusted value retailer, we have historically attracted new shoppers to our stores in many different types of environments. Therefore, we are convinced that we will have an opportunity to gain market share if more consumers seek out value in the current environment. We are confident that our commitment to our shoppers' great value on every item, every day, will continue to resonate with consumers and drive more shoppers to our stores. Next, our team of over 1,300 buyers source goods from an ever-changing universe of over 21,000 vendors from more than 100 countries around the world. We have a global buying infrastructure and supply chain that has been in place for multiple decades. Further, we have longstanding relationships with many of our vendors, and we can offer another avenue for them to grow their business. All of this gives us great confidence that we'll have plenty of merchandise available to support our long-term growth plans. Third, We successfully operate stores across a very wide customer demographic. We offer shoppers a wide breadth of good, better, and best brands to appeal to shoppers across a broad range of income and age groups. We believe this is a tremendous advantage and will continue to allow us to attract a wider shopping audience than many other retailers. Next, all aspects of our business model are driven by flexibility. Our global buying, store operations, supply chain, and systems are designed to support our flexible business model. This allows us to offer an exciting treasure hunt shopping experience with rapidly changing selections across all categories. We are confident that our flexibility will continue to help us to navigate through many types of environments and allow us to react to changing consumer preferences. Lastly, but most important, is our talent. I truly believe that the depth of off-price knowledge and expertise and longevity of our management teams within TJX is unmatched. We take great pride in being a teaching organization, which is a high priority of our managers throughout the company. This is supported with our TJX University and other training programs. Our human resource teams are extremely focused on developing talent and succession planning to ensure we develop the next generation of leaders of TJX. Additionally, I am so proud of our culture, which I believe is a major differentiator. I am convinced that our constant focus on talent and culture have been significant keys to our success and will continue to be going forward. Again, We are confident that the combination of these characteristics is why we have delivered decades of sales and profit growth and gives us great confidence that we are set up very well for long-term success. Summing up, we are very pleased with the overall performance of TJX in the first quarter. I truly believe we have one of the best models in retail and that it will serve us well in today's environment. Longer term, we continue to see a long runway for growth. As an up-price leader in every country that we operate in, we see plenty of opportunities to further grow our market share in the U.S. and internationally. Lastly, I have great confidence that the flexibility of our business, our relentless focus on value, and, very importantly, our talented associates will continue to be major contributors to our success for many years to come. Now, I'll turn the call back to John to cover our full year and second quarter guidance, and then we'll open it up for questions.

