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Ross CEO: ‘Merchandise Deliveries Are Sliding’

After a second quarter that came in ahead of Wall Street estimates, Ross Stores CEO Barbara Rentler warned that “merchandise deliveries are sliding,” a common refrain peers have repeated this earnings season amid port congestion, container shortages and dizzying freight fees.

In a Nutshell: Though the market has “plenty of supply,” backlogs are delaying receipts by up to a month, Rentler told Wall Street analysts in a call Thursday. Ross’s merchants, she added, are “constantly flexing based off of what they’re seeing in the market…and they’re chasing into classification.”

“It’s a little bit of a moving [target], but overall, there’s plenty of supply,” Rentler said.

The bigger challenge is getting its China-sourced goods out of the manufacturing powerhouse, where a closure at Ningbo, the world’s third-busiest port, is just starting to reverse course after officials confirmed a single Covid-19 case last week. Though cascading delays are likely to continue for some time, Rentler believes these supply-chain challenges could present an opportunity for Ross’s reliance on closeouts if other companies shed in-season goods.

Inventory packaways ended the quarter at 30 percent, versus 43 percent in 2019, she said, as Ross unlocked some of this merchandise for planned sales.

“Sales benefited from customers’ positive response to our broad assortment of great bargains,” Rentler said.

The strong momentum seen in first-quarter apparel sales didn’t let up in Q2, where home continued to be a top performer as well. Rentler said shoppers are beginning to resume purchasing “more traditional sports[wear] classifications” in the apparel category, after gravitating toward activewear and other casual options throughout the pandemic.

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Like other retailers, Ross is mulling the possibility of pulling prices up a bit, though the retailer’s consumer is “really price savvy,” Rentler said.

This year’s back-to-school shopping season is looking more like 2019, after the pandemic disrupted the usual course of events last year, said Rentler, who believes Ross can springboard off recent closures and bankruptcies into greater market share.

Freight is stymieing Ross’s operations, not unlike its competitors across the industry. According to chief operating officer Michael Hartshorn, “ocean freight costs are up significantly in the back half,” and the resulting congestion is seen “bleed[ing] into the first part” of 2022.

Net Sales: Net sales for the three months ended July 31 were up 79 percent to $4.80 billion from $2.68 billion. Sales rose 21 percent from $3.98 billion when compared to the same 2019 pre-pandemic quarter. Comparable store sales climbed 15 percent in the quarter, Hartshorn said.

For the six months, net sales more than doubled to $9.32 billion to $4.53 billion.

Earnings: Net income for the quarter was $494.3 million, or $1.39 a diluted share, from net income of $22.0 million, or 6 cents, a year ago. Net income was up 20 percent from $412.7 million, or $1.14, from the same 2019 quarter.

Wall Street expected 94 cents on revenue of $4.48 billion.

Third-quarter guidance pegs same-store sales at up 5 percent to 7 percent, with earnings per share between 61 cents to 69 cents. “This guidance reflects our expectation for escalating freight and supply chain costs, and ongoing Covid-related operating expenses,” Rentler said.

Based on first-half results, the company said it expects fiscal year 2021 earnings per share in the range of $4.20 to $4.38 on a comparable store sales gain of 10 percent to 11 percent.

Next year, Ross could restart the store-opening plans that it paused due to Covid, Rentler said.

For the six months, net income was $970.7 million, or $2.73 a diluted share, against a net loss of $283.8 million, or 81 cents, in the year-ago period.

CEO’s Take: “Sales benefited from customers’ positive response to our broad assortment of great bargains. In addition, our results were bolstered by a number of external factors, including ongoing government stimulus, increasing vaccination rates, and diminishing Covis restrictions,” Rentler said.