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Ross Stores Inc
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Good afternoon, and welcome to the Ross Stores First Quarter 2018 Earnings Release Conference Call. The call will begin with prepared comments by management followed by a question-and-answer session. [Operator instructions]
Before we get started, on behalf of Ross Stores, I would like to note that the comments made on this call will contain forward-looking statements regarding expectations about future growth and financial results, including sales and earnings forecasts and other matters that are based on the company's current forecast of aspects of its future business. These forward-looking statements are subject to risk and uncertainties that could cause actual results to differ materially from historical performance or current expectations. Risk factors are included in today's press release and the company's fiscal 2017 Form 10-K and fiscal 2018 Form 8-K's on file with the SEC.
Now, I'd like to turn the call over to Barbara Rentler, Chief Executive Officer.
Good afternoon. Joining me on our call today are Michael O'Sullivan, President and Chief Operating Officer; Gary Cribb, Group Executive Vice President, Stores and Loss Prevention; John Call, Executive Vice President, Finance and Legal; Michael Hartshorn, Executive Vice President and Chief Financial Officer; and Connie Kao, Vice President of Investor Relations. We'll begin our call today with a review of our first quarter performance, followed by our outlook for the second quarter and fiscal year. Afterwards, we'll be happy to respond to any questions you may have.
As noted in today's press release, despite unfavorable weather throughout the period, we achieved above-plan growth in both sales and earnings in the first quarter. Earnings per share for the 13 weeks ended May 5, 2018 were $1.11, up from $0.82 for the 13 weeks ended April 29, 2017. Net earnings were $418 million, up from $321 million in the prior year. These earnings per share results include a $0.17 per share benefit from recently enacted tax legislation and a $.02 per share benefit from the favorable timing of packaway-related cost that we expect to reverse in subsequent quarters.
Total sales for the quarter increased 9% to $3.6 billion. Comparable store sales for the 13 weeks ended May 5, 2018 rose 3% over the 13-week period ended May 6, 2017. This growth compares to a same-store sales gain of 3% for the 13 weeks ended April 29, 2017. We estimate that unfavorable weather throughout the quarter reduced our comparable store sales by over 1%.
For the first quarter, the strongest merchandize category at Ross was men, while geographic trends were very broad-based when normalized for weather. Operating margin for the period of 15.1% was down slightly from the prior year as an improvement in merchandize gross margins and favorable timing of packaway-related expenses were offset by higher freight costs and wage-related investments.
As we ended the first quarter, total consolidated inventories were up 19% over the prior year, mainly due to higher packaway levels as our buyers were able to take advantage of numerous opportunities in the marketplace. Average in-store inventories are up 2% as planned, due to an earlier Mother's Day this year. While packaway as a percentage of total inventories was 49% compared to 46% last year.
We are also pleased to report that dd's DISCOUNTS delivered another quarter of solid growth in sales and operating profit. Our store expansion program is on schedule with the addition of 23 new Ross and six dd's DISCOUNTS locations in the first quarter. We remain on track to open a total of approximately 100 locations in 2018, comprised of 75 Ross and 25 dd's DISCOUNTS. As usual, these numbers do not reflect our plans to close or relocate about 10 older stores.
Now, Michael Hartshorn will provide further color on our first quarter results and details on our second quarter guidance.
Thank you, Barbara. Let's start with our first quarter results. Our 3% comparable store sales gain was driven by higher traffic and an increase in the size of the average basket. First quarter operating margin of 15.1% was down five basis points from last year.
Cost of goods sold improved 20 basis points in the quarter driven by 30 basis points of higher merchandize margin, and distribution cost that declined by 15 basis points mainly due to previously-mentioned favorable timing of packaway-related expense. Occupancy also levered by 15 basis points. These gains were partially offset by a 20 basis point increase in freight cost and 20 basis points in higher buying expenses.
Selling, general, and administrative expenses for the period increased 25 basis points mainly due to higher wage-related costs. During the first quarter, we repurchased 3.3 million shares of common stock for a total purchase price of $255 million. We remain on track to buy back a total of $1.075 billion in stock for the year.
