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Edited Transcript of ROST earnings conference call or presentation 23-May-19 8:15pm GMT

Q1 2019 Ross Stores Inc Earnings Call

Pleasanton May 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Ross Stores Inc earnings conference call or presentation Thursday, May 23, 2019 at 8:15:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Barbara Rentler

Ross Stores, Inc. - CEO & Director

* Michael J. Hartshorn

Ross Stores, Inc. - Group Executive VP of Finance and Legal, Principal Accounting Officer & CFO

* Travis Marquette

Ross Stores, Inc. - Group Senior VP and Deputy Chief Financial Officer

* Gary Cribb

Ross Stores, Inc. - Group Executive VP of Stores and Loss Prevention

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Conference Call Participants

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* Alexandra E. Walvis

Goldman Sachs Group Inc., Research Division - Research Analyst

* Dana Lauren Telsey

Telsey Advisory Group LLC - CEO & Chief Research Officer

* Jamie Susan Merriman

Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst

* Jay Daniel Sole

UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Softlines & Luxury

* John Dygert Morris

D.A. Davidson & Co., Research Division - Research Analyst

* Kimberly Conroy Greenberger

Morgan Stanley, Research Division - MD

* Krista Kerr Zuber

Cowen and Company, LLC, Research Division - VP

* Krisztina Katai

Deutsche Bank AG, Research Division - Research Associate

* Laura Allyson Champine

Loop Capital Markets LLC, Research Division - MD

* Lorraine Corrine Maikis Hutchinson

BofA Merrill Lynch, Research Division - MD in Equity Research and Consumer Sector Head in Equity Research

* Mark R. Altschwager

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Marni Shapiro

The Retail Tracker - Co-Founder

* Matthew Robert Boss

JP Morgan Chase & Co, Research Division - MD and Senior Analyst

* Michael Charles Binetti

Crédit Suisse AG, Research Division - Research Analyst

* Robert Scott Drbul

Guggenheim Securities, LLC, Research Division - Senior MD

* Lauren Frasch

Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst

* Simeon Avram Siegel

Nomura Securities Co. Ltd., Research Division - Executive Director & Senior Analyst

* Tracy Jill Kogan

Citigroup Inc, Research Division - VP

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Presentation

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Operator [1]

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Good afternoon, and welcome to the Ross Stores' First Quarter 2019 Earnings Release Conference Call. This 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, new store openings 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 risks and uncertainties that could cause actual results to differ materially from historical performance or current expectations. Risks factors are included in today's press release and the company's fiscal 2018 Form 10-K and fiscal 2019 8-Ks on file with the SEC. Now I'd like to turn the call over to Barbara Rentler, Chief Executive Officer.

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Barbara Rentler, Ross Stores, Inc. - CEO & Director [2]

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Good afternoon. Joining me on our call today are Gary Cribb, Group Executive Vice President, Stores and Loss Prevention; Michael Hartshorn, Group Executive Vice President and Chief Financial Officer; Travis Marquette, Group Senior Vice President and Deputy Chief Financial Officer; and Connie Kao, Vice President, Investor Relations.

We'll begin our call today with a review of our first quarter performance followed by our outlook for the second quarter in fiscal year. Afterwards, we'll be happy to respond to any questions you may have. As noted in today's press release, for the first quarter, we delivered sales gains at the high end of our guidance as well as better-than-expected earnings per share growth despite continued underperformance in Ladies apparel. Earnings per share for the 13 weeks ended May 4, 2019 was $1.15, up from $1.11 for the same period last year. Net earnings for the 2019 first quarter were $421 million compared to $418 million in the prior year. These results include an approximate $0.02 per share benefit from favorable timing of expenses that are expected to reverse over the balance of the year.

Total sales for the period increased 6% to $3.8 billion with comparable store sales up 2%. For the first quarter, the strongest merchandise category at Ross was men's while the Midwest was the best performing geographic region.

As I just mentioned, Ladies apparel trailed the chain. Our execution in this important business remains below our standard and consequently, we did not offer our customers the compelling values they have come to expect from us. While we are working diligently to improve our merchandise assortments, which were out of balance in a number of areas in Ladies, plus strengthen our value propositions, it can take some time to correct issues like this in a chain of our size.

