Ross Stores, Inc. — 2024 Q1

Barbara, I wanted to follow up on the efforts to offer more sharply priced products to your customers. Were you pleased with the initial results in the first quarter? Do you think it led to market share gain? And what's the margin implication of your plans to build on this initiative?

So let me start with, just on the whole, our progress. We feel like in the first quarter, we made progress on our initiatives. And so we're still at the early stages of it, but we feel like it's a good place to be.

I just wanted to hear about the go-forward margin implication of your plans to build on the initiative.

Yes. Lorraine, this is Adam. I'll jump in on that. So higher-quality branded merchandise will typically carry lower margins relative to lower quality, less recognizable brands. So as we move through the year, this will be pressured throughout the year, but will be even more so in the back half of fiscal 2024 as we continue to make further progress on this, as Barbara talked about. We really feel like long term, this is the right thing for us to do to position us to capture market share going forward.

I'll take the first part, Mike. I appreciate the spirit of your question, but you're right. So domestic -- so let me just kind of walk through all the parts, right? So the EPS beat and operating margin benefit, lower distribution costs.

Michael, there's one other nuance in the first quarter. The -- because your sales are based on a fiscal basis, your comps are on a restated. There's an outsized impact between your total sales and your comp sales because of that disconnect that corrects itself through the year. So we actually get higher leverage in the first quarter. Longer term, though, we would still expect the leverage at 3% to 4%.

Likely stays with us through the balance of the year. But not -- just clarifying, not at the level we saw in Q1, right? So the Q1 number that we reported is -- it has the benefit of the packaway timing right? So that's -- step back that in a tangible way.

Matthew, that's a lot to take in, but I'll start with the health of the consumer. I would say it's hard to say on the health of the consumer. There's clearly a lot of uncertainty in the macro economy. The silver lining for our business is the customer is seeking value more than ever, and we're in a position to deliver that.

And on the comp components, average basket was up slightly. So we had higher AUR driven by a higher mix of brands and is partially offset by lower units per transaction.

And on the health of the consumer go forward, look, our low to moderate income consumer is still being squeezed, I mean, prolonged deflation, macroeconomic environment. I think our job to drive sales is for us to continue to offer really the best possible branded bargains that we can. The value that she really wants because she really does want to buy a brand, better quality, better product, but she needs to have it at a price that she really can afford.

Sure. In terms of the sales, our apparel business in Q1 did not perform below the chain. So as we go forward, if we continue to execute at a higher level and continue with our brand strategy, our apparel business, as we go forward, should improve as it historically improves as you get to quarters 2, 3 and 4. So that's the one piece of our business that, in Q1, we were not as happy with and recognize that we have more progress to make, more things to accomplish, and that's a focus for us.

Well -- look, if the merchants are getting better deals, we're passing it along to the customer because we really believe that offering her good quality, branded products at sharp prices is very important for us to be able to really satisfy the customer when she's really under -- she's under pressure. So we would pass that along to the consumer. So that's really what -- that's really how we're thinking about it at this point.

Chuck, on the -- on dd's, as I said, part of the performance was against easier prior year comparisons than Ross. But we do believe that we've started making adjustments, and the customer is responding. And I'll just repeat, we think we're at the very early stages of making the merchandise adjustments we need to make. So we'll see how it progresses through the year.

At a high level, the merchants improved the value offerings that they had, whether it's different assortments, broader assortments, better quality, better products. So I think we've taken our first step forward there. And to Michael's point, we feel like there's room for us to improve. And if we continue to improve, even this low-income customer, if we can satisfy her, we should define.

The way we're thinking about this is we are actually building the margins the way we see them. We have a merchandise strategy. We've developed a value strategy by type of product, and we then went in and figured out what the margins would be. So at this stage of the game, as you know, we've lowered our margins to be able to get those values on the floor to satisfy the customer and to gain market share. This whole thing is about us gaining market share. So at this point in time, where our strategy is to pass along the values as we get them. And so I wouldn't say it's quite as rigid as, last year, my margin was X and I've got to plan to Y. It's not. It's a strategy we want to execute.

It's Tracy Kogan filling in for Paul. I just wanted to clarify if -- was anything within cost of good meaningfully favorable to your plan? Or was it primarily an SG&A beat?

Within the cost of goods sold, Tracy, freight is included in our cost of goods sold, and we did see favorability.

Yes, and the DC cost.

And in terms of what we've built in because they're recognizable brands, they turn quickly. But quite frankly, we turn everything quickly. So in terms of a benefit just purely out of turn, I don't see that as one of our levers in terms of markdowns. I think the markdowns will be reasonable based on the brands that they are, the value they are, the retailers they are. And so again, we have gone in and we built that bottom up.

Great, and nice quarter. Barbara, my question is on the packaway. The 41%, I believe, was this quarter. Typically, if I'm correct, that's typically short stay, I think. Can you comment on if you were being impacted by weather events as with TJX than most frontline retailers also would be? Are you seeing that short stay opportunity? And have you taken advantage of it to deploy in the second quarter, perhaps?

Adrienne, just on -- before the packaway, packaway usually stays in about -- the average is about 4 months. That said, you could obviously use it for short stay if you needed to.

