Ladies and gentlemen, thank you for standing by. Welcome to The TJX Companies Second Quarter Fiscal 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference call is being recorded, August 17, 2022. I would like to turn the conference call over to Mr. Ernie Herrman, Chief Executive Officer and President of The TJX Companies, Inc. Please go ahead, sir.

Thanks, Sheila. Before we begin, Deb has some opening comments.

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 30, 2022. 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. We have detailed the impact of foreign exchange on our consolidated results and our international divisions in today’s press release and the Investors section of our website, tjx.com. Reconciliations of the non-GAAP measures we discuss today to GAAP measures are posted on our website, tjx.com, in the Investors section. Thank you. And now I’ll turn it back over to Ernie.

Good morning. Joining me and Deb on the call is Scott Goldenberg. I’ll start today by once again thanking each of our global associates for their hard work. I truly appreciate their commitment to bringing our customers excellent value every day. Now, to our results. I am very pleased with our second quarter pretax profit margin, which was above our plan and our earnings per share, which are at the high end of our plan. This is despite U.S. comp sales coming in lighter than we expected as we believe historically high inflation impacted consumer discretionary spending. We achieved the strong profitability through better-than-expected merchandise margin and disciplined expense management. I can’t emphasize enough how this quarter is a testament to how great our business model is. Our teams executed our off-price fundamentals extremely well, and our merchants did an excellent job buying the right merchandise in the right categories. Across the company, our talented associates all played a part in delivering great value to our customers every day and helped our company drive strong profitability in the quarter. As we enter the second half of the year, we see the flexibility of our business and our value proposition as key advantages in the current retail landscape. While we’re not immune to macro factors, over our 46-year history, the flexibility of our off-price model and our commitment to value have served us very well in different kinds of macro environments. We attract a wide range of customers, which we believe is a key advantage in today’s environment. Long term, we remain very confident in our plans to capture market share and improve the profitability profile of TJX. I’ll talk more about our opportunities for the remainder of 2022 and beyond in a moment. But before I continue, I’ll turn the call over to Scott to cover our second quarter financial results in more detail.

Thanks, Ernie, and good morning, everyone. I’d like to echo Ernie’s comments and thank all of our global associates for their continued dedication to TJX. I’ll start with some additional details on the second quarter. Second quarter consolidated pretax margin of 9.2% was above our plan. We are very pleased with our strong flow through, despite our softer sales. Our pretax margin outperformance was primarily driven by merchandise margin and effective expense management, which were both better than we planned. Pretax margin was down 150 basis points versus last year’s adjusted 10.7%. Merchandise margin had a significant benefit from a combination of strong mark-on and our pricing initiative, but was down due to 240 basis points of incremental freight pressure. Incremental wage costs were 80 basis points. Second quarter U.S. comp store sales decreased 5% over an outsized 21% open-only comp increase last year versus fiscal ‘20, which when summed together would be a 16% comp increase on a three-year stack basis. Moving on, we are very pleased that our comp sales in our overall apparel business at Marmaxx were slightly positive every month of the quarter. U.S. home comp sales were down low teens versus a 37% U.S. home open-only comp increase last year and were the primary driver of the U.S. softer -- of the softer U.S. sales trends we saw. For the second quarter, U.S. average basket was up, driven by a higher average ticket, and U.S. customer traffic was down. Lastly, earnings per share of $0.69 were at the high end of our plan. Now, to our divisional results. At Marmaxx, second quarter segment profit was 12.9%. Comp store sales decreased 2% versus an 18% open-only comp increase last year. Again, it was great to see their overall apparel comps slightly positive. While customer traffic was…