That said, we do believe that the actions we are taking will lead to improved results as we move through the year. As we ended the period, total consolidated inventories were down 4% over the prior year.

Average in-store inventories were up 1% as planned while packaway, as a percentage of total inventories, was 44% compared to 49% last year. As it has for time now, dd's DISCOUNTS posted better-than-expected gains in both sales and operating profits for the quarter.

Turning to store growth. Our 2019 expansion program is on schedule with the addition of 22 new Ross and 6 dd's DISCOUNTS locations in the first quarter. We remain on track to open a total of approximately 100 locations in 2019 comprised of 75 Ross and 25 dd's DISCOUNTS. As usual, these numbers do not reflect our plan to close or relocate about 10 stores. Now Michael Hartshorn will provide further color on our first quarter results and details on our second quarter guidance.

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Michael J. Hartshorn, Ross Stores, Inc. - Group Executive VP of Finance and Legal, Principal Accounting Officer & CFO [3]

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Thank you, Barbara. Let's start with our first quarter results. Our 2% comparable store sales gain was primarily driven by an increase in the size of the average basket. While operating margin of 14.1% was down 95 basis points from last year, it was better-than-expected mainly due to above plan merchandise margin and favorable timing of expenses. Cost of goods sold rose by 85 basis points in the quarter, a 30 basis point improvement in merchandise margin was more than offset by a 60 basis point increase in distribution costs as we were up against last year's benefit from packaway-related expense. In addition, freight costs grew by 35 basis points and occupancy and buying expenses increased by 10 basis points each.

Selling, general and administrative expenses for the period increased 10 basis points as higher wage-related costs were partially offset by favorable timing of expenses.

During the first quarter, we repurchased 3.4 million shares of common stock for a total purchase price of $320 million. We remain on track to buy back a total of $1.275 billion in stock for the year.

Let's turn now to our second quarter guidance. For the 13 weeks ending August 3, 2019, we're forecasting same-store sales to increase 1% to 2% on top of a 5% gain last year.

Earnings per share for the second quarter are projected to be in a range of $1.06 to $1.11, up from $1.04 in the prior year period.

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 28 new stores during the period including 22 Ross and 6 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 13.2% to 13.4%. The forecasted decline from last year's 13.8% mainly reflects headwinds from higher wage and freight costs, partially offset by the anniversarying of last year's negative impact from packaway timing.

In addition, we would expect some deleveraging on occupancy if comparable sales performed in line with our guidance.

We expect net interest income of about $4 million, our tax rate is expected to be approximately 24% to 25% and weighted average diluted shares outstanding are projected to be about $363 million.

Based on our first quarter results and second quarter guidance, we now project earnings per share for fiscal 2019 to be in the range of $4.38 to $4.52. This compares to EPS of $4.26 last year, which included a $0.07 per share benefit from the favorable resolution of a tax matter in the fourth quarter. Now I'll turn the call back to Barbara, for closing comments.

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Barbara Rentler, Ross Stores, Inc. - CEO & Director [4]

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Thank you, Michael. To sum up, we delivered respectful results in the first quarter despite difficulties in our Ladies apparel business. As I said earlier, we're working hard to improve our merchandise assortments and strengthen the values we offer in this important business. We do believe the steps we're taking in Ladies will lead to improved performance over time. At this point, we'd like to open up the call and respond to any questions you might have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Matt Boss from JPMorgan.

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Matthew Robert Boss, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [2]

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Congrats on a nice quarter. I guess on the top line, can you speak to Ladies apparel performance, maybe, versus plan in the first quarter? And just how much do you attribute to company's specific execution versus relative category weakness as we've heard this trend from a number of retailers in the last couple of quarters?

