Ross Stores, Inc. (NASDAQ:ROST) Q3 2022 Earnings Call Transcript

Ross Stores, Inc. (NASDAQ:ROST) Q3 2022 Earnings Call Transcript November 17, 2022

Ross Stores, Inc. beats earnings expectations. Reported EPS is $1, expectations were $0.81.

Operator: Good afternoon and welcome to the Ross Stores Third Quarter 2022 Earnings Release Conference Call. 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 the company’s fiscal 2021 Form 10-K and fiscal 2022 Form 10-Qs and 8-Ks on file with the SEC. And now I’d like to turn the call over to Barbara Rentler, Chief Executive Officer. Thank you, ma’am. Please go ahead.

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 will begin our call today with a review of our third quarter performance, followed by an update on our outlook for the fourth quarter and fiscal year. Afterwards, we will be happy to respond to any questions you may have. As noted in today’s press release, third quarter results were above our expectations as we delivered stronger value throughout our stores. Operating margin for the period was 9.8% versus 11.4% last year, reflecting the deleveraging effect from the comparable sales decline as well as pressure from higher markdowns and unfavorable timing of packaway-related costs.

Earnings per share for the 13 weeks ended October 29, 2022, were $1 on net income of $342 million. This compares to $1.09 per share or net earnings of $385 million for the 13 weeks ended October 30, 2021. Total sales for the quarter were $4.6 billion, in line with the prior year, with comparable sales down 3% on top of a robust 14% gain in the third quarter of 2021. The first 9 months earnings per share were $3.08 on net earnings of $1.1 billion, compared to $3.82 per share on net income of $1.4 billion for the same period in 2021. Sales for the year-to-date period totaled $13.5 billion with comparable store sales down 5% versus a strong 14% increase last year. For the third quarter at Ross shoes was the best performing business, while Florida and Texas were the top performing regions as they were bolstered by the outperformance of border and Forex locations.

At dd’s DISCOUNTS, sales trends improved versus the first half, but continue to trail Ross’s results due to ongoing inflationary pressures that are having a larger impact on dd’s lower-income customers. Inventory levels moderated significantly from the first half of the year with total consolidated inventories at the end of the quarter up 12% compared to last year. Average store inventory during the quarter were up 4% versus 2021 and down compared to pre-pandemic loans. Packaway merchandise represented 41% of the, total compared to 31% last year, when we used packway merchandise to fuel robust sales gains. Turning to store growth. We completed our expansion program for 2022 with the addition of 28 new Ross and 12 dd’s DISCOUNTS in the third quarter.

For the year, we added a total of 99 locations comprised of 71 Ross and 28 dd’s DISCOUNTS. We now expect to end the year with 1,693 Ross stores and 322 dd’s DISCOUNTS locations for a net increase of 92 stores. Now, Adam will provide further details on our third quarter results and fourth quarter guidance.

See also 12 Best Affordable Energy Stocks To Buy and 11 Best Aggressive Stocks To Buy Now.

Adam Orvos: Thank you, Barbara. As previously stated, comparable store sales were down 3% in the quarter. Although traffic improved from the second quarter, it still declined versus the prior year. Partially offsetting these declines was a higher average basket size. Operating margin of 9.8% for the third quarter was down 160 basis points from last year. Cost of goods sold grew by 230 basis points in the quarter. Merchandise margin declined 165 basis points, primarily due to higher markdowns. Distribution costs were up 140 basis points, mainly due to unfavorable timing of packaway-related costs and deleverage from our new distribution center, while occupancy delevered by 20 basis points. These higher expenses were partially offset by a 75 basis point decrease in buying costs, mainly from lower incentives.

Lastly, pressure from domestic freight expenses eased in the third quarter and improved 20 basis points as we anniversaried the freight headwinds that began in the second half of last year. SG&A for the period improved by 70 basis points as deleverage from the negative comparable sales was more than offset by lower incentives. During the third quarter, we repurchased 2.8 million shares of common stock for an aggregate cost of $244 million. We remain on track to buy back a total of $950 million in stock for the year. Now, let’s discuss our fourth quarter guidance. We continue to expect a very promotional holiday selling season and ongoing inflationary headwinds to pressure our low to moderate-income customers. That said, we face our easiest sales and earnings comparisons in the fourth quarter and are raising our guidance given our third quarter sales momentum and improved holiday assortments.