Thanks, Scott. I’d like to start by sharing the key traffic, sales and profitability opportunities we see for the remainder of the year. Starting with the top line. First, we are excited about our merchandising plans for the fall and holiday season. Again, this year, we will be flowing eclectic assortments to our stores and online multiple times a week. This is a strategy that has worked well for many years and sets us apart from other retailers during the busy holiday season as shoppers can see something new every time they visit us. We are confident that we can execute on our merchandising initiatives and manage our supply chain to keep our shelves fully stocked. Second, availability of merchandise across good, better, and best brands is exceptional. We have plenty of open-to-buy, and I have great confidence that our buying team of more than 1,200 buyers will bring the right brands, fashions and values to our consumers throughout the years. Next, we are laser-focused on driving traffic and sales with our marketing initiatives. This year, we have sharpened our messaging to reinforce our value leadership position. Each of our banners are communicating that we offer shoppers more for their money, and at the same time, deliver great brands and quality. In an environment where consumer wallets are stretched, we believe it is as important as ever to amplify our value messaging across television, digital and social media platforms. I also want to highlight that our customer satisfaction scores remain very strong. Further, we continue to attract a significant number of millennial and Gen Z shoppers, which we believe bodes well for the future. Moving to profitability. We are extremely pleased that we are able to increase our full year pretax margin guidance in this environment, giving us confidence of…

Thanks again, Ernie. I’ll start with the full year. We now expect full year U.S. comp sales to be down 2% to 3% versus an outsized 17% U.S. open-only comp increase last year. This guidance now reflects the flow-through of our second quarter U.S. comp sales and our expectations for the second half of the year, which assumes our three-year stacked U.S. comp continues at levels similar to recent trends. For the full year, we are now planning total TJX sales in the range of $49.6 billion to $49.9 billion. The lower sales guidance includes our lower-than-planned second quarter sales and our updated sales expectation for the second half of the year. Despite the reduction in our sales plan, we are pleased to be raising our guidance for the full year adjusted pretax margin to 9.7% to 9.9%. This is 10 basis points higher than our previous guidance due to our assumption for even stronger flow-through for the back half of the year. Our improved profitability outlook versus our prior guidelines is due to stronger merchandise margin, better expense management and less incremental freight and wage pressure expected in the second half of the year. For modeling purposes, we are now assuming 140 basis points of incremental freight expense and 70 basis points of incremental wage costs. For full year adjusted earnings per share, we are now planning a range of $3.05 to $3.13, which is up 7% to 10% over last year’s adjusted $2.85. This guidance now includes a $0.03 negative impact from FX that was not contemplated in our original full year plan. Excluding this impact, the high end of our earnings per share guidance would be the same as our original plan. For modeling purposes, for the full year, we are currently anticipating an adjusted tax rate…

Thank you. [Operator Instructions] Our first question will come from Lorraine Hutchinson.

Thank you. Good morning. Can you just talk a little bit about your view of the U.S. consumer and how that changed over the course of the quarter? Are you seeing any pushback to the price increases you’ve taken? And are you seeing that trade-down customer shop your store a little bit more? Thank you.

Thanks, Lorraine. First of all, U.S. customer trend in the quarter, it’s moved around a bit. I think what happened in this quarter is when a little bit of that fuel spiked, if you remember back in the middle of the quarter, that’s when we had a big ramp-up on that. In addition to really food, those are the two inflationary categories that really, we feel, can impact our consumer the most. But the fuel has obviously come down more recently. So I’m thinking there, we might have a bit of a lag in terms of the benefit of that having coming down, and that could work out better for us as this quarter moves on. There was no -- let me be clear on your question about pushback on the pricing. We have zero -- not only do we do qualitative studies on it, we are actually able to measure, well, down to the SKU level, turns, how we’re selling an item where the retail has been adjusted, but even entire categories, departments and the store. In fact, we’re measuring our turns and all of these things relative to pre-COVID, fiscal ‘20, calendar ‘19. And in most cases, we are actually turning our inventories faster than then. And that, as you know, was a very, very good year for us and a real, actually, model of business that we’re very happy with from an inventory turn and sales perspective. So, we have zero concern overall. We’ve had a couple of items here or there, where we found it, and we react quickly if it hasn’t worked. But I would say, Lorraine, our batting record is in the probably 95% zone. So a great question, by the way, because, of course, we monitor that every week. So, that has been…

Thank you. Our next question will come from Matthew Boss.

So, it’s kind of a perfect set up for my question, Ernie. So, on the overall product availability, are there any inventory constraints by category that you still see remaining or on the very attractive buying environment and maybe some of the category opportunity you left on the table last year that you’ve cited? Do you see this translating now to an optimal fall and holiday assortment across apparel and home? And maybe just last, could you elaborate on the excitement you cited in the release for some of the back half initiatives to drive traffic?