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Barbara Rentler, Ross Stores, Inc. - CEO & Director [3]

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Sure. Well, obviously, I wouldn't talk versus plan, all I I'll say is that Ladies on the top line trailed the chain. In terms of company execution versus relative performance in the outside world, we really feel that our execution was below our standards. And obviously, there are other outside factors, there's weather and there was whatever, but in terms of execution, we felt that our assortments were out of balance, that our value offerings were not as compelling as they should have been and obviously, the price value equation is critical. And so we really feel like it's an execution issue and not necessarily based off of other factors in the outside world.

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Matthew Robert Boss, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [4]

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Got it. And then maybe just a follow-up on the margin front. On gross margins, what's your expectation for merchandise margin in the second quarter and then the balance of the year in the back half?

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Michael J. Hartshorn, Ross Stores, Inc. - Group Executive VP of Finance and Legal, Principal Accounting Officer & CFO [5]

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Sure, Matt. We don't give specific guidance by quarter. I will tell you when we started the year, we planned merchandise margin relatively flat for the year and at this point, that's what's embedded into our guidance for the remainder of the year.

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Operator [6]

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Your next question comes from Lorraine Hutchinson from Bank of America.

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Lorraine Corrine Maikis Hutchinson, BofA Merrill Lynch, Research Division - MD in Equity Research and Consumer Sector Head in Equity Research [7]

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You've had a couple of your senior leaders leave over the past few months. I'm just hoping you could talk about the bench under them if you're planning external searches? Or how you are thinking about the leadership team going forward?

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Barbara Rentler, Ross Stores, Inc. - CEO & Director [8]

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Sure. What I would say, overall, our ability to -- we have a very deep bench of talented and long-tenured executives on the operational side and on the merchandising side. And so we have a strong succession plan in all of those worlds underneath. So we feel strongly that our bench at the senior level and the level below that is very solid. And as we know that certain executives where we knew that they were leaving, we had transition plans put in place for them, so that we could have a smooth transition and not have disruption to the business.

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Operator [9]

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Your next question comes from Mark Altschwager from Baird.

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Mark R. Altschwager, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [10]

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With respect to the comp guidance of 1% to 2%, I think last quarter you guided 0% to 2% given some of the headwinds you identified in Women's apparel. So I mean, is the fact that you're returning to that 1% to 2% range, even with the tougher Q2 comparison or reflection that you think the Women's apparel issue is improving as you move forward? Or are there other categories that are perhaps making up big difference in giving you some more broad-based confidence in the trajectory of the comp?

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Michael J. Hartshorn, Ross Stores, Inc. - Group Executive VP of Finance and Legal, Principal Accounting Officer & CFO [11]

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Yes. I'd say on the guidance, I mean, we did a 2% in the first quarter, so the 1% to 2% is kind in line on how we usually guide the business and that's all I'd read into it and that's the way I think about it.

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Operator [12]

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Your next question comes from Kimberly Greenberger from Morgan Stanley.

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Kimberly Conroy Greenberger, Morgan Stanley, Research Division - MD [13]

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I wanted to know if there's any color you can provide on just the monthly cadence in the first quarter? And whether you saw the same sort of headwinds in February this year from delays in tax refunds that you have seen perhaps 2 years ago? And then secondarily, Barbara, I'm wondering if there is a good basic way to help us understand the out of balance in Women's, we're all -- many of us are finance people not merchants. So just maybe in simple terms, how would you explain to a non-merchant person what is the out-of-balance issue? And then is the lack of the value proposition you talked about or lack of compelling value, is that a function of the availability of goods in the market, the price that those goods are available for or perhaps maybe just some mistakes in the buying process? Any insight would be really appreciated.

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Michael J. Hartshorn, Ross Stores, Inc. - Group Executive VP of Finance and Legal, Principal Accounting Officer & CFO [14]

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Kimberly, on the trends during the quarter, sales strengthened as the quarter progressed and as frankly as weather improved and obviously, also with the later Easter that was 3 weeks later than last year. Like others, we did the delay in tax refunds, did have a short-term impact until they got caught up pretty quickly. I think overall, the tax refunds were slightly down for the kind of tax filing year. But hard to understand that's any impact to us for the entire quarter.

