Ross Stores Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 28, 2023

There are 15 speakers on the call.

Operator

Afternoon, and welcome to the Ross Stores 4th Quarter and Fiscal 2022 Earnings Release Conference Call. The call will be given with prepared comments by management followed by a question and answer Before we get started, on behalf of Ross Stores,

Speaker 1

I would like to note that the comments made on

Operator

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. Session. 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 ks and fiscal 2022 section. Form 10 Qs and 8 ks on file with the SEC.

Operator

And now, I'd like to turn the call over to Barbara Rentler, Chief Executive Officer.

Speaker 2

Joining me on our call today are Michael Hartshorn, Group President and Chief Operating Officer Adam Orbos, Executive Vice President and Chief session and Connie Kao, Group Vice President, Investor Relations. We'll begin our call today with a review of our Q4 2022 performance, followed by our outlook for 2023. Afterwards, we'll be happy to respond to any questions you may have. As noted in today's press release, during a very competitive holiday season, our 4th quarter sales and earnings results session. Exceeded our guidance due to customers' positive response to our improved assortment and stronger value offerings.

Speaker 2

Earnings per share for the Q4 were $1.31 on net income of $447,000,000 These results compared earnings per share of $1.04 on net earnings of $367,000,000 for the 13 weeks ended January 29, 2022. Sales for the Q4 of 2022 For $5,200,000,000 with comparable store sales up 1% on top of a 9% increase for the same period in 2021. For the 2022 fiscal year, earnings per share were $4.38 Our net income of $1,500,000,000 compared to $4.87 per share on net earnings of 1 point $7,000,000,000 in 2021. Sales for 2022 were $18,700,000,000 With comparable store sales down 4% versus a robust 13% increase in the prior year. 4th quarter operating margin was 10.7% compared to 9.8% in 2021.

Speaker 2

This improvement was mainly driven by lower freight and incentive costs that were partially offset by unfavorable timing of Packaway related expenses. Now let's turn to additional details on our 4th quarter results. For the holiday selling season, was the best performing merchandise area, while Florida was the strongest region. Similar to Ross, dd's discount sales trends improved compared to the prior quarter, but continue to trail Ross' results primarily due to ongoing inflationary pressures that are continuing to have a larger impact on DD's lower income customers. Inventory levels moderated significantly from the first half of 2022 with consolidated inventories down 11% versus last year.

Speaker 2

Session. Average store inventories during the quarter were down slightly compared to 20 21's holiday period, while Packaway merchandise represented 40% Total inventories similar to last year. We also believe we are well positioned to take advantage of the numerous buying opportunities in the marketplace. As noted in today's release, the company repurchased a total of 2,100,000 and 10,300,000 shares of common stock, respectively, for an aggregate purchase price of $231,000,000 in the quarter $950,000,000 for the fiscal year. These purchases were made pursuant to the 2 year $1,900,000,000 program announced in March of 2022.

Speaker 2

We expect to complete the $950,000,000 remaining under this authorization in fiscal 2023. Our Board also recently increased our quarterly cash dividend by 8% to $0.335 per share to be payable on March 31, 2023 to stockholders of record as of March 14, 2023. Our stock repurchase and increased dividends programs reflects our continued commitment to enhancing stockholder value and returns as well as our confidence in the strength of our balance sheet and projected future cash flows. Now Adam will provide further details on our 4th quarter

Speaker 3

Thank you, Barbara. As previously mentioned, comparable store sales rose 1% for the quarter on top of a 9% gain in the prior year. This slight increase was due to growth in the size of the average basket as traffic was relatively flat compared to last year. As Barbara discussed earlier, 4th quarter operating margin of 10.7% was up 90 basis points from 9.8% in 2021. Cost of goods sold grew 15 basis points versus last year due to a combination of factors.

Speaker 3

Distribution expenses rose 90 basis points, primarily due to timing of Packaway related costs session and deleverage from the opening of our Houston distribution center earlier in the year, while domestic freight and occupancy delevered by 20 and 5 basis points respectively. Partially offsetting these costs was higher merchandise margin, which grew by 15 basis points as the benefit from lower ocean freight costs more than offset somewhat higher markdowns. Buying expenses also improved by 85 basis points due to lower incentive compensation. SG and A for the period levered by 105 basis points, again, primarily due to lower incentive expense. Session.

Speaker 3

Now let's discuss our outlook for fiscal 2023. As Barbara noted in our press release, session. The macroeconomic and geopolitical environments remain highly uncertain. As a result, we believe it is prudent to remain conservative when planning our business. While we hope to do better for the 52 weeks ending January 27, 2024, we are planning comparable session.

