Ross Stores, Inc. — 2023 Q1
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
Good afternoon, and welcome to the Ross Stores' First Quarter 2023 Earnings Release Conference Call. [Operator Instructions]
Good afternoon.
Thank you, Barbara.
total sales are forecast to increase 1% to 4% versus the prior year. We plan to open 27 locations in the second quarter, including 18 Ross and 9 dd's DISCOUNTS locations. Operating margin for the second quarter is planned to be in the 9.8% to 10.1% range, down from 11.3% in 2022 as higher merchandise margin from lower ocean freight cost is forecast to be offset by an increase in expenses, primarily related to incentive compensation and store wages.
Thank you, Adam.
[Operator Instructions] And the first question comes from the line of Matthew Boss with JPMorgan.
So Barbara, maybe given the pressure on your low to middle income or low to moderate income customer base that you cited, how do you feel today about your merchandise assortments across categories from that value perspective? And then how are you managing buys in the marketplace just given the current level of disruption across the apparel landscape today?
The merchandise assortments from value perspective -- first, let me lead with, we weren't really satisfied with our results. So as I look across the different businesses, we had some businesses where the business didn't perform as well as we had expected, and we're addressing those issues. So let me start with that. As I look at value across the store, that has been a main focus for the merchants for the last few months. So I'd say that we've made progress across the board, but I still think that that is a major focus for us, offering the customer the best branded bargains possible at the best possible values we can put out there.
Yes, just how you're managing buys given how much disruption there is in the overall apparel landscape? How much you're leaving, thinking about current open to buy and relative to maybe things opportunistic from a packaway perspective.
Okay. Well, we have enough open to buy for both packaway and to chase the business. So right now, the plan is postured that we would chase the business as we're coming across and we're monitoring the speed of spending. And the hotel, same scenario. Hotel inventories are basically at the same rate as they were last year. And so the merchants are out in the market seeking out deals and based on those deals, we make those decisions. So if a deal comes in one business and that wasn't really even planned for that business, we might take that plan up.
And the next question comes from the line of Mark Altschwager with Baird.
So you're holding your comp guide for the year, though, you noted the consumer is looking for a deeper value and your merchants are focused on that. So I guess I'm wondering how the expected makeup of that flat comp has changed versus your expectations at the start of the year? And to the extent that there's perhaps some lower ticket involved, are there any margin implications we should be aware of?
Mark, it's Michael Hartshorn. Let me start by just talking a little bit about the first quarter. The comp in the first quarter was driven by a number of transactions, and that was -- for us, that's our proxy for traffic. It was up versus a year ago. So that's a good sign on customer traffic returning. The average basket was flat and it was flat on units per transaction, up on a lower AUR.
And the next question comes from the line of Paul Lejuez with Citigroup.
Curious about geographic dispersion, maybe if you could talk about some of your big states performance in those states, specifically California. How the trends look from the beginning of the quarter to the end of the quarter? And if maybe you could talk about apparel versus home performance.
Sure, Paul. On trends during the quarter, as I just mentioned, on a stack basis, we did see -- and stack basis versus pre-COVID, we did see trends improve as we moved through the quarter with April being the strongest. Geographically, we mentioned the Midwest with the top-performing region for our larger markets. Texas was above the chain average. Florida was in line and California underperformed the chain average given the difficult weather throughout the quarter in the West. Merchandise-wise, accessories and cosmetics were the best-performing businesses as we said in the script. Overall, shoes performed above the chain average, while home was in line and apparel trailed.
Michael, can you just -- a little bit more on California. Any quantification of how much of it was below the chain? And did that gap close that between California and the rest of the chain by the end of the quarter?
It did close, it was -- we wouldn't get into the specifics, but it did underperform the chain average and it improved as weather improved.
And the next question is from the line of Lorraine Hutchinson with Bank of America.
As you move through the quarter, did you see any signs of customers trading down into Ross or any other notable changes in consumer behavior?
I'd say overall, Lorraine, it was -- it's hard -- there's so many factors that go into sales. Obviously, the low-end customer continues to be pressured, whether it's ongoing inflation, reduction in SNAP benefits, lower tax refunds, but it was hard to see whether there's a trade down customer in that data.
And the lower AUR in the quarter, was that all moving towards sharper price points? Or is there a mix component to that that we should factor in?
That's really off of a sharper price point. It wasn't generated by mix.
And the next question is from the line of Chuck Grom with Gordon Haskett.
The merchandise margin had a nice uptick here in the first quarter relative to the last quarter. Can you talk about the drivers? I think you called out freight and then how you're thinking about that line item over the balance of the year?