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Barbara Rentler, Ross Stores, Inc. - CEO & Director [15]

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And then Kimberly, in terms of out of balance, I mean that some of the simplest examples would be I own not enough shorts, too much denim, it could be out of balance by classifications, it could be out of balance by price points. I mean those are the kinds of things I've been talking about out of balance to give you a couple of examples to put sides around it. In terms of offering the compelling value, it has nothing to do with the availability of goods, there's a lot of merchandise in the market, there continues to be merchandise in the market. I would say that the overall merchandise offerings just weren't where they needed to be and really it was execution issues that were really below our standards.

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Operator [16]

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Your next question comes from Michael Binetti from Crédit Suisse.

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Michael Charles Binetti, Crédit Suisse AG, Research Division - Research Analyst [17]

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I wanted to maybe, Barbara, ask a similar question what Matt asked before. But when you think about how to isolate your comments to your business versus what's going on more broadly in a marketplace, obviously there's a quite a bit going on out there right now. But how much do you -- how do you assess your comment that Midwest was the strongest market relative to your own company's performance versus externals like the big Bon-Ton bankruptcy? Have you guys tried to measure how much that's helping add to the Midwest?

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Michael J. Hartshorn, Ross Stores, Inc. - Group Executive VP of Finance and Legal, Principal Accounting Officer & CFO [18]

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Sure. On the Midwest -- Michael, on the Midwest, Midwest has been comping well for us for -- frankly, since we entered the market in 2011. And it's been one of our strongest performing comp. And it continues to be a place that we're adding stores. So it's a newer store base and have been -- continued to be successful there in gaining market share.

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Barbara Rentler, Ross Stores, Inc. - CEO & Director [19]

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And then in terms of -- I'm sorry, there was an echo there. In terms of our business (inaudible) to comments people have made on the outside, we look at a number of metrics, Ladies to plan, other apparel businesses to plan and key classifications, churn, I mean, there's a variety of metrics that we look at to make that assessment overall. I mean it isn't just 1 metric, it's a series of metrics.

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Michael Charles Binetti, Crédit Suisse AG, Research Division - Research Analyst [20]

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Got it. And then if I could follow-up quickly. I think you said the merch margin was up 30 basis points in the quarter, but you think flat for the year. Michael, is there a point on the horizon where we see minus sign in front of that? And then if so, any reason why? That's a planning or just area on the side of conservatism?

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Michael J. Hartshorn, Ross Stores, Inc. - Group Executive VP of Finance and Legal, Principal Accounting Officer & CFO [21]

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Well, when we entered the quarter, we were actually able to take -- be able to remain very flexible and so our merchants were able to take advantage of close-outs during the quarter, which helped the margin. I would also say that we entered and exited the quarter with healthy inventory positions and therefore there wasn't markdown exposures.

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Operator [22]

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Your next question comes from Paul Trussell from Deutsche Bank.

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Krisztina Katai, Deutsche Bank AG, Research Division - Research Associate [23]

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This is actually Krisztina Katai, on for Paul. I was just wondering if you could just maybe talk a little bit more about the weakness that you continue to see in Ladies apparel. I know you've discussed it earlier, but I'm just wondering what are some of the steps that you have taken to improve these results. And maybe the timeline to remedy it? And then just if you could just discuss some of the categories, what you saw there? I mean you called out men's outperforming, but what about some of the other categories such as home and beauty? If you could just share anything there?

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Barbara Rentler, Ross Stores, Inc. - CEO & Director [24]

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Sure. First, as it pertains to Ladies issues, as I've said before, we're working diligently to improve the assortments in this important area. But it's going to take time to completely -- address all of the issues for a chain of our size. That said, we believe that we will see improved performance as we move through the year. In terms of other categories, home and beauty, home was relatively in line with the chain and beauty outperformed the chain.

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Operator [25]

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Your next question comes from Simeon Siegel from Nomura Instinet.

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Simeon Avram Siegel, Nomura Securities Co. Ltd., Research Division - Executive Director & Senior Analyst [26]

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Just given your comments on the inventory and the supply in the market, just any help on understanding why the inventory decline? And I guess, specifically packaway would've -- I thought, you would have had a nice opportunity there. So just any thoughts on that and the comfort in the ability to comp with the down inventory.

