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Edited Transcript of ROST.OQ earnings conference call or presentation 19-Nov-20 9:15pm GMT

·41 min read

Q3 2020 Ross Stores Inc Earnings Call Pleasanton Nov 20, 2020 (Thomson StreetEvents) -- Edited Transcript of Ross Stores Inc earnings conference call or presentation Thursday, November 19, 2020 at 9:15:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * 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 ================================================================================ Conference Call Participants ================================================================================ * 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 * Janine M. Stichter Jefferies LLC, Research Division - Equity Analyst * Jay Daniel Sole UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Softlines & Luxury * 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 - Director of Research * 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 JPMorgan Chase & Co, Research Division - MD and Senior Analyst * Michael Charles Binetti Crédit Suisse AG, Research Division - Research Analyst * Paul Trussell Deutsche Bank AG, Research Division - Research Analyst * Paul Lawrence Lejuez Citigroup Inc., Research Division - MD and Senior Analyst * Robert Scott Drbul Guggenheim Securities, LLC, Research Division - Senior MD * Roxanne Felice Meyer MKM Partners LLC, Research Division - MD & Senior Research Analyst for Specialty Retail * Simeon Avram Siegel BMO Capital Markets Equity Research - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good afternoon, and welcome to the Ross Stores Third 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 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 10-Q and 8-Ks on file with the SEC. Now I'd like to turn the call over to Barbara Rentler, Chief Executive Officer. -------------------------------------------------------------------------------- Barbara Rentler, Ross Stores, Inc. - CEO & Director [2] -------------------------------------------------------------------------------- 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, Group Vice President, Investor Relations. We'll begin our call today with a review of our third quarter and year-to-date performance. Afterwards, we'll be happy to respond to any questions you may have. The vast majority of our stores were operating throughout the third quarter. That said, given the worsening pandemic, we will remain vigilant in monitoring local developments to assess any potential changes that might be necessary to our operations based on local state or other government directives. We will continue to make the health and well-being of our associates and customers a top priority. Turning now to our financial results. Total sales for the third quarter declined 2% to $3.8 billion with comparable store sales down 3%. Sales improved substantially compared to the second quarter following a slower start in August. This acceleration was driven by several factors, including an improvement in our merchandise assortments, a later back-to-school season, stronger performance in our larger markets and our return to more normal store hours. In October, the company refinanced $775 million in senior notes to significantly reduce the annual interest expense and total cash outlays over the life of the debt. This action resulted in a one-time charge of $240 million or $0.65 per share impact to net earnings in the third quarter of fiscal 2020. Including this impact, for the 13 weeks ended October 31, 2020, net income was $131 million or $0.37 per share compared to $371 million or $1.03 per share for the same period last year. Year-to-date, the loss per share was $0.43 on a net loss of $153 million, also including the aforementioned one-time charge. This compares to net income of $1.2 billion or $3.32 per share for the same period in 2019. Sales for the first 9 months of 2020 were $8.3 billion versus $11.6 billion last year. Third quarter operating margin of 4.4% was down from 12.4% last year and was negatively impacted by the one-time debt refinancing charge, which was equivalent to 640 basis points. In addition, the year-over-year margin decline reflects higher COVID-related operating costs in 2020 and the deleveraging effect on expenses throughout the business from the decline in same-store sales. At quarter end, total consolidated inventories were down 25% from the prior year with average store inventories down 8%. During the period, we continued to make progress on our distribution capabilities to support peak sales during the holiday selling season. Packaway levels at quarter end were 26% of the total compared to last year's 39%. For the third quarter, the strongest merchandise areas at Ross was home, while the Midwest and the Southeast were the best-performing geographic regions. Similar to Ross, dd's DISCOUNTS performance accelerated during the quarter as their value offering also resonated well with customers. Overall, our improved core business results demonstrates consumers' continued focus on value and our ongoing ability to deliver the bargains our customers come to expect from us. Turning to store growth. As expected, we opened 30 Ross and 9 dd's DISCOUNTS locations in the third quarter, completing our expansion program for 2020. After the planned closing of about 10 existing stores in the fourth quarter, we anticipate ending the year with 1,585 Ross and 274 dd's DISCOUNTS locations for a net increase of 54 for fiscal 2020. Now Travis will provide further color on third quarter results. -------------------------------------------------------------------------------- Travis R. Marquette, Ross Stores, Inc. - Group Senior VP & CFO [3] -------------------------------------------------------------------------------- Thank you, Barbara. As Barbara noted, comparable store sales decreased 3% versus last year. This decline was driven by a lower number of transactions that was partially offset by a larger average basket size. Again, as mentioned earlier, operating