Yes. Chuck, this is Adam. So I mentioned the merchandise margin grew by 120 basis points in Q1. Ocean freight was clearly the most impactful component here driving the improvement. Our performance in merc margin was in line with what we embedded in our guidance for Q1. And assuming rates stay where they are, I expect that to continue as we move through the year.
And the next question is from the line of Adrienne Yih with Barclays.
Barbara, I want to ask you about packaway, the 42% this year versus 43%. First and foremost, it sounds like you believe that your assortment is on trend, and then typically, when there are these kind of late weather breaks to kind of warmer weather across retail, it gives you the opportunity to chase into sort of known winters. Do you feel better about the assortment heading into the second quarter? And then, Adam, or Barbara, with frontline still being very promotional, does that somehow impede the ability to drive maybe higher AURs because the value is not as evident as it may be when frontline is a little bit less promotional?
Okay, Adrienne. So let's start with packaway, I think the first question was about packaway, the content at packaway? So the content at packaway, we feel good about that content at packaway. Last year at this particular moment in time was when we started to bring in goods because of all the carrier issues that went on with whenever things speeded up, we took good and put them into packaway as we told all of you that we use later on in the year, really our direct imports. So the packaway that we have in there now is really closed out great deals that we feel very good about. So the percent might be the same, but the content is different. So that's the first one.
So oftentimes when it's been cold in the Northeast and many people were sort of -- retailers were sort of missing plan for -- just because it was colder than for longer. And in the past, it seems like those types of poor weather transitions have given you the opportunity, but I think you just answered it in your first one.
Yes. Yes, you're saying were there additional great deals out there because weather is good. That's kind of ongoing. And the merchants, yes, are in the market, looking close out facing the business and all of that. So that's very different by type of business. Yes, there are -- so that's part of the supply availability that's out there.
And the spread, the kind of wide the spread from frontline to your pricing?
I think you're just saying that they are promoting now, it's more promotional than it's been and then what's our relationship to the promotional environment?
Yes. Does it make it harder to create that value notion when the frontline retailers are sort of every day sitting on the 50 half.
Yes. Listen, look, I think the promotional environment is still very -- is still competitive. It's still a competitive market. We watch people get more promotional in the last few months. I don't think that that's going away. I think what has to happen is and what is happening is that the buyers have to be in the market, constantly working with vendors to understand 2 things. One, not only just brand availability, but also pricing because they need -- they know that they need to get -- they need to have their values be sharper. So they're competitive shopping, seeing what's going on in stores and then they're in the market and vendors are giving them the lay of the land, availability, I have -- what you're talking about the excess goods close out and also kind of where the pricing is, they're keeping that in mind because they're studying that.
And the next question comes from the line of Ike Boruchow with Wells Fargo.
This is Kate on for Ike. I guess just to hone in on the gross margin piece, you guys had a decent amount of volatility in both distribution and buying buckets last year within COGS. Can you walk us through how you think those line items progress through the rest of the year, maybe direction or magnitude?
Yes. Kate, this is Adam. So we'll take them individually. So ocean freight costs, a significant tailwind in Q1. Again, given all the volatility we've seen over time, don't want to get too far ahead of ourselves, but kind of what's embedded in the guidance is we'll continue to see that as a tailwind as we go through the balance of the year. Domestic freight, we called out the 60 basis points of improvement year-over-year. Again, highly dependent here on fuel prices. And obviously, there's wage increases embedded in those costs. But assuming those things stay stable, would continue to expect that to be a tailwind for us as we go forward.
And the next question comes from the line of Alex Straton with Morgan Stanley.
Great. So it feels like this is kind of an ongoing narrative for the last year that you're not super happy with the value you're offering the customer. Though historically, I think you've proven super consistent and successful there. So I'm just wondering, has anything changed in the buying organization? Or what do you think the buying team is getting wrong now? And maybe how you're thinking about correcting this or putting initiatives in place to perhaps get this back on track?
Look, I think the value equation we've been working on for the last few months -- over the last year, moving towards getting to that value point, I think we're kind of at a different place now than where we were a few months ago, both in brands and in values on the floor. So I don't see it kind of the merchants aren't doing their job. I kind of see it as an evolution. And so we are very, very highly focused now on delivering compelling value as we watch our customers in both companies struggle with all the inflation and all the things that are going on around them, we've gotten pretty beary.
And our next question comes from the line of Simeon Siegel with BMO Capital Markets.
Any change in the percent of sales being driven by top vendors versus last year and then just versus a historical trend. Just wondering if concentration of the largest vendors has changed at all? And then just because it's coming up fairly frequently, any updated thoughts on shrink.