Speaker 3

If sales perform in line with this plan, we expect earnings per share For 2023 to be in the range of $4.65 to $4.95 compared to $4.38 in fiscal 2022. It is important to note that fiscal 2023 is a 53 week year. Incorporated in this guidance range is Estimated benefit to earnings per share of approximately $0.15 from the extra week. Our guidance assumptions for the 2023 year include the following. Total sales are planned to grow by 2% to 5% for the 53 weeks ending February 3, 2024.

Speaker 3

Session. Comparable store sales for the 52 weeks ending January 27, 2024 are planned to be relatively flat. Based on these sales plans, operating margin for the full year is expected to be in the range of 10.3% to 10.7%. This reflects the resetting of the baseline for incentive compensation, higher wages, session. Also incorporated in this operating margin guidance It's an estimated benefit of about 20 basis points from the 53rd week.

Speaker 3

For 2023, We expect to open approximately 100 new locations comprised of about 75 Ross and 25 dd's discounts. As usual, these openings do not include our plans to close or relocate about 10 older stores. Net interest income is estimated to be $115,000,000 Depreciation and amortization expense, Inclusive of stock based amortization is forecast to be about $570,000,000 for the year. The tax rate is projected to be about 24% to 25% and diluted shares outstanding are expected to be approximately $339,000,000 In addition, capital expenditures for 2023 are planned to be approximately 810,000,000 As we make further investments in our stores, supply chain and merchant processes to support our long term growth session and to increase efficiencies throughout the business. Let's turn now to our guidance for the Q1.

Speaker 3

Session. Elevated inflation continues to impact our low to moderate income customer. As such, we are also planning Comparable store sales to be relatively flat for the 13 weeks ending April 29, 2023. This compares to a 7% decrease And a 13% gain in the 1st quarters of 2022 2021 respectively. If sales perform in line with this plan, we expect earnings per share for the Q1 of 2023 to be $0.99 to $1.05 versus $0.97 last year.

Speaker 3

The operating statement assumptions that To support our Q1 guidance include the following. Total sales are planned to be up 1% to 4% versus last year's Q1. We would then expect Q1 operating margin to be 9.6% to 9.9% compared to 10.8% last year. The expected decline reflects the deleveraging effect if same store sales perform in line with our plan, unfavorable timing of Packaway related costs session and higher wages. Further, merchandise margin is forecast to benefit from lower freight costs.

Speaker 3

Session. We plan to add 19 new stores consisting of 11 Ross and 8 dd's discounts during the period. Net interest income is estimated to be $28,000,000 Our tax rate is expected to be approximately 24% to 25% session and diluted shares are forecast to be about 341,000,000. Now I will turn the call back to Barbara Rentler for closing comments.

Speaker 2

Thank you, Adam. To sum up, over the past 3 years, we have faced a wide range of unprecedented challenges from the COVID pandemic, session. These factors have not only negatively impacted our own business, session, but also our customers' household budgets, their discretionary income and their shopping behaviors. As a result, our shoppers today are seeking even In response, our merchants are fine tuning our assortments with an increased focus on delivering the most competitive bargains available, while continuing to adjust our product mix based on our customers' evolving preferences. Looking ahead, we have significantly increased our focus on Strictly controlling inventory and operating expenses throughout the company.

Speaker 2

We strongly believe that these measures will enable us to maximize our potential for both sales and profit growth in 2023 and beyond. At this point, we'd like to open up the call and respond to any questions you may have.

Speaker 1

Session. Thank you. One moment while we poll for questions. And our first question comes from the line of Lorraine Hutchinson with Bank of America. Please proceed with your question.

Speaker 4

Thank you. Good afternoon. I wanted to

Speaker 5

ask about freight, both of the components Within gross margin, how much recovery do you have baked into your guidance for this year versus pre COVID levels? And then how much opportunity remains for the next year and the year after.

Speaker 3

Yes. So Lorraine, this is Adam. Thanks for the question. Related to merchandise margin, Q1 fiscal 2023 will clearly benefit from lower ocean as we anniversary the significantly higher cost from last year. While these costs will drop, They'll likely still be higher than pre pandemic levels in the short term.

Speaker 3

But on the ocean side, they've clearly dropped dramatically And we'll harvest a significant portion of the increase we've faced over the last 3 years. On the domestic side, Because of wages, elevated wages and still higher fuel costs than pre pandemic, we'll harvest back Some of the domestic freight, but not as tangible in 2023 as it will be on the ocean side.