Sure. No, a great question, Matt, and it does piggyback on what we started to talk about with Lorraine. Well, constraints, I would tell you there were no -- the only constraints that would apply in this discussion is the constraints and us having to hold back all the merchants from buying too much too soon. So, we have -- this is self-inflicted constraints we’re putting on because the teams right now, and I know my senior team, right now, one of their prime responsibilities has been to -- this really gets at the meat of what’s been going on, has been to get at -- holding the merchants back from buying too much too soon. As you know, we mentioned in the release, and I think even ahead of this, many of you were aware of the amount of goods in the market. I hesitate to use the word unprecedented, but it is at a different level, I would say, than we’ve seen. And it’s across our good, better and best zones. And so, I’m going to give you an example that speaks to a place where we’ve been challenged but I would tell you gives us a level of optimism, as you would say, to getting to that optimal mix and an excitement level for the back half. So, we’ve been struggling in our home area, as other retailers have, and you can see with the HomeGoods sales. However, they have done, as has Marmaxx specifically, both have gone in and kept their inventories very clean and taken aggressive markdowns to ensure that we go into the back half with no liabilities and mix so that we can deliver as much fresh excitement based on what’s working and chase the hotter trends and vendors. So, HomeGoods specifically, again,…

Our next question will come from Kimberly Greenberger.

Ernie and Scott, you guys have been talking about getting back to this sort of 10%-plus pretax margin in the back half. And I mean, in a year when so many retailers are struggling with margin visibility, you guys look to be sort of solidly on track to hit those targets. I wanted to know if you could sort of step back and talk about margin, not specific targets necessarily for 2023 or 2024, but just what are the puts and takes as we head into next year and the following? What are the puts and takes on margin? And do you see opportunity to sort of claw back even more of the margin here over the next couple of years that we saw under some pressure through COVID? Thanks.

Yes. Kimberly, I’ll let Scott jump in on some of the big pieces of this. But what I’d like to highlight one thing I mentioned in the script is -- well, first of all, I’m thrilled with we -- and we called this out back really at the beginning of the year that we thought we could approach -- getting approached at 10%. We’re getting there as we’re talking, I think, at 9.7% to 9.9% this year. But even over the three years, Scott, I think, will talk to this, is we’re feeling good about getting back to that pre-COVID 10.6% for TJX, which is right, I think, what you’re getting at. And he’s going to give you some of the puts and takes. But let me give you another piece on that that I think is really -- one thing is a moderation, obviously, of some of the other expenses around us, freight, for example. We realized where wage is going. That’s been something we haven’t talked on this call about, but we kind of have a good feel for where that’s going. The big game changer right now in this environment, in addition to what Scott’s going to talk about, is our merchandise margin -- not that I’m leaving him a lot to talk about, is the merchandise margin opportunities we see really from two things. We’ve been talking more in the last two calls about retailing, Kimberly, right, retailing selectively better and the way we’re changing retail. But the buying better is one of the things -- right now we’re seeing is we’re able to really because of the availability out there, lower our costs on light goods. And so, we’re kind of -- over the next couple of years, what I’m envisioning is we’re going to win on both sides of it, on the retail and on the cost of the goods because our buyers are doing a terrific job in the market. And again, the market right now across all the different categories and vendors is really yielding some amazing opportunity. And this will not be short term based on what’s happening in the industry as far as store closures and market shift and online, online shifting patterns where we think we get market share, but we get margin opportunity on that. Scott, I don’t know if you...