I'll start. It's Michael, Simeon. On shrink, we -- the shrink was a little bit higher for us last year, wasn't meaningfully higher. We've assumed that it will stay at or slightly above those levels in our estimates, but no updates -- we typically update the financial impact of that when we take true up our physical inventory in the third quarter.
And the percentage of our top vendors versus historical, I mean, that moves based up of supply, right? So one year, we could have a great deal of merchandise from one vendor, top vendor and then the next year, a little bit less, but a little bit more from someone else. So I think that it kind of moves around. I don't think it's changed that much. I don't know if we're defining as top vendors, but it hasn't changed that much. It changes more by the vendor itself and the availability that's out there.
[Operator Instructions] Our next question comes from the line of Dana Telsey with the Telsey Advisory Group.
As you think about the performance of dd's and what's happening in the environment, was there any differential in dd's performance in the fourth quarter to the first quarter and what you saw? And then just lastly, on the Bed Bath & Beyond locations that are available, if you were to get any, would that be in addition to the current run rate of store openings this year? Or would it be part of it?
Dana, on dd's, the sales trends continue to trail Ross' results during the first quarter. I wouldn't comment on the differential between fourth and first. Obviously, their customer faces even more macro headwinds relative to Ross', which is, I think, reflected in their underperformance. I would also say, though, similar to Ross, we are sharply focused on offering better values to help drive improved sales performance there.
And our next question comes from the line of Bob Drbul with Guggenheim.
I guess just a question for me is as you think about what's happening in the macro, when you look at your good, better, best mix, are you migrating your offering to the lower end of the spectrum? I'm just curious just in terms of the buys or how you're thinking about the merchandising piece of it.
Sure. So we have a good, better, best strategy, and that is really driven by the assortment that we put on the floor and the values we put out there. So we want a tiered strategy because we're going to track much more broader set of customers. But that can move based on supply, based on availability, based on our purchases. So it fluctuates as you go.
And your -- as you think about the rest of the year, you're not really buying for sort of more of a good environment versus a better versus best in your offering?
I think that depends by business. I think that I can't tell you that that is a company-wide strategy. I think that moves by business based on what the business is. And clearly, the dd's customer, in particular, is very price-sensitive, so really paying attention to the values we're putting on the floor or the pricing we're putting on the floor, both. So -- but even at dd's, these things, it moves around. So we are obviously conscious there, particularly with that customer.
And the next question comes from the line of Brooke Roach with Goldman Sachs.
Given the ongoing inflationary pressures in the macro, I'm wondering if you can provide updated thoughts on the longer-term path to recapturing pre-COVID operating margins? Are there any initiatives that you're contemplating to help drive that recovery outside of sharpening values and driving additional market share capture?
Brooke, this is Adam. Thanks for the question. So our long-term operating margin improvements are to be highly dependent on us delivering strong sales over a sustained period of time. And then the question on how long do inflationary pressures persist, but -- over the longer term, we believe we can achieve gradual improvement in profitability. I think if you get into like, are there any structural questions related to that? We're seeing tangible benefit in freight cost, but we're still -- these costs still are not at pre-pandemic levels. And then we're seeing some wage pressures in the stores.
And the next question comes from the line of Laura Champine with Loop Capital.
It's about the weather's impact on your comp in Q1. Is that something you can quantify or maybe if that's a tough one, maybe give us the discrepancy roughly between California and the rest of the chain?
Laura, it's hard to calculate. I mean, I think it -- suffice it to say, it didn't help our business. I would say California was slightly under the -- trailed the chain average and did improve as weather improved is what we'd say.
And the next question comes from the line of Marni Shapiro with Retail Tracker.
I just wanted to clarify. I think you said the 53rd week adds about $0.15. Could we expect between like $350 million to $400 million in sales? Is that a decent number to use for that week? Or is it a little less because it's a January week? Just curious.
Probably a little bit less than that, Marni, given that it's, as you said, given that it's January, early February.
That's what I figured. And then this came up on other calls, it looks like your traffic is good that people are looking for sharper deals, but you obviously called out accessories and cosmetics beauty, which tends to have a lower AUR. Are people gravitating towards the lower-priced items? Or as you've seen the weather improve, have you seen apparel come back in slightly higher AUR, but they're looking for the apparel items that are on sale or just at the better prices. I'm curious sort of what the dynamic is there.
So apparel struggled in Q1. So I don't necessarily think it was driven off the prices. I think that the assortments were not necessarily where we wanted them to be. So depending upon what this discussion, that could have been the price, that could have been the product because there's a variety of factors in there. So I don't think I could take it down to a common denominator price or say, was it driven by markdowns or was it driven -- it really -- I would say, it was driven by the assortment when it's all said and done. Certainly, the weather didn't help, but I don't think the weather is a big enough impact, so I could sit here and say that. I think our assortments weren't necessarily where we wanted them to be. And so we're working on that, and we're going to continue to work on that. But it's not really based off of a price or one thing or -- we have our work cut out for us and the merchants are working on that now.