Speaker 5

Session. You'd say some opportunity will remain for fiscal 2024?

Speaker 3

Probably not prudent to go that Far ahead, but it clearly will be a tailwind on both sides for us in 2023 and depending on how much they move in 2023 that session. Okay. Then I'll kind of see what's left for 2024.

Speaker 4

Thank you.

Speaker 1

And the next question comes from the line of Matthew Boss with JPMorgan. Please proceed with your question.

Speaker 6

Great, thanks and congrats on a nice quarter. So Barbara, on 4th quarter same store sales inflecting back to positive territory, maybe can you just speak to the cadence of traffic that you saw during the quarter. And then on the outlook for flat comps in both 1Q and for the year relative to session. Historically, a 1% to 2% starting plan. Have you seen a material change in customer behavior post holiday?

Speaker 6

Or is this More just taking a prudent stance given the volatility that you cited.

Speaker 2

Okay.

Speaker 7

Matthew, hi. It's Michael Hart session. On the guidance for the Q1 as we said in our commentary, with the lasting inflation And highly uncertain macro economy ahead of us, we firmly believe it's prudent To be conservative in planning the business internally this puts us in a chase mode to start the year Both from an inventory open to buy perspective and in managing the underlying costs in the business, It's a playbook that we're familiar with, we know well and believe it will allow us to, as we said in the commentary, session. Maximize both the top line and the bottom line in an uncertain environment and we'll have to see how it plays out for the year. In terms of traffic data, As we said in the commentary, traffic was relatively flat in the quarter and that was relatively consistent across for Q4.

Speaker 6

Great. And then maybe just a follow-up on gross margin. So if we exclude the freight recovery, How are you thinking about underlying merchandise margins within this year's guide? Meaning, is there any impact we need to think about with some of the changes in mix that you cited, maybe how best to think about price. I mean, what I'm really trying to get at is beyond this year, do you think there's any structural underlying change Double digit earnings growth in this model, if we can get back to that 3% to 4% comp algorithm?

Speaker 7

Session. Let me talk a little bit about the long term operating model. We certainly with ocean freights coming down, we would expect session. A big benefit this year. Longer term, the margin improvements will be highly dependent on sustained strong sales growth, but also As we mentioned to a large extent the persistence in the inflationary costs in the business.

Speaker 7

We again expect to see ocean freight costs receding this year, but they still remain above pre pandemic levels in a number of transportation lanes. So that could be a benefit beyond 2023. We also expect to see lower domestic session. Freight rates this year and that's embedded in our guidance, but we see these pressures easing over a longer horizon And is somewhat dependent on fuel costs. Wage costs have risen, but are growing at a slower pace than they did during the pandemic.

Speaker 7

We expect from a wage perspective that it will be an ongoing pressure, but we are finding ways to be more efficient in the business that's offsetting some of those costs. So all of those taken together, we believe we can grow our EBIT margins and profitability over session. But it would be very important to drive top line sales growth in that equation.

Speaker 1

And the next question comes from the line of Mark Altschwager with Baird. Please proceed with your question.

Speaker 8

Session. Great. Thanks for taking my question. In terms of the competitive backdrop, some of the bigger general merchandise retailers look session. Leaner on inventory, especially apparel and discretionary categories heading into the spring.

Speaker 8

Just curious how that's incorporating into your thinking session on comps and potential for some recapture of market share cycling last year. Thank you.

Speaker 2

Session. Sure. I think then pulling back on general merchandise Potentially gives us an opportunity to grow those businesses since they're such a big part of our business. But I really think regaining, Capturing market share, however we want to say that, really depends on us driving sales and we think that the best way to drive sales Is for us to continue to focus on value for our customer. I mean that's really what helped us perform in the 4th quarter session.

Speaker 2

It's really making sure that we're delivering the best branded bargains possible throughout the entire store and that really is our focus. That compounded with the fact There's a lot of merchandise in the marketplace, which will enable us to do that. I think that's really what will help us gain back that market session. Whether it's coming from a big box or it's coming from other parts of retail department stores wherever it is, I think that's really the key for our success go forward to drive top line sales. Session.

Speaker 1

Thank you. Our next question comes from the line of Paul Lejuez with Citigroup. Please proceed with your

Speaker 8

question. Session.

Speaker 9

Hey, thanks guys. Are you seeing any signs of a trade down customer showing up in your stores? I know you said session. Transaction's traffic was flat, but curious if the customer base is changing at all or maybe you're seeing set. Some higher income folks show up, maybe some of the lower income folks shop less.