Let's turn now to our second quarter guidance. For the 13 weeks ending August 4, 2018, we are forecasting same store sales to increase 1% to 2% over the 13 weeks ended August 5, 2017. Earnings per share for the second quarter are projected to be in the range of $0.95 to $0.99, which includes the benefit from lower taxes.
The operating statement assumptions for our second quarter guidance include the following. Total sales are projected to grow 5% to 6%. We expect to open 30 new stores during the period, including 22 Ross and eight dd's DISCOUNTS locations. If same store sales are in line with our guidance, then we project operating margin to be in the range of 13.3% to 13.5%. The forecasted decline from last year's 14.9% reflects the unfavorable timing of packaway-related costs, as well as our previously-announced wage and benefit investments. We expect net interest income of about $900,000. Our tax rate is expected to be approximately 24% to 25%, and weighted average diluted shares outstanding are projected to be above 375 million.
Based on our first quarter results and second quarter guidance, we now project earnings per share for the 52 weeks ending February 2, 2019 to be in the range of $3.92 to $4.05, compared to $3.55 for the 53 weeks ended February 3, 2018. As a reminder, our fiscal 2018 guidance includes the benefit from lower taxes. In addition, last year's 53rd week added approximately $0.10 to earnings per share for 2017.
Now, I will turn the call back to Barbara for closing comments.
Thank you, Michael. To sum up, despite unfavorable weather throughout the period, both first quarter sales and earnings per share outperformed our plan. Looking ahead, we expect the retail landscape, both brick-and-mortar and online to remain very competitive throughout 2018. In addition, we face robust multi-year sales comparisons as the year progresses.
With that said, we remain confident in the strength of the off-price sector and ongoing ability to perform well in this space. Our focus will remain on offering customers the outstanding values they have come to expect, which has allowed us to achieve profitable growth in sales, earnings, and market share over time.
At this point, we would like to open up the call and respond to any questions you might have.
[Operator Instructions] Your first question comes from the line of Matthew Boss from JPMorgan. Go ahead please. Your line is open.
Great, thanks. On gross margin, can you speak to drivers of the 30 basis points of merchandize margins in the first quarter? Any change in freight? And then just larger picture, if we look through tax reform this year, I guess has anything changed with your double-digit bottom line algorithm if you are able to drive the 3% to 4% comp?
Sure. So, Matt, it's Michael Hartshorn. Let me answer those in pieces. On merchandize margin, as we mentioned in the comments, those were up 30 basis points in Q1. That was driven by better buying. In addition, we benefited from a very clean inventory position entering the quarter.
In terms of freight costs, freight has been a headwind for over a year. Our outlook has not changed. A number of factors are contributing to the increase. Like others, we had seen significant increases in market rates due to a very tight capacity. This capacity seems to be driven by driver shortages, impacts of increased regulation, and perhaps the stronger economy. In addition, diesel fuel costs were up about 20% from last year in the quarter. So we expect freight to be a headwind for the remainder of the year, and that is reflected in our guidance.
On your last question, certainly this year reflects the benefit of tax reform. Our current guidance reflects the 10% to 14% EPS growth that includes about a $0.69 benefit from tax reform. Going beyond this year, there is nothing that's changed our long-term model.
Great. Best of luck, I’ll see you next week.
Your next question comes from the line of Brian Tunick from RBC. Go ahead please. Your line is open.
Great, thanks. Good afternoon. I guess, curious as we sat here on the Northeast with all the - I guess the nor'easters to hear you guys talk about unfavorable weather, can you maybe give us a little more clarity on sort of what markets, was it just year-over-year in some of your key markets, just give us a little more color on the weather issues. And then curious on the packaway inventory growth, if you can give us a better sense of maybe what categories, or just a good/better/best situation, just give us a better feel for the packaway inventory growth? Thank you very much.
Sure, Brian. On weather, as we've said in our remarks, we estimate the impact to overall chain was about -- was over 1%. For us, every major region actually had negative weather comparisons during the quarter, with one exception, that was the Pacific Northwest. So the areas as you can imagine that were impacted the most included the Mid-Atlantic and also the Midwest.
