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Ross CEO: We Saw ‘Major Improvement in Apparel’

Like its off-price brethren, Ross Stores beat Q1 estimates, with home continuing to dominate while apparel shows signs of life.

In a Nutshell: While home remains the category to beat, the off-price company said apparel is gathering momentum as well.

Ross is confident it’ll be able to source the right goods to meet customers’ changing whims, though it funneled some of its packaway inventory into stores and might need some additional time to rebuild its stockpile. “I do think it’ll take a little bit of time, but there is sufficient availability to be driving our business,” CEO Barbara Rentler told Wall Street analysts.

Ross saw strength build throughout the quarter, including in home, she said.

“We did see major improvement in apparel,” she said, and as the U.S. continues to lift social restrictions, “apparel will continue to strengthen as time goes on.”

First-quarter sales “significantly exceeded our expectations,” she added. Government stimulus payments, vaccinations, loosening Covid restrictions and consumer demand all contributed to a strong quarter, she said.

“Customers responded enthusiastically to the broad assortment of great bargains we offered throughout our stores,” Rentler said.

Inventories were down 6 percent versus the same 2019 quarter, with packaway also lower as Ross “used a substantial amount” of this merchandise to support planned sales.

The off-price company’s large merchandising team is “out there looking constantly” for new merchandise, which for now is in good supply, but trends are shifting and “things are moving very, very quickly,” Rentler said. Consumers are replacing their appetite for active apparel with a new taste for sportswear, which Ross said it has been able to satisfy so far. Rentler is “comfortable that the availability is there in the business that the customer wants at this moment in time.”

Net Sales: For the three months ended May 1, sales more than doubled to $4.52 billion from $1.84 billion in the same 2020 quarter, and were up 19 percent from $3.80 billion in the comparable 2019 period. Comparable store sales rose 13 percent over 2019.

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For the quarter, Rentler cited home as the best-performing category, while the Midwest was the strongest region.

During the conference call, Travis R. Marquette, executive vice president and chief financial officer, said quarterly traffic was down slightly versus 2019, but “accelerated significantly compared to the fourth quarter” in 2020. A larger average basket size bumped quarterly comparable store sales up 13 percent versus 2019 though Ross saw fewer transactions.

Operating margin in the quarter was above plan at 14.2 percent versus 14.1 percent in 2019. While merchandise margins were up 85 basis points, that was partially offset by higher freight costs at 75 basis points, driven by ongoing industry-wide supply chain congestion, he said.

Earnings: The company posted net income of $476.5 million, or $1.34 a diluted share, against a net loss of $305.8 million, or 87 cents, in the year-ago quarter. In the 2019 period, net income was $421.1 million, or $1.15 a diluted share.

Wall Street was expecting adjusted diluted earnings per share of 88 cents on revenue of $3.87 billion.

Marquette said Ross projects total sales to grow 9 percent to 12 percent, based on a same store sales gain of up 5 percent to 7 percent. Earnings per share were guided to the range of 80 cents to 89 cents. Ross plans to open 22 Ross Dress for Less stores and eight DD’s Discount doors in the quarter, for 30 total.

For the full year, total sales were forecasted at up 11 percent to 13 percent, on a comparable store sales gain of 7 percent to 9 percent versus 2019. Earnings per share were guided to $3.93 to $4.20. Operating margin for 2021 is projected to between 10.7 percent to 11.2 percent, down from 13.4 percent in 2019, given the expected impact from continuing supply-chain challenges with higher freight costs and wages, Marquette said.

CEO’s Take: Rentler said Ross’s confidence about its prospects this year “is based on our recent results and ongoing improvements in the macro economic environment, bolstered by vaccine rollout and the easing of pandemic related restrictions. That said, it’s difficult to predict the lasting impact from the factors that benefited our first quarter sales results, especially the recent government stimulus payments.”

“As always, we’ll remain nimble to address the dynamic consumer and retail landscape, while staying focused on delivering the great bargains our customer has come to expect from us. Longer term, we remain confident about our opportunity to gain market share, as we expect to benefit significantly from the favorable competitive climate, given the large number of retail store closures and bankruptcies in recent years. This, along with the consumers heightened focus on value and convenience, bodes well for our ability to achieve solid results into the future,” she added.