While persistent port congestion eats into its own and others’ profits, off-price empire Ross Stores Inc. sees a potential opportunity.
CEO Barbara Rentler, speaking on a call with investors to discuss the company’s fourth-quarter and full-year earnings, said West Coast port congestion “obviously has slowed down some of the receipts coming into the country.” And while Ross itself is still seeing “great supply opportunities” right now, she said she believes supply disruptions at the port will at some point create a bubble further down the line.
“I don’t think we’ve seen that bubble yet, but at some point, historically, when things start to self-correct, there’ll be a bubble of inventory,” Rentler said. “So that would be an opportunity.”
In a Nutshell: Despite the upsurge of Covid-19 cases resulting in lower foot traffic, particularly in Ross’ largest state of California, Rentler said fourth-quarter sales exceeded the company’s expectations.
Rentler highlighted home as the best-performing major merchandise area during the holiday selling season and the Southeast and Midwest as the strongest regions. In addition to California, which was subject to more extensive occupancy and operating-hour restrictions, large states like Texas and Florida also “significantly underperformed the chain average,” she noted.
The company’s DD’s Discounts business also felt the impact of Covid-19 issues, although to a lesser extent given a smaller number of border and tourist locations, Rentler said.
At the end of 2020, total consolidated inventories were down 18 percent compared to the prior year, with packaway levels at 38 percent of the total compared to 46 percent last year. Average store inventory at year-end was down 16 percent compared to 2019.
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According to chief financial officer Travis Marquette, Ross exited 2020 with more than $5.6 billion in liquidity, which included an unrestricted cash balance of about $4.8 billion and an $800 million revolver. In 2021, he said the company is planning for approximately $700 million in capital expenditures. This number includes investments for the company’s next distribution center and the resumption of projects deferred from 2020.
During the first quarter, Marquette said the company plans to open four Ross and three DD’s locations. Over the year as a whole, he said it expects to open approximately 40 Ross and 20 DD’s stores.
Net Revenue: Sales for the fourth quarter ended Jan. 30 totaled $4.2 billion, with comparable stores sales down 6 percent compared to the prior-year period. The comp represented a slight backslide from the third quarter, when comparable store sales declined 3 percent.
Marquette said the year-on-year sales dip was driven by lower traffic, which reflected increased hesitancy to shop amid the spike in Covid cases. An increase in average basket size partially offset this.
Total sales for the 2020 fiscal year reached $12.5 billion, down from $16 billion in 2019.
Looking to the first quarter of 2021, Marquette said Ross projects total sales will be between down 1 percent and up 4 percent compared to the same period in 2019, with comparable store sales between down 5 percent and down 1 percent. This guidance, he noted, reflects the potential impact of lower demand during the Easter season and ongoing supply-chain congestion.
Net Earnings: Fourth-quarter operating margin fell to 9.5 percent, compared to 13.3 percent last year, Marquette said. Cost of goods sold rose 125 basis points. Merchandise margin gain of 70 basis points was more than offset by higher costs, including freight, which rose 100 basis points due to industry-wide supply chain congestion. Distribution costs rose by 15 basis points, primarily due to higher wages but offset by favorable timing of packaway.
Selling, general and administrative expenses rose 260 basis points in the fourth quarter, mainly due to the deleveraging effect from the decline in comparable store sales and $40 million in Covid-related operating expenses, Marquette said.
Ross’ fourth-quarter earnings totaled $238 million, or $0.67 per diluted share. This compared to net earnings of $456 million, or $1.28 per diluted share, for the quarter ended Feb. 1, 2020.
Ross saw net earnings of $85 million, or $0.24 per diluted share in fiscal 2020, down from $1.7 billion, or $4.60 per diluted share, the previous year. This included a one-time pre-tax charge of $240 million, or $0.54 per share for the year, from the refinancing of $775 million in senior notes.
Marquette said Ross is projecting earnings per share of between $0.74 and $0.86 for the first quarter of 2021. However, given headwinds from increased supply chain costs, higher wages and ongoing Covid-related expense, he said the company anticipates its operating margin will be 9.9 percent to 10.8 percent, versus 14.1 percent in 2019.
“From a top line perspective, with the continued rollout of vaccines, potential additional government stimulus and likely pent-up consumer demand, we expect sales trends to strengthen as we move through the year,” Marquette said. “We are predicting the operating margin, relative to 2019, will continue to be affected by increased supply-chain costs, higher wages and Covid-related expenses. Therefore, profitability will be well below recent historical high levels.”
CEO’s Take: “Like so many other retailers and businesses, our operations and financial results reflect the major problems caused by the Covid-19 pandemic,” Rentler said. “Over the longer term, we believe both Ross and DD’s are well positioned in the off-price sector as consumers continue to favor retailers focused on delivering both value and convenience. This is especially true given the number of retail closures and bankruptcies over the past several years.”