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Ross COO: ‘Shrink Was a Little Bit Higher for Us Last Year’

Ross Stores Inc. executives last week shared what they’re seeing with inventory, freight, sales, inflation and shrink, the industry term for shoplifting, organized retail crime and other forms of stock loss.

In a Nutshell: “Operating margin for the period was 10.1 percent, down from 10.8 percent in 2022, primarily reflecting higher incentive compensation versus last year when we underperformed our expectations,” CEO Barbara Rentler told investors during a conference call last Thursday.

As was the case last quarter, inflation is still affecting consumer spending.

“There remains a high level of uncertainty in today’s macro-economic and geopolitical environments,” Rentler said. “In addition, prolonged inflationary pressures continue to negatively impact our low-to-moderate income customers’ discretionary spend. As such, we remained focused on delivering the most compelling value possible to maximize our opportunities for growth.”

Adam Orvos, executive vice president and CFO, said that the merchandise margin was up 120 basis points primarily due to lower ocean freight costs, while domestic freight costs declined by 60 basis points.

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Looking ahead, comparable store sales are projected to be relatively flat, Rentler said, with earnings per share for the second quarter forecasted to be $1.07 to $1.14 versus $1.11 for the same period last year.

“It’s important for us that we deliver, you know, really sharp value for our customer, particularly in this timeframe,” Rentler said. “And now that the world is getting even, you know, more competitive and more promotional, we have to look through that lens also. So I think that we need to stay focused on it and do a better job on this and making sure that we really understand, where it’s appropriate, that we are sharpening our brand values.”

Net Sales: For the first quarter ended April 29, net sales were $4.5 billion, up from $4.3 billion in the prior year period. Comparable store sales were up 1 percent.

Orvos told investors that increased transactions drove comparable sales.

“First quarter operating margin of 10.1 percent was down from 10.8 percent,” he said.

The company opened 11 new Ross stores and eight DD’s Discounts locations in the first quarter and continues to plan for approximately 100 new stores this year, 75 being Ross and 25 being DD’s. This does not account for the plans to close or relocate about 10 stores.

“[Regarding] the merchandise assortment for value perspective, first let me lead with, you know, we weren’t really satisfied with our results,” Rentler said. “We had some businesses where the business didn’t perform as well as we had expected, and we’re addressing those issues. As I look at value across the stores, that has been a main focus for merchants for the last few months. So I’d say that we made progress across the board, but I still think that is a major focus for us, offering the customer the best branded bargains possible as the best possible values we can put out there.”

Earnings: Net earnings for the quarter were $371 million, down from last year’s $338 million. Diluted earnings per share were $1.09, up from last year’s $0.97.

Cosmetics and accessories were the strongest merchandise categories during the quarter, while the Midwest was the top-performing region, Rentler said.

“Based on our first quarter results and guidance for the second quarter, comparable store sales for the 52 weeks ending January 27, 2024, are still planned to be relatively flat,” she said. “We now project earnings per share for the 53 weeks ending February 3, 2024, to be $4.77 to $4.99 compared to $4.38 for the 52 weeks ended January 28, 2023. This guidance includes an estimated benefit to full year 2023 earnings per share of approximately $0.15 from the 53rd week.”

Michael Hartshorn, the company’s president and chief operating officer, said that traffic was up versus a year ago, but the average basket and units per transaction were flat. As the weather became “more favorable,” Ross did see trends improve on a multiyear basis.

“As far as how we’re looking at the year outlook has not changed,” he said. “We’ll continue to manage the business with a conservative posture and be in a position to chase trends, chase the business and mange expense and inventory very conservatively on a stack basis as we move through the quarter.”

The company ended with quarter with total consolidated inventory down 16 percent year over year, while average store inventory was up 20 percent. Packaway stock fell 1 percent year on year, to make up 42 percent of total inventory.

Executives also addressed what’s going on with shrink, a topic that came up during Target’s earnings report last week. “Shrink was a little bit higher for us last year [but] wasn’t meaningfully higher,” Hartshorn told investors. “We’ve assumed that it’ll stay at or slightly above those levels in our estimates.”

CEO’s Take: “We had expected fiscal 2023 to be another challenging year. This was especially true, given the uncertainty in the macro-economic, geopolitical and retail environment,” Rentler said. “As a result of today’s uncertain external landscape, especially the prolonged inflationary pressures negatively impacting our customer’s discretionary spend, shoppers are seeking even stronger value when visiting our stores. In response, we remain focused on delivering the most compelling bargains possible, while diligently managing expenses and inventory to maximize our opportunities.”