I needed to put some -- my mouth got a little dry the last few minutes. But the -- a few things. The -- first, I’d say that we’re starting, as Ernie said -- I mean, when we started the year, we thought we were going to be similar to last year in that 9.5%, 9.6% range. So, the fact that we have dropped effectively ex-FX almost $2 billion in sales from our original guidance and our margins are going up, I think just speaks, as Ernie, I think, said several different times to the model and our ability to -- in a sluggish environment where we’ve never said we’re immune from sales, we’ve been able to take advantage of those other aspects of the business on the gross margin and the -- and expense management that we do when we flex down. Again, Ernie, I think, touched on it, but we’ve managed our markdowns quite well, maybe a little more due to some of the home sales. But the markdowns have have been in -- slightly higher but in line with what we would have expected. And our -- as we move through -- as the freight starts to moderate, a lot of this has to do with the freight. We did say if the environment was such that the freight would moderate, we would be able to improve our margin. That certainly is what’s happening in the back half. And we still would expect our freight rates to be better next year. Some of that has to do a lot with what our teams are doing, the logistics folks and others in terms of a lot of the mitigation strategies, getting longer term contract rates, more -- using much more contract rates on the spot market -- the…

Thank you. Our next question comes from Paul Lejuez.

Hey Thanks, guys. Curious if you can talk a little bit about what you saw just throughout the quarter on a monthly basis, maybe changes in traffic patterns and the detail you might be able to provide by concept. And Ernie, usually, you say something about the quarter-to-date period. So, curious if you’re seeing comp trends in line with that third quarter comp guidance. Earlier, I think you made a comment about maybe there being a lag effect on the gas price reduction. Does that mean that you have not seen any sort of a pickup as gas prices have come down? Anything you could say on 3Q quarter-to-date? Thanks.

Yes. I’ll let Scott jump in, but I’ll talk about the quarter-to-date. Basically, the guidance we gave is based on how we’re trending. So, that’s -- we’re right in line with what we just gave for guidance. To your point, could -- I’m hoping we get a little benefit as that fuel factor wears off a little. And the other dynamic that we’re not sure of that was in the quarter, we haven’t talked about it, is we had some weather noise, I guess, a little during the quarter where the weather was -- for apparel was a little -- it was just extremely hot in certain areas of the country. So, I don’t know if that hit us by a little. So, this is where we say we wanted to be prudent on our go-forward comp estimates and stay conservative. My goal and the team’s goal is to beat those. And I think we -- I just think we have upside. If you look at some of those other issues as well as we -- going into this quarter so far, I would tell you our flow was a little less than probably we would have liked, and that is getting into the stores as we speak. And I think that could give us a little bump up at the end of August going into September because we did run a little lighter than we would have liked at the end of July. So, that hit Q2 and it’s really hit us a little. Having said that, again, we’re trending right now where we’re giving you the guidance. So hopefully, that gives you a little color there.

Yes. Just to add to what Ernie said, I think we’ve been -- we’ve done the sales, I’ll call it, forecasting or what we put in our guidance exactly the same way at the end of -- from we started the year to the first quarter to now and that we’ve taken whether -- whatever we think the appropriate period, but it’s generally been 4 to 6 weeks of the most recent trend and use that for the rest of the year, regardless of trying to -- as Ernie said, we think we might be able to do better in the fourth quarter, but we’ve just held that trend because that’s what we’re seeing. Because last year was such a volatile year on the upside, those comps, as we’ve said many times, we’re on a -- we’re 21% in the second quarter, 16% in the third quarter, moderating in the fourth quarter of last year but still higher than in typical year. So, we just felt that was the more prudent way from a sales perspective. Within the sales and in the adjustment, it’s more HomeGoods adjustment than Marmaxx adjustment as our home sales have -- the HomeGoods sales dropped a bit more than the Marmaxx sales from the prior trend, and that’s reflected in our go-forward trends. Other than that, addressing maybe the first question that was asked on the call, where Ernie alluded to, whether it’s inflation or gas prices. In the first quarter, for the first time in 5, 6, 7 years, we saw that our lower -- where our stores are in lower-income areas were dropped below the higher-income areas. That is still true through the second quarter, although the change from the first quarter to the second was equal. But the higher demographic stores are still doing better than the lower. And again, that’s a pretty much of a big change versus the last five to seven-year trend. Everything -- I think it just seemed to, at least for our spend, stay similar type of impact across the different demographic levels. And again, not much change also from a geographic perspective within the United States as well, pretty equal the change from the first quarter to the second.

Ernie, what drove that slower flow relative to what you would have liked at the end of the quarter there?

