The Ross Stores Second Quarter 2023 Earnings Release Conference Call began with remarks from Barbara Rentler, Chief Executive Officer. Total sales for the period were $4.9 billion, up from $4.6 billion the previous year, while comparable store sales rose 5%. Earnings per share for the 13-weeks ended July 29, 2023 were $1.32 on net income of $446 million, exceeding expectations. Management discussed their expectations for future growth and financial results, and then opened the call up to questions.

In the second quarter of fiscal 2023, Ross Stores reported earnings per share of $1.26 on net income of $426 million, compared to $1.11 per share on net earnings of $385 million in the prior year. The first six months of the year saw earnings per share of $2.41 on net income of $818 million, compared to $2.08 on net earnings of $723 million. Sales during the year-to-date period were $9.4 billion with comparable sales up 3% versus a 7% decline in the prior year. Cosmetics and accessories were the strongest merchandise areas during the quarter, while Ross and dd's DISCOUNTS both saw improved performance due to better merchandising and moderating inflation. At quarter end, total consolidated inventories were down 15% and average store inventories were up 4%. 18 new Ross and nine dd's DISCOUNT locations were opened in the second quarter, with plans to open a total of approximately 100 locations this year.

In the second quarter, the company experienced higher buying expenses and SG&A costs due to higher incentives and store wages, but they still repurchased 2.2 million shares of common stock for $230 million. For the remainder of the year, they are planning for sales to be up 2-3% for the third quarter and 1-2% for the fourth quarter, with earnings per share projected to be $1.16 to $1.21 and $1.58 to $1.64 respectively. They are also planning to open 51 stores during the third quarter, including 43 Ross and 8 dd's locations.

Operating margin for the third quarter is expected to be in the 10.3%-10.5% range, with net interest income estimated at $34 million and a projected tax rate of 25%. Barbara Rentler mentioned that the company is pleased with their above-plan results, and they will continue to deliver the most compelling bargains possible to their customers. They will also manage their expenses and inventory to maximize potential for sales and earnings growth.

Adam Orvos and Barbara Rentler both spoke to trends in the second quarter. Orvos reported that comps were strong across the quarter, with traffic being the primary driver of the 5% comp. Rentler noted that merchants are providing better-branded value bargains to customers, as they are responding to the availability in the market. In response to a follow-up question, Orvos stated that operating margin components in the third quarter will be similar to the second quarter, with ocean freight being a significant tailwind.

In the fourth quarter of last year, ocean freight costs began to moderate and domestic freight costs decreased by 60 basis points. Incentive costs were a headwind in the second quarter but will still be a factor in the third and fourth quarters. To achieve long-term growth, strengthening price-value offerings across the entire assortment is key and there are opportunities throughout the P&L to help drive comp growth and EBIT margin expansion. Markdowns should also decrease in the second half, assuming sales expectations are met.

Adam Orvos and Michael Hartshorn answered questions from Bank of America's Lorraine Hutchinson about SG&A and wage pressures. Orvos stated that a 4% comp is needed to leverage SG&A, and Hartshorn mentioned that wages are relatively stable and that wage growth is dependent on the statutory environment. Finally, Mark Altschwager asked about the confidence of returning to 3%+ comps next year, to which no answer was given.

Adam Orvos and Barbara Rentler discussed how Ross Stores is working to offer customers the best value possible in the uncertain economic environment. They believe that by offering a good-better-best strategy and incredible values they can gain more customers across all income demographics. Chuck Grom then asked about the home category, and Adam and Barbara mentioned that cosmetics and accessories were areas of strength.

Barbara Rentler discussed the growth potential in the home category, noting that it is performing above the chain average and that there may be opportunity to pick up more volume in the future. She also pointed out that the home category is starting to form a base after several quarters of attrition and that the growth potential depends on how developed the home business is.

Chuck Grom asked a question about the value equation for the home business and Michael Hartshorn answered that dd's performance improved during the quarter compared to Ross, but still trailed Ross due to the lower average household income of dd's customers. The strategy for dd's is focused on offering strong values which is important to the customer. Adrienne Yih then asked Barbara about the pack-away merchandise which was a shade lower than last year.

Michael Hartshorn responds to a question about the transportation mix of ocean freight and domestic transportation, explaining that ocean freight has a larger impact than domestic transportation, and that fuel rates have been lower than expected. Barbara Rentler then explains that the mix of short-stay and long-stay packaway products fluctuates based on the best possible deals they can get for customers.

Barbara Rentler discussed the opportunity to continue to improve their assortment, but there was no significant change in their good-better-best strategy. She also mentioned that they do not typically bring in their own imports for short stays in hotels unless they have to, but they do do it sometimes for reasons such as container sizes.

The merchants have been doing a good job of getting value on the floor and chasing back into more flex items that customers want, while also trying to hit the appropriate levels of each one of the three buckets (good-better-best). The customer is voting every day, so the merchants have been out in the market looking for great deals. This strategy is expected to fluctuate in Q3 and Q4, but they will continue to look for great deals in all of the buckets.

Adam Orvos stated that productivity levels have stayed the same, averaging between 60% and 65% of average mature store for the chain. Barbara Rentler stated that customers are feeling a bit more room to spend money, but the merchants are responding and offering better values and broader assortments. She believes that the merchants have heightened awareness and the ability to chase goods, which can help accelerate progress.

Barbara Rentler discusses the competitive landscape for Ross, noting the rise of low-price e-commerce players like Shein. She acknowledges that there is more competition in the market than there used to be, with department stores having had more share in the past. Rentler emphasizes the importance of offering broad assortments and strong values in order to satisfy all types of customers, and to take advantage of the unique opportunity that off-price retailers have.

Michael Hartshorn and Barbara Rentler discussed the moderation of AURs and how it is a result of mix-shift and providing better values to the customer. They also discussed the potential for increasing AURs with the improvement of home performance.

Michael Hartshorn answered a question from Marni Shapiro about back-to-school trends and traffic, saying that the business has been steady rather than having peaks and valleys. He then answered a question from Laura Champine about inventory levels, saying that inventory was down 15% year-over-year due to early receipts and higher in-transit inventory, but that overall the level and content of the inventory was satisfactory, ending up 4% in stores.

Barbara Rentler and Michael Hartshorn answer a question from Edward Yruma about inventory availability for cosmetics and accessories, and the potential impact of M&A in the space. Hartshorn then explains that the increase in accrued payroll is due to financial performance and incentives, while Rentler clarifies that there is availability for cosmetics clinics. The next question is from Aneesha Sherman, who asks about the confidence in the comp acceleration going into the second half.

Michael Hartshorn spoke about the performance of different merchandise categories, with cosmetics and accessories being the best performing and shoes and home performing above the chain average. Apparel trailed the chain but performed above plan and improved from Q1. He also mentioned that there had been an increased interest from other retailers in the types of real estate that Dollar Tree typically prefers.

The team has a methodical process for developing a healthy real estate pipeline and rent costs are not seeing major increases. In terms of merchandise margin, ocean freight benefit will be the main factor and there is a lot of availability in the inventory buying environment compared to last year.

Barbara Rentler concluded the teleconference by thanking the participants for their interest in Ross Stores, and the operator ended the call. There is a broad-based supply of businesses available this year, as there was last year.

This summary was generated with AI and may contain some inaccuracies.