Ross Stores, Inc. (NASDAQ:ROST) Q3 2023 Earnings Call Transcript

Ross Stores, Inc. (NASDAQ:ROST) Q3 2023 Earnings Call Transcript November 16, 2023

Ross Stores, Inc. beats earnings expectations. Reported EPS is $1.33, expectations were $1.21.

Operator: Good afternoon and welcome to the Ross Stores Third 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 the company’s fiscal 2022 Form 10-K and fiscal 2023 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.

Barbara Rentler: Good afternoon. Joining me on our call today are Michael Hartshorn, Group President and 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 third quarter performance followed by an update on our outlook for the fourth quarter 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 that both sales and earnings outperformed our expectations for the quarter as customers responded favorably to the terrific values we offer throughout our stores. Operating margin for the period was 11.2%, up from 9.8% last year.

Leverage from the same-store sales gain and lower freight costs were partially offset by higher incentives and store wages. Earnings per share for the 13 weeks ended October 28, 2023, were $1.33 compared to earnings per share of $1 last year. Net income for the period rose to $447 million versus $342 million in the prior year period. Total sales for the quarter were $4.9 billion, up from $4.6 billion last year, with the comparable store sales gain of 5%. For the first 9 months, earnings per share were $3.74 on net earnings of $1.3 billion compared to $3.08 per share on net income of $1.1 billion for the same period last year. Sales for the year-to-date period grew to $14.4 billion with comparable store sales up 4% over last year. For the third quarter at Ross, cosmetic, accessories and shoes were again the strongest performing businesses, while geographic results were broad-based.

Like Ross, dd’s DISCOUNTS shoppers also responded favorably to its strong value offerings, driving improved sales trends during the quarter. At quarter end, total consolidated inventories were up 5% versus last year, while average store inventories were up 2%. Packaway merchandise represented 39% of total inventories versus 41% in the same period of the prior year. During the third quarter, we also completed our expansion program for 2023 with the addition of 43 new Ross and 8 dd’s discounts. Over the year, we added a total of 97 locations comprised of 72 Ross and 25 dd’s. We now expect to end the year with 1,764 Ross stores and 345 dd’s DISCOUNTS for a net increase of 94 stores. Now Adam will provide further details on our third quarter results and fourth quarter guidance.

Adam Orvos: Thank you, Barbara. As previously stated, comparable store sales rose 5% in the quarter, primarily driven by higher traffic. Operating margin increased 135 basis points to 11.2%. Cost of goods sold improved by 260 basis points in the quarter. Merchandise margin was the main driver with a 235-basis point increase, primarily from lower ocean freight costs. Distribution expenses improved by 45 basis points, mainly due to favorable timing of packaway-related costs. Domestic freight and occupancy levered by 40 and 25 basis points, respectively. Partially offsetting these benefits were higher buying costs that increased 85 basis points, mainly from higher incentives. SG&A costs for the period increased by 125 basis points, primarily driven by higher incentive costs and store wages.

During the third quarter, we repurchased 2.1 million shares of common stock for an aggregate cost of $239 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 face macroeconomic volatility, persistent inflation and more recently, geopolitical uncertainty. In addition, we are up against our most difficult quarterly sales comparisons versus 2022 in the fourth quarter. As a result and while we hope to do better, we believe it is prudent to maintain a cautious approach in forecasting our business and reiterating our prior sales guidance for the fourth quarter. For the 13 weeks ending January 27, 2024, we continue to plan same-store sales to be up 1% to 2%.

Earnings per share for the 14 weeks ending February 3, 2024, are projected to be in the range of $1.56 to $1.62 compared to $1.31 in the fourth quarter of 2022. This guidance range includes an approximate $0.02 per share unfavorable impact from the timing of expenses that benefited the third quarter. Based on our year-to-date results and our fourth quarter forecast, earnings per share for the 53 weeks ending February 3, 2024, are now expected to be in the range of $5.30 to $5.36 versus $4.38 last year. Incorporated in this guidance for both the fourth quarter and full year is an estimated earnings per share benefit of $0.16 from the 53rd week in fiscal 2023. The operating statement assumptions that support our fourth quarter guidance include the following: Total sales are projected to grow 8% to 10%, including an estimated $260 million benefit from the 53rd week.

We expect operating margin to be in the range of 11.3% to 11.5% versus 10.7% last year. This range includes a 65-basis point benefit from the extra week. We are planning for higher merchandise margins, given lower ocean freight cost, though moderating from the improvement earlier this year. In addition, lower domestic freight and distribution costs, partially due to favorable packaway timing are expected to benefit margin. Partially offsetting these lower costs are forecast for higher incentive compensation. Net interest income is estimated to be about $45 million as we continue to benefit from higher interest rates on our cash balance. Our tax rate is expected to be approximately 23% to 24% and weighted average diluted shares outstanding are projected to be about 335 million.

Now I’ll turn the call back to Barbara for closing comments.