Speaker 9

And also curious how you're thinking about the drivers of comp in F 23 from a traffic versus ticket perspective. Thanks.

Speaker 7

Carl, on the Trade down customer, there isn't what we see in our data a material shift in spending trends across the different income demographics. So At this point for us we don't see any evidence that the trade down that there is that trade down customer and it's impacting our business. On how we're thinking about the business going forward, we don't typically plan the business based on components of the Transaction as Barbara said our focus is on value and off price value will session. It will lead to a higher basket if you offer great deals to the customer and that's how we're thinking about the business going forward.

Speaker 9

Got it. And can you please share what your home versus apparel comps were in 4Q? Also curious about session. California, Florida, Texas performance.

Speaker 2

Sure. The home sales were slightly above the chain average And then overall apparel, non apparel performance was relatively similar. And the thing that part of what's really drove Home is that Home has the highest penetration of gifting and that part of our business performed well.

Speaker 3

And Paul on the geography side, Florida as we mentioned it was the strongest market. Session. Regarding our other large markets, California performed slightly above the chain average and Texas Track in line with the change average. With all that said, we did not see

Speaker 9

a lot of deviation in

Speaker 3

the numbers by geographic area.

Speaker 9

Session. Got it. Thank you. Good luck.

Speaker 3

Thanks.

Speaker 1

And the next question is from the line of Michael Binetti with Credit Suisse. Please proceed with your question.

Speaker 10

Hey guys, thanks for taking our questions here. Could you unpack how you're thinking about session. The merch margin excluding the freight here for the year, I guess, the product margin, just trying to think just trying to marry up what you guys are seeing on inventory buys session and how pricing can lead us to the product margin this year. And then I guess a pretty simple one, Michael, when you guys think about the puts and takes on or Michael or Adam, I should say, puts and takes on the margins and the buckets that you pointed to, resetting the incentive comp to higher wages, session. The flat in store sales impact and the lower freight costs, can you speak to how the upside would flow through on a point of comp this year?

Speaker 10

I know you always give us some the framework of about 15 basis points, I think, from memory. What's better in the composition of the model this year? What's worse than normal on a point of upside in the comp?

Speaker 7

Michael, you got it exactly right. One point of comp is approximately 10 basis points to 15 basis points of EBIT session. Margin expansion, so that hasn't changed.

Speaker 3

And Michael, I'll jump in. So like on operating margin, The moving parts in 2023, so first of all, we're planning the flat comp, which will cause some amount of deleverage. As you mentioned, we have to reset our incentive cost at target levels. So 2022 was clearly an underperforming year for us and that on top of 2021 where we significantly over performed our plan. So for 2023, we will reset that session.

Speaker 3

Michael mentioned earlier, we've seen wage increases both in our stores and our distribution centers. And While that's easing, we've not been able to fully mitigate those increases within the stores by driving other efficiencies. And then by earlier comments on freight, we expect good news on both sides,

Speaker 2

session. And then in terms of buying, Michael, session. I know you know there's a lot of merchandise out in the marketplace, but the way we're looking at that now is we are really highly focused on value session and giving our customers the best value possible. And so that very much depends on our mix, on the buys, what we're doing and session. Really driving broad based across the company, I can't emphasize this enough, the best value possible that we can session.

Speaker 2

Because that really our customer is under such inflationary pressures that it definitely is impacting our spend and so her discretionary spend. And so that's really how we're thinking about that, making sure that our values are correct and that we have a good, better, best strategy session. And that she really feels great about what she buys and that it's compelling to come to the store. And so those Based on the brands that we have out there, so that she can really get the value that she's come to expect from us. Session.

Speaker 10

Barb, could I chase that with a question on how you think about what are the biggest opportunities that you see to go after some market share this year to help session. If there is an opportunity to drive comp above flat, maybe it's from the ability to compete better or anything that stands out to you early in the year?

Speaker 2

Session. I think there's a well, I think there's a few things. Just internally, we had our own internal issues obviously last year within our assortments. Session. So correcting those issues right now is important to us just from a balance and mix perspective.

Speaker 2

Session. Based off of the carrier issues and the things that went wrong last year, I think that's probably 1st and foremost getting that corrected. And then really rightsizing again our values session that we're offering the customer and understanding what our pricing strategy really is and hitting all three customers. And outside of that is, if we execute better, history would tell us and we chase, which is what we do best, in a time when there's a lot of merchandise in the market, session. We should be able to drive sales and take market share and that market share as you know can come from any session.