And then as it pertains to packaway, what I would say to you is that there's an abundance of merchandize in the marketplace. So we were able to take advantage of those opportunities, and they're pretty broad-based in terms of different types of products, so it isn't just one classification. And I think the merchants have been out there in the market looking to see what's available, and felt that the timing was right to buy those goods as you know that's a big part of their job.
And will there be any implications for the back half regarding packaway or distribution expenses?
In terms of distribution expenses what we did -- so we had a $0.02 benefit in the first quarter based on how we capitalize packaway cost, and we'd expect that to reverse and be a negative impact over the remainder of the year.
Great, thanks very much, and good luck.
Your next question comes from the line of Lorraine Hutchinson from Bank of America. Go ahead please. Your line is open.
Thank you. Good afternoon. Can you talk a little bit about the composition of the comp, how much of that was traffic versus basket, and what drove the basket increase?
Sure, Lorraine. As we mentioned in our prepared remarks, the 2% comp was driven by higher traffic and an increase in the size of the average basket. The higher basket was primarily driven by higher units per transaction with AUR was down slightly, and the decrease in AUR was driven by mix of business.
Thank you.
Your next question comes from the line of Kimberly Greenberger from Morgan Stanley. Go ahead please. Your line is open.
Great, thank you so much. I wanted to just ask about the SG&A de-leverage, 25 basis points, obviously I think your guidance this year includes some ongoing de-leverage. Is there any guidance you have sort of on a quarter-by-quarter basis? How we should think about that? And then I just wanted to follow-up on the weather question. Could we assume that you are seeing some pick up here in May assuming that weather has normalized so far here in Q2? Thank you so much.
Sure, Kimberly. On SG&A, the 25 basis point increase reflects a couple of different things. It's the lapping of market-based increase, the wage increases that we made last year, as well as the impact of statutory increases that included California increasing to $11 in January. It also includes a piece of wage investments that we are making this year.
Our guidance for the remainder of the year would include further de-leverage as the year progresses as a result of the associate investments we announced at the beginning of the year, which includes going to $11 throughout the company, payment of one-time bonuses, and also improvements to our paid leave programs. And then in terms of weather, beyond the quarter our practice is not to comment about post-quarter trends.
Okay, thank you.
Your next question comes from the line of Ike Boruchow from Wells Fargo. Go ahead please. Your line is open.
Hi, good afternoon everyone. I'm not sure who wants to take this question, but you guys have talked a little bit over the past couple of quarters around the beauty category becoming more of an opportunity for you to buy into. Any updates there on that category specifically to Q1, and then just updated thoughts as you move forward?
Sure. The beauty category has been a growing category for everyone as the market has shifted around a lot. We feel good about beauty category, and you know ourselves as well as many other people in the industry feel that it's an opportunity as the market itself is shifting from department stores to other sectors.
Thanks.
Your next question comes from the line of Paul Trussell from Deutsche Bank. Go ahead please. Your line is open.
Good afternoon. Thanks for taking our question. Just on the second quarter guidance, I believe you outlined EBIT rates in 13.3% to 13.5% range or so, which are -- down 140, 150 basis points or so at the midpoint year-over-year. Can you just kind of rank or quantify for us to what extent that contraction is wages versus freight versus the packaway expenses in 2Q, and any other puts and takes we should be mindful of?
Sure. On the components, we wouldn't break down the specific levels, but I will repeat, I think what you just said is there is three main drivers. Most importantly the wage and benefit investments, a portion of those will happen in the second quarter, so actually the de-leverage will increase as we progress through the year. So that's the first main impact in the second quarter. It also includes as we mentioned the negative impact of timing of packaway-related costs and freight will continue to be a headwind for us.
Okay, thank you. Best of luck.
Your next question comes from the line of Paul Lejuez from Citigroup. Go ahead please. Your line is open.
Hey, thanks guys. Going back to the traffic first ticket question, curious if you saw any difference in the Ross business versus dd's on those metrics? And then secondly, also curious if you track how your performance is at centers where you are co-located with another off price, if you can maybe share how those stores of yours are performing in the co-located locations with the TJ concept or Burlington versus those that are there in the separate center? Thanks.