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Michael J. Hartshorn, Ross Stores, Inc. - Group Executive VP of Finance and Legal, Principal Accounting Officer & CFO [27]

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So inventory was down just slightly at the end of the quarter. So we think we can continue to operate at that level of inventory and turn faster. On packaway, we're actually up against the very large number last year. Packaway tends to be between 40% and 49% of the total inventory and that can vary over time. But I think we're happy with the level and the content of our packaway inventory as we ended the quarter.

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Barbara Rentler, Ross Stores, Inc. - CEO & Director [28]

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Right. And in terms of supply in the market, there's an abundance of supply in the market just based off of Q1 performance and just -- even in just traditional department stores. So supply is not the issue, buying it at the right price and the right time is really a merchant's judgment call.

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Operator [29]

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Your next question comes from John Morris from D.A. Davidson.

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John Dygert Morris, D.A. Davidson & Co., Research Division - Research Analyst [30]

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Congratulations on a good quarter. Very brief, I'm just curious why this shifting of the timing of the expense? Why that was particularly or generally happening in the current quarter? And then on the merch margin, merch margin was up, Women's -- however, Women's underperformed. So maybe if you can dive a little bit deeper to help us understand the differences there. Was it all men's or should we look at it from a different -- with a different filter in terms of why you were able to have that merch margin up despite the Women's underperformance?

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Michael J. Hartshorn, Ross Stores, Inc. - Group Executive VP of Finance and Legal, Principal Accounting Officer & CFO [31]

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Sure. On the timing, it was really broken into 2 pieces. It's -- part of it's just the packaway timing. And all of these timing, by the way, is not versus last year it's versus our original guidance. And so what you've noticed we did is, we beat the first quarter by $0.04 and then upped the full year by $0.02 on the top end of the range. So we're just trying to call that out. But part of it was packaway-related and part of it was SG&A cost that we expected to happen in the first quarter that will happen later in the year. And then just kind of on the merchandise margins, the reason we didn't have -- we're able to operate with higher merch margin and -- what's very important when you have a business that underperforms is that you manage the inventory. And with Ladies and overall inventories, we entered -- both entered and exited the quarter with healthy inventory positions. So I think that's an important part of the margin improvement.

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Operator [32]

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The next question comes from Ike Boruchow with Wells Fargo.

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Lauren Frasch, Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst [33]

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This is Lui, on for Ike. I wanted to ask about the margin dynamics in the quarter just around freight since I know that it's been such an outsized drag on your costs. How are you thinking about that dynamic for the balance of the year and in Q2?

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Michael J. Hartshorn, Ross Stores, Inc. - Group Executive VP of Finance and Legal, Principal Accounting Officer & CFO [34]

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Sure. So -- and maybe it's best to go through last year. Last year, the freight cost escalated as we moved through the year. So in our initial call this year, we said that we thought freight would be a negative impact for the first half of the year and then as we round some of the increases we had in the last year's second half, that the cost would abate. So that's -- our thoughts continue to be that the first half of the year, we'll have freight pressure and then we'll have a lower cost versus last year in the back half.

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Operator [35]

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Your next question comes from the line of Paul Lejuez for Citigroup.

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Tracy Jill Kogan, Citigroup Inc, Research Division - VP [36]

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It's Tracy, filling in for Paul. I just had a follow-up question packaway. I was wondering if you're seeing more availability in certain categories versus others and maybe perhaps in categories that are already being impacted by tariffs?

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Barbara Rentler, Ross Stores, Inc. - CEO & Director [37]

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Well, availability is pretty broad-based in terms of categories where the tariffs is -- as I'm sure, you've probably read in first that lot of vendors brought merchandise into the country even starting a few months ago to get ahead of the 10% tariff even before the 25%. So I would say there is -- in certain pockets of those classifications, there are vendors who own inventories. And then there are some that really don't own excess inventories. So that's kind of a mixed story based on classification. And then in terms of apparel, apparel availability is broad-based.

