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Edited Transcript of ROST earnings conference call or presentation 21-May-20 8:15pm GMT

Q1 2020 Ross Stores Inc Earnings Call

Pleasanton May 23, 2020 (Thomson StreetEvents) -- Edited Transcript of Ross Stores Inc earnings conference call or presentation Thursday, May 21, 2020 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 President & COO

* Travis R. Marquette

Ross Stores, Inc. - Group Senior VP & CFO

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Conference Call Participants

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* Adrienne Eugenia Yih-Tennant

Barclays PLC - MD and Senior eCommerce & Brand Retailing Analyst

* Alexandra E. Walvis

Goldman Sachs Group Inc., Research Division - Research Analyst

* Charles P. Grom

Gordon Haskett Research Advisors - MD & Senior Analyst of Retail

* Dana Lauren Telsey

Telsey Advisory Group LLC - CEO & Chief Research Officer

* Irwin Bernard Boruchow

Wells Fargo Securities, LLC, Research Division - MD and Senior Specialty Retail Analyst

* 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 David Kernan

Cowen and Company, LLC, Research Division - MD & Senior Research Analyst

* Kate Bridget Fitzsimons

RBC Capital Markets, Research Division - Assistant VP

* Kimberly Conroy Greenberger

Morgan Stanley, Research Division - MD

* 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 Allen Baker

Nomura Securities Co. Ltd., Research Division - Research Analyst

* Michael Charles Binetti

Crédit Suisse AG, Research Division - Research Analyst

* Robert Scott Drbul

Guggenheim Securities, LLC, Research Division - Senior MD

* 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 Fiscal Year 2020 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 may contain forward-looking statements regarding expectations about future operations and financial results, including store openings and reopenings 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 those statements and from historical performance or current expectations.

Additional information about related risk factors is included in today's press release and in the company's fiscal 2019 Form 10-K and fiscal 2020 Form 8-K is 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 Michael Hartshorn, Group President and Chief Operating Officer; Travis Marquette, Group Senior Vice President and Chief Financial Officer; and Connie Kao, Vice President, Investor Relations. We'll begin our call today with an update on the current status of the company's operations, including our store reopening plans, followed by a review of our first quarter performance and details of our financial position entering the second quarter. Afterwards, we'll be happy to respond to any questions you may have.

As a reminder, all store and distribution center locations were closed from March 20 through the quarter end to help prevent the ongoing spread of the coronavirus. Further, our corporate and buying offices were also closed with most associates continuing to work remotely. With the closure of our retail operations, we made the difficult but necessary decision to temporarily furlough the majority of our store and distribution center associates as well as some other employees across the business effective April 5.

More recently, on May 14, we began a phased process of reopening stores on a market-by-market basis. This followed a careful review of current guidance from health officials and advisors as well as federal, state and local governments. Approximately 700 stores have reopened since, with the remaining stores expected to be reopened over the coming weeks. Our top priority will always be the health and well-being of our associates and customers, and we will only reopen stores when it is safe to do so.

Further, the state of the pandemic remains very dynamic, and these plans could change materially as we cautiously move forward. As we restart operations, we are implementing a variety of measures with the goal of keeping our associates, customers and the communities we serve, safe. These measures will include additional cleaning and sanitation of stores and workspaces, providing associates with personal protective equipment based on CDC or other health guidelines and implementing physical distancing practices.

We will also be reopening and ramping up our distribution center network in the coming weeks. In addition, we expect to reopen our corporate and buying offices in the coming months. As with our stores, we are putting in place additional health and safety measures across all areas of these facilities.

Turning now to our financials. As noted in today's press release, our first quarter results reflect the unprecedented impact the COVID-19 pandemic has had on our business, which led to the closure of all stores from March 20 through the end of the quarter and of our first quarterly loss in more than 30 years. Total sales for the quarter were $1.8 billion, down from $3.8 billion in the prior year. Given that stores were open for less than 7 weeks of the 13-week period, the comparable store sales metric is not meaningful for the quarter. For the 13 weeks ended May 2, 2020, we incurred a loss per share of $0.87 versus earnings per share of $1.15 for the same period last year.

The net loss for the period was $306 million versus net income of $421 million last year. In addition to the significant negative impact due to the lack of revenue from the closure of all stores beginning March 20, our operating loss also includes a onetime noncash inventory valuation charge relating to the portion of the inventory that we now expect to sell below our original cost. As we ended the quarter, total consolidated inventories, net of this valuation charge were down 3% over the prior year with packaway levels at 42% of the total compared to last year's 44%.

Average in-store inventories were up 1% at quarter end versus the same period last year. Turning to store growth. We opened 20 Ross and 7 dds DISCOUNTS locations in the first quarter and ended the period with 1,832 total stores. Given the significant uncertainty of consumer behavior and shopping patterns as stores reopen, we will not open new stores in the current quarter and now expect to open about 39 stores this fall for a total of 66 new stores for the full year.