Sure. I would say the dd's and Ross, they were proportional in terms of mix of transaction, AUR, traffic et cetera. On the - we're co-locating about a third of our chain with either TJ Maxx Marshalls or Burlington and those stores preformed in line with the rest of the chain.
Thanks. Any comment on home versus apparel during the quarter?
Overall non-apparel was slightly above apparel, given the weather.
Got it. Thanks. Good luck guys.
Your next question comes from the line of Oliver Chen from Cowen & Company. Go ahead please. Your line is open.
Hi. On the gross margin line, the buying expenses, do you expect that trend to continue? And what was underlying some of that? Also as you think ahead, particularly in the all the opportunities available in non-apparel businesses such as home, what are your thoughts about the opportunity you have ahead and how you can seek to maximize your store space as you look at different, new opportunities where customers still value in other categories? Thank you.
Oliver, on buying, expenses can fluctuate quarter-to-quarter. In the first quarter, there was some, I would say negative timing impact, but it also reflects mainly that we are going to make ongoing investments in the buying organization.
And as it pertains to opportunities in non-apparel areas such as some, actually, Oliver, we think that our opportunities are very broad-based in addition to come in the entire box. So in terms of maximizing space in the stores, we really decide what businesses we want to drive, and then we figure out how it fits within the box.
Got it. So which businesses do you want to drive?
Well, I think on this call I really wouldn't be saying which businesses we want to drive, I would just leave it with you know, it's broad-based, it's not just focused on winning.
Got it. Best regards.
Your next question comes from the line of Marni Shapiro from Retail Tracker. Go ahead please. Your line is open.
Hey, guys. I had a quick question about the size of the business. Historically this has always been a business you guys have done well with and you've had in your stores forever and there's quite a buzz around the business right now. So I'm curious just, you know, how it's done for you, are you finding availability starting to be more plentiful or easier to find and what you're thinking strategically about the business?
Sizes business, Marni, you mean like woman's special prices…
Exactly. And even on the men's side, the big and tall business on the men's side as well?
Sure. Listen, woman's world are plus sizes in the United States is a total growing business. So I think in apparel it's certainly an opportunity. In terms of availability, right now there's just a lot of availability, pretty much most classifications of products. So supply was pretty plentiful -- so supply is pretty actually supply. So from that perspective, there would be merchandize out there. In terms of opportunity, we grow as the customer base of what the customer is telling us, and those are the businesses that we go after.
Fantastic, that's great. And there is any reason to believe that merchandize margins will be we pressured? I know you have headwinds as far as wages and freight costs and things like that, but there is a lot of availability in merchandize. It seems like generally the environment while competitive isn't in fire sell mode. So, is there any reason to believe merchandize margin shouldn't be okay rest of the year?
It's our guidance assumes that merchant margins are relatively flat…
All right, thanks guys. Best of luck.
Your next question comes from the line of Laura Champine from Roe Capital. Go ahead please. Your line is open.
Good afternoon. Just one more question on the weather, can you break down sort of the methodology that you used to determine that it was about a 1% hit? How do you get there, or greater…
Sure. So we use weather services to do that. And also obviously storms are easier to calculate, that's a methodology. The only thing I would add is that includes both temperature and precipitation.
Got it. Thank you.
Your next question comes from the line of Bob Drbul from Guggenheim Securities. Go ahead please. Your line is open.
Hi, good evening. Just two questions; I guess that the first one is on the current marketplace or the competitive store closures, is that providing additional opportunity for you to get product from different vendors? And I think the second question is as you continue to expand stores and your store base with -- the ability to attract talent both whether it's managers or even the labor component in the associates within the stores, are you seeing any pressure there that you could talk to?
So, Bob, it's Michael O'Sullivan. First of all, in terms of the store closures, it's hard to tell what contribution that's having to availability. Availability is driven by a number of a number of things. And it's possible. What's actually -- let me step back, I think the struggles that the rest of the retail industry is having certainly is helping to drive availability on store closure specifically account to kind of like that particular component.
In terms of availability of labor, we are very happy with our ability to attract and retain people throughout the level -- throughout all levels in the company.
Great, thank you very much.