Well, when we -- so what we do is we look at the way sales are trending. And so, when we were having that little bump down in July, we slowed the shipping a little bit. And that’s what we do -- it’s a big ship. And so, we probably ended up with a little bit less shipping than we would have liked. However, we reacted a week or two later, and we know it will be in good shape at the end here. We have an advantage, Paul, in the way we stage goods in our warehouse, right, because we’ve always talked about it. We can use it to manage. So, if we see -- this happens quite a bit. By the way, if we see sales slowing, we’re able to slow our shipping out of our DCs. But sometimes you get caught off guard, and this was one of those where we shipped to the sales, but then the sales started nudging up a little. And we realized, oh, we probably could have shipped a little bit more. And so, it’s just -- that’s our own execution. Yes, I would tell you there was -- nothing impacted that other than us. But the teams are great and they reacted quickly. And so, we ended up with a couple of weeks of blip, where we’re probably giving up a little business, but then we’ll be back on track really in about two weeks from now. So yes, good question. It’s -- that is part of the -- if it was easy, anyone would do it, right? But it’s a big ship when you have that many stores. And I give the teams a lot of credit because they caught it -- they catch it quickly. And by the way, I’m giving you the time -- we don’t talk about the times when 9 out of 10 times, if we slow the shipping or increase the shipping based on the trend, it happens to be the right amount, which isn’t always easy. This just happened to be one of the times where we’re a little on the wrong side of it.

Our next question comes from Jay Sole.

Just curious about what’s baked into the guidance in terms of what you see from competition from your -- from the other off-price retailers, meaning whether it’s a Nordstrom Rack or Burlington or Ross. Like given that -- obviously, inventory availability seems really strong for your company, but maybe it’s not so great out there for everybody at large. Do you expect them to get more competitive? And what impact do you think that would have on the business? Thank you.

Yes. Jay, so we’re pretty simple with the teams here. And again, our buyers are excellent and our planning and allocation team. And we -- the good news is we kind of keep them focused, and I tell them not to worry too much about what the competitors are doing because -- let’s face it, we’re in a bit of a fortunate position. This isn’t anything we’re doing, but we’re so big. And we have a lot of strong relationships with certain -- some of the strongest relationships with certain vendors. And some of the vendors don’t overlap as much with those competitors you’re talking about, and some do. From what we’ve seen and what we hear, there’s plenty of goods, honestly, to go to everybody in the off-price world right now. And they typically is, by the way. But right now, we don’t foresee that as being any issue. I don’t know how they -- that’s up to them as far as how they’re running their open-to-buys and what they’re doing as far as how far they want to buy out or whatever. We right now -- if anything, our strategy on the buying of goods is to get more liquid, and it has been for the last month, and to buy less further out than we typically have because of -- we’re not worried about other competitors buying the goods. We think there’s going to be more goods, an unusual amount of more goods across all the branded areas, which, by the way, going back to what I mentioned before, I think for Q4, gift giving, I think we’re going to have some of the best branded content we’ve had in a while, again, regardless of what competitors are doing in terms of how much they are buying or not. Now, let me say, good question. We do talk about -- our merchants talk about in a category with a vendor, hey, based on this amount of goods, do we think that could go to one of the other competitors? Is this important for us to have or -- they weigh all of that out when they’re making buys. And again, that’s why I give them all the credit on handling it all really, really well in this environment. I have to say, we like an environment like this where there’s a lot of -- strangely enough, a lot of volatility around. That generally bodes both for us because in the end, I usually think there’s a market share opportunity for us to keep getting additional brick-and-mortar market share from other brick-and-mortar out there because the model is so flexible and it will allow us to chase the hotter category trends more nimbly than most retailers. But, thanks for your question.

Our next question comes from Brooke Roach.

Ernie, you’ve made some comments about the strong buying environment and the opportunity that that better buying can drive some of the margin improvement that is underpinning the improvement of 10.6% pretax margins. Can you discuss your view on the longevity of this benefit and perhaps the opportunity for this buying environment to persist even when we’ve heard about some order book cuts into the second half of this year and also a more promotional retail environment overall? Thank you.