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Operator [38]

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Your next question comes from the line of Marni Shapiro from The Retail Tracker.

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Marni Shapiro, The Retail Tracker - Co-Founder [39]

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Great job in a cold and very late Easter first quarter. I'm not going to ask about your Ladies apparel. I'm actually curious about your real estate. You were one of the few net openers of stores out there and in a space where there are a lot of people vacating. So if you could just talk to us a little bit about the tone of your -- of what you're seeing out there for your leases? And are you able to go back to some of your existing leases and renegotiate? Or what percentage of your releases are coming up for renewal each year? If you could just put some color around that.

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Gary Cribb, Ross Stores, Inc. - Group Executive VP of Stores and Loss Prevention [40]

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So we have seen closures with other retailers and that's been going on for quite a while. We tend to look 2 to 3 years out and feel pretty confident that we'll be able to achieve our store opening targets. We didn't really comment on the leases, but whenever there's closures, it generally means good news for everybody.

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Operator [41]

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Your next question comes from the line of Jay Sole with UBS.

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Jay Daniel Sole, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Softlines & Luxury [42]

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A couple of questions going to where tariff was mentioned. Can you just talk about how the company is planning to handle the situation if there are new tariffs applied to apparel and footwear? And can you talk about what percent of your merchandise is imported from China into stores directly?

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Michael J. Hartshorn, Ross Stores, Inc. - Group Executive VP of Finance and Legal, Principal Accounting Officer & CFO [43]

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Sure. So like everybody else, we're closely monitoring the trade talks and tariffs and at this point, it's too early to say what the potential impact could be on the industry. Our focus is to maintain a pricing umbrella versus traditional retailers and offer the best values to the customers. At this point, it's unclear how the industry would react with increases to apparel and shoes. And -- but we certainly would not be the price increase leader in that regard. The silver lining is we have a flexible business model and can react to the price increases and disruptions like this that historically meant to supply opportunities for off-price. And then we wouldn't comment on the direct-sourcing question, what percentage is directly sourced from China.

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Operator [44]

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Your next question comes from the line of Laura Champine with Loop Capital.

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Laura Allyson Champine, Loop Capital Markets LLC, Research Division - MD [45]

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It is on the underperformance in the Women's apparel. Were there any changes in staffing for senior merchants? Or any significant changes in your relationship with vendors? Or any quality issues coming up with vendors that were unanticipated? I'm just trying to diagnose better what's going on and how long it might take to fix?

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Barbara Rentler, Ross Stores, Inc. - CEO & Director [46]

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Okay. Well, in terms of the team, no, there were no significant changes. We have a very large and talented merchant team, very tenured. And it's the same team that has delivered results for many years and being able to deliver value to the customer. In terms of relationships in the market, no, we have -- again, we have a very large merchant team whether in Ladies or in the entire company. So out there -- we're constantly out there building relationships and trying to do more business. So I don't see any relationships or quality issues. The issues are really they are internal. They are execution issues and we're working diligently, as I said before, to correct those issues. But because of our size, we believe, we'll see improved performance as we move through the year. But the issues are not external, the issues are internal. It's our execution.

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Operator [47]

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Your next question comes from Alexandra Walvis with Goldman Sachs.

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Alexandra E. Walvis, Goldman Sachs Group Inc., Research Division - Research Analyst [48]

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I had a question on the Home category you mentioned in response to a prior question that was tracking in line with the chain. I think that represent a little bit of a deceleration in that category from prior, some of your peers and other retailers have called out some softness in home category and some difficulties with the competitive environment. I was wondering if you could comment on your experience there? How you're seeing demand, pricing and so forth?

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Barbara Rentler, Ross Stores, Inc. - CEO & Director [49]

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From the -- just from the general, the general classification of home, again, some of our businesses are a lot better than...

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Alexandra E. Walvis, Goldman Sachs Group Inc., Research Division - Research Analyst [50]

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Yes. That's...

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Barbara Rentler, Ross Stores, Inc. - CEO & Director [51]

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I'm sorry, go ahead.

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Unidentified Analyst [52]

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Yes. That was...

