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Home Merch a Holiday Headache for Ross?

Ross Stores Inc. posted a solid third quarter, but the company was cautious about holiday in connection with some category items because of possible supply-chain delays.

In a Nutshell: For the holidays, the company has adjusted order-in times, chartered its own ocean vessel and purchased market rate capacity to move goods, Michael J. Hartshorn, group president and chief operating officer, said during a Wall Street conference call on Thursday. The company will continue to have a “fresh flow of product,” with receipts through the next six weeks, despite concern that directly imported home goods could be stuck in ports or on container ships. Hartshorn doesn’t expect freight congestion to subside through the first half of next year.

Higher shipping costs saw domestic freight expenses rise by 125 basis points, while increased ocean freight costs negatively impacted merchandise margin, which fell by 40 basis points, Adam Orvos, executive vice president and chief financial officer, said.

In the third quarter, both “children and men’s were the best performing businesses, while the Midwest and Southeast were the top performing regions, CEO Barbara Rentler said. While casual apparel has always been a big business for the company, the female customers are now shifting back into traditional holiday product, such as dress-up, footwear and handbags, she said.

Inventories were up 3 percent, while average selling store inventories were down 1 percent when compared with 2019 levels, Rentler said. Packaways ended the quarter at 31 percent, versus 39 percent in 2019, as Ross continued to use a “substantial amount of packaway merchandise to support ahead of planned sales. In addition, there were receipt delays due to supply-chain congestion,” she said.

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Although she acknowledged that merchandise availability wasn’t consistent across the board, Rentler said that overall it was “very good” in some areas and that over time she expects “the market will get more bullish on creating more goods.” Canceled goods due to delays or other reasons would be packaways for next fall in the third and fourth quarters, while seasonless apparel merchandise potentially could be allocated for the first quarter, she added.

Ross is keeping tabs on pricing at different distribution channels so it can adjust its discount where needed, and continues to “experiment with higher [prices] in all areas.” Increases have worked in some areas and not in other categories, she said.

Off-price peers are also reviewing pricing. TJX also has raised some of its prices. CEO Ernie Herrman said that the company has surgically raised prices and didn’t get any pushback from customers.

For the year, the company added 18 new Ross stores and 10 DD’s Discounts in the quarter. For the full year, the company added 65 doors, including 44 Ross stores and 21 DD’s Discounts. The company also plans to return to its normal annual opening program of 100 stores in 2022.

Net Sales: For the three months ended Oct. 30, net sales rose 22 percent to $4.6 million from $3.8 million a year ago. The company said that when compared with the same pre-pandemic quarter in 2019, sales rose 19 percent, with comparable store sales up 14 percent.

For the nine months, net sales jumped 68 percent to $13.9 million from $8.3 million.

Earnings: Net income nearly tripled to $385.0 million, or $1.09 a diluted share, from $131.2 million, or 37 cents, in the year-ago quarter.

The company projected fourth quarter comparable sales gain at between 7 percent to 9 percent, and earnings per share in the range of 83 cents to 93 cents. The fourth quarter ends on Jan. 29, 2022.

“Based on our year-to-date results and our updated fourth quarter guidance, we are now planning earnings per share for Fiscal 2021 to be in the range of $4.65 to $4.75 on a comparable store sales gain of 12 percent to 13 percent,” Rentler said.

For the nine months, the off-pricer posted net income of $1.4 million, or $3.82 a diluted share, against a net loss of $152.6 million, or 43 cents, in the year-ago period.

CEO’s Take: “Uncertainty remains on how industry-wide supply chain congestion may negatively affect our business in the fourth quarter. That said, we believe we are well-positioned as a valued retailer and our constant customers will find a broad assortment of great branded bargains in our stores for the holiday season,” Rentler said. “Moving forward, consumers increasing focus on value and convenience, along with the large number of recent retail closures and bankruptcies, we are confident about our prospects for continued market share gains in the future.”