Sure, Brooke. Yes, these are -- these topics are things we talk about internally quite frequently. First of all, we think we have multiple years of longevity to this strategy. From what we’re seeing, there’s even probably more opportunity in the retailing of the buying of goods as we continue as well as, by the way, not just merchant-driven, some of the costs that Scott mentioned could be a couple -- a few year trend because they -- some of those freight costs went up so dramatically so fast. It could be kind of a bit of a slow correction, and we don’t think it’s going to happen fast. So, between buying goods, retailing the way we’re retailing, the fact that we mean more to the market than ever before and to key vendors and as well as -- well, and you’re talking about, by the way, the promotional environment. So, we haven’t seen the promotional environment, if anything, because of what’s happened with inflation, again, we look at the promotional environment is less promotional. And a lot of these costs are baked in even going forward. I foresee the promotional environment not getting any worse for a few years. I think we’re good for a couple of years there. And as I said back in the script, our mission still is -- our out-the-door retail that we provide to the consumer has to maintain that gap between the out-the-door retailer that they have and what we sell it for, our out-the-door retail, which is always our ticketed price. I do if you -- you’re onto a whole -- we could spend a whole phone call on this. But if you look at the promotions happen, there’s still, as you know, a lot of retailers that are still doing the very high/low game of a sale all the time. And it’s -- I always look at that where consumers today are looking for authenticity. They’re looking for an exciting treasure hunt entertaining shopping experience in stores. And we continue -- along with that value equation, we continue to provide those two things. In fact, one thing we haven’t talked about today is we’re very bullish on keeping our store experience right in line with the strong merchandise values and excitement that we’re giving. So, we’re going back to our remodeling program aggressively. We have new prototype in our Marshalls business specifically that we’re excited about that we’re starting to roll out because we want our -- we believe there’s a market share gain, not just on -- number one, by our merchandise value, yes, but number two, by the shopping experience. So, that’s a long-term play as well, just so you know. But I know you were talking about the buying and the retailing. No reason to think this won’t go on for a number of years. And thanks. It was a good question, Brooke.

Thank you. Our next question comes from Omar Saad.

Ernie, I was hoping maybe you could elaborate a little bit the comment you made earlier about the availability of brands and the excitement you have around, especially with the fourth quarter, around brands. Are you talking about designer brands? Is this kind of across categories? Is it more specific to apparel or some of the fashion areas? And maybe also talk about -- for T.J. Maxx, obviously, TJX company is obviously known for its flexibility at scale. Maybe talk about broadly your ability to reassort away-from-home categories if they’re going to be soft for a while as you deal with -- consumers deal with inflation and you cycle those big gains from last year and towards some of those more reopening-type categories? Does the organization as a whole have the ability to kind of shift its merchandising assortment? Thanks.

No. Omar, two big things that we’re approaching. I’ll start with the reassort from home. We’ve been doing that consistently in Marmaxx and in the international divisions and in total TJX, where we have moved funding out-of-home goods. And into Marmaxx and within Europe and in Canada, we do the same thing, where we take open-to-buy. And sometimes, by the way, we move actual merchants out of those areas to the areas that are the more trending areas that we forecast over the next 12 to 18 months. So, we have been doing that consistently since we were watching the home trend, and it’s really one of the strengths of the business model because we can do it so quickly. Again, we buy so much of the inventory so close in relative to traditional retailers, we don’t get stuck with this big liability of home product like many retailers would. And you tend to read about some of the other retailers that are more bought in advance, how they run into really a profit hit because they’re stuck with the liability, we are not to that degree. We took our markdowns, as I said earlier, and we were able to move more over. On your first part, Omar, which is interesting, the brands are across, yes, not just -- actually not just designer and not just apparel. So, we’re getting some brands. I can’t give you what they are, but this applies to accessories, hardlines. If you walk in our store even in some of the hardlines, either the gondolas where home is or in our queue line area, you’re going to see some new vendors there, but you’re also going to see that we’ve gone after some of those categories more aggressively than before because we’re getting new vendors at different levels of goods. So, when we talk about good, better, best, sometimes it can be assumed I’m talking about on the best end is designer appeal, and it isn’t always that way. It’s actually, I guess, you would call it better or designer hardlines of merchandise that we have -- which, by the way, is as we go to Christmas on gift giving, which I think you mentioned, some of those hardline better vendors, which are special, are great gifts. And it’s not just the apparel because as you know, you probably personally or friends -- today, we don’t -- consumers don’t just give apparel gifts. It’s also other hardline gifts, some of it in the tech area. We have that tech area out there in the queue line. And that’s often given -- those are great gifts, especially when we’re able to buy some better brands in that. And so, that’s all the type that we’re really excited about. And I think it’s going to help us with that Q4 opportunity.