Now Travis Marquette will provide further color on our first quarter results and details on our financial position entering the second quarter.

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Travis R. Marquette, Ross Stores, Inc. - Group Senior VP & CFO [3]

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Thank you, Barbara. As Barbara mentioned earlier, we reported a net loss of $306 million or $0.87 per share for the first quarter. Operating margin for the period reflects the impact of the significant revenue decline from our store closures as well as a onetime noncash inventory valuation charge of $313 million or $0.58 per share.

As a reminder, we are on the lower of cost or net realizable value method of accounting for inventory, which provides that most markdowns are recognized when inventory is sold unless the markdown takes the item's value below costs. The onetime valuation charge in the first quarter reflects our estimate of inventory that we expect to sell below cost in the coming months. This first quarter reserve, therefore, reflects only a small portion of the total markdowns, we believe will be necessary to sell through the existing spring inventory. We expect that the vast majority of markdown activity will occur in the second quarter. It is important to note that the ultimate impact of these markdowns will depend on the pace of sell-through as we move through the quarter.

Now let's discuss our current financial position and balance sheet. As noted in our press release, in response to the severe economic disruption created by the COVID-19 pandemic, we quickly took decisive actions to increase our liquidity and financial flexibility. These included drawing down $800 million under our existing revolving credit facility, completing a $2 billion senior unsecured public bond offering and obtaining a new undrawn $500 million revolving credit facility. As previously announced, we suspended our stock repurchase program on March 19. Before doing so, we repurchased 1.2 million shares of common stock for a total purchase price of about $132 million. We have no plans to repurchase shares for the remainder of the year. In addition, we also announced today the suspension of our quarterly dividend payments. We are also aggressively cutting costs throughout the company by minimizing nonbusiness critical operating expenses, rightsizing our merchandise receipt and inventory plans and reducing capital expenditures to further enhance our liquidity.

Capital expenditures for this year are now projected to be approximately $420 million, down from our initial guidance of $730 million. We ended the quarter in a strong financial position with over $3 billion in liquidity, which includes an ending unrestricted cash balance of about $2.7 billion and the new $500 million revolver. As Barbara mentioned earlier, we are in the early stages of resuming operations by reopening groups of stores as it becomes safe to do so over the coming weeks.

However, we have no visibility on how quickly consumer demand will recover and the impact this will have on store traffic. Given these unknowns, we are not providing second quarter sales and earnings guidance or an updated annual fiscal 2020 outlook at this time. 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, Travis. We want to reiterate that given the extraordinary global health crisis created by COVID-19, the safety and well-being of our associates and customers will always be of the utmost important to us. Considering the uncertainty on how this health crisis could impact consumers, we believe it is prudent to take a conservative approach to managing our business.

Looking ahead, I want to emphasize that we have a deep bench of proven and experienced leaders throughout the business. And as Travis noted, a very strong financial foundation. We also see significant opportunities in the marketplace to acquire some of the best brands ever -- bargains ever. Longer term, we remain well positioned in the off-price sector and believe consumers will continue to favor retailers focused on delivering both value and convenience, all this makes us confident in our ability to successfully navigate through these challenging times.

At this point, we'd like to open up the call and respond to any questions you may 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 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 [2]

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I know it's early days on the store openings, but I was wondering if you could just provide some performance details for those stores that have been open, how they're trending?

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Michael J. Hartshorn, Ross Stores, Inc. - Group President & COO [3]

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Hi, Lorraine, it's Michael Hartshorn. Stores for us have been reopened less than a week. So we wouldn't provide commentary at this point. Beyond the initial openings though, as Travis talked about in his commentary, there's a number of factors that will impact consumer demand post opening, including the economy on the backside of commerce reopening, changes to customer behaviors, impact of social distancing and certainly, the competitive environment among others. So at this point, we can't predict what's going to happen after we reopen the stores for the remainder of the year. We do believe, though, there'll be a negative impact on consumer demand throughout the remainder of the year.

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Operator [4]

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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 [5]

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I was hoping you could talk a bit more about the process of realigning inventory. Obviously, you took the write-down here in the quarter. How long do you think it will take to clear through some of the seasonally inappropriate goods and make room for fresh inventory? And then just any context on how aggressive you're being with purchases in the marketplace today?

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Travis R. Marquette, Ross Stores, Inc. - Group Senior VP & CFO [6]

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Yes. In terms of inventory, again, given the fact that our stores were closed for 2 months, we do have a substantial amount of aged seasonal goods. Again, with the abrupt closure of the stores and the significant broad-based decline and trends leading immediately preceding the stores, again, inventories were misaligned. So in that light, we reviewed our inventory position and assessed the markdown risk that we had. And have recorded in the first quarter, the portion of markdowns that we believe will be below cost. In terms of ultimately what the sell-through and how long it will take to move through those, again, it really depends. We don't have a crystal ball. We don't know how quickly the consumer will return to our stores. As Michael mentioned, there's a lot of economic factors that will influence that.