Speaker 2

Bucket of merchandising now since everyone is, whether it's big boxes or everyone is in the game now. So I think that's kind of the formula for us is to correct our issues from last year, to get our value straight and so that the customer really is getting a great deal maximizing those closeouts in the market. And listen, remembering, we have a very large merchant team. We have 900 merchants and strong relationships in the market. So now is the time for us to maximize on that And to really give the customer what she's come to expect from us and to get ourselves set.

Speaker 2

And if we do those things, then I think we will get ourselves on the track we want to be on and continue to grow and gain market share.

Speaker 8

Thanks a lot, I appreciate it.

Speaker 1

Session. Our next question comes from the line of Alex Stratton with Morgan Stanley. Please proceed with your question.

Speaker 5

Session. Great. Thanks so much for taking my question here. It sounds like sales recovery is key to returning to pre COVID margin and the earnings algorithm. But are you exploring ways to kind of offset that while top line growth is underperforming that typical algorithm?

Speaker 5

Maybe put differently, what specific levers do you have in COGS or SG and A to offset some of the freight and wage headwinds you're seeing this year? I I know you mentioned some efficiencies, but any examples there or levers broadly would be helpful to hear. Thank you.

Speaker 7

Sure. You'll see in our Capital spend this year, we have about $810,000,000 included in that and one of the biggest increases There are technology investments that we're making and some examples of that would be automation in our distribution centers. It would be looking at store level activities and providing technology to make those more efficient In all of our stores, for instance, how our associates mark down goods, how they receive in the backroom And making sure we can continue to have associates focusing on customer facing activities. So those are a few of those examples And we have as we have over the years have a roadmap of efficiencies that we'll continue to Work on as an organization and drive into the P and L.

Speaker 1

And the next question comes from the line of Ike Boruchow with Wells Fargo. Please proceed with your question.

Speaker 8

Session. Hi, everyone. This is Jesse Sobelson on for Ike. I believe at the beginning of last year's 1st The buying environment was just beginning to turn into a tailwind for you guys. So how does the environment look today versus this time last year and then versus maybe 6 months ago?

Speaker 8

Session.

Speaker 2

Sure. The buying environment right now session. I mean, there's a lot of merchandise. It's very broad based. Session.

Speaker 2

It's across all different classifications and types of products. So the buyer environment is probably as good as it gets right now. I would say that that environment has been there though for the last few months and started at the beginning of last year, just timed perhaps differently, session. Depending upon what type of product it was and when it came in, all going back to the carrier issue, right? So session.

Speaker 2

Everyone was kind of vendors were kind of late in receiving their goods because people couldn't really control the way the freight came in. So It's been here for a while. I would think at this point in time, a lot of stores have promoted to get their inventories in line session. But the vendor community still has a lot of merchandise that they'd like to move through, and take them forward to newness to the session. So I think it's very good now.

Speaker 2

I think it's been good and I think it'll be good for a while as the vendors are trying to work through that And understand what that looks like and then understand what kind of inventory position they want to take go forward as opposed to having a resultant session coming from the carrier issues that everybody kind of felt at the same time. So

Speaker 8

Great. Thank you.

Speaker 1

And the next question comes from the line of Adrienne Yih with Barclays. Please proceed with your question.

Speaker 11

Session. Great. Thank you very much. First, just a housekeeping. Is it fair to use $200,000,000 to $250,000,000 in sales for that 53rd week?

Speaker 11

And then, Barbara, I think maybe this is for you. What is the issue with sort of the packaway timing? And I know packaway ended up at 40%, session. But that's still below kind of run rate norm. And I'm just thinking if the environment is super conducive, would you not want to kind of have that short stay?

Speaker 11

Because I know you guys Do it more on a 4 month or less or whatever shorter duration? And the last one is for the shrink. I think you do it once a year, but what's strength as a percent of sales in a normal backdrop? Where is it today? Thank you so much.

Speaker 11

Sorry to interrupt.

Speaker 2

Session. Okay. No problem. So the pack weighs 40% are all deals that we feel very, very good about. Session.

Speaker 2

Yes, remember that in the beginning of last year and you'll see this as we go along, we had all those late goods session that were home goods that we took into our DCs, which would have increased part of our Packaway. The 40% that we have in there right now, we feel very good about. Session. And buying PACWAY is an art. You can buy a lot of PACWAY anytime you want, right?

Speaker 2

But the PACWAY you put in there, you have to feel session. It's great product at great values. And right now with the buying environment being very favorable with really quite frankly session. Broad access to some really key brands, you can be very judicious about what you put in Packaway and how you time that and what that looks like. So I'd say we feel good about the position we're in today.