The final question of the day comes from John Kernan.

All right. Thanks for squeezing me in. Congrats on a nice quarter. Ernie, not to belabor the point, but just can you talk to the mark-on opportunity? You’ve talked about it in prior calls. It seems like you’re getting more conviction in the opportunity and the deals you’re getting from vendors. And then, maybe just elaborate on what this means for merch margin and gross margin as we go forward. Thanks.

Sure, John. Well, we spent more time -- Scott and I both really on the prior two calls, we were -- because I guess it was more new news, I was talking about the retailing of the goods in terms of how that would create some mark-on and ability to offset costs, start with that whole strategy. Again, that’s a -- we’re a byproduct of the fact that all the retailers around us, for the most part, have had to raise retails on certain categories or some, as you know, have done it more in a widespread raising of retail across the board. We didn’t do that. We did it very selective and surgically. But what’s happened is, for different reasons in this environment, our teams -- and we see this every week, are also getting mark-on improvement from the costs. And that is the reason we’re talking about that more. And I think it’s almost as though the two-prong has evened off because we were talking before about the retail was giving us. You can see from these results that we’re delivering and the outlook for the back half of the year that we’re very bullish on our merchandise margin, and it’s really because of both.

Yes. Just to echo what Ernie just said, given our, call it, whatever, the better retailing strategy, all of our improvement versus our last guidance, not -- at least from a margin -- merchandise margin perspective, is all in the buy. So, our average retail is up whatever we had planned it to be up, but it’s all better buying in the -- across all of our divisions. And it’s fairly significant improvement in our mark-on in the back half of the year. So, it’s better buying. Costs are going up, but the retailers are going up a bit more…

More than the cost, right.

Yes. That’s the other way. And part of that -- no one asked, part of why the inventory is up is you have the freight and cost impact that’s buried in the overall inventory. But the costs are going up, but the retailers are going up more than the cost. But we had that baked into our both original and last guidance.

John -- and the other thing, John, that goes hand-in-hand with this because that wouldn’t -- that would all just be okay if we thought, oh, we’re doing that, but our -- but we’re hurting sales. The opposite is happening because proportionally, our values, you could -- on many of these things are even better value today than they were because retails have gone up even more than what were going up and -- which is why our -- I think it was in the either the first question or close to that, where I was talking about our turns are actually faster than they were in FY20, which is an indication that when the customer’s in the store that those are actually hitting them as stronger than they’ve been for a few years. So, it’s really nice to see. You need both, right? You can’t just have the buy and then retail move if you’re not selling the goods at the right -- and the customer is not seeing the fact that you’re still providing. And I’m telling you, in many cases, we’re providing because of what’s happening around us, more out-the-door value relative to the competition than ever before.

And with a slight -- with the moderation in freight and with a better buying, the back half of the year, our merchandise margin, including all the freight pressure, is actually going to be up versus it was down in the first half of the year.

It’s kind of -- I hate to belabor the point, but it’s really what we just experienced in Q2 and the way we’re guiding, yes. But more conservative sales but healthy profit directionally is -- really, it is a testament and a great example of textbook utilization of this business model. And you couldn’t do that if you didn’t have the right teams. And again, we have such great associates here that are executing on this, whether from merchandiser or planning or marketing or in our distribution area, logistics, it’s all working. And it -- this is just a great, I think, evidence of how we’re able to flex and take advantage of the market.

Excellent. Thanks, guys.

Thank you, John. That was our last question. So, thank you all for joining us today, and we will be updating you again on our third quarter earnings call in November, and we look forward to it. Thank you, everybody.

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