Ross Stores, Inc. (NASDAQ:ROST) Q2 2023 Earnings Call Transcript

Ross Stores, Inc. (NASDAQ:ROST) Q2 2023 Earnings Call Transcript August 17, 2023

Operator: Good afternoon and welcome to the Ross Stores Second Quarter 2023 Earnings Release Conference Call. The call will begin with prepared comments by management, followed by a question-and-answer session. [Operator instructions] Before we get started, on behalf of Ross Stores, I would like to note that the comments made on this call will contain forward-looking statements regarding expectations about future growth and financial results, including sales and earnings forecasts, new store openings, and other matters that are based on the company’s current forecast of aspects of its future business. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from historical performance or current expectations.

Risk factors are included in today’s press release and in the company’s fiscal 2022 Form 10-K and fiscal 2023 Form 10-Q and 8-Ks on the file with the SEC. And now I’d like to turn the call over to Barbara Rentler, Chief Executive Officer.

Barbara Rentler: Good afternoon. Joining me on our call today are Michael Hartshorn, Group President, Chief Operating Officer; Adam Orvos, Executive Vice President and Chief Financial Officer; and Connie Kao, Group Vice President, Investor Relations. We’ll begin our call today with a review of our second quarter 2023 performance followed by our updated outlook for the second-half and fiscal year. Afterwards we’ll be happy to respond to any questions you may have. As noted in today’s press release, we are pleased with our second quarter results with both sales and earnings well above our expectations. Along with easing inflationary pressures, customers responded well to our improved value offerings throughout our stores. Total sales for the period were $4.9 billion, up from $4.6 billion last year, while comparable store sales rose 5%.

Earnings per share for the 13-weeks ended July 29, 2023 were $1.32 on net income of $446 million. These results compared to $1.11 per share on net earnings of $385 million in the prior year second quarter. For the first six months, earnings per share were $2.41 on net income of $818 million. These results compared to earnings per share of $2.08 on net earnings of $723 million and first-half of 2022. Sales to 2023 year-to-date period were $9.4 billion with comparable sales up 3% versus a 7% decline in the first-half of last year. Cosmetics and accessories were the strongest merchandise areas during the quarter, while performance across geographic areas was broad based. Similar to Ross, dd’s DISCOUNTS performance also improved due to better merchandised assortments and the aforementioned moderating inflation.

At quarter end, total consolidated inventories were down 15% versus last year, while average store inventories were up 4%. Packaway merchandise represented 38% of total inventories versus 41% in the same period of the prior year. Turning to store growth, we opened 18 new Ross and nine dd’s DISCOUNT locations in the second quarter. We remain on track to open a total of approximately 100 locations this year, comprised of about 75 Ross and 25 dd’s. As usual, these numbers do not reflect our plan to close or reclose — relocate about 10 stores. Now, Adam will provide further details on our second quarter results and additional color on our updated outlook for the remainder of fiscal 2023.

Adam Orvos: Thank you, Barbara. As previously mentioned, our comparable store sales were, up 5% for the quarter, driven by higher traffic. Second quarter operating margin was flat, compared to last year at 11.3%. Cost of goods sold during the period improved by 185 basis points. Merchandise margin increased 200 basis points, primarily due to lower ocean freight costs. Domestic freight declined 60 basis points, while occupancy and distribution cost improved by 20 basis points and 5 basis points, respectively. Partially offsetting these benefits were buying expenses that delevered by 100 basis points, mainly due to higher incentives. SG&A for the period increased 180 basis points as higher incentive costs and store wages more than offset the leverage from higher sales.

During the second quarter we repurchased 2.2 million shares of common stock for an aggregate cost of $230 million, we remain on track to buyback a total of $950 million in stock for the year. Now let’s discuss our outlook for the remainder of 2023. As Barbara noted in today’s press release, despite the recent moderation and inflation, our low to moderate income customer continues to face persistently higher costs on necessities. As a result, we believe it is prudent to continue to plan the business cautiously. However, given our improved second quarter performance we are raising our second-half sales and earnings outlook. We are now planning comparable store sales for the third and fourth quarters of 2023 to be up 2% to 3% and 1% to 2% respectively.

As noted in our press release, if the second-half performs in line with these updated sales assumptions, earnings per share for the third quarter is projected to be $1.16 to $1.21 versus $1 last year and $1.58 to $1.64 for the fourth quarter, compared to $1.31 in 2022. Based on our first-half results and second-half guidance, earnings per share for fiscal year 2023 are now planned to be in the range of $5.15 to $5.26 versus $4.38 last year. Incorporated in this updated guidance range is an estimated benefit to earnings per share of approximately $0.16 from the 53rd week in fiscal 2023. Now let’s turn to our guidance assumptions for the third quarter of 2023. Total sales are forecast to increase 4% to6% versus the prior year. We expect to open 51 stores during the quarter, including 43 Ross and eight dd’s locations.

