PROF WASHINGTON WATSON 6/1/2020

TJX

Student’s Name

Institution Affiliation

Date

1. The name of the company

Introduction

Our firm has been requested to provide auditing services to TJX Companies, Inc., a leading discount price retailer with a global presence. After an in-depth review of this company, it is deemed as a reputable firm having an executive level management team of credible professionals that exemplifies integrity. Therefore, TJX, Inc. should impose minimal risk to our firm. It is my professional recommendation that our firm acquire TJX, Inc. as a new client. Having been audited by PricewaterhouseCoopers LLP since 1962, I suggest we obtain approval from TJX, Inc. to request any information from the predecessor auditor deemed as being relevant before providing services.

If no financial or audit evidence is disclosed from PWC that increases our risks, it is recommended that the appropriate fee structure be submitted to TJX, Inc. for approval, and that we initiate and obtain all needed legal and signatory documentation for services. If information is obtained from PWC that warrants a risk to our firm, a second engagement review will be mandated to further discuss the confirmation of this prospective client.

Overview

“The company was founded by Stanley Harris Feldberg and Sumner L. Feldberg in 1956 and is headquartered in Framingham, MA” (WSJ Markets, 2020). TJX, Inc.’s initial store, TJ Maxx, was founded in 1976, and in 1995 TJX, Inc. bought its direct retail competitor, Marshall’s. TJX, Inc. also owns Home Goods, Sierra, Home sense, and Winners. The majority of stores are U.S. based with the exception of Canada (Winners, Home sense, and Marshall’s), Europe (TKMaxx and Home sense), and Australia (TKMaxx) (TJX 2018 Annual Report, 2019). TJX, Inc., owning 4,306 stores and employing 270,000 people, offers brand name clothing and home interior goods at 20%-60% less than full-price department stores (TJX 2018 Annual Report, 2019). By offering deeply discounted merchandise, TJX, Inc. successfully reaches a broader customer base that spans various income levels.

2. The ticker symbol and closing stock price of the company’s stock as of February 18, 2020

TJX, Inc. filed an 8-K with the Security and Exchange Commission on November 20, 2019. The purpose of the filing was to announce that Scott Goldenberg, Senior Executive VP/CFO on December 4, 2019 and Richard Sherr, Senior Executive VP and TJX Group President on November 20, 2019 elected to exercise stock options. Form 8-K announced that their stocks would be sold on the open market according to TJX’s trading policy and publicly disclosed that these transactions were compliant with the Securities and Exchange Commission (TJX, 8-K, 2019). The number of neither stocks nor the value was disclosed for either trade on the 8-K, but the “WSJ Markets” detailed the following information for each of the trades (2020).

3. Look at the Statement of Stockholders’ Equity or the Statement of Cash Flows. Were dividends issued?

Financial and Comparative Analysis

The “WSJ Markets” posts TJX Inc.’s 5-year average of key financial indicators which validates their business model’s success (2020).

Average Growth Rates

Past Five Years Ending 01/31/2019 (Fiscal Year)

Chart from WSJ Markets website (2020)

TJX has doubled their sales in the last ten years equaling $39 billion in 2018 which was a 9% increase from the previous year (TJX 2018 Annual Report, 2019). TJX is strategically building their e-commerce platform which supports the current trends of today’s shopper. TJX’s e-commerce has already experienced substantial customer traffic and sales growth.

To extend due diligence before accepting TJX, Inc. as a client and reflect the standards of the auditing profession, it was necessary to give attention to and evaluate their financial liquidity, solvency, and profitability.

4. Looking at the notes of the financial statements, summarize the following policies: 

Current Ratio

TJX, Inc, by explanation, a ratio greater than 1 predicts that a company has more current assets than current liabilities. Currently, TJX, Inc. has almost 1.5 times the amount of current assets than current liabilities.