margin for the quarter was 4.4%, down from 12.4% last year. Cost of goods sold increased 35 basis points in the period. Merchandise margin grew by 190 basis points, driven by a favorable buying environment and lower inventory shortage. These items were more than offset by freight costs that rose 90 basis points and higher distribution expenses of 70 basis points. In addition, buying and occupancy delevered by 40 and 25 basis points, respectively. Selling and general and administrative expenses increased 765 basis points, which includes the previously mentioned 640 basis point impact from the one-time debt refinancing charge in addition to the deleveraging effect from the decline in same-store sales and higher COVID-related operating costs in 2020. Total net COVID-related expenses for the quarter were approximately $25 million with a slightly higher impact to cost of goods sold than SG&A. We expect net COVID-related costs to be significantly higher in Q4 relative to Q3. These increases primarily relate to managing impact from industry-wide capacity constraints and congestion as well as wage and incentive actions in our supply chain and stores. Turning to our balance sheet. In addition to the refinancing of a portion of our senior notes during the third quarter, we also took several actions to reduce our ongoing debt costs, including the repayment of the $800 million revolving credit facility and terminating the undrawn $500 million revolver. Overall, we remain in a strong financial position, ending the quarter with over $5.2 billion in liquidity, which includes an unrestricted cash balance of about $4.4 billion and the $800 million revolver that remains available. As mentioned in our press release, entering the fourth quarter, our month-to-date comparable store sales in November are down mid-single digits. In addition, there remains a high level of uncertainty related to the worsening health crisis, and we are concerned with how the upsurge of this pandemic might impact consumer demand during what we expect to be a highly competitive holiday shopping season. Given the lack of visibility we have concerning these external risks and how they may evolve and impact our business, we will continue to manage our operations conservatively and will not be providing specific sales or earnings per share guidance for the fourth quarter. Now I'll turn the call back to Barbara for closing comments. -------------------------------------------------------------------------------- Barbara Rentler, Ross Stores, Inc. - CEO & Director [4] -------------------------------------------------------------------------------- Thank you, Travis. As we look ahead to the holiday season, we expect a highly competitive retail environment in a difficult economic and political atmosphere, both of which are complicated by our lack of visibility surrounding the worsening pandemic. Despite these near-term challenges, I want to emphasize that we have a talented and seasoned management team that we believe will enable us to effectively navigate through any short-term headwinds. Over the longer term, we remain well positioned in the off-price sector to gain market share, as we believe consumers will continue to favor retailers' focused on delivering value and convenience, both of which we have and will continue to provide to our customers. At this point, we'd like to open up the call and respond to any questions you might have. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Your first question comes from the line of Matthew Boss from JPMorgan. -------------------------------------------------------------------------------- Matthew Robert Boss, JPMorgan Chase & Co, Research Division - MD and Senior Analyst [2] -------------------------------------------------------------------------------- Great. And congrats on the improvement. So Barbara, could you help bridge improvement from negative mid-teens to start August and more or less flat comps for the remainder of the quarter? I think, would be the math. Are you happy with your inventory assortments today and the availability that you see out there with close-out product? And then larger picture, to touch on your comments, just given the stability that your model is showing in the midst of a pandemic, how do you see opportunity for the off-price model post pandemic as it relates to market share? -------------------------------------------------------------------------------- Barbara Rentler, Ross Stores, Inc. - CEO & Director [3] -------------------------------------------------------------------------------- Sure. First, in terms of our inventory assortments, I think as the quarter went on, the merchants did a fine job of actually chasing the goods in the market and shifting the assortments into the classifications that the customer is desiring, which is more home and things that are casual activewear. In terms of availability in the market, we're seeing availability pretty broad-based in most classifications, and there's plenty of supply, so we're not as worried about the supply. And in terms of stability of the model for off-price, as we go forward, look, I think when we get to the other side post pandemic, there's a customer who really likes shopping in stores, who enjoys the off-price model because there's a treasure hunt and the excitement, and I'll call it the fun, and also for retail stores that really focus on value and convenience, and that's really all those metrics is what the Ross model does. -------------------------------------------------------------------------------- Michael J. Hartshorn, Ross Stores, Inc. - Group President & COO [4] -------------------------------------------------------------------------------- Matt, it's Michael Hartshorn. I'll also add with the extraordinary large number of current and future retail closures, it does mean that she has fewer places to shop, and we think that off-price in general and Ross and dd's specifically are well positioned to gain market share post pandemic. -------------------------------------------------------------------------------- Matthew