Your next question comes from the line of Simeon Siegel from Nomura Instinet. Go ahead please. Your line is open.
Hey. This is Dan Stiller [ph] on for Simeon. Thanks for taking that question. Just wanted to know if there's been any notable change recently over the past several years in what brands your shoppers are gravitating towards, basically trying to figure out if your top selling brands really turned over much and kind of favor for newer up and coming brands? Thanks.
For competitive reasons, we really wouldn't talk about brands on the call.
Okay. And on the consumer base, anything you're seeing in terms of frequency of visit of existing shoppers, or I guess customer acquisition and the initiatives there? That would be very helpful. Thanks.
So, we slice and dice customer data all the time, we're often out that doing research, and I would say there's nothing to call out in terms of any changes to consumer behavior or demographics or anything of that nature at this point.
Got it. Thank you very much.
Your next question comes from the line of Michael Binetti from Credit Suisse. Go ahead please. Your line is open.
Hey, guys. Good afternoon. Thanks for taking my questions here. Could you speak a little bit more to the change in AUR and the mix-based delta there? I think lot of the competitive sort of speaking to positive AURs at this point across both half price and department stores frankly. So I'm wondering if there's some kind of category divergence that you guys are pursuing that's causing some puts and takes on your AUR, and if you think that that continues remain a headwind through this year, if you see some reason why the categories that you guys have been inventory with the change in the inventory line there could take some pressure off on that line?
Yes. I would say -- so AUR obviously can change from quarter-to-quarter. So it's not something that's I would say strategic, but so as we look out for the rest of the year, it will be based on category performance. So, hard to say at this point, I'd said over the last couple years based on the categories they've done well, AUR has been down, but just slightly.
I mean I was a little surprised that AUR was still headwind in the first quarter with the weather citing maybe you didn't move into some of the categories in the spring that I thought about a little bit, there would've been a little bit higher AUR in the comp, was that a surprise to you all or not?
Not really. I mean our strategy, Michael, is -- over a long period of time has been to be a shopping price just possible to drive sales, and that's the approach we took n Q1 as we've historically taken, and basically that we're pretty happy with the 3% comp on top of the 3% comp that we got last year.
Sure. And then, if you just help us one last one on the model, I think any kind of calendar shift cadence that we should think to? I think in 2013 you said you had about one percentage point benefit sales in the first half, I mean sales not comps and then a one point drag in the second half. Is it a similar map this year that we should have in our models?
Yes, I would say it's similar, just sort of be clear, we reported on a restated basis, and you can see this in the difference between our total sales and our comp sales.
Right.
So for the year, I think it's accurate that the first-half has a larger negative impact than the second-half. So for us, the difference between restating that wage and not is worth about 200 basis points in the first quarter.
All right, thanks a lot.
[Operator Instructions] Your next question comes from the line of Jerry Merriman from Bernstein. Go ahead please. Your line is open.
Thanks. It's Jamie Merriman. My question is just about your marketing strategy. As you work on attracting younger consumers into the business, is that pivoting at all and if so, how? Thanks.
Sure. So Jamie, I would say that our marketing approach in terms of the types of media that we're using has been evolving over time, and will likely continue to evolve obviously moving to less traditional forms of media. Some of that's still experimental. We will see how those media perform, but I would expect that over time you can see more of that shift for us as in deed you'll see for other appetizers as well.
And have you found that maybe able to be a little bit more targeted and therefore lower cost on an acquisition basis, so you're seeing -- too early to see benefits like that?
I think it depends on the market. It depends upon the individual type of media you're talking about. And what exactly we're trying to do in terms of who you're trying to target. So the answer is -- the answer can be yes depending upon the situation or it can be no depending on the situation. And that's kind of what I mean by saying that some of those channels are fairly experimental, and that's why we're sort of evolving into them rather than making significant changes at this point.
Okay, thanks very much.
There are no further telephone questions. At this time, I will turn the call back over to the presenters. I wanted to stop in. Your next question comes from the line of Sandra Parker. I think she's just removed herself again from the queue, sorry.
Okay. Thank you for joining us today and for your interest on Ross Stores. Have a great day.
This concludes today's conference call. You may now disconnect.