And ultimately, as I mentioned, the impact of the markdowns will depend on what that rate of sell-through is as we move through the quarter.

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Barbara Rentler, Ross Stores, Inc. - CEO & Director [7]

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And in terms of fresh inventory in the stores, obviously, we're just first opening our stores now and trying to liquidate the goods that are in the stores and also the goods that were in process outside the DCs and in the DCs. So we need to first work through that. The merchants have not been actively buying in the marketplace. They've been staying very close to their vendors. And after we understand a little bit more about what sales and sell-throughs can look like, we will go back into the market, I would say, with a very surgical lens of what it is we need and what we can understand of what we think the customer wants.

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Operator [8]

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Your next question comes from the line of Kate Fitzsimons from RBC Capital Markets.

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Kate Bridget Fitzsimons, RBC Capital Markets, Research Division - Assistant VP [9]

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I guess, an extension of the last question is just when you are finally willing to go back into the marketplace and buy, how are you evaluating category opportunities on the other side of this? We've heard from some peers about home outperforming, maybe more than fashion apparel. So just curious to maybe how industry trends could be dictating how you will be buying in -- out of the gate?

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Barbara Rentler, Ross Stores, Inc. - CEO & Director [10]

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Sure. Category opportunity. First, I think we have to see as we sell through our inventory, what the customer is voting for, whether it's apparel or home. The home business overall has had a trend for a long period of time, one would expect that home, go forward, would still be a good category, especially as people are kind of home nesting and buying things that perhaps they normally might buy. But with that, it will really depend on what the opportunities are out there in both apparel and in home. We see a lot of goods out there. We're anticipating that there'll be a lot of great closeouts and branded bargains for the customer. So I don't want to put sides around saying it's one business versus the other. I think in this environment, a lot of the deals may dictate where the sales would come from.

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Operator [11]

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Your next question comes from Paul Lejuez from Citigroup.

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Tracy Jill Kogan, Citigroup Inc, Research Division - VP [12]

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It's Tracy Kogan filling in for Paul. I was wondering if you guys could talk about how you're thinking about packaway in this environment? And maybe if you might be packing things away for less time than you normally would? And as a corollary to that, how quickly could you flow things into stores?

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Michael J. Hartshorn, Ross Stores, Inc. - Group President & COO [13]

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On the speed, Tracy, on the speed, we can flow inventory from packaway very quickly, a matter of days through the DC and a matter of a week or 2 into the stores.

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Barbara Rentler, Ross Stores, Inc. - CEO & Director [14]

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And just in terms of just the thought process around buying packaway, I'm assuming you mean pack away that I could release earlier than packaway that it might not release till March of next year. Is that really your question?

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Tracy Jill Kogan, Citigroup Inc, Research Division - VP [15]

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Exactly.

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Barbara Rentler, Ross Stores, Inc. - CEO & Director [16]

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I think it depends on what the product is, right? So in some classifications of product, there'll be goods that would be appropriate sooner than later. And in some products, some classifications, you would really have to hold it until the spring season, if it's truly spring product. So it varies based off of the classification and the gender, the timing, the whole thing. But there's a lot of product out there in total. So I would say there's a lot of choices, some of which probably could flow a little sooner.

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Operator [17]

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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 [18]

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I wanted to understand if you excluded packaway from your inventory, how many weeks of inventory would you typically have on hand? Is it sort of 8 weeks or 10 weeks at normal sales volume? And then secondarily, are all of your distribution centers also reopening at this time? And as your stores are reopening, are you in a position to be able to actively flow inventory to stores now that you've got some of them opening?

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Michael J. Hartshorn, Ross Stores, Inc. - Group President & COO [19]

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Kimberly, on the distribution centers, we have management teams in all of our distribution centers and are ramping -- preparing to ramp up production, and that includes California, the Carolinas and also in Carlisle, Pennsylvania. So we're ready to start the DCs. In South Carolina, we've already started production and prepared to start backfilling stores as they need.

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Travis R. Marquette, Ross Stores, Inc. - Group Senior VP & CFO [20]

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In terms of in-store inventory turns, again, if you just focus on in-store only, our turns are quite quick. I don't think we've quantified that specifically in the past, but it would be significantly faster than if you're just trying to look at the total inventory metric on the balance sheet.

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Kimberly Conroy Greenberger, Morgan Stanley, Research Division - MD [21]

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Okay. Great. And lastly, I'm wondering if you have any comments on just how business was trending pre-COVID for either the month of February or the month of February and the first week of March, just any way to understand directionally how the business was moving before we went into this very, very unusual time.

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Travis R. Marquette, Ross Stores, Inc. - Group Senior VP & CFO [22]

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Sure. As we talked about previously, sales trends were above plan in February, and we felt good about sales up until early March when, I think, as we talked about, there was a very rapid deceleration just prior to when we closed our stores on March 20.

