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Why Ross CEO Doesn’t Think ‘Supply Bubble’ Will Burst

Ross Stores CEO Barbara Rentler is feeling good about the “supply bubble” dominating the marketplace right now.

In a Nutshell: “Third quarter results were above our expectations as we delivered stronger values throughout our stores,” said Rentler, who runs the company behind Ross and DD’s Discounts.”Operating margin for the period was 9.8 percent versus 11.4 percent last year, reflecting the deleveraging effect from the comparable sales decline as well as pressure from higher markdowns and unfavorable timing of packaway-related costs.”

She said that total consolidated inventories at the end of the quarter was up 12 percent, while average store inventories rose 4 percent versus last year, but were down compared to pre-pandemic levels.

“Despite the many challenges over the last few years, coupled with today’s uncertain macro economic and geopolitical environment, we remain optimistic about our future growth prospects. A top priority is and always will be [delivering] fresh and exciting name-brand merchandise at compelling discounts, every day,” she said.

Shoes turned in the best quarterly performance at America’s biggest off-price retailer, the CEO said.

Rentler expects the “supply bubble” Ross is seeing right now to continue into next year. “The buying environment has gotten even better [and] broader,” she said.

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Ross has opportunities to work with new vendors who are motivated “to move merchandise” and could break into additional categories given all the goods floating around the market, according to Rentler.

And in terms of margin, Rentler said buyers will look at the brand and how it compares with pricing of similar merchandise, then “build value that appropriate” because that’s customers have said they want.

Chief operating officer Michael Hartshorn said traffic improved for the quarter, but declined versus the prior year. “So offsetting the traffic declines was a higher average basket,” he said, adding that sales trends improved as the quarter progressed.

DD’s Discounts also showed improvement similar to Ross moving from the second quarter to the third, although it trails slightly as the customer as a lower average household income level, he said.

Net Sales: For the three months ended Oct. 29, net sales slipped 0.2 percent to $4.565 billion from $4.574 billion. Comparable store sales fell 3 percent, on top of a robust 14 percent gain in the same year-ago quarter.

Chief financial officer Adam Orvos said higher markdowns largely fueled a 165-basis-point merchandise margin decline. Similar to what TJX’s CEO indicated earlier this week, Orvos said it’s unclear if customers are trading down to more affordable goods. “We have not seen a material shift in spending trends across different income [and] different demographics,” he said.

For the nine months, net sales decreased by 3 percent to $13.48 billion from $13.9 billion.

Earnings: Net income for the quarter fell 11.2 percent to $342.0 million, or $1.00 a diluted share, from $385.0 million, or $1.09, a year ago.

Wall Street was expecting adjusted diluted earnings per share (EPS) of 81 cents on revenue of $4.37 billion.

The company expects fourth-quarter same-store sales to be flat to down 2 percent on top of a 9 percent gain in the year-ago period, with EPS in the range of $1.13 to $1.26. For the full year, EPS for Fiscal 2022 was guided to the range of $4.21 to $4.34, versus $4.87 last year.

“We continue to expect a very promotional holiday selling season and ongoing inflationary headwinds to pressure our low-to-moderate income customers. That said, we face our easiest sales and earnings comparisons in the fourth quarter and are raising our guidance given our third quarter sales momentum and improved holiday assortments,” Rentler said. “There remains a high level of uncertainty in today’s macroeconomic and geopolitical environment that continues to negatively impact consumer sentiment and demand. However, we remain confident in the off-price business model, which offers both value and convenience.”

For the nine months, net income declined 21.4 percent to $1.06 billion from $1.36 billion.

CEO’s Take: “With consumers heightened focus on value and convenience, this bodes well for our ability to expand our market share and profitability in the future,” Rentler said.