For the 13 weeks ending January 28, 2023, we now expect comparable store sales to be flat to down 2% on top of a 9% gain in the prior year. As a result, earnings per share are forecasted to be in the range of $1.13 to $1.26. The operating statement assumptions that support our fourth quarter guidance include the following: Total sales are projected to be flat to up 3%. We expect operating margin to be in the range of 9.7% to 10.5% versus 9.8% last year. This mainly reflects the anniversarying of significant cost pressures from ocean freight and lower incentives, partially offset by the deleveraging effect from lower same-store sales, unfavorable timing of packaway-related costs and higher markdowns. Net interest income is estimated to be about $14 million.

Our tax rate is expected to be approximately 23%. And weighted average diluted shares outstanding are projected to be about 342 million. Based on our year-to-date results and fourth quarter guidance, earnings per share for fiscal 2022 are now projected to be in the range of $4.21 to $4.34 compared to $4.87 last year. Now, I will turn the call back to Barbara for closing comments.

Barbara Rentler: Thank you, Adam. Despite the many challenges over the last few years, coupled with today’s uncertain macroeconomic and geopolitical environment, we remain optimistic about our future growth prospects. Our top priority is and always will be delivering fresh and exciting named brand merchandise at compelling discounts every day in our growing store base of over 2,000 locations. With consumers’ heightened focus on value and convenience, this bodes well for our ability to expand our market share and profitability in the future. At this point, we would like to open up the call and respond to any questions you may have.

Q&A Session

Operator: Thank you. And our first question comes from the line of Matthew Boss with JPMorgan. Please proceed with your question.

Matthew Boss: Thanks and congrats on a nice quarter. It’s great to see the return to beat in rates . So Barbara, maybe relative to your internal expectations, what did you see from traffic or maybe could you speak to the cadence of comp trends as the third quarter progressed? And then could you just elaborate on the improved holiday assortments that you cited in the release?

Michael Hartshorn: On the traffic trends, as we mentioned €“ this is Michael Hartshorn on, Matt. As mentioned in the prepared comments, with the comp down 3%, as we mentioned, traffic did improve for the quarter, but it still declined versus the prior year. So offsetting the traffic declines was a higher average basket. The basket was driven by higher AURs, while UPTs were flattish. The increase in the average basket was more than offset by the decline in the number of transactions. As we move through the quarter, what we saw on a stacked basis, so compared to 2019, our trends improved as we progressed through the quarter.

Matthew Boss: Great. And then just follow-up, maybe relative to the third quarter, could you just elaborate on maybe the macro or the competitive landscape assumptions that you embedded in your fourth quarter comp guide? It does embed a moderation. Is that prudent? Is it something that you have seen or are you embedding more competitive backdrop and maybe deterioration in the macro in the fourth quarter?

Michael Hartshorn: I would say that, from our point of view, the macroeconomic environment obviously remains uncertain, but we do think that the holiday period is going to be very promotional. So, that’s what we have embedded into the guidance. And then just as a reminder, last year, sales at the end of the quarter did trail off. It’s our easiest quarterly compare, trailed off for two main reasons. One was the spike in Omicron cases. And then at this point last year, the supply chain continued to be a real challenge for us and other retailers.

Matthew Boss: Great color. Congrats again. Sorry, go ahead, Barbara.

Barbara Rentler: Okay, that’s the holiday assortment. So look, we believe our holiday assortment this year will really have an improved offering of both branded bargains based off of availability in the marketplace and also, particularly our gift giving, because of the imbalances we had from the supply chain congestion, as Michael just alluded to. So, we feel between the two of those, we will be able to offer great brands, strong values and a broader assortment.

Matthew Boss: Best of luck.

Barbara Rentler: Thank you.

Operator: And our next question comes from the line of Alex Stratton with Morgan Stanley. Please proceed with your question.

Unidentified Analyst: Great. Thanks so much for taking my question. Just as it relates to the updated guidance, perhaps could you kind of talk about what the key swing factors are there that could drive you either to the higher or the lower end of that new range? Thank you.