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Kimberly Conroy Greenberger, Morgan Stanley, Research Division - MD [23]

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Okay. Great. And lastly, is there any way for us to think about where you would expect second quarter inventory to land? And would you -- do you feel like you would be able to work through the aged inventory that you're sitting with today? Is it your expectation that you will have cleared through and moved through that aged inventory by the end of the second quarter?

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Michael J. Hartshorn, Ross Stores, Inc. - Group President & COO [24]

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Kimberly, on pace, our goal is to move through it in the second quarter. And we're going to operate the business very, very cautiously, both inventory, sales, expenses, capital, and we're going to put ourselves in a position of strength so that we can chase the business, leverage expenses. So we would expect inventory to be down at the end of the second quarter.

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Operator [25]

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(Operator Instructions) Your next question comes from Adrienne Yih from Barclays.

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Adrienne Eugenia Yih-Tennant, Barclays PLC - MD and Senior eCommerce & Brand Retailing Analyst [26]

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Barbara, I was wondering if you can talk to us about comparisons to the post 2008, the 2009 and '10 recovery period? And what opportunity you see from potential bankruptcies, all at J. C. Penney? And then for Michael or Travis, if you can quickly talk about when you're opening the stores, just curious, how are you layering in payroll hours? How are you metering throughput? And then what's happening to the basket size?

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Michael J. Hartshorn, Ross Stores, Inc. - Group President & COO [27]

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Sure. We wouldn't comment on basket size. Again, the stores have been only opened a week. Obviously, there's local regulations on how to meter in and out of the stores. We have security at the front of each store that's metering based on those predetermined occupancy limits, in most cases, we're below -- even below metering than what the restrictions require to make sure we keep customers and associates safe.

We have included payroll to make sure that we're keeping safe distances and trying to move people through the registers as appropriate.

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

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And then in terms of a comparison to 2008, I think the current retail environment is different. Obviously, this crisis is much worse. We're expecting the recovery to be much slower. During the financial crisis, we didn't have to close stores. We didn't have to navigate through health and safety mandates, shelter in place, social distancing. So we think this is very different, and we think it will be a slow recovery on our way back. In terms of Penney's and bankruptcies, there's been a lot of bankruptcies I think long term, the way for us to think about it is that there's an opportunity for market share, particularly in the moderate portion of the business.

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Operator [29]

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Your next question comes from Mike Baker from Nomura.

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Michael Allen Baker, Nomura Securities Co. Ltd., Research Division - Research Analyst [30]

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Could you maybe discuss your fixed versus variable cost, including costs that fall into your cost of goods sold? And how might that change? Or will costs need to ramp up with some of the things you need to do to operate stores now in terms of cleanliness and other safety precautions?

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Travis R. Marquette, Ross Stores, Inc. - Group Senior VP & CFO [31]

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Yes. Sure. If you think about our total operating costs, which would include both cost of goods as well as G&A. The vast majority of those are variable costs. If you pull out the merchandise margin line, and just look at the remaining costs, it's roughly about 2/3 fixed and 1/3 variable. In terms of costs that we'll add, as Michael alluded to, we've talked about, there definitely will be additional costs that we will be working into the business, particularly around managing social distancing, additional cleaning tasks as well as significant cost for personal protective equipment. So those will be added to the business as we move forward. And we'll do -- we'll work as aggressively as we can to try to find offsets. We've taken a number of actions to identify cost savings already, and many of those will carry forward.

But I would expect costs will be a bit elevated related to those other factors.

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Michael J. Hartshorn, Ross Stores, Inc. - Group President & COO [32]

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And I would just add that those safety investments are absolutely necessary as we prioritize health and safety for the associates and customers. So we would expect the new protocols to be in place for the foreseeable future.

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Operator [33]

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Our next question comes from Matthew Boss from JP Morgan.

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Matthew Robert Boss, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [34]

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On merchandise margins, as we think about the cadence of the headwind this year, any way to size up or think about the magnitude of second quarter merchandise margin pressure relative to the back half of the year. And maybe just as importantly, what's your confidence in returning to 2019 gross margin levels? Is that a 2021 event? Or over what time frame is that a reasonable assumption to get back to where we were pre-pandemic?

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Michael J. Hartshorn, Ross Stores, Inc. - Group President & COO [35]

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It's Michael. On getting back to pre-pandemic, there's just not enough visibility to give you a good answer on that at this point. The second quarter margin is going to be -- it's going to be based on the sell-through in these early days as we reopen the stores. So we'll see how that plays out and have more to report at the end of Q2.

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Operator [36]

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Your next question comes from Charles Grom from Gordon Haskett.

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Charles P. Grom, Gordon Haskett Research Advisors - MD & Senior Analyst of Retail [37]

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So there's a lot of talk out there about being -- just being one of the best buying opportunities in a long time and Barbara, you spoke to that during your prepared remarks. But there's also some talk in the channel about vendors starting to pack away their own inventory. So I guess I'm just curious if this changes the opportunity set for you? Or do you think it's more of a near-term phenomenon?

