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Ross CEO Explains $183 Million Q1 Sales Shortfall

Ross Stores chief operating officer Michael Hartshorn said the off-price retail company will be “highly dependent on how China comes back from their shutdown,” speaking to Wall Street analysts Thursday after the chain reported a first-quarter profit miss on execution and merchandise mistakes.

In a Nutshell: Apparel sales outperformed home in the quarter, even though Easter sales failed to live up to the company’s plan.

CEO Barbara Rentler told analysts the Russia-Ukraine war “exacerbated inflationary pressures on the consumer not seen in 40 years,” adding that the year ahead “may prove to be more difficult than initially anticipated.”

Freight and fuel costs hampered the retailer’s business, though executives blamed their own missteps for the disappointing quarter.

“I wouldn’t really say that that there are problems in any pockets of inventory that we have. And we feel that we can we can improve the assortments. And we can improve our execution. At this point, you know, it’s really about us. It’s about us taking different actions in some of our assortments overall,” Rentler said.

Merchants are refocusing the fashion assortment to prioritize dress over casual, with Rentler saying, “We’re getting into that piece right now.”

Echoing TJX’s comments earlier this week, Ross pointed to a robust availability of goods in the market. “At this stage, if you’re really in the market, there’s a lot of availability, and it’s very broad basedwhether it’s in home or whether it’s in apparel. There’s a lot of supply out there,” Rentler said.

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This means merchants can take advantage of closeout opportunities, especially in home more so than in apparel, she said.

While inventory levels at quarter end were higher than a year ago, a portion of that consists of packaways that the retailer will pull over the course of the year to meet consumer demand. “Packaway merchandise represented 43 percent of total inventories versus 34 percent last year when we used a substantial amount of packaway to meet robust consumer demand,” Rentler said.

Hartshorn pointed out that the packaway strategy is helping Ross managing home products as well.

“When we came into the year, we planned longer lead times based on what we saw in the fourth quarter,” he said. “So what that meant for us, for businesses where we directly import mainly in home, what happened in Q1 is the supply chain eased somewhat and we received early second quarter goods in home, and we stored them in packaway and will flow them later in the year.”

Store inventories were up too, but still lower than pre-pandemic levels.

Rentler said Ross is carefully increasing prices to be sure customers are still getting a good value. “We monitor that very, very closely,” she said, adding that merchants for both the Ross Dress for Less and DD’s Discounts nameplates monitor and tweak pricing on a weekly basis.

“We remain confident in our ability to successfully navigate through this period. We have shown in the past that a value-focused business model has served us well in both healthy and more uncertain external climate. I believe the current challenging conditions will be no different,” Rentler said.

Net Sales: For the three months ended April 30, net sales fell 4 percent to $4.33 billion from $4.52 billion. Ross said comparable store sales fell 7 percent on top of a 13 percent gain in the year-ago period.

Earnings: Net income for the first quart dropped 29 percent to $338.4 million, or 97 cents a diluted share, from $476.5 million, or $1.34, a year ago.

Wall Street was expecting EPS of $1.00 on revenue of $4.53 billion.

The company provided a more conservative outlook for the balance of 2022, predicting same-store sales for the second quarter ending July 30, 2022 to fall 4 percent to 6 percent, on top of a strong 15 percent gain a year ago, and EPS in the range of 99 cents to $1.07.

For the year ending Jan. 28, 2023, Ross is forecasting comp store sales to fall 2 percent to 4 percent and EPS between $4.34 and $4.58. That compares with prior guidance in March of comps flat to up 3 percent on an EPS range between $4.71 to $5.12.

CEO’s Take:Our mission continues to be delivering the best bargains possible to leverage our favorable market position, as demonstrated by our long, successful track record. We believe our steadfast focus on the execution of this core strategy will be the key driver of our success,” Rentler said.

Additional reporting by Jessica Binns.