Thanks again, Ernie. I'll begin with some color on how we're thinking about tariffs. Let me start by saying that we believe we can navigate through the current tariff environment. While we're not immune to tariffs, we feel great about the components of our business that we can control and remain confident in our long-term growth and profitability plans. We're also realistic that in the short term, we are operating in a highly fluid macro environment. For simplicity purposes, we're making the assumption that the current level of tariffs on imports into the U.S. from China and other countries will stay in place for the remainder of the year. In terms of our guidance, as we noted in our press release this morning, we are maintaining our full-year comp sales growth, pre-tax profit margin, and diluted earnings per share outlook. This guidance assumes that we can offset the significant incremental pressures we have seen and expect to see from tariffs on both our direct and indirect imports this year. We believe we can do this primarily through our buying process, our ability to adjust our ticket while maintaining our value gap, and our ability to diversify our sourcing. Further, we are focused on cost efficiencies and productivity initiatives. Now to our detailed full-year fiscal 26 guidance, which remains unchanged versus the previous full-year guidance we gave in February. We expect overall comp sales to increase 2 to 3 percent. We're planning full-year consolidated sales to be in the range of $58.1 to $58.6 billion, up 3 to 4 percent. With the volatility we've been seeing with foreign exchange rates, we are holding rates at the same level as our previous guidance. We are planning full-year pre-tax profit margin to be in the range of 11.3 to 11.4%, down 10 to 20 basis points versus last year's 11.5%. Moving to gross margin, we expect it to be in the range of 30.4 to 30.5%, a 10 to 20 basis point decrease versus last year's 30.6%. We expect full-year SG&A to be 19.3%, versus last year's 19.4%. We're assuming net interest income of about $98 million, which we expect to deliver fiscal 26 pre-tax profit margin by 20 basis points. Our full year guidance assumes a tax rate of 25.1% in weighted average share count of approximately 1.13 billion shares. Lastly, we expect full-year diluted earnings per share to be in the range of $4.34 to $4.43. This would represent a 2 to 4 percent increase versus last year's diluted earnings per share of $4.26. Moving to the second quarter, we expect overall comp sales to increase 2 to 3 percent, consolidated sales to be in the range of $13.9 to $14 billion, Pre-tax profit margin to be in the range of 10.4 to 10.5%, down 40 to 50 basis points versus last year's 10.9%. Gross margin to be 30%. This would be a decrease of 40 basis points versus our last year. This includes incremental tariff costs on the directly sourced merchandise that we were committed to when the additional tariffs went into place in March and April. mostly offset by our mitigation efforts. We are also lapping a benefit from a true up of a freight accrual last year. SG&A to be 19.7% down 10 basis points versus last year. This is due to a benefit from lower incentive compensation accruals plan this year. We're also assuming net interest income of about $24 million which we expect to deliver second quarter pre-tax profit margin by 20 basis points. Our second quarter guidance also assumes a tax rate of 24% and a weighted average share count of approximately 1.13 billion shares. Based on these assumptions, we expect second quarter diluted earnings per share to be in the range of $0.97 to $1, up 1% to 4% versus last year's 96%. In closing, I want to emphasize that we are in an excellent position to continue to invest in the growth of our company while simultaneously returning significant cash to our shareholders. Now we are happy to take your questions. As a reminder, please limit your questions to one per person so we can answer as many questions as we can. Thanks, and now we'll open it up to questions.

Thank you very much. If you would like to ask a question, please press star 1. Please unmute your phone and record your name clearly when prompted. Your name is needed to introduce your question. To withdraw that request, you may press star two. One moment for our first question, please. And our first is from Lorraine Hutchinson with Bank of America. Ma'am, your line is open.

Thank you. Good morning. Good morning. I wanted to ask about inventory availability. I think for two decades, I've been asking about inventory availability, and you use great adjectives like outstanding. And that's always been the case. But we're in a little bit of a different environment right now. We're hearing about delayed ship sailings, uncertainty around tariff rates for holiday. There's a lot of question marks in the buying offices of the traditional retailers and brands. So can you just give us a little bit more context on what's changed? How how your conversations have gone and what kind of pricing you think you may have to put in place in the back half to offset some of these tariffs?

