Ross Stores, Inc. — 2023 Q3

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.

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

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.

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?

Yes.

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.

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.

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.

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.

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

Yes, Paul. I won't go through a component by component but merch margin in addition to the ocean freight benefit, but if you back ocean freight out of it, we were better than last year as we anniversary the markdowns that we took last year. So third quarter last year was kind of our peak quarter for incremental markdowns last year.

What were the drivers of dd's improved sales trends during the quarter? And is that now running in line with Ross?

Sure, Lorraine. As -- dd's, as we said, also improved and were relatively in line with performance at Ross. We believe the improved performance here like it is at Ross is the customers responding to the broad assortment of values throughout the stores. And I'd also add easing inflation certainly doesn't hurt this customer.

And then any update on shrink from your recent physical inventory?

Yes. Lorraine, in third quarter -- so we took our second physical inventory over the year in third quarter and trued up those results, the results were in line with our expectations and in line with last year.

Well, obviously, we're not going to talk about but IMU. But I think as the merchants are in the market and they are really looking for compelling deals, they obviously have metrics that they should hit, and I would say that they do that. But if there's a really unbelievable deal, we're going to price it the way we think we need to price it. Our strategy now is really to continue to deliver value. And so again, they have metrics, everyone is hitting their metrics, but that's the focus. What is the right price, what is the right value to drive the customer into the store to gain market share. So that's the hit that everyone does.

We're just getting into the -- we're working our way through the planning process. We'll come back and talk at the end of the year and kind of frame up how we see the go forward at that point in time. I think just to give you some generalities, I feel like we've recaptured most of the ocean freight at this point. When we look at container rates now are very similar to where they were in 2019. So we think by the end of the year, we'll capture all that benefit.

Sure. And as we said, traffic was the primary driver of the 5% comp. Average basket was up just slightly as an increase in the units per transaction was partially offset by slightly lower average unit retails. And if we think about it going forward, we'd like to be driven by traffic but we don't plan our business around the components. We plan the business on offering the best value. And if we get traffic and a basket size increase, that's great for the business.

Brooke, this is Adam. Yes. So store wage, as we said in the comments, they'll continue to put pressure on us. That's largely driven by minimum wage changes that we need to take in the marketplace. But I would say overall on SG&A, the biggest moving part this year has been incentive comp, right? So as you'll remember, very little incentive comp last year. And not only did we have to reset the bar this year but we're obviously outperforming our financial plan. So that's the biggest kind of volatility in the SG&A line.

I'll just add on the wage front. I mean, generally speaking, wages have stabilized throughout the stores and the DCs and any increases we're seeing are really driven by minimum wages. On SG&A going forward, I think we'd expect that we'd be able to lever between the 3 and 4 comp as we have in the past.

Sure. On merchant margin for next year, we're in the middle of our planning process now. So I'd wait until our year-end call, and we can give you some more feedback on that. As you mentioned, we entered Michigan and Minnesota during the third quarter. It's very early on those. So hard to comment at this stage other than we're very optimistic about our new market growth..

And in terms of brands and AUR increase. Really, I know it sounds like I'm going back to same thing. We really are looking at every deal based on the value we put out on the floor. And so obviously, if they're higher on brand, those goods would -- even at great values would have higher AUR. But it's really a mix of all brands, whether they're moderate, they're better, they're good, better, best, where they're best. That's how we're really approaching it in terms of just saying I'm going to raise the AUR because we increased we [ debt ] in total. That's not how we're thinking about it. We're thinking about it more holistically, and that's the piece that customers responding to.

Great. And I'll add my congratulations. Barbara, I often -- I am on the topic of your packaway and your short stay. Historically, when we have sort of disruptive weather and kind of like the unseasonable weather in the early in the quarter, you're able to use your short-stay flexibility to kind of pace into that. I'm just wondering how advantageous has that been this season? Or is the macro -- kind of more challenging macro sort of overwhelming that?

I just want to make sure I understand what you're saying. You're saying that did we get seasonal products early and [indiscernible] closing the fourth quarter?

Yes, yes. I think it's more that weather has not transitioned to cold for any long permanent period of time, so we're hearing frontline retailers talk about that lower their fourth quarters, and there's a disconnect between how much they've ordered and what things that they need to get rid of. So I'm wondering if that's been a benefit to you.