Debt to Equity Ratio

Being a ratio that helps determine a company’s solvency, debt to equity helps identify a company’s risk of not being able to pay their long-term debt which could lead to bankruptcy. In fact, “the higher the debt to equity ratio, the higher the risk of bankruptcy. When a company assumes more debt, risk increases” (Spiceland, Thomas, & Herrman, 2016, p. 437). TJX carried a lower debt to equity ratio in 2018 than Macy’s, and this rate is deemed acceptable.

*The decrease in interest expense from 2019 to 2018 was due to additional interest income (2018 TJX Annual Report, p. 36)

5. Identify the following for the last two years: Revenues Expenses Income from Operations Net

Gross Profit Ratio

A ratio that determines a company’s profitability, the gross profit ratio is simply the gross margin divided by net sales. For example, if the two companies sold the exact same sales volume and COGS were the same, TJX would realize smaller gross margins. Smaller gross margins are determined to be the effect of being a discount retailer.

Net Prkofit Ratio

A ratio to determine profitability, the net profit ratio takes the net income and divides it by the net sales. This ratio compares a company’s income after the necessary expenses have been deducted from the net sales revenue to its net sales. It indicates what percentage of the net sales remain after everything is paid.

Times Interest Earned Ratio

There is a significant discrepancy in this ratio, and it warrants an explanation. As a solvency indicator, times-interest-earned, reveals (primarily to creditors) “how many ‘times’ greater [a company’s] earnings are than [their] interest expense. To substantiate and provide a needed explanation to the comparative ratios, each company’s financials that impact this ratio are disclosed.

The amount and description

6. Largest Source of Cash from Financing activities and amounts.

Other financial accomplishments that reveal TJX, Inc.’s success stated in the 2018 Annual Report (2019) suggested it was TJX’s “disciplined approach to capital allocation” that allowed the company to experience a “strong return on invested capital in 2018”. TJX’s return is recognized as “one of the highest . . . in the retail industry”, and their S&P Global rating of A+ “is one of the strongest in retail” (2018 TJX, Inc. Annual Report, 2019).

Recognized Risks for TJX and the Industry

A portion of TJX’s identified risks that were included in their 2018 Annual Report (2019) were,

· The failure to properly manage their buying strategies which directly impacts their inventory levels.

· The failure to unsuccessfully manage economies of scale effectively during anticipated growth.

· The failure to not recognize shopping trends and customer preferences, because TJX’s success is largely dependent on meeting their customers’ expectations.

· The failure that exists when a competitor’s marketing is more effective

· The failure to employ and retain the right associates

These risks are deemed as inherent, because they exist for any retailer trying to stay abreast of its market demand. Not considering or giving attention to these underlying risks would put any retailer out of business.

Because TJX, Inc. trades and competes internationally, they highlighted two additional areas of risks: 1) the impact that foreign exchange rates can adversely have on their financials, and 2) the risks of significant loss due to fluctuating financial markets. TJX invests in pension assets,

7. Get an article dated 2020 that mentions your company

According to envisionreports.com, the most prevalent industry risk TJX Inc. faces is that retailers are being forced to close due to decreased customer traffic. Thomas (2019) reported that approximately 6,000 retail stores would close by the end of 2019. Despite retail projections, TJX believes their increased customer traffic in stores substantiates why 2018 was their “23rd consecutive year of annual comparable store sales increases and . . . 22nd straight year of dividend increases” (TJX 2018 Annual Report, 2019). It appears TJX has found a niche market where shoppers see the benefit of saving 20%-60%, shoppers enjoy an eclectic shopping experience, and they are offered a fast inventory turnover which provides them with a new experience every time they visit.

After a thorough engagement analysis, I believe our firm can provide a full scope of audit services to TJX Companies, Inc. Because our firm exemplifies the necessary expertise, has the labor resources needed to fulfill such an engagement, and proves to be independent in fact and appearance, it enables us to successfully provide auditing services.

Upon your final review of this request, it is recommended that the 2019 TJX, Inc. Annual Report be obtained. The Wall Street Journal announced in a press release on February 12 that the 2019 fourth quarter and 2019 annual reports would be available on February 26, 2020 (The Wall Street Journal, 2020).

References