Speaker 2

We have a tremendous amount of liquidity and we really feel like we're in a good place.

Speaker 7

Session. Very helpful. Adrienne, on shrink, so our shrink, we don't disclose what it is session. But it is a place where we constantly invest whether it's security tags or new equipment in the stores. If you've been in our stores, you see we have people in front of the store and our shrink was slightly higher session this year as we closed out the year.

Speaker 3

And Adrian

Speaker 2

Yes, go ahead.

Speaker 8

Well, I was just going to jump in on

Speaker 3

the session. 53rd week, so a little bit higher than what you said. You can think about it as an additional week, somewhat pro rata, but then session. Downward calibrated a little bit that it's call it January, February week and lighter than an average week.

Speaker 2

Perfect. Thank you very much and best of luck.

Speaker 12

Thank you. Thank you.

Speaker 1

And the next question comes from the line of Chuck Grom with Gordon Haskett. Please proceed with your question.

Speaker 8

Hey, thanks very much. Curious if stores in higher demographic Markets performed better than stores and lower income demographic markets. And the second follow-up, there's a lot of talk about snap cuts next month and lower tax session. Refunds this year versus last. Curious how much of a potential headwind that could be for you guys over the next couple of months?

Speaker 1

Session. Yes, we'll have

Speaker 7

to see. On the tax refunds, they just started to come out last week and that does have an impact, especially for DD's business, but we'll have to session. We certainly, where we're coming into it that the tax refunds could be lower. So we'll have to see how it plays out. But certainly that is a customer that can be impacted by both the tax refunds and the SNAP benefits.

Speaker 7

Session. On your other question, I think you asked the question around demographics. And I think I answered this earlier with Paul. We have not seen a material shift in spending across different income demographics.

Speaker 1

And the next question comes from the line of Brooke Roach with Goldman Sachs. Please proceed with your question.

Speaker 13

Barbara, it sounds like you continue to see opportunities to right size the value that you offer the consumer to go after that market share session. Can you talk a little bit more about the actions that your buying team can take to ensure that you're offering that value? And can you contextualize that with the higher rate of markdowns that you also saw in the quarter? Thank you.

Speaker 2

Sure. Well, obviously, when there's a lot of merchandise in the marketplace, the buyers are out looking for really great deals. So it starts with being in the market, Having good relationships and really getting the deals at the prices that the customer wants and then offering that value to the customer. Session. So I think that's critical for what's going on in the world today.

Speaker 2

It's always been critical for us delivering branded bargains And I think today it's even more important than it's been before. In terms of just Rightsizing the value just as a concept of rightsizing the value, I think that's really session. From putting things out there and watching things turn, watching things watching the customer vote And then making the adjustments based off of what she's telling us, whether it's in the assortment and the products that she wants or whether it's in the retail session. That we put it in. And Brooke, what was the second question?

Speaker 13

The second question was just how to think about the session. Time line of getting that on from a markdown perspective. It sounds like making those adjustments does require some markdown. And so does the markdown have to session. Increase year on year as you move through 2023.

Speaker 2

No, no, no. We took okay, I understand. So, we took somewhat slightly higher markdowns in the 4th quarter And we made sure that when we came out of the Q4 that we really came out of everything clean, that we took everything and if The value wasn't right. We didn't wait. We took markdowns.

Speaker 2

They were somewhat higher. They weren't that much higher. They were somewhat higher. And so if you're rightsizing your values going forward, you wouldn't expect to be taking additional markdowns. The key session.

Speaker 2

So if we have the right values and we return quick enough, we'll drive receipts, which will drive sales, which will session. Put us in a healthy position.

Speaker 4

Thank you.

Speaker 1

And our next question comes from the line of Dana Telsey with the Telsey Group. Please proceed with your questions.

Speaker 4

Good afternoon, everyone. As you think about the real estate portfolio and the stores, we obviously have heard about some of the space availabilities from a Bed Bath or a Party City. Is this an opportunity for you? And does it all change the cadence of store openings or the locations or regions for either 2023 or 2024 in your outlook. Thank you.

Speaker 7

Hi, Dana. Certainly Bed Bath, Mian and Party City like they have been historically anytime there's retail bankruptcies that's provided us Opportunities for new store locations, I would say at this point it hasn't changed our outlook. We will review session. Potential new site on a store by store basis and if it's appropriate for Ross and Didi's location, session. We can certainly add it to our portfolio.

Speaker 7

But as we think about 2023, as we said in the commentary, we think About 100 new locations, about 75 Russ and 25 Peoples.