Very good question, Lorraine. Yes, I remember many times you've asked about availability. This time, to your point, the environment is so different. Totally appropriate question. Shipments, yeah, I think we've heard from vendors, especially pre the adjustment in the tariffs, shipments were being delayed. But, you know, things change a little when the tariffs were moderated a bit. I believe you have, and I'm kind of talking globally here in the vendor community, you definitely have an uneasiness, I would say, uneasiness on what's going to be happening now and forward because it isn't still crystal clear. The way we approach it, though, I think you'll appreciate this. You look at our inventories, they're up a bit. That's reflecting some of the great buys that our teams have really been able to take advantage of in the market recently. We only see that trend going up in terms of availability as we go to the back half. To your point, When some of the vendors are talking about cutting back or delaying, could we see a category here or there where there's less availability than we traditionally see from the traditional retailers potentially cutting back in advance or the wholesaler cutting back? That could happen. The good thing with our flexibility is we will just take advantage of an adjacent category or something. We'll say, hey, we'll give up on the one category. that might have a little less, and we'll just have a little less of it. I shouldn't say give up. We'd have a little less inventory on that, and we'll go after the ones where we think there's more exciting value to put out there. I always emphasize this. Our only contract to the customer is that we will have great value on the goods that we put out there, and it'll be below the out-the-door price of traditional retailers. especially retailers, etc. So that is always, you never have to worry about that. In our pricing, yes. Do we think we are going to take advantage of the, I guess the word would be chaos that's out there? And Lorraine, I know you've heard us talk about that in the past. In this type of environment, albeit the tariff situation might make things obviously a little more complicated around the board, And as you saw in some of the numbers, you know, we take a little bit of a hit in Q2. Over the back half, we believe there's going to be a tremendous opportunity for our merchants to take advantage of it. And then as far as pricing goes, it's kind of funny your question, there's a few parts. As far as the pricing goes, We will always ensure that we are below, that we have a gap between us and the outdoor price at the regular traditional retailers. Having said that, we believe there's opportunity for us to buy better. And if retails do move out there, we will adjust our retails. To preserve that gap, that could mean they go up on certain items. If somebody actually adjusts, this is always the case also, if they adjusted a retail down, we would do that as well. But that's kind of, I think I touched on all the great questions because it really encompasses a lot of what I think people are thinking right now, Lorraine, in terms of how we're going to approach the buying end of this business.

Great. Thank you.

Thank you.

Our next question is from Matthew Boss with JP Morgan, and your line is open now.

Thanks, and congrats on the continued consistency.

Thank you, Max.

So, Ernie, maybe first, could you speak to the progression of comp trends that you saw at MarMax in March and April, maybe relative to the start of the quarter with some of the weather disruption? And maybe if you could elaborate on that strong start to the second quarter. And then one for John. Just gross margin considerations maybe for the balance of the year relative to the contraction in the first quarter.

Sure. Yeah, very good, Matt. Actually, John will start off here.

Yeah, so as far as the sales go, you know, we did see weather early in the first quarter. And once the weather improved, we did see a comp increase. our comps improve month to month as the quarter went on. And we saw that continue into the second quarter, and that's why we've highlighted a strong start in our prepared remarks.

Yeah, and Matt, great question. First of all, I'm very encouraged by the strong start in Q2 as well. And one of the most encouraging things going back to Q1 is And again, happy with this in Q2, is that every division is participating in our comps. And as John said, in Marmax, which got better as the quarter went on, I think we've been very happy when we saw the more recent Marmax comps coming out of Q1. And I think... We have not, our business obviously for years has been extremely strong. It's just nice to see right now where we have every division participating in that strength, every geography we're in, and specifically internationally as well. And obviously bucking a trend in the home industry right now is our home business, highlighted by home goods. Very proud of those teams and what we're doing there versus the industry, and proud of the way they're beginning Q2 as well.

Yeah, and then, Matt, to answer your second question, so for Q2, Q2 is really our most impacted quarter for tariff pressures as the tariffs were put in place after we had placed the orders for goods that we directly import. So we have significant mitigation efforts in place for Q2, and we expect those mitigation efforts to continue into the back half. But in addition to that, we've also experienced a negative impact on the mark-to-market of our inventory hedges in Q1, and some of that will reverse in the back half favorably. In addition to that, the front half is negatively impacted versus last year from favorable freight accrual reversals last year. So all that adds up to why you're seeing a headwind in the first half and an improvement in the back half.

great color best of luck thank you our next question is from Adrienne yay with Barclays your line is now open good morning and congrats on the success and continued success Ernie I wanted to go back to kind of the era of 2018-19 do you recall if vendors did try to pass price through to you and then you negotiated back against them And then I see two different ways that, as you described earlier, that you can react here. One, you can obviously, if prices go up, you can maintain that 20% to 60% off. You can maintain your margin and then hope to get some comp. Or I think in another call you said you also have the flexibility, if you chose to do so, take some of the margin hit, hold your pricing 30% to 70% and then go for comp. So it seems like you have so many different routes back to success. I wonder if you can elaborate.