Robert Boss, JPMorgan Chase & Co, Research Division - MD and Senior Analyst [5] -------------------------------------------------------------------------------- Perfect. And then just to follow up on gross margin. Could you just walk through any puts and takes for us to consider in the fourth quarter gross margin? Anything preventing underlying merchandise margin expansion? -------------------------------------------------------------------------------- Travis R. Marquette, Ross Stores, Inc. - Group Senior VP & CFO [6] -------------------------------------------------------------------------------- Sure. This is Travis. We're not providing specific guidance for the fourth quarter, but a couple of comments on merchandise margins. We mentioned merch margin was up 190 basis points, driven by the favorable buying environment. We think there's -- that can continue for a little bit. Over the longer term, remains to be seen how long that will last, but we think that will continue. We also mentioned the shrink benefit, which was about 1/3 of the gain that we saw during the quarter. That's obviously specific to Q3 and would not repeat in Q4. Just a little color on that. The benefit was due to the significant markdowns that we took earlier this year, which reduced the value of the items that we recognized in shrink during the quarter. If you exclude the markdowns, the impact on unit shrink was relatively flat. -------------------------------------------------------------------------------- Operator [7] -------------------------------------------------------------------------------- Your next question comes from the line of Mark Altschwager from Baird. -------------------------------------------------------------------------------- Mark R. Altschwager, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [8] -------------------------------------------------------------------------------- Just first, on inventory, just a follow-up there. Pack and hold remains fairly low relative to where it's been historically. I was wondering if you could speak to that and how you see that evolving here as you move forward. And then just given the current buying environment, which sounds like it's pretty favorable, just wondering if you could speak to your level of confidence in being able to generate merchandise margins as we move into the spring of next year. -------------------------------------------------------------------------------- Michael J. Hartshorn, Ross Stores, Inc. - Group President & COO [9] -------------------------------------------------------------------------------- On the packaway levels, similar to the last quarter, we used packaway to chase ahead of plan sales as sales -- the acceleration of the quarter was well ahead of our internal plans. Overall, availability is plentiful, and we expect packaway to continue to build to historical levels. -------------------------------------------------------------------------------- Barbara Rentler, Ross Stores, Inc. - CEO & Director [10] -------------------------------------------------------------------------------- And then in terms of the current buying environment and margins, I think what we'll see is that, over time, that the margin part of it will not be quite as favorable as it is today because the buying environment in Q3 was really favorable. So we expect over time that it would more normalize. -------------------------------------------------------------------------------- Operator [11] -------------------------------------------------------------------------------- Our next question comes from the line of Kate Fitzsimons from RBC. -------------------------------------------------------------------------------- Kate Bridget Fitzsimons, RBC Capital Markets, Research Division - Assistant VP [12] -------------------------------------------------------------------------------- I guess last quarter, you guys had called out underperformance in California, Texas, Florida and Arizona. Can you just give us an update on how some of those lagging markets were faring in the third quarter? And then just in terms of the negative mid-single digits quarter-to-date, is there any region that is leading the decline? That would be helpful just to frame up the regional complexion. -------------------------------------------------------------------------------- Michael J. Hartshorn, Ross Stores, Inc. - Group President & COO [13] -------------------------------------------------------------------------------- At the time of our Q2 call in early August, we had begun to see some stabilization in those markets in our larger markets in California, Florida, Texas and Arizona. But tourist and border locations continue to significantly underperform the rest of the chain. For the quarter, California performed above the chain average, while Florida and Texas continue to be impacted by their higher concentration of border and tourist locations. And then on the month-to-date trend, we wouldn't get into the details of intra-quarter trends other than to say, the current trend is down mid-single digits. -------------------------------------------------------------------------------- Operator [14] -------------------------------------------------------------------------------- Your next question comes from the line of Paul Lejuez from Citi. -------------------------------------------------------------------------------- Paul Lawrence Lejuez, Citigroup Inc., Research Division - MD and Senior Analyst [15] -------------------------------------------------------------------------------- Curious if there's anything within your supply chain that's not functioning as you would hope at this point, whether it be your ability to buy the items you want to buy or getting the product to the DCs and out to the stores. Is there anything that you're not happy with where you think there's room to improve in the fourth quarter and beyond? And then just bigger picture. Curious if the current situation makes you think any different about growth at dd's over