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Barbara Rentler, Ross Stores, Inc. - CEO & Director [53]

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Walvis, go ahead and continue. Why don't you continue with the question?

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Alexandra E. Walvis, Goldman Sachs Group Inc., Research Division - Research Analyst [54]

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Yes. Sure. I was just wondering if you could comment a little bit more on your experience in the general home classification and if you have any comments beneath that level in terms of what's performing well? As well and how well the market is in that category that would also be really helpful?

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Barbara Rentler, Ross Stores, Inc. - CEO & Director [55]

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Okay. Generally, some businesses in home are better than others. I really wouldn't go into the specifics of that on the call. I think the home category, as a general statement for the market is that's where a lot of people haven't absorbed increased costs. And so I think the market maybe depending upon the classification of business they're in, the market maybe a little bit more disrupted than others, some classes more than others and therefore, in some of the businesses, there's more opportunities for us and in some of the other businesses, there's less opportunity. And so -- and then -- so the balance of it maybe a little bit different than it's been probably for everyone in the last few months. Without getting into more specifics on the call, I mean, that's kind of the general gist of what's going on.

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Operator [56]

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Your next question comes from the line of Jamie Merriman from Bernstein.

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Jamie Susan Merriman, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [57]

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I think in the prepared remarks you mentioned that the driver of the comp performance was the basket size increasing. But I'm just wondering if you could speak to what you've seen in traffic over the last quarter? I mean also maybe break that basket size down into price versus units.

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Michael J. Hartshorn, Ross Stores, Inc. - Group Executive VP of Finance and Legal, Principal Accounting Officer & CFO [58]

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Sure. So as we mentioned in the remarks the 2% comp was driven by the increase in the basket. The basket was driven by higher units per transaction, AUR was down slightly. And with traffic, given the performance in Ladies apparel, we think that had an impact on traffic for the quarter. And again, the way we measure traffic is through the number of transactions. We actually do not have traffic counters.

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Operator [59]

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The next question comes from the line of Dana Telsey from Telsey Advisory Group.

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Dana Lauren Telsey, Telsey Advisory Group LLC - CEO & Chief Research Officer [60]

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Do you think about just the state of the consumer, anything you are picking up that in this first quarter was different than in quarters past that would've made the difference in top line? Whether it is delayed tax refunds or obviously the comparison? And did you see a difference in performance of dd's versus Ross?

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Michael J. Hartshorn, Ross Stores, Inc. - Group Executive VP of Finance and Legal, Principal Accounting Officer & CFO [61]

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With the consumer, there is nothing I'd call out. With tax refunds, the refund cycle was completed in the quarter. So perhaps there was timing differences within the quarter. But there is nothing really that I'd call out. I mean first quarter has been tough for us and other retailers versus the rest of the year for a number of years. And dd's versus Ross -- yes, dd's actually -- we were pleased with the performance and we're ahead of last year. So we're pleased -- as we said in our commentary, we're pleased with their results.

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Dana Lauren Telsey, Telsey Advisory Group LLC - CEO & Chief Research Officer [62]

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And on the real estate front, what are you seeing in terms of the opportunity for relocations? And as you're renewing existing leases, is there opportunity for occupancy cost improvement?

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Gary Cribb, Ross Stores, Inc. - Group Executive VP of Stores and Loss Prevention [63]

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So we tend to relocate on average about 10 -- relocate or -- and [close] (corrected by the company after the call) about 10 stores on a year. And we're always looking to improve stores that are underperforming for various reasons. On the -- the second question was on opportunity to improve leases?

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Michael J. Hartshorn, Ross Stores, Inc. - Group Executive VP of Finance and Legal, Principal Accounting Officer & CFO [64]

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Yes. On...

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Dana Lauren Telsey, Telsey Advisory Group LLC - CEO & Chief Research Officer [65]

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Yes.

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Michael J. Hartshorn, Ross Stores, Inc. - Group Executive VP of Finance and Legal, Principal Accounting Officer & CFO [66]

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On occupancy overall and leases, I mean we've seen a pretty good market for the last number of years and -- so I think it's remained pretty stable to that -- to what it's been like over the last several years.