Uh, absolutely. Adrian. Um, those are, you touched on some of the levers that we had in 2018. First of all, yes, we had a, uh, a case where, um, in that situation we were able to, in most cases negotiated out of it. Uh, so the tariff just didn't mean as much in total. I would tell you, though, back then, yes, we would, but I would say more rarely than today, we would grab a little bit of a retail and adjust where possible. This time period we're in now, I think, is a little different, so more widespread in the pure numbers, as well as since 2019, you know better than me, inflation overall had hit starting back a few years ago, which only adds into inflation. retails over the last few years, and then now you have tariffs on top of that. So a little different back when those other tariffs happened, you didn't have nearly as much inflation prior to that time period. So back to answering your question, yeah, prices, retails, I'm sorry, retails can be part of the adjustment, but as we did talk about and you just referred to it, we have other levers. which is the ability to buy in this environment with all the availability that's out there, buy really, I would say, more profitably and advantageous. The other thing that's happened is we're continuing to be more important to the vendors, and I think that is creating an ability for us to work with the vendors to ensure that we are getting to a price, tariffs or no tariffs, to get to the price and the retail that is still the significant value because they see us as probably one of the more consistent retail outlets. Our buyers are very straightforward with them. And we're very transparent with our vendors. And so I think an advantage that's taking place, and this could continue to improve as other stores perhaps close. We've had a number of close prior obviously in the last couple of years. I only see those relationships becoming stronger, and those are not about adjusting retails. Those can be about, as you said, driving comps and having retails that create a wow in our mix, because sometimes we want a customer to actually say that it almost feels too cheap, all right? So that's the art form that we try to bring to the table, whereas a lot of the other retailers, I think, would never even go down that route. We want, I don't know, one out of every ten hangers I want a customer saying, boy, that almost feels too inexpensive, strangely enough. And that's what creates the wow factor in our business, and that's the art form. So I hope I answered. But that's, I think, what you were referring to where I've talked before about we'll put it, sometimes we won't, we'll just retail the goods at an extremely sharp price. Oh, last thing. that hits me is remember our buyers are trained to not they do not use a markup wheel so meaning on what item they can pay X doesn't mean on that item they're gonna retail it at Y the next time that's paying X gets retailed at the same Y that doesn't happen they they're merchants where we go by what is the right value for the out the door of that item regardless of the cost and that's what I think is a different thing where our buyers work retail backwards and the why retail backwards and don't start with the cost and focus on the cost as much as the other merchants do at other retailers. Probably a little more infertile than you need it, but it's a good topic. So thanks for asking it.

John, just a real quick one. From China, are you seeing any redirected China make into the European market yet?

Sorry, are we seeing what? Any redirective of merchandise into the European market?

Yeah, so China that they don't want coming here from other retailers or vendors that are coming to you in Europe, right?

Yeah. So nothing significant that we've seen. I think that the factories were kind of holding off and waiting for a tariff deal to be done or at least lowered before. shipping the goods. But no, we haven't seen a lot hitting Europe that were destined for the United States.

Fantastic. Thank you. Best of luck.

Our next question now is from Paul Leshway with Citi, and your line is open.

Hey, thanks, guys. What percent of your product currently is direct source by you, and how might that change, if at all, in response to the current environment and Also curious if you maybe do less up front in anticipation of maybe better deals that you expect to come in the second half. And then just would also love to hear about anything you can share in terms of income demographics, any signs that you're gaining share more so with any one specific income cohort, right?