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Barbara Rentler, Ross Stores, Inc. - CEO & Director [38]

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Let me start with there is a lot of merchandise in the market, and it's very broad-based. In terms of vendors saying that they're going to pack away goods, I think the majority of the vendors aren't really in the position to do that, that they really wouldn't have the -- be in the cash position to do it. I think maybe the large vendors can do it.

But if you take the market in total, I think that's not the majority of people.

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Operator [39]

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Your next question comes from Jay Sole from UBS.

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Jay Daniel Sole, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Softlines & Luxury [40]

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I got a question. The stores haven't been open for very long. So it's hard to get a read probably on how much traffic is going to return and how quickly. But have you done any market research over the last few weeks, trying to figure out how consumers may feel about the off-price shopping experience and the treasure-hunt experience in this world of social distancing. And if you think that they'll feel just as comfortable in your stores when things reopen as they were before the pandemic started?

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Michael J. Hartshorn, Ross Stores, Inc. - Group President & COO [41]

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Jay, we have seen customer research, maybe more generally, but it's really hard to read. When you have customers sitting at home versus returning, leaving their homes. I think their perspectives are going to be very different over time. And I think they're going to evolve very, very quickly. So it's really hard to rely on that data to make any decisions. I think the country opening very quickly, I think everything is evolving very fast. So it's hard to put a lot of reliance on that data.

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Operator [42]

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Your next question comes from Bob Drbul from Guggenheim.

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Robert Scott Drbul, Guggenheim Securities, LLC, Research Division - Senior MD [43]

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Just a couple of questions from me. I think the first one is can you just update us on store opening plans for this year? Just sort of how you're thinking about that, both at Ross and at dd's. And I'd just be curious if this situation has changed your thought process at all? Or if there's any sort of way forward for any e-commerce business at Ross?

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Michael J. Hartshorn, Ross Stores, Inc. - Group President & COO [44]

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Sure. On store opening. So as we said in the commentary, in the first quarter, we did add 20 Ross, 7 dd's locations. For the balance of the year, we're not going to open stores in the second quarter based on where we are in the pandemic and based on the uncertainty. And then based on lease obligations and opportunities we have in fall, we're going to open 39 stores. So that's 66 new stores for the year, and that compares to our previous guidance of about 100 stores.

I'd say beyond that, at this time, we wouldn't comment beyond this year, but we still believe we have the opportunity to grow to 3,000 stores. And then on e-commerce, I'd say our view has not changed at this point. Our focus and efforts are going to be on safely and profitably reopening our bricks-and-mortar stores this year.

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Robert Scott Drbul, Guggenheim Securities, LLC, Research Division - Senior MD [45]

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Got it. And if I could just ask one more. In terms of like the vendors and your vendor partners, do you think that ones that are talking about packaway, do you think they'll be able -- they'll be good at it? Do you think that they're qualified to make good judgments on packaway? I don't know if you can just maybe give us some perspective on that Barbara. That would be helpful.

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

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On when the vendor is packing away their own goods?

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Robert Scott Drbul, Guggenheim Securities, LLC, Research Division - Senior MD [47]

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Yes. Yes.

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Barbara Rentler, Ross Stores, Inc. - CEO & Director [48]

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Just want to make sure. Listen, just because they haven't done it before, it doesn't mean they won't do it well. I would imagine that they go through and would assess the way we would assess what the mix of their inventory is and what they think can go forward into the next year. And depending upon what type of manufacturer I am, if I have basics, I might think I could carry those forward, but I might not want to carry forward my fashion goods. I would think there'll -- be a lot of pieces of it that would be somewhat similar to our thinking in terms of just understanding what you think you can sell when you get to that period because when you're holding goods, it's critical to understand when I go to sell and in their case sell it to us or release it, you know it's the right goods at the right time.

So I would imagine they're putting together a process of how they feel about their assortments and then making a judgment call. But again, I'm not a vendor.

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Operator [49]

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Your next question comes from Ike Boruchow from Wells Fargo.

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Irwin Bernard Boruchow, Wells Fargo Securities, LLC, Research Division - MD and Senior Specialty Retail Analyst [50]

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I guess just on the margins, I think you guys typically do a nice job of breaking down the gross margin line. I mean, at the very least, could you help us on merchandise margin versus store occupancy, merch margin, either including or excluding the write-down? And then Travis, I think you said merch margin pressure should be worse in Q2. And I guess I'm just trying to understand, should merch margins be where should gross margins be? Just -- I know you're not giving guidance, but just a little bit color on the margins, just to make sure we know how to model this out.

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Travis R. Marquette, Ross Stores, Inc. - Group Senior VP & CFO [51]

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Yes. In terms of total operating margin, again, the biggest impacts for the quarter were -- the biggest impact was just the low level of sales. That, combined with the valuation charge really is what drove the overall result. Given the significant deleverage related to sales, the details and the components of that really just aren't very meaningful. And so we don't think it's really relevant to provide that breakdown.