Speaker 4

Got it. And then Barbara, just on the category mix, session. What was the weakest and what do you see as opportunities on the category side as we go through 2023? Thank you. Session.

Speaker 2

The business pretty much performed at The same level. I mean, obviously, some things are better. I mean, home and gifting with very good shoes was very good. But if I look at shoes from a 2 year basis, The year before we had carrier issues, which also helped us to drive some sales this year. I think the key is to get the category mix session.

Speaker 2

And I think last year with the carrier issues and with some of the things that went on in our assortments that we didn't have that. So I think now it's really identifying what she wants, making those moves to ensure that we are delivering the session. Products that she's moving towards as things continue to evolve in her assortment and just session. We're making sure we're making moves quick enough, fast enough. And the advantage when there's a lot of goods in the marketplace, it allows you To do more of these things and oftentimes, sometimes be able to make some bolder moves.

Speaker 2

So I think, that's kind of how I'm thinking about it. I'm thinking about just getting our inventories session. And classifications in line and then more fine tuning to what if we were talking about this a few months ago, we would be saying, session. People now want career pants versus casual, right? But I'm thinking more broader that with all the carrier issues that went on and delivery issues and everything else, session.

Speaker 2

That things were not exactly the way we would like them to have been even if we wanted them to be there. It just it wasn't balanced. So I think that's our number one thing is getting ourselves back in line. We made a lot of those moves into the Q4 and getting ourselves repositioned where we want to be. And then going again hand in hand with making sure we come in clean into the year clean from session.

Speaker 2

And then giving ourselves the flexibility to go in the market and buy it the way the customer wants it and sees it.

Speaker 4

Thank you.

Speaker 1

And our next question comes from the line of Simeon Siegel with BMO Capital Markets. Please proceed with your question.

Speaker 9

Thanks. Hey, good afternoon. Could you discuss what like for like AUR look like versus session. And then a dumb question, I think interest income came in nicely higher this quarter. And if I heard correctly, I think you're expecting a pretty nice jump session or a nice number this year as well.

Speaker 9

Is that just a function of higher rates and does it impact your capital return strategy and maybe just given how large the cash balance is, any broader thoughts on your use of cash with all the moving pieces. Thank you.

Speaker 7

Sure. The interest income is entirely driven by our cash balances That's invested in government backed securities. So as interest rates have risen, we're getting a benefit there. In terms of how we're thinking about use of cash, and I guess just general capital allocation, We will, as we always do, first invest in the business to support profitable growth. We also session.

Speaker 7

Plan to pay down COVID related debt that begins to mature over the next few years in 2024 and 2025 is when those first session. And then we'd expect to grow our shareholder payouts as the business grows, as I said, deliberately over time and we do that in a very deliberate and reliable manner over time.

Speaker 2

Session. And then in terms of our AUR, our AUR has been relatively flat despite all the different shifts session. This is coming up because obviously Shoes has a higher AUR than, some of our other businesses. So that's really where we stand today, how we're thinking about it.

Speaker 3

Session. Great. Thanks a lot. Best of luck for the year.

Speaker 12

Thank you.

Speaker 1

And our next question comes from the line of Jay Sole with UBS. Please proceed with your question.

Speaker 8

Great. Thank you so much. I'm wondering if you can elaborate a little bit on some of the higher wages that you mentioned as a driver of the session. EBIT margin in the Q1 this year, can you just talk about the impact on what you're seeing at a store level versus like say at a warehousing level versus at a corporate level? That would be helpful.

Speaker 8

Thank you.

Speaker 7

Session. Sure. I mean it's been a competitive market across all three of those for some time. What we saw during COVID is the Biggest pressure we had was in the distribution center line item and that we've seen The pressure there slowed down considerably. And for the stores, we continue to take a market by Market approach to staffing them and increasing wages where appropriate.

Speaker 7

In addition, as you know, there's growing statutory minimum wages session. For us in almost half of our store base and that includes both statewide and local municipality minimum wages. But overall, it's really driven, at this point by those minimum wages increases. I would say we feel good about the workforce in totality and are confident about what we have in place for the year.

Speaker 8

Session. Okay. Thank you so much.

Speaker 1

And our next question comes from the line of Laura Champine with Loop Capital. Please proceed with your question.

Speaker 14

Crossing my fingers you'll answer this one, but are you currently trending in line with your Q1 guide?

Speaker 7

We wouldn't. Our practice is Laura, does not comment on inter quarter trends.

Speaker 14

Understood. Is the guidance for the full year comp to be flat? Would that assume that traffic is Roughly flat this year?