Yeah, and we'll have John jump in on the income there. But as far as direct source, it's really less than 10% of our business. And I would tell you that we don't purposely, we keep that in a balance. You know, we're all about having eclectic, well-balanced mixes and assortments. And so we don't swing the pendulum on those places. So that is not something you'd see us play with a lot because obviously we can move sourcing countries on our direct imports around. And we could have China, for example, be less of a percentage. But we tend to hover around that number of the 10% because, again, we're very brand driven. So we don't want to have that go out of context. Having said that, on those direct imports, they fill voids and give us great quality and fashion, and we do it differently than others. So on the upfront buying, Paul, that you're asking about, yeah, we are viewing this, you're really spot on, as a time to, I would say, buy more quickly hand to mouth closer in the market and call back our upfront buying to a degree again we're very strategic that varies by category and that varies by department literally and by buyer item and skew but that would be the lean right now so you are on the right trend because we do forecast again it's never not happened By the way, and I've heard in the past, going back 30 years, there's always a reason why people think, well, this time is different. I don't believe this time is different to any large degree, that we will come out stronger and we will really take advantage of the situation as we move throughout the year here opportunistically, both from a drive sales and a profitability standpoint. standpoint.

John, you want to talk about income demos? Again, we are not measuring the actual customer income. We're looking at our store performance in certain income demographic areas in lining that up. What we saw during the first quarter is that across all our income demographic bands that we saw strong sales in all of those those bands leaning slightly towards the lower income demographic. Um, and again, that kind of speaks to, you know, when you look at our overall sales drive driven by mainly by transactions is that, you know, as cost as there's, you know, customers are, are concerned, uh, about the economy, you know, many of them are going to look for value and, you know, TGX is one of the cut, one of the companies that, uh, you know, we're, we're, we're one of the leaders in offering value to those customers.

So, um, yeah, that's it. Uh, I'll also jump in, um, and, um, piggyback on John here a little on this. Paul is one of the, and I mentioned it in the script. Again, one of our key, key advantages is the fact that we purposely try to appeal to all these demos, just like John said. So we are, um, you know, the whole good, better, best aspect of our business, which we believe is an advantage. We are conscious not only in our mixes that we put in the stores, but in the way we model the stores to continue to do balanced business with each income demographic, just like John said. And we think that is one reason we deliver consistent results, whereas we don't tend to have these up and downs as some other retailers do, I think because we're more diversified. from the income demographic standpoint. And so even to get off on a little bit here of a tangent, even in our marketing, if you look, I think in this environment, indirectly it's coming up in your questions, how do we take advantage of this environment? Our marketing teams really look at the different programs that we have. So if you look, we have the Campaign and Max, which is called What Makes You You. In Marshalls, we have the Hustlers. campaign which actually shows you how the buyers work so hard at bringing the best value to the customers and I think that shows you right now our mindset and with that marketing we're hoping to get some of the customers out there that have not engaged with us to get them to shop us because this is a perfect opportunity when some of our competitors have been I don't mean off price by the way I mean just total retail competitors are offering customers the desire to probably try other avenues. So I think our marketing teams are doing a great job with the campaigns of giving them a reason why should I try shopping at Marshalls or at TJ Maxx. So, and again, across all income, even our marketing is aimed at all different income demos and the way our creative is placed and as well as the spots that they're placed in digital or TV or radio, et cetera.

Thanks a lot, Ty. Appreciate it. Good luck. Thank you.

Our next question now is from Alex Stratton with Morgan Stanley, and your line is open.

Perfect. Congrats on a great quarter. I wanted to focus on home goods, which had a nice comp and margin expansion. Can you just talk about how you think about the margin trajectory of that business for the rest of the year? I'm curious in the context of the low-teens margin. It's done in the past. Do you think that's in reach? And then related to that, you know, We know that home and toys tend to be more sourced out of China, super important for holiday. So with the incremental tariff there, can you just talk about how you're managing those categories, both near term and then with respect to the holidays? Thanks so much.

Sure, Alex. Yes, as I mentioned before, we're very happy with the HomeGoods comps because relative, just as you're feeling, relative to the environment out there, we are certainly outpacing. And I can't be more proud of those teams. and really all the home merchants across the corporation, home has performed strong for us overall. While we're looking at the margins, yeah, I won't give you the number, but we are feeling very positive about continued improvement, right, John? Yep. I think that would be the way that I think.