It wasn't driven by mix. It was driven -- being sharper priced across the assortment.
So it was across -- you saw the softness across the assortment in apparel. It wasn't specific -- AUR?
You asked that was AUR driven by mix in the business. It was not driven by mix.
But on the apparel side, was the softness across the board, whether it was men's Polo shirts or women's dresses or kids, every department across the board was soft? Or were there certain spots even without disclosing if you don't want to, were there certain spots that were -- that really need a lot of work and other spots that were okay.
Well, obviously, we're not going to get into details, but within all the apparel businesses, like common sense to tell you that some businesses are better than others, right? So with that, we wouldn't get into specifics, but there's no -- you're asking is there like you're [indiscernible]. In one particular area? I don't know. I know what you're referring [indiscernible] there.
I was kind of thinking on the positive. Was there something that you're saying -- dress were killer.
Couldn't decide where you were going with that. Every business has businesses that were performing, some businesses didn't and so we're not going to get into specifics on that. What I would say is that the merchants are very diligently working on the assortments, whether it's delivering the right products, whether it's the values, I mean they're really highly focused on that right now.
And the next question comes from the line of Corey Tarlowe with Jefferies.
Barbara, just on the availability across your good, better, best spectrum that you have. Is there any better availability within any one of those 3 segments as you speak to your merchants?
You're just saying where does the supply -- the supply is pretty broad-based. I mean supply in most businesses, there's always more one vendor than the other, more on product than the other. I mean, it fluctuates overall, there's still a lot of supply. I wouldn't say it's bucketed in one of those 3 buckets. No, I would still say it's pretty broad-based.
Got it. And then just on the lower AUR common being driven by sharper price points. I guess within the context of the guide for the full year for flat comps, is the expectation that the AUR is likely to be lower throughout the rest of the year as well?
The -- putting out better value doesn't necessarily mean that your AUR is going down. But what we're focused on is we're focused on delivering really sharp value. So depending upon what -- you're -- using your example of the good, better, best depending upon what that mix looks like, that doesn't necessarily mean the AUR is going down. What we're really trying to do is we're really trying to focus on sharpening our branded values for the customer. And so we think that's our path to driving sales, and we think that's our path ultimately to gaining market share. So those 2 don't necessarily go hand in hand.
And the next question comes from the line of Jay Sole with UBS.
It looks like you beat the low end of your -- the guidance that you gave for EPS in the first quarter by about $0.10, but you're raising the low end of the full year guidance by about $0.12. Can you just tell us what the extra $0.02 is, where that's coming from?
Yes. I think the better way to look at it is what we did on the top end. We beat the top end by 4, you lose a quarter in that, and then we raised the full year by the $0.04.
And the next question comes from the line of Aneesha Sherman with Bernstein.
So your guidance implies -- your 2-year stack comp for this quarter was minus 6%, and your guidance implies a deceleration of that stack to about minus 7% for Q2 and then a pickup in the back half to get kind of closer to 0 to your stack. Can you talk about how you're thinking about the progression through the year? And why are you more cautious about Q2 and then a little bit more optimistic for the back half of the year?
Sure, Aneesha. I think it's hard to look at these on a 2-year stack with all the fiscal stimulus and COVID. So we're really looking at it, pre-COVID, what's changed on a 4-year stack and how that's progressed over time. And we went into the year and had a plan in the first quarter. What we saw is that 4-year stack improved as we move through the quarter and weather improved and exited in a place that would support that stack guidance for the year.
Okay. So just to clarify, you are embedding an improvement in the 4-year stack through the course of the year?
Correct, yes.
And the next question comes from the line of Krista Zuber with TD Cowen.
It's Krista on for John. Just a quick question. On inventory, you've had several -- at least 2 quarters here of a fairly sizable declines. Just wondering how you're thinking about it through the balance of this year. And should we continue to expect declines on a quarterly basis through the end of the year? Or do you think at some point, you sort of pull in line with your sales growth expectations.
Sure. It's -- if you look at the first quarter, for instance, we were down 16%, but we were up against elevated inventories last year when supply chain lead times eased, and we had a surplus of early receipts. So what you'd expect as we move through the year with the -- with that elevated inventory last year, it started to recede, in the third and fourth quarter and you get more comparable, but we should be lower given the excess inventory we had last year in the first half of the year.
And at this time, I'm seeing no further questions. I'd like to pass it back over to Barbara Rentler for any closing comments.
Thanks for joining us today and for your interest in Ross Stores.
Thank you, everyone. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.