Barbara Rentler: Thank you, Adam. Looking ahead, despite all the challenges in the external environment, we are encouraged by our healthy above-plan results to date this year. We also remain confident in the resilience of the off-price sector and our ability to operate successfully within it, especially given consumers’ heightened focus on value and convenience. As a result, we remain optimistic about the company’s future prospects and our ability to expand market share and profitability over time. At this point, we’d like to open up the call and respond to any questions you might have.

Operator: [Operator Instructions] And the first question comes from the line of Matthew Boss with JPMorgan.

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Q&A Session

Matthew Boss: Congrats on another nice quarter. So Barbara, could you elaborate on changes across categories that you’ve made to increase your value focus? It seems like that was a clear takeaway from your comments. Maybe also if you could speak to the cadence of traffic that you saw as the third quarter progressed? And just how you see your assortments positioned in the holiday to take share.

Michael Hartshorn: Matthew, I’ll start with the traffic. As we said in the commentary, traffic was the primary driver of comp for the quarter on a stack basis. The comps were fairly consistent across the quarter with a couple of fits and starts late in the quarter regionally with weather as it always is this time of year. That said, for the entire quarter, weather was neutral.

Barbara Rentler: And Matt, by change across categories, do you mean performance?

Matthew Boss: More the value — I think you talked about a greater value focus starting in the second quarter. It sounds like it resonated further in the third quarter. So just maybe changes that you’ve made as it relates to that.

Barbara Rentler: Well, the value changes that we made are across the entire box. So the merchants are out there really looking for great branded products where they can offer compelling values. So that’s really — it’s not in any one area. It’s across the box. Obviously, some businesses are further along than others as you would expect. But that’s a company-wide focus now to offer the most compelling value to the customer at this time. And changes to the assortment of the fourth quarter or just share is really after gifting. We’ve expanded some of our products in gifting categories which I wouldn’t talk about on the call but it’s really a focus on gifting.

Matthew Boss: Great. And then maybe as a follow-up, Adam, how best to think about merchandise margin recapture opportunity in the fourth quarter just given the environment a year ago? And any change in terms of flow-through in the model on 3% to 4% same-store sales as we think more multiyear.

Adam Orvos: Yes. On the latter part, no change in the flow through in the model, right? We still expect to lever on the 3% to 4% comp. And your question on merchandise margin was fourth quarter specific?

Michael Hartshorn: Yes.

Adam Orvos: Yes. So ocean freight which we benefited from all year, will still be a benefit in the fourth quarter. But as we said in the call comments, we’ll moderate considerably. We started to see pretty significant rate reductions about this time last year. So there’ll be further benefit in fourth quarter but not like we have seen in the first 3 quarters of the year. I would expect that really to be the main driver on merchandise margin. All other components should be pretty consistent with last year.

Operator: The next question comes from the line of Mark Altschwager with Baird.

Mark Altschwager: Great. I guess, first, your plan for the fourth quarter top line hasn’t really changed despite comps exceeding the high end of your plan by a couple of hundred basis points in the third quarter. Curious, does that give you more confidence in the upside case? Or are there things you’ve seen in recent trends that would suggest a more material quarter-over-quarter deceleration is the right expectation?

Michael Hartshorn: It’s Michael again. I would say, for the most part, it’s — there’s a lot going on in the external environment, whether it’s a macro economy. We expect it to be a very promotional retail environment and now you have geopolitics into the mix and it is our toughest compare for the year. So given everything going on externally, we think it’s prudent to remain very conservative in running the business in the fourth quarter.

Mark Altschwager: And maybe a follow-up for Barbara. The North American wholesale channel continues to be challenging for many vendors, given the dynamic macro. I’m curious what you’re hearing with respect to product availability heading into calendar ’24?

Barbara Rentler: Well, currently, there’s a lot of availability in the market, as I know you know that. Here’s a look at availability at this point. Vendors — in this environment, vendors are really looking for ways to increase their market share. And so they’ve shifted some of their business towards the growing retail channels. So if, in fact, they get less bookings, we talked about them having less bookings for fall and there’s still availability. So bookings are one thing. Then how much they decide to bring in to drive market share or to shift channels is an other things. So I don’t necessarily think they’re the — you can judge just by bookings what they say about their bookings. And therefore, frankly, there are some vendors that are really looking to gain market share in this period in time and are taking greater risk on bringing in more goods.

So it’s kind of a mixed bag but they’re really looking to expand who they do business with and to shift channels. So I think that’s the reason why goods continue to become available.

Operator: [Operator Instructions] The next question comes from the line of Paul Lejuez with Citigroup.

Paul Lejuez: Sorry if I missed it but could you talk about performance in the home category? And then also I was curious about store performance based on income, demographic, locations. Any change in terms of how any specific income cohort behaved during the quarter?

Michael Hartshorn: Paul, on the income, as we said in the commentary, the comp performance was fairly broad-based across geographies but also what I’d say is trade area demographics, including income. So your bigger question is, are you seeing a trade down? We saw very broad-based performance across income levels.

Barbara Rentler: And in terms of the home performance, home performed slightly below the chain average.