Yeah, one of the biggest levers we have to pull in order to improve our margins is through the top line sales, and we think there's a lot of opportunity going forward there. as well as, you know, expense savings initiatives and productivity initiatives that we've gotten in place.

Yeah, so no, feeling good about continued profitability improvement there. Home and toys are both, yes, very China-oriented sourcing for sure. Home, in our case, even though there's a fair amount of home product there, we're dealing with third-party vendors for the most part. and a lot of that in terms of proportion to our mix. So our merchants deal with negotiating with, um, with the vendor who's in negotiations really with their factories in China. And again, I'd go back to on that piece. I think the availability will be fine. There's so many vendors that we deal with in home. Uh, so I don't really get concerned about, uh, empty shelf, so to speak, in many of those categories. And if they are, again, I would say we would just shift it to another deck category, for example. We're very fashion and deck-oriented and more of the categories that would be out of China. On the toy front, a little trickier, not as many branded toy vendors, per se, as there are home vendors. And also, yes, China-based. I think we look at that could there be a situation where some of those big brands and toys bring in less units because their retail their costs are going up and so there might be a retail I think what would happen there is if retails went up around us we would adjust appropriately but there might be less units that go on the floor and we're okay with that because again we would have enough other hot hands so to speak within the mix and that we could drive incremental business there. Because there's always a bit of a yin and yang in our world where we can flex to the other categories, even if one is not panning out as exactly as we would have hoped at the beginning. But I would say for us and the way our model is, those two categories, home, really don't see any obstacles of substance. And in toys, you know, we're cautiously watching what could happen there. But I think back to our relationships are so good, we will get more than our share of availability there.

Thanks a lot.

Thank you. Thank you.

Thank you all. Our next question now is from Simeon Siegel with BMO Capital Markets. And your line is open.

Morning. Thanks. Hi, everyone. Ernie, to an earlier point you brought up, and I'm not sure if I'm going to ask this cogently, but I'll try. Do you feel like you can buy backwards for all your product and be somewhat cost-input agnostic, or is there a percentage of the business where maybe you have the leverage and permission to pay the goods based on a planned out-the-door AUR, and there's another percentage of the buys where the price you'd pay actually would be impacted by input cost? I don't know if that's just a direct versus indirect question. I'm curious how you would think about that. And then, John, I don't know if I missed this. Can you just elaborate or quantify the mark-to-market inventory adjustment and how to think about that in the gross margin? Thank you.

All right. So, Simeon, let me – I want to make sure I have the question right on this. But you're basically asking, is there a way that we can kind of go back on the price based on what happens? Is that what you're getting at?

I'm just trying to think through as we think about the cost inputs going up, how that does impact you, given you are able to generally get the merchants buy backwards and think about the, but to your point about not focusing on the cost input, I'm curious if there's.

Oh, okay.

All right.

So yeah. So how does it impact? So if the costs go up again, I would go on this one. I would go back to, we start with looking at the retail on those items at the other retailers and, and whatever they have done in terms of their adjustments, we then go to we have to still have a significant gap in our retail versus their retail. So if we had, say, bought at a certain time, and those retails go up, but we were at a certain retail, we might go up on that item. If that's what you're getting, if you're saying those retails don't move and we were buying it at a slightly increased, anticipating a move because we're close in, we would not raise the retail because where our contract to the customer is to stay at the appropriate gap between us and the outdoor somewhere else. I hope I'm answering the question. But our buyers are in such a better seat because they're doing it so hand-to-mouth And we are able to follow what we're seeing around us at all of the different retail formats. And by the way, they're all trained and diligent about looking at all the different formats. And they're pretty educated on when they think some, they know enough from talking in advance to their vendors where the costs are potentially going on an item in a category. And that's, I think that's a little bit of what you're asking about. that allows them, with that information, because they're buying so much hand-to-mouth, they're not buying six months in advance, that allows them to be educated when they retail the goods. And really, it does allow us to be more profitable, I think, on buying in this type of environment.