Your second question is around -- sorry, remind me of your second question?

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Irwin Bernard Boruchow, Wells Fargo Securities, LLC, Research Division - MD and Senior Specialty Retail Analyst [52]

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Just, I guess, merchandise margin trajectory, Q2 relative to Q1.

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Travis R. Marquette, Ross Stores, Inc. - Group Senior VP & CFO [53]

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Yes, relative to Q2. Again, it's going to completely depend on what the ultimate sell-through is of the product as we move through the quarter. As I mentioned, what the hit or the impact that we took in Q1 really just related to the below cost portion of those markdowns. And so the rest of the markdowns will be recognized as we sell the product in Q2, depending on how quickly that product sells is going to determine sort of what the ultimate value of the markdowns that we need to take and what gross margin looks like. But there is absolutely a risk that it could be depressed further in Q2.

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Michael J. Hartshorn, Ross Stores, Inc. - Group President & COO [54]

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Ike, So in our markdown approach, we'll obviously take a first markdown. And then based on sales, the second markdown. And then we'll be very, very aggressive to liquidate the spring merchandise. So it's going to be highly dependent on how quickly we sell through the merchandise.

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Operator [55]

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Your next question comes from Laura Champine from Loop Capital.

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Laura Allyson Champine, Loop Capital Markets LLC, Research Division - MD [56]

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I'm curious when you'll start to -- when you will have to start buying for fall and back to school? And Barbara, how would you -- what are the metrics or the factors that you'll use to decide how deep that buy should be?

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Barbara Rentler, Ross Stores, Inc. - CEO & Director [57]

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How big the buy will be or just how...

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Laura Allyson Champine, Loop Capital Markets LLC, Research Division - MD [58]

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Exactly, exactly.

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Barbara Rentler, Ross Stores, Inc. - CEO & Director [59]

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Just how big? Well, I think whenever you're buying, you're not necessarily buying to the size of the buy, you're buying to what you think you need and/or in our case, if it was a huge deal, we might pack it away. We're going to go into fall with very conservative plans. And so we're going to buy -- we're going to control our speed of spending and the rate at which we buy goods since there's so much uncertainty out there. However, if there was a great deal, that we wanted to have, we thought the value was unbelievable and offers a customer a great branded bargain. It wouldn't stop us from making a large deal. But I think it depends. But in terms of the approach to the stores, we're going to go with a conservative plan, and we're going to control what we spend, how much we spend, again, unless something is incredible, and we want to buy it, in which case, part of it might turn out to be a packaway deal or not. But each deal is different.

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Laura Allyson Champine, Loop Capital Markets LLC, Research Division - MD [60]

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And how much can you delay that buy for this fall? I mean when will you have to make your initial decisions on what to carry for back-to-school, what to buy for back-to-school?

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Barbara Rentler, Ross Stores, Inc. - CEO & Director [61]

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Well, first of all, we could challenge what back-to-school is going to look like, right? I mean, right now, I'm not sure we even know when schools are going back, if schools are going back, if there's going to be children learning remotely. So I think that's the first question of whether there is a true back-to-school the way we know it, a traditional back-to-school. We're going to buy it as close as we can buy it, the way we normally do because, again, we still have this inventory in front of us that we have to liquidate. We're planning on liquidating. We're planning on getting through. So if I take the continuum, we have to open the stores, get through those goods and then come out and buy new goods for that July, August, September period, based on trend line we'd determine how much we would buy. So there's a lot of factors in there, but we're going into it, thinking it's a very conservative plan because we're not sure how the customer is going to respond once all the stores are open and is she willing to shop and come back after we get through this huge liquidation period across the whole country. So I think it remains to be seen.

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Operator [62]

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Your next question comes from Alexandra Walvis from Goldman Sachs.

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Alexandra E. Walvis, Goldman Sachs Group Inc., Research Division - Research Analyst [63]

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My question was on negotiations with landlords. Can you talk about any rent deferrals that you achieved for April and into the second quarter? Will any permanent reductions perhaps be achieved? Or anything that you can share there would be very helpful.

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Michael J. Hartshorn, Ross Stores, Inc. - Group President & COO [64]

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Alexandra, it's Michael. Our real estate relationships are obviously critical to the long-term success of the business. Like many other retailers, we are engaging with our landlord partners to negotiate either abatement or deferment of occupancy costs during the period of closure. At this point, we wouldn't get into the specifics at this point because the negotiations are ongoing across our fleet of landlords.

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Operator [65]

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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 [66]

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First, I just wanted to try and clarify some of the language you had on gross margins earlier. So in this quarter, you took a charge of over $300 million, it looks like it's 1,600, 1,700 basis points of an impact to the grosses in the quarter. That was really just the -- you referred to that as a small part of it, Michael. So I want to see -- that's the inventory you estimate you'll be selling below cost, and then as you look to next quarter, we're not talking about an inventory reserve, we're talking about having to put inventory on markdown, I mean, sell it. But are you -- did you mean that, that impact of that could be similar to the order of magnitude of the charge in the first quarter?

