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Will Walmart and Target’s Price Cuts Lure Shoppers Away From Ross?

With prices plummeting across retail, the off-price value proposition might not be what it was even just a few months ago. Asked if Walmart and Target might be stealing market share as they slash prices on apparel and more to clear bloated inventories, Ross Stores CEO Barbara Rentler brushed aside the question.

“We look at everyone as a competitor, whether it’s Walmart, whether it’s the other off-pricers, whether it’s Macy’s,” she told Wall Street analysts on a call Thursday to discuss second-quarter results. “I think there’s a lot of opportunities for the consumer to buy bargains now, whether it’s Walmart or Target, whoever it is.”

In a Nutshell: Ross, like other names in the business, raised prices in the past year, but inflation coupled with a downturn in demand suggests the customer “doesn’t think the value is where it needs to be,” Rentler said.

The company believes its product mix and prices didn’t provide the right “value” equation shoppers wanted. Rentler said that inflation is already showing its impact on a larger portion of the lower-income consumers shopping at the company’s DD’s Discounts nameplate.

“We are making merchandising adjustments to meet changing customer demands,” she said, adding that the actions haven’t offset either the mounting financial pressure on its low- to moderate-income consumers or the “impact on our business from increasingly promotional retail environment.”

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Home and apparel sales were in line with the chain average. The apparel assortment evolved from casual products into dress-up looks for work and going out. “We’ve made some progress there, but we certainly have a longer way to go,” Rentler said. The company is shipping products in earlier to get ahead of potential delays.

Similar to what TJX CEO Ernie Herrman said Wednesday about an abundance of merchandise options in the market, Rentler said buyers are also seeing new vendors and vendors that previously didn’t have anything on hand to offer.

“The availability is pretty broad based right now in all products in a good, better, best—its just a lot of merchandise in the country,” she said. “Vendors themselves are looking to expand their business [and] I think that probably will continue based on the amount of inventory that’s in the country.”

Rentler is ready for “heightened” promotions during the holiday quarter.

The company expects domestic and import costs won’t sustain their current heights, though the higher wages doled out during Covid are likely to stick around for the long haul.

The company still plans to open 41 stores during the quarter, including 29 Ross and 12 DD’s Discounts locations.

Net Sales: For the three months ended July 30, net sales fell 5 percent to $4.58 billion from $4.80 billion. Comparable store sales were down 7 percent in the quarter, versus a 15 percent gain a year ago.

Shoes and mens’ were the strongest merchandise areas during the quarter, with Florida and Texas for the top performing regions, Rentler said. She said for back-to-school, consumers are focused on buying necessities,” such as backpacks.

For the six months, net sales decreased 4 percent to $8.92 billion from $9.32 billion.

Earnings: For the quarter, net income was down 22 percent to $384.5 million, or $1.11 a diluted share, from $494.3 million, or $1.39, a year ago.

Wall Street was expecting adjusted diluted earnings per share of $1.22 on revenue of $4.61 billion. Results this period represented two consecutive quarters of earnings misses. And Wall Street was expecting earnings pressure for the off-price sector.

For the third quarter, the retailer is forecasting same-store sales to fall 7 percent to 9 percent, versus a 14 percent gain in the year-ago quarter. And for the fourth quarter, comps were guided down 4 percent to 7 percent, versus a 9 percent increase in the year-ago period. The guidance includes a higher level of markdowns in the back half.

Presuming earnings per share of 72 cents to 83 cents for the third quarter and between $1.04 to $1.21 in the fourth quarter, Ross said fiscal year 2022 EPS would be in the range of $3.84 to $4.12.

For the six months, net income dropped 26 percent to $723 million, or $2.08 a diluted share, from $970.7 million, or $2.73, in the same year-ago period.

CEO’s Take: “We are facing a very difficult and uncertain macro-economic environment that we expect will continue to strain our customers’ discretionary spending,” Rentler said. “Though 2022 will likely remain a challenging year for our company, we believe our value-focused business model and our strong financial position will enable us to manage through these economic pressures and rebound over time.”