Great. Thanks, Ernie.

And then, Simeon, just to answer your question on the mark-to-market adjustment in the first quarter. So when we make, when our divisions... make purchases in currencies other than their local currency, uh, we hedge that, uh, that purchase to ensure that, you know, what we agreed to for the cost is what, what it comes in at. So when we have a movement of exchange rates, we have to mark mark to market those at the end of a quarter. So in this instance, um, the exchange, the, the, um, the exchange rates improved for those currencies. And that caused the hedge to lose money. When we actually pay the invoice, that will be the offset. So when we pay the invoice in second, third quarter, down the road, that's when you're going to see the offset to that come in. So it's a timing between quarters. Perfect.

Thanks a lot, guys.

Best of luck for the rest of the year.

Thank you.

Our next question now is from Michael Benetti with Evercore. Your line is open.

Hey, guys. Thanks for taking all our questions here. So gross margin guidance, John, versus 90 days ago, you came in a little lower on 1Q, understandable, the press release. And today you mentioned there's some incremental tariff in 2Q versus what you were thinking. But you're holding the year on gross margin. So I guess, is there any pricing that's already contemplated in 2H since you already commented earlier that you're using this as an opportunity to buy inventory closer to markets? You may not know as much of your inventory buying picture yet for 2H as you normally would. I know from your comments you're leaving some flexibility, but it seems like there's maybe a placeholder in the model for some pricing in 2H, just so we know what's baked in and what's not, regardless of what materializes.

I would say our mitigation efforts include a number of things. Better buying, taking advantage of deals in the market, having the flexibility on how we're buying the goods, but also expense initiatives and productivity strategies that we have in place. So there's a number of things that we have in place currently in the second quarter that we also anticipate to also benefit us in the back half of the year as well.

Okay. And then if I could just follow with one. On customer acquisition, you know, obviously the growth coming from transactions is always good to hear. I know it's hard to measure real-time share gains from other retailers on a traffic basis. But are there any signs of trade down in the basket, UPT versus AUR, to be aware of that could maybe give us a little bit of a double-click on what's going on with trade down or the customer inflows that you're seeing potentially from other retailers?

Yeah, no sign, Michael, of trade down per se. Yeah, and it's interesting because across the board, selling. Our average retails are pretty balanced and we're selling it across the board.

It's really hard for us to read that, but I think the thing to just take away is that sales are driven by our transactions, which means that we're getting more foot traffic through the stores from our customers. Whether they are giving up a purchase at a different retailer for one for us, it's hard for us to read that.

Got it. Okay, I appreciate it, guys. Thanks for all the detail.

Yeah, Michael, one thing I would go back to, and I said it earlier, is the, I mean, common sense would tell, I think, all of us that as we look out, I believe some of what's happened is the, you've had in the past number of, couple of years, you know, when you have store closures or traffic off in the other stores, we just can't read exactly, like John said, where it's coming from. but we do believe, judging by the nature, if you, so for example, if you look at our home business, and you look at how long, again, we're a fashion home business, and now we have a fair amount of, I guess you would call it, consumable product within our home business, which is creating repeat visits. We have to believe, we can't measure it, but we have to believe that's coming from a variety of other retailers, only because some of these new categories that we've gone in, and we're consistently in them now, or our home business wouldn't be trending so differently than some of the others, I think. So a combination of, you know, other doors maybe closing and the different way we're approaching certain categories like our home business.

Okay. That's what I was looking for. Thanks a lot, Ernie. I appreciate it. Yep.

Yep. You've got it.

Our next question now is from Anisha Sherman with Bernstein, and your line is open.