So in terms of you're asking are there closeout opportunities out there based off of tough weather across the country and as vendors move goods. I think some vendors are starting to move goods, and some vendors, depending upon what your cash flows look like, are still holding on to those goods because of everything that you're saying. The weather was a little bit tougher across the country, and they don't really need to move those goods today. If we were at June 15th, I might tell you something different. So I really think that goes back to who the vendor is, what their needs are, what their cash flow is, if they're a public -- it is a variety of things.

Sure, Bob. I would only talk on a consolidated basis. But as we said in the commentary, the geographic performance was strongest in California and the Pacific Northwest. Both of those are areas that were impacted by poor weather last year, so easier compare perhaps. For our other largest markets, Texas was above the chain while Florida was just slightly below.

On AUR, I'd say we don't plan or focus on driving a specific price point. While it was up in the first quarter, our focus is on delivering the most compelling value as possible, which, as we said, we believe will drive sales and market share gains.

And in terms of the sharper prices, I just want to be clear, the sharper prices are necessarily just in a goods -- in the goods. Sharper prices, I really should probably used word stronger values on the floor. So that's tiered up in all different -- each one of those tiers. It's not just we're looking for an opening. It's not an opening price point strategy. It's a value strategy, but the values, let's say, we offer perhaps 4, a type of product or 1 of those 3 buckets, we may have sharpened so that the customer is getting an even better deal, an even better value. So that's really how we're thinking about the strategy. I probably shouldn't be using the word price because I think everyone is finding that a little bit confusing. But is that the answer to your question?

I mean, I think that's hard for us to measure. But I think the more brand that we get and the broader assortments we can offer, the more customers we'll get. We gain the -- our purpose here is to gain market share, right? And so gaining market share, you like to gain different customers. And so if we get more branded, have unbelievable values and get broader in assortments, that I would imagine would be the combination we need to gain more market share.

It's a good question. I think right now, as you know, we slowed down growth specifically in the new markets. I think we'll have to see sustained trends before we reaccelerate growth in those newer markets. But if we see it, then we would do so.

Sure. Look, weather, we didn't think of weather as a major component. It's always part of the component. And in Q1, our business in apparel, historically, has been very challenging. So we go into the quarter with a conservative plan, seeing how it works and then chase. That's what we've done for years. The early sharpened prices and in the assortment, our new strategy, I think we're at the beginning apparel, particularly in the ladies apparel, we're at the very early stages of that.

Okay. Let's start with -- so with Ross, the magnitude is different by category. Some businesses, by the nature of what they are, are more branded. Like shoes, for example, that's a highly branded business. Handbags is a highly branded business. Naturally, it's the highly branded business. And then I think as we go into different categories, we've set different targets of what that looks like based off of what's in the outside world, the brand -- just the brand strategies of everyone else and what that looks like and what we think that percent should be for us. So that is built with a strategy of what we believe it should be.

Aneesha, on the guidance, I mean I would say it's our best assessment of where the business is and the merchandising plans we have to further increase the branded bargains we offer as we progress through the year. As you know and as you look at the stack comps, we have, for many years now, had stronger comps beyond the first quarter. So we believe we plan the business appropriately based on what we know.

But the pressure is still there from where we have to take statutory increases, right? And that's where we're -- as Michael said and as I said earlier, that's where we're working hard, to try to find offsets to them.

In terms of inventory, part of the increase, Laura, was that with the fiscal calendar, restated calendar at fiscal year-end, we were 1 month closer to Mother's Day where we tend to drive receipts. So that's why you see in-store inventory position up 4%. I'd say the other factor is we do have more goods in transit. Part of that is due to the Suez Canal, and we're going around the Horn of Africa. So that creates a little bit more of in-transit inventory coming into the country.

Go ahead. No, go ahead, Laura.

No, no, no. I was going to -- I was going to pivot, so go back -- go back to Michael.

It's actually relatively flat for the rest of the year in terms of ocean freight, and we do have the -- we do have our contracts locked in at this point, including the Suez Canal shipments.

We think ocean freight will be neutral the balance of the year and it's more of a transit time issue than a cost.

Marni, we're just showing up in your feeds. No, our marketing strategy has stayed fairly consistent. We have -- like everybody else over the years, have shifted more of our media to digital from broadcast, and maybe that's what you're seeing because we have more of our marketing in digital channels.

I would say it's -- we've always done well with the younger customer, and we continue to do well with the younger customer. When we look at the performance, say, Q4 and Q1, it's been fairly broad-based across trade area demographics, and that includes income. So from an income standpoint, it's hard to pinpoint whether there's increasingly a trade-down customer. But what it does say is we're attracting a very broad customer base, which is good for us.

This is Alex on for John. So I had one on gross margin. So how should we think about the quarterly sequencing of gross margin through fiscal '24 and any puts and takes there?

Alex, so domestic freight, it was favorable in Q1; expected to be favorable, the balance of the year, assuming fuel stays where it is. We talked about distribution cost. Feel good about productivity levels, the hiring environment, we'd expect that to continue the balance of the year. Merchandise margin is probably the big call-out, that we were below last year in Q1 and expect that to get -- to be further below last year as we move through the quarter, as we get further into the branded strategy that Barbara spoke of.

The biggest difference is, though, in gross margin between pre-COVID levels are freight costs that spiked during COVID. They're still pretty sticky with driver wages, but we made progress last year. We're going to make progress again. And then the other big factor is in our distribution center with wages, and you see that at least in the first quarter, we had good productivity gains. So both of those, we believe, we can track back over time, again, depending on the macro economy when it comes to fuel prices on freight.

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