the next few years, either faster or slower? -------------------------------------------------------------------------------- Michael J. Hartshorn, Ross Stores, Inc. - Group President & COO [16] -------------------------------------------------------------------------------- Paul, on supply chain, if you recall, at the end of the second quarter, we had some staffing challenges, but we took a number of wage -- both wage and incentive actions in Q3 and actually feel really good about our staffing levels as we move into Q4. Throughput has improved, and we also feel good about our receipt flow to the stores. If there's one thing I would say about the supply chain is there has been and continues to be port congestion, like you've seen across retail. That is causing product delays in certain areas, but with our flexible business model, our overall inventory levels are positioned in line with our plans coming into the quarter. That congestion, not only in the port but across transportation modes means that we are seeing cost pressures due to the higher rates to move freight across the U.S. On dd's growth, I think it's too early to talk about dd's growth. We'll be in a better position to do that on our year-end conference call in March. -------------------------------------------------------------------------------- Paul Lawrence Lejuez, Citigroup Inc., Research Division - MD and Senior Analyst [17] -------------------------------------------------------------------------------- And just one follow-up. Any quantification of the number of new vendors that you've added this year? And where do you stand now in terms of total vendor count? -------------------------------------------------------------------------------- Barbara Rentler, Ross Stores, Inc. - CEO & Director [18] -------------------------------------------------------------------------------- Well, during the course of the year, we've added hundreds of vendors, pretty broad-based across all areas. In terms of our total vendor count at this moment, I don't know if I can answer that exact number at this moment. In our annual report, we had -- I think it was 7,500. -------------------------------------------------------------------------------- Michael J. Hartshorn, Ross Stores, Inc. - Group President & COO [19] -------------------------------------------------------------------------------- Yes, a little over -- we're a little over 8,000 now, Paul. So it's about a 5% increase that we've seen since COVID. -------------------------------------------------------------------------------- Operator [20] -------------------------------------------------------------------------------- Your next question comes from the line of Kimberly Greenberger from Morgan Stanley. -------------------------------------------------------------------------------- Kimberly Conroy Greenberger, Morgan Stanley, Research Division - MD [21] -------------------------------------------------------------------------------- Great. The inventory level still looks, obviously, very, very lean. But it sounds like you're quite happy with the inventory that you've got. I'm wondering if you can help us understand what you have packed away for spring and summer that you could bring out in early 2021 to help kick off that season? Is it similar to what you would have last year? Or is it leaner? Just thinking about the first half of the year next year. And you talked about some port delays and some challenges that vendors have relayed to you, I think, just with moving goods. Does that, in any way, create opportunities for Ross? Or on the other hand, are you experiencing some delivery delays to your stores that could be slightly holding back sales trends? -------------------------------------------------------------------------------- Michael J. Hartshorn, Ross Stores, Inc. - Group President & COO [22] -------------------------------------------------------------------------------- I'll answer your second question first and then turn it over to Barbara on packaway. Historically, any time there's disruptions like these, it has always created supply opportunities for off-price. And I don't think this will be any different. There's -- with the port delays, there'll be missed holiday dates, and we'd expect there to be inventory opportunities. For us, there could be some risk in the fourth quarter. But again, with our -- we have a lot of flexibility to move goods in and out. We have to make sure, obviously, we have the right assortments for the customer. But coming into the quarter, we feel good about our inventory levels. -------------------------------------------------------------------------------- Barbara Rentler, Ross Stores, Inc. - CEO & Director [23] -------------------------------------------------------------------------------- And in terms of packaway, Kimberly, I think it's similar to every year. It moves based on what you find in the market. And I don't think it's consistent year-to-year. I would say, overall, that it's slightly less than what we had the year before because we flowed a lot of goods into the third quarter. That's pretty much where we are today. And then in terms of the port and disruptions at the port, you would think disruption for us equals supply. So what goes on in the first quarter, depending upon how long the ports are jammed up, we might wind up even getting some spring supply earlier. We'll have to wait and see what happens. -------------------------------------------------------------------------------- Kimberly Conroy Greenberger, Morgan Stanley, Research Division - MD [24] -------------------------------------------------------------------------------- Great. And then just given the really materially improved financial position of the business, I'm wondering how you're thinking about the dividend and when you would expect to reevaluate potentially reinstating that dividend. -------------------------------------------------------------------------------- Michael J. Hartshorn, Ross Stores, Inc. - Group President & COO [25] -------------------------------------------------------------------------------- Kimberly, our near-term focus is -- continues to be preserving liquidity, especially given the current upsurge in the virus and potential impact of additional government restrictions could have on consumer demand during the holidays. So we'll wait and see how holiday pans out. But based on that, it's too early to comment on future payouts. We'd expect to have commentary in our year-end earnings conference call. -------------------------------------------------------------------------------- Operator [26] -------------------------------------------------------------------------------- (Operator Instructions) Your next question comes from the line of Ike Boruchow from Wells Fargo. -------------------------------------------------------------------------------- Irwin Bernard Boruchow, Wells Fargo Securities, LLC, Research Division - MD and Senior Specialty Retail Analyst [27] -------------------------------------------------------------------------------- Travis, just for you on the SG&A side. Could you possibly quantify the COVID costs that you guys are incurring right now? And if there's anything -- any color you can add on what you mean when you say it should -- the cost should accelerate into Q4? And then just big picture on that topic. Should we consider those to be one-time, assuming if there is a vaccine and life goes back to normal by the time you start lapping these results come next year? -------------------------------------------------------------------------------- Travis R. Marquette, Ross Stores, Inc. - Group Senior VP & CFO [28] -------------------------------------------------------------------------------- Yes, sure. I think as we mentioned, cost for the third quarter, the sort of net COVID costs is how we've been talking about it, were about $25 million. So that's some pluses and then some savings and minuses that get to that number. In terms of the fourth quarter, again, we expect the cost to be significantly higher in Q4, really related to a couple of things within stores. We expect higher costs related to ongoing investments for personal protective equipment and other payroll and incentive actions. And then in the supply chain, again, we're forecasting higher costs due to COVID-related labor actions as well as cost to respond to industry-wide supply chain capacity constraints. On your question around COVID and are they one-time? Generally speaking, yes, we would expect that as the pandemic ends that these costs would start to fade out of the business. -------------------------------------------------------------------------------- Operator [29] -------------------------------------------------------------------------------- Your next question comes from the line of Michael Binetti from Crédit Suisse. -------------------------------------------------------------------------------- Michael Charles Binetti, Crédit Suisse AG, Research Division - Research Analyst [30] -------------------------------------------------------------------------------- Great quarter. On the real estate outlook, as you look at 2021, should we think that that's like a normal year, 90 stores per year like you were doing roughly before COVID? Or is it -- is there some catch-up next year? Or is it a slower year as you kind of restart operations? I'm just trying to think if it's an above or below normal year. -------------------------------------------------------------------------------- Michael J. Hartshorn, Ross Stores, Inc. - Group President & COO [31] -------------------------------------------------------------------------------- Sure. At this point, it's too early to say what our plans are for next year, but we'll be in a position to discuss in March at our year-end conference call. -------------------------------------------------------------------------------- Michael Charles Binetti, Crédit Suisse AG, Research Division - Research Analyst [32] -------------------------------------------------------------------------------- Okay. And then, I guess, is there any consideration about the Northeast has been out there as a market that you guys haven't been in for a while. I know some of your thinking has been on the value we offer, the AURs, like, can they support the rents that are a little bit higher in that market. Is this a more attractive time for you to look at that market? -------------------------------------------------------------------------------- Michael J. Hartshorn, Ross Stores, Inc. - Group President & COO [33] -------------------------------------------------------------------------------- Yes. I mean, I think we're going to see opportunities across the U.S., including most -- especially in the existing markets that we're in. And also in our newer markets. So certainly, over the next couple of years that will continue to be our priority. At some point, we'll get into the Northeast. -------------------------------------------------------------------------------- Michael Charles Binetti, Crédit Suisse AG, Research Division - Research Analyst [34] -------------------------------------------------------------------------------- And then Michael, as you look at it, we've had a bunch of brands that have commented on pulling back from off-price as much as possible. I'm not sure that they stuck to their discipline on it or not. There seems to be a bit of a renewed focus. But as you look at that, and they're all -- everything going on and think about packaway versus the ones in closeout, do you think a little differently about how you want the mix of that to look going forward than in the past? Or is there anything structural that you're looking at that might be a little bit different going forward that we should think about? -------------------------------------------------------------------------------- Barbara Rentler, Ross Stores, Inc. - CEO & Director [35] -------------------------------------------------------------------------------- Well, actually, let's talk about brands first. Brand strategies fluctuate from year-to-year