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Ross Says Home and Casual Clothing Starred in Stronger Q3

Following a slow start in August, Ross Stores said sales improved substantially in the third quarter as total sales came in just 2 percent below the same period last year, much better than the second quarter’s more than 30 percent drop.

Ross Stores CEO Barbara Rentler, speaking on a call with investors Thursday, attributed this acceleration to an improvement in merchandise assortments, a later back-to-school season, stronger performance in larger markets and a return to more normal store hours.

In a Nutshell: According to Rentler, the off-price retailer’s operating margin shrank from 12.4 percent to 4.4 percent year-over-year, which included a 640-basis point impact from a one-time debt refinancing charge. The de-leveraging effect from the decline in same-store sales and higher Covid-related operating costs also had an impact, said Travis Marquette, group senior vice president and chief financial officer at Ross.

Total net Covid-related expenses for the quarter were approximately $25 million with a slightly higher impact to cost of goods sold than selling, general and administrative expenses, according to Marquette. Looking to the fourth quarter, he noted that the off-pricer expects net Covid-related costs to be “significantly higher” relative to Q3 due to industry-wide capacity constraints and congestion, as well as wage and incentive actions in its supply chain and stores.

Ross’ month-to-date comparable store sales are currently down mid-single digits in November, Rentler said. With the high level of uncertainty surrounding the ongoing health crisis, she said Ross is “concerned with how the upsurge of this pandemic might impact consumer demand during what we expect to be a highly competitive holiday shopping season.” Given this lack of visibility, she said the company plans to continue to manage its operations conservatively, though she noted that Ross is “not as worried about supply” with the strong availability of goods in the market. However, Rentler expects that margins “will not be quite as favorable as [they are] today because the buying environment in the Q3 was really favorable.”

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Net Sales: Total sales at Ross Stores came in at $3.75 billion for the third quarter, down 2 percent year over year from $3.85 billion. Sales for the first nine months of 2020 were $8.3 billion, down from $11.6 billion last year.

Comparable store sales decreased 3 percent versus last year, according to Marquette. The decline was driven by a lower number of transactions and partially offset by a larger average basket size, he said.

Ross’ strongest merchandise area in the third quarter was home, with the category making up 30 to 31 percent of its business mix compared to 25 to 26 percent historically, according to Rentler, who noted that shoppers are buying “casual activewear,” too. Plus, she said, those “businesses got stronger as we chased after them more aggressively when we saw the customers’ trend” during the quarter.

Geographically, the Midwest and Southeast were the best performing geographic regions, she added. “Overall, our improved core business result demonstrates consumers’ continued focus on value and our ongoing ability to deliver the bargains our customers have come to expect from us,” Rentler said.

At quarter end, total consolidated inventories were down 25 percent from the year, Rentler said, with average store inventories down 8 percent. Packaway levels fell to 26 percent, compared to last year’s 39 percent, and Ross added 5 percent more vendors to its matrix since Covid, said chief operating officer Michael Hartshorn, growing that number to more than 8,000.

Net Earnings: Ross Stores’ net income dropped from $371 million in the third quarter of last year to $131 million during the same period this year. This translated to $0.37 earnings per share this past quarter compared to $1.04 in Q3 2019.

Rentler noted that the off-price retailer refinanced $775 million in senior notes in October “to significantly reduce the annual interest expense and total cash outlays over the life of the debt.” The action, she said, resulted in a one-time impact of $240 million to net earnings in the third quarter, or $0.65 per share.

Year-to-date, Ross has experienced a $153 million net loss compared to $1.2 billion in net earnings over the same period last year. The company’s loss per share came in at $0.43 for the first nine months of 2020, compared to net earnings of $3.32 earnings per share for the same period last year.

Ross has $4.4 billion in “unrestricted cash” and about $5.2 billion in liquidity, Marquette noted.

CEO’s Take: “As we look ahead to the holiday season, we expect a highly competitive retail environment in a difficult economic and political atmosphere, both of which are complicated by our lack of visibility surrounding the worsening pandemic,” Rentler said. “Despite these near-term challenges, I want to emphasize that we have a talented and seasoned management team that we believe will enable us to effectively navigate through any short-term headwinds. Over the longer-term, we remain well positioned in the off-price sector to gain market share as we believe consumers will continue to favor retailers focus on delivering value and convenience, both of which we have and will continue to provide to our customers.”