Speaker 7

We again, we don't plan the business around traffic or transaction. Session. Our view has always been if we provide the great branded bargains to the customer that will be a combination of 1, bringing more customers to the store and 2, when they're in the store, increasing the size of the average basket. What's happened over the Last several years is that basket has grown and even into last year on top of the stimulus year session. The customer is buying more when they're coming to the

Speaker 12

store. Okay. Let me see if I

Speaker 14

can get this one. Session. The gross margin and this is last. The gross margin commentary that you've made, Is that consistent with taking more markdowns this year for the year as a whole compared to last year?

Speaker 3

Session. Laura, we don't guide really at that component level of merchandise margin, but obviously our markdown Those will be highly dependent on if we deliver our sales plan and buy the right goods. The biggest moving part as we said session. The merchandise margin will be the ocean freight cost reductions that we're seeing in the marketplace.

Speaker 14

Understood. Thank you.

Speaker 1

And our next question comes from the line of Anisha Sherman with Bernstein. Please proceed with your question.

Speaker 13

Thank you. So the comp guidance for the full year implies a 4 year stack of 10, a CAGR of Just over 2, which is quite a bit lower than your historical pre COVID performance. Do you still believe in the medium term algo being kind of a little bit higher than that around 3% comp algo or is there something structural about the comps that you think will decelerate even beyond this year? And then, Michael, you talked about the sensitivity of margins to comp, but with higher wages now embedded into your cost structure, Has that sensitivity changed or is it still a similar sensitivity as what you've talked about in the past?

Speaker 7

Hi, Anisha. On the guidance, session. It's hard to comment on structural in this environment. As we guide the year, it's really a section of us wanting to be very conservative in a blasting inflationary environment and session. A macro economy that we'll see how that plays out later in the year.

Speaker 7

So I don't think there's anything to read into that at this point. Obviously, we session. Hope to beat the guidance. We think it's a good way to run our business in an uncertain environment. In terms of the long term algorithm, it certainly doesn't change.

Speaker 7

As I said earlier that A beat to comp is 10 to 15 basis points upside. And then longer term, we think if we can grow the 3% to 4% session. As we did historically prior to COVID, that we'll be able to leverage the P and L.

Speaker 13

Okay, that's helpful. Thank you.

Speaker 1

Session. And our final question comes from the line of Cory Tarlow with Jefferies. Please proceed with your question.

Speaker 12

Session. Hi, good afternoon and thanks for taking the question. You mentioned that shoes had done pretty well a few times. Is there any way to parse out maybe whether it was session. Informal or casual, what did better?

Speaker 12

And then I know availability is quite robust, but across your good, better, best strategy, Is there any particular segment within those 3 that's maybe you're seeing a little bit better availability? And then just lastly on session. CapEx, historically, you're usually around I think like $500,000,000 or so in CapEx. And now I think in this year, you're expected to do 800,000,000 session. And in this coming year as well another $800,000,000 So could you just parse out maybe what the incremental spend is really going to be?

Speaker 12

I know you talked a little bit about automation, but just curious what else there is in there. Thank you.

Speaker 2

So let me start with shoes. So the shoe business It's pretty broad based. I would say that athletic performed slightly better than Brown shoes, but the shoe business again, session. Industry had issues delivering Mirfimera in 2021 with the whole carrier issue. So it is pretty broad based session.

Speaker 2

And meeting customers' demands that they want not just athletic, but other Brown shoes to wear. That's the first thing. In terms of good, better, best, The availability is pretty broad based in all three buckets. So, I think that's session. A little unusual, but that is what that's kind of going on out there right at this moment.

Speaker 3

And Cory, on CapEx, So our $810,000,000 will roughly be 40% new and existing stores, 40% distribution centers and about 20 session. And I would say with our new store opening plan of 100 new stores that session. Those levels are consistent with pre pandemic levels. From a mix standpoint, the distribution session line probably a little bit inflated as we ramp up capacity to support our long term growth and session. The technology side is a ramp up as we're making investments, not only from a customer convenience standpoint in the stores, but also building capabilities and additional tools in the merchandising organization.

Speaker 12

Session. Great. Thank you very much. Best of luck.

Speaker 3

Thank you.

Speaker 8

And at

Speaker 1

this time, we have reached the end of the question and answer session. And I would like I'll turn the call back over to Barbara Rentler for closing remarks.

Speaker 2

Thanks for joining us today and for your interest in Rostov.

Speaker 1

That concludes our conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.

Remove Ads
Powered by Quartr
Earnings Conference Call
Ross Stores Q4 2023
00:00 / 00:00
Remove Ads