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Operator [67]

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Your next question comes from the line of Bob Drbul from Guggenheim Securities.

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Robert Scott Drbul, Guggenheim Securities, LLC, Research Division - Senior MD [68]

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I was just wondering if you could give us an update just in terms of what you're seeing on your labor costs and the outlook for the year, there's been any change from that perspective. And then second question is just around dd's versus Ross. Can you give us an idea on sort of vendor overlap and sort of how that might be trending over the last few years?

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Michael J. Hartshorn, Ross Stores, Inc. - Group Executive VP of Finance and Legal, Principal Accounting Officer & CFO [69]

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On the wage front, our most recent national increase, the $11 we did in the second quarter last year, we believe, it keeps us competitively positioned. That said, we always take a market-to-market approach in determining our wage rates and that will not change and, in fact, many of our markets are well above the $11. And as we always have done, we'll make the necessary adjustments to ensure we continue to attract and retain talented associates.

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Barbara Rentler, Ross Stores, Inc. - CEO & Director [70]

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And it pertains to dd's versus Ross with vendor overlap, the dd's customer is a lower-income customer. So there is some overlap with Ross, but not a large overlap with Ross.

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Robert Scott Drbul, Guggenheim Securities, LLC, Research Division - Senior MD [71]

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Got it. And dd's, as you open up more stores, are you able to open in the closer proximity to Ross Stores. Can you just give us an idea just in terms of like the trade areas? How you really see that developing as well?

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Gary Cribb, Ross Stores, Inc. - Group Executive VP of Stores and Loss Prevention [72]

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Yes. I think it -- I think we look at it market by market. There are some markets where Ross alone make sense and other markets where the 2 of them really enhance having them close by. So we take a market-by-market approach. And you'll find locations where we're next door to each other.

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Operator [73]

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Your last question comes from the line of John Kernan from Cowen.

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Krista Kerr Zuber, Cowen and Company, LLC, Research Division - VP [74]

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This is Krista Zuber, on for John. I just wanted to follow up on 2 previous questions. One on inventory and one on freight. Just in terms of where you're thinking your inventory positioning or levels will be at the end of the year? And then secondly on freight. You mentioned that sort of your guidance or your thinking was unchanged, is that a reflection of the renegotiations you'd expected to have this year for the rates?

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Michael J. Hartshorn, Ross Stores, Inc. - Group Executive VP of Finance and Legal, Principal Accounting Officer & CFO [75]

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Sure. On inventory, at the end of the year, that's a long way out. But the way we have it planned is store positions to be relatively flat at this point. On freight, we have pretty good visibility on our renegotiations with our freight, again, a recap last year, the cost escalated as we moved through the year. And so in the front half, we've continued to see wage pressure -- or not wage pressure -- the freight pressure on -- just based on rates and market, inflationary cost in the freight industry. And then in the back half, we're up against those larger increases. So our viewpoint at this point is that they will -- they'll abate as we move through the year.

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Krista Kerr Zuber, Cowen and Company, LLC, Research Division - VP [76]

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And if ask -- I could just add one more follow-up. Just kind of looking at your free cash flow generation, I think you stepped up the CapEx this year to about $600 million when you gave guidance at the end of the fourth quarter. I'm just curious, is this how we should think about the run rate of CapEx as a percentage of sales going forward?

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Travis Marquette, Ross Stores, Inc. - Group Senior VP and Deputy Chief Financial Officer [77]

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This is Travis. We're still planning CapEx at around $600 million for the year. And as you may recall that includes the initial investments at our next distribution center. In terms of spending going forward, we wouldn't be too specific for the future, but suffice it to say, it takes a little while to build the distribution centers. So we expect CapEx to be elevated for the next couple of years.

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Operator [78]

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I will now turn the call back over to Barbara Rentler, for closing comments.

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Barbara Rentler, Ross Stores, Inc. - CEO & Director [79]

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Thank you for joining us today and for your interest in Ross Stores. Have a great day.

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Operator [80]

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This concludes today's conference call. You may now disconnect.