And I'm not really trying to get you to commit to guidance for the company, but to compare this to some of the mainline stores, the department stores who I think that, that component will be as big as the reserve in the first quarter. Is that what you're saying it could be close to that size?

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Travis R. Marquette, Ross Stores, Inc. - Group Senior VP & CFO [67]

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Yes. So again, the portion that we recognize -- let me just kind of take a step back. Again, we are on the cost method of accounting. So typically, markdowns are only recognized in earnings when the product is sold. If the markdown takes the item below cost, then that portion that is below cost gets recognized immediately. So as we assessed our inventory position at the end of the quarter, the portion that we've recognized as of the end of Q1 is just the portion of markdowns that take the product below its original cost.

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Michael J. Hartshorn, Ross Stores, Inc. - Group President & COO [68]

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And to be clear, it's what we expect to happen during the second quarter. It's not necessarily markdowns we've already taken below cost.

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Travis R. Marquette, Ross Stores, Inc. - Group Senior VP & CFO [69]

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Correct. Correct. Again, ultimately, the markdowns that we'll recognize in Q2 relate to as the product is sold, it depends on what the markdown is as it goes out the door. And so that's going to depend on the rate of sales. Obviously, we have first markdowns on that product now, depending on rate of sales, we'll take second markdowns and/or third markdowns. And depending on how deep those go that will determine the ultimate markdown impact.

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Michael J. Hartshorn, Ross Stores, Inc. - Group President & COO [70]

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But to answer -- a short answer to your question, yes, it could be more than that in the second quarter.

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Michael Charles Binetti, Crédit Suisse AG, Research Division - Research Analyst [71]

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Relative to the dollar, okay. Okay. And then you mentioned some of the new costs related to sanitization and things like that in stores, COVID-related costs, but I'm wondering what are some of the other puts and takes that you see from here, as we back up and just take the aperture out a little bit, you've had a lot of pressure from wage gross that one would argue that with 20% of the country currently unemployed, don't know where that's going, but perhaps that's a little easier going forward. Things like freight and energy have been a pressure obviously, you have a very intense supply chain. Those look like they could be easier. Is there -- I mean do those -- are those big enough to -- those seem like they'd be more than enough to offset anything related to COVID as we roll through the year?

And then final question, just would love to know how your -- if you could help us think alongside you a little bit on how you will look at reinstating the dividend as you go, what are some of the earmarks you look for along the way?

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Travis R. Marquette, Ross Stores, Inc. - Group Senior VP & CFO [72]

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Yes. Let me -- this is Travis. Let me just cover a couple of those. In terms of cost savings, let me go through a couple of things you mentioned. In terms of wage rates, yes, obviously, the economic situation is very different, but it's important to remember that a lot of the wage rate pressure that we would be experiencing going forward relates to statutorily mandated minimum wage increases. And at least as of now, there's been no change in those, particularly California, but there are some other places.

Again, it's hard to say what's going to happen in the freight markets. Obviously, fuel rates are down, that could be helpful. But it's really hard to speculate exactly what's going to happen in terms of capacity and overall freight rates. So again, there are puts and takes, and it's -- we'll have to see how it plays out. But there's a lot of uncertainty. So we don't exactly know. In terms of reinstating the dividend, again, I think what's critical is that we're going to have to have a much greater visibility on sort of what the sales trend is, what the sustainability of those trends are and factor that in relation to the needs of the business over both the short and the long term.

And so there are a number of factors that we're going to look at before we would consider reinstating the dividend.

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Operator [73]

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Your next question comes from Marni Shapiro from Retail Tracker.

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Marni Shapiro, The Retail Tracker - Co-Founder [74]

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It's good to hear everybody's voices and glad you all sound okay. Could you just talk a little bit about the store openings? You -- clearly, you've slowed them for this year. I'm curious if you've signed those leases that you intended and are pushing them to next year? Or are those leases that weren't signed yet. And so there's opportunity if you want there to be, maybe at better prices maybe you don't open as many next year. I'm just curious where your thoughts are on that and how easy it was to push those -- push that number down to the 66?

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Michael J. Hartshorn, Ross Stores, Inc. - Group President & COO [75]

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Sure. On the openings this year, we made the decision not only on the lease obligations, but the cash to open the store. Many of those will get pushed into next year. And then as we get a better view of what the post-trend opening is as we move through the year, we'll certainly make calls on new leases that we'll sign for next year. But wouldn't comment further on how many stores that could be for next year at this point in time.

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Marni Shapiro, The Retail Tracker - Co-Founder [76]

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That makes sense. And then just one follow-up. Barbara, you talked about somebody asked about packaways and how the big -- how companies would do this. And I guess my follow-up there is, you do work with a lot of small and medium vendors, the ones that supply all the department stores, and we don't -- they're not publicly traded, and not everybody knows of them. Are you -- I guess, how are you working with these guys? They've been partners with you for a very long time. I'm curious how your relationship with those vendors are because some of them could be in very tenuous shape given all the cancellations, not just from you guys, but across all of retail?