Thank you so much. So I want to focus on margins. I'm curious, John, on your gross margins for the quarter. You had already anticipated some of the inventory hedging headwind. You talked about it last quarter. Did that end up being a bigger effect than expected? And could you talk through some of the other moving parts in the margin, for example, product margin or supply chain investments and how they might have hit gross margin through the quarter? And then a follow-up on your margin guide on Q2 is, If I can clarify, is the Q2 margin guide net of the mitigation efforts that you've described, or is it more that those mitigation efforts are starting in Q2 and it'll take some time for them to fully roll out into the back half? Thank you.

All right, so Q2, so our Q2 gross margin forecast includes mitigation efforts, as we said in our prepared remarks. As far as our Q1 gross margin, I mean, it was essentially the variance to last year was essentially the hedge and the impact of that, which, again, is timing between our Q1 to, you know, Q2, Q3 mostly, as when we pay, again, when we pay the invoices, we'll see the offset to that and the favorability increase. But, yeah, the Q1 gross margin is, you know, it's the hedge that is the variance of last year.

Okay. Sorry. If I can clarify just another way to rephrase my question around Q2 mitigation. So you talked about goods that were already committed to that are going to arrive in Q2 that will drive some headwind on cost. Is that going to go away in Q3? I mean, are you committed to orders that are going to arrive beyond Q2?

July and I mean, the thing about after q2 is that during q2 or q1 into, you know, for goods in q2, those were goods that were placed before we knew about the tariff. So we didn't have an opportunity to negotiate. So moving forward, the deals will include the assumption that there is a tariff in place.

That makes a lot of sense. Thank you.

So, Anisha, so combined with what John is saying, so you don't have that direct import hit, so to speak, because we didn't know about it when we were doing it. And then added to the other, I guess, tailwind and positive things we have going on, we're able to also... not deal with that per se in Q3 and Q4. We know what the tariffs are fundamentally right now. And then that's when the other things kick in, not just kick in, those are kicking in now. But, you know, that's where we're taking advantage of the availability as we, you know, adjusting retail selectively where appropriate, the vendor relationships, and all the uneasiness that's out there that could create additional cancellations from different vendors, et cetera. So that's another reason that Q3 looks very different than Q2.

Appreciate the color. Thank you.

Yep.

Our next question is from Jay Sol with UBS. Your line is now open.

Great. Thank you so much. You mentioned that part of the mediation efforts involves some expense initiatives, presumably in cost of goods sold. Can you talk about maybe a little bit more what those, where the opportunities are, what line items within cost of goods sold might, you know, you'd be able to save some money. And then are you also contemplating some SG&A cost savings as you go through the rest of the year to just be able to maintain the EBIT margin guidance that you gave? Thank you.

I mean, yeah, in gross margin, they would essentially be centered around distribution center initiatives. And SG&A would be store initiatives.

Is there any way to quantify sort of like what the impact of the expense initiatives would be on?

At this point now, we're not quantifying the impact by category.

Okay. Thank you so much.

Our next question is from Ike Borichow with Wells Fargo, and your line is open.

Hey, thanks, guys. Congrats. I guess, John, I was hoping you could elaborate a little bit more on freight what exactly you kind of, you know, have been seeing in one queue and then your forecast for two queue and then what's kind of embedded in the outlook, both domestic and ocean, just kind of your bigger picture thoughts and how to think about the P&L. Thanks.

Yeah, so our freight rates are based on what we know today. And again, Just to clarify, our ocean freight rates are approximately 20% to 25% of our overall freight. So we're not as impacted on the ocean freight. We have not seen, to this point, costs go up. But, again, it's early. You know, the tariffs were just lower. excellent relationships with our shipping providers and we believe that from what we know today, our freight is accurately reflected in our forecast.

Got it.

Thanks. Thank you very much. As time is restrictive right now, I would like to turn it back to management for closing remarks.

Okay. Thank you all for joining us today. We look forward to updating you again at our second quarter earnings call in August. Thank you, everybody.

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