At this point in time, there's -- the goods are obviously building because the weather has been warmer than people anticipated. But there is a moment in time when vendors decide to really move the goods and that really -- becomes really more longer-term packaway. So if you're thinking outerwears, whether its classifications like that, that really would be longer term versus shorter term deals.

Great. Maybe for Barbara, some peers have highlighted opportunities in new or adjacent categories. So I'm just wondering, has Ross entered any newer categories recently? Or what kind of thoughts do you have on opportunities in general and then any changes in category mix shift that you guys have done?

Sure. Yes, we have entered into some new categories. Obviously, I'm not going to talk about it on the call. But yes, for the fourth quarter, we entered some different categories for gifting, which are going on the floor now and into December. And then just opportunities in general as we move into next year. I think we have some opportunities in expanding certain businesses and then also coming back into some businesses that we exited, I would say, sometime during COVID.

Marni, on traffic. So traffic like Ross, the comp for dd's was entirely driven by traffic.

And then in terms of assortment, yes, it is a family-focused box and the dd's customer does have more children. So businesses like toys in the fourth quarter becomes very important [ for the toys ].

We do all those businesses. All the traditional businesses you would expect, you would expect holiday dresses, you would expect toys, you expect anything, also family photo shoots and then toys or other little things that they give to kids but...

I think it's part of the regular stores to go to. And do they like seasonal products, Halloween harvest, Christmas. Obviously, Christmas is very big. Yes. dd's, I don't think they'll get up in the morning and say, I need to go buy some Halloweens. I think there is always [indiscernible] they're going to stores, they are seeing things that they like and I think it's simple purchases probably for everyone.

Regionally, Dana, our largest markets, California was above the chain average. Texas and Florida were in line. And as we mentioned on the call, it was very broad-based across the country.

And then in terms of apparel, it's slightly trailed the chain average and the comps were relatively similar between Q2 and Q3, but they did exceed plan.

On the self-checkout, we're in a very small number of stores. And as you can imagine, we're going very slowly to make sure we get it right. We're in about 100 stores right now, and we're going to continue to pilot the operating model that we have there, and we're very cognizant of the shrink environment, so we're going to go slow.

And then in terms of upfront versus closeouts, as the year progressed, I mean it's pretty similar. It can peak up and down a little bit in the fourth quarter. You have more home business, some of that's more DI, so that gets bigger versus the rest of the year. But I would say it's similar. I think closeouts have come across all year pretty much in most businesses. And so I think -- yes, I don't see a bigger shift. It could have gone up or down 2 or 3 points, but nothing major.

And Aneesha, just building on those comments, within our CapEx, we're definitely investing in technology, more automation in our distribution centers. We're spending money in our stores just to automate. A lot of our noncustomer-facing tasks in more efficient ways to take markdowns and check inventory and also just investing in more analytics in the business.

Sure. Shoes, again, was one of our best-performing businesses. And that was pretty -- that was broad-based across all the shoes.

The higher buying was all incentive cost related.

Laura, obviously, we've been tracking up in California for some time with their minimum increases there. It's been a competitive market for us for a long time. I think in regards to the fast-food workers, we'll have to see how that spills over, but we believe we recruit from a different pool than the fast-food industry.

It will be a little higher than our store count because those tend to be higher-volume stores but slightly above our store count, I would say.

This is Arian Razai on for Bob. It looks like inventories are up 5 -- on a 5% comp increase. Could you please expand on packaways, given the great brand availability, the reason of packaways have been trending down a couple of percentage points below last year and every quarter this year? Any changes in approach, a factor of higher deployment of product? Is it like better inventory productivity at stores? Any additional color would be super helpful.

Really no change to how we're running packaway. Sometimes when your business is very good, and we've been chasing a lot of business this year [indiscernible]. So we've been in a constant chase. And the thing about packaways, when you're buying goods that you're going to hold, you have to be absolutely sure that the values are correct. So the merchants are very discerning in what they buy when they put in packaway because when you're bringing it back out, we want to make sure that the value is right.

Got it. Got it. So would you say that the product this year resonates better with the consumer like from the value perspective?

You mean the packaway product or just products in general?

Just products in general.

I think the customer is really responding to the better values. Clearly, she's financially pressed. And even though inflation is easing, she's still under pressure. And so whenever you can give the customer a better branded bargain at an unbelievable value, she's going to respond, which is why we're highly focused on that, and that would therefore take us through stronger market share.

Thank you for joining us today and for your interest in Ross Stores. Happy holidays.