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Barbara Rentler, Ross Stores, Inc. - CEO & Director [77]

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Marni, I mean, obviously, we're working with all our vendors. The buyers haven't been buying. They've been keeping close relationships. And when we go back out into the marketplace, we'll obviously shop all those same people we've been shopping and doing business with for years and then see what opportunities are out there. I mean...

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Marni Shapiro, The Retail Tracker - Co-Founder [78]

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Right. Yes. I guess what else is there to do unless you're going to buy them and make them part of Ross Stores. Best of luck of opening everything.

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Operator [79]

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Your next question comes from Dana Telsey from Telsey Advisory Group.

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Dana Lauren Telsey, Telsey Advisory Group LLC - CEO & Chief Research Officer [80]

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As you think of the measure of fixed and variable expenses, with the thought of reopening and whether it's more limited hours or obviously the extra sanitation and treatment that's needed within a store to operate. How do you think about some of the expenses coming back into the fold? Do you need as much store staff as you had before? And with the combination of what you may be able to do on rents, is there an opportunity for a lower expense structure going forward in terms of how you're thinking about it?

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Travis R. Marquette, Ross Stores, Inc. - Group Senior VP & CFO [81]

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Dana, I think it's going to be difficult, at least as the world looks today to drive expenses significantly lower. Obviously, as we pull -- we are pulling back where we can. If I think about the store environment, we do have shorter hours that reduces cost to some extent. But we've always managed our stores pretty specifically to the sort of payroll demand by the stores. So there's not a lot of just blanket hours that we hand out. And so as we -- are we reopening and we need to take into account additional labor to manage social distancing, to complete cleaning tasks and other things. Again, that's going to have an impact on sort of overall cost for the stores.

So clearly, though, we are continuing to evaluate our total P&L, and we are continuing to look, even though we've taken a number of actions already to reduce costs. We continue to and will continue to evaluate where we can find savings across the P&L.

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Dana Lauren Telsey, Telsey Advisory Group LLC - CEO & Chief Research Officer [82]

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And then is there any difference on the dd side in terms of getting operations back up and running as compared to the Ross Stores side, whether in terms of payroll or occupancy?

And is there more occupancy in dd's to manage rent costs than there is in Ross? Or is it not different at all?

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Michael J. Hartshorn, Ross Stores, Inc. - Group President & COO [83]

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Yes. Dana, it's very similar across both chains. I wouldn't say there were significant differences.

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Operator [84]

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Your next question comes from John Kernan from Cowen.

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John David Kernan, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [85]

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Most of them have been answered. Just curious, can you tell us what percent of your store base you expect to have open by the end of May? And then what you are anticipating to have open by the end of the quarter in July?

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Michael J. Hartshorn, Ross Stores, Inc. - Group President & COO [86]

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Sure. On openings, I wouldn't tell you specifically May, but we're ready to open stores when the state of the pandemic allows us to do so and when the government allows us to do so. So that's out of our control of when that -- when the openings will actually happen. Our expectation, though, based on what we're monitoring that could change is that we'd have the chain open by the end of June.

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Operator [87]

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And our last 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 [88]

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My question, Barbara, is just on the vendor base. And whether you see this as an opportunity to grow the vendor base and whether -- I understand that the buyers aren't currently buying in the market, but if they're pursuing new relationships, new opportunities on that front? And then just with your existing vendors, whether orders needed to be canceled and more payments extended during the quarter?

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Barbara Rentler, Ross Stores, Inc. - CEO & Director [89]

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Sure. In terms of growing the vendor base, there's an opportunity for us to continue to open new resources, especially now, some people are a little bit more flexible as business has gotten a little bit more difficult. And the merchants are always trying to open new resources. So whether we're buying or not, still calling people, still trying to build relationships, still trying to move the business forward. Just say the second part of your question, again, about existing vendors?

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Jamie Susan Merriman, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [90]

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Whether you had to cancel orders and extend payment terms during the quarter just from a liquidity perspective?

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Barbara Rentler, Ross Stores, Inc. - CEO & Director [91]

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Initially, we did cancel some orders in the beginning of the quarter when we first took action on what was going on when the pandemic started. But that's very similar to what other retailers did. So we took the actions that we thought were necessary at that time to position us. And then after that, we feel that we'll continue to remain engaged with the vendors we have relationships with now as we come back, but we definitely took actions the way other retailers took actions to get ourselves positioned in a better position so we can manage our way through this very unprecedented situation. So as we come back into the market, we'll be coming back and working with vendors again.

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Operator [92]

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And I will now turn the call back over to Barbara Rentler for closing remarks.

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Barbara Rentler, Ross Stores, Inc. - CEO & Director [93]

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Thank you for joining us today. Our thoughts go out to all of you and your families for your continued health and safety.

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Operator [94]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.