Operating margin for the third quarter is planned to be in the 10.3% to 10.5% range versus 9.8% in 2022, as the benefit from lower ocean and domestic freight costs more than offsets an increase in other expenses, primarily related to incentive compensation and store wages. Net interest income is estimated to be approximately $34 million versus $2.8 million last year as we continue to benefit from higher interest rates and our cash balance. The tax rate is projected to be about 25% and diluted shares outstanding are expected to be approximately $337 million. Now I’ll turn the call over to Barbara for closing comments.

Barbara Rentler: Thank you, Adam. While we are pleased with our above planned results in the second quarter, the macroeconomic, geopolitical and retail environments remain uncertain. Moving forward we remain keenly focused on delivering the most compelling bargains possible as our customer is more motivated than ever to seek the best branded values as prolonged inflation remains an issue. We will also carefully manage our expenses and inventory to maximize our potential for both sales and earnings growth. Longer term, we believe the rigorous execution of our off-price business models will allow us to consistently deliver solid results. At this point, we’d like to open up the call and respond to any questions you may have.

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Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] And the first question comes from the line of Matthew Boss with J.P. Morgan. Please proceed with your question.

Matthew Boss: Great, thanks and congrats on a really nice quarter. So Barbara, could you just elaborate on the improved value offerings that you cited in the release and just proactive assortment changes that you’ve made in stores that you think are contributing to the improved performance. If any way to speak to trends that you’re seeing with traffic versus basket as the second quarter progressed and into August, that would be really helpful.

Adam Orvos: Matthew, let me just start on overall trends for the quarter. On sequential trends, we wouldn’t provide specifics, but I would say comps were relatively strong across the quarter, both on a single year comp basis and a multiyear basis. On the components, as we said in the commentary, traffic was the primary driver of the 5% comp. That was true for both chains. The average basket was flat with an increase — slight increase in the units per transaction and a lower AUR which offset the units per transaction.

Barbara Rentler: And then, Matt, in terms of the improved value offerings, as we said before, we are really striving to offer better-branded value bargains for the customer. I mean, our customer is low-to-moderate income customer and the merchants have been out there really chasing the business, buying closeouts, really looking for compelling values and bargains and that’s across all areas of the company. It’s not just one particular area, it’s everywhere, because that’s really what the customers are responding to and because the amount of availability in the market, we’ve been able to do that.

Matthew Boss: Great. And then just as a follow-up, could you expand on gross margin for the balance of this year, meaning how best to think about the opportunity to recapture markdown headwinds that we saw a year ago as the year progresses within merchandise margin? And then just multi-year, are there any structural impediments to returning to pre-pandemic operating margin levels, which I think we’re in the mid-13s?

Adam Orvos: Yes, I’ll take the first phase. Matt, this is Adam, thanks for the question. Third quarter from an operating margin standpoint, the components will look similar to second quarter. So, ocean freight was a significant tailwind for us and will continue in the third quarter. But I’ll remind you that in fourth quarter of last year, we started to see the benefits of ocean freight. So it will moderate considerably in fourth quarter. But again, to answer your third-quarter versus second-quarter should be comparable on that standpoint. From a domestic freight standpoint, again, we commented in the call on 60 basis points, a good news, assuming fuel costs stay the same. We’d expect that to continue through the balance of 2023.

Other big movers, we’ve commented a lot about incentive costs, we knew that it would be a headwind coming into the year. As we outperformed this year and go up against an underperforming 2022, so that was a big moving part, and that will continue into the third quarter and fourth quarter, but I would also comment that the way we flowed incentive cost, last year’s second quarter was the most impactful quarter. So it’s still be a significant headwind, but in third-quarter and fourth-quarter but not as significant as second-quarter.

Michael Hartshorn: Matthew, on the long-term growth algorithm, we still believe we can achieve gradual improvement in profitability over time. In general, EBIT growth that will be highly dependent on sustained strong sales growth and certainly how the macroeconomic and geopolitical factors including inflation may continue to unfold. To achieve this obviously strengthening our price-value offerings across our entire assortment is going to be key to that success. I’d say outside topline, we continue to believe there are opportunities throughout the P&L that can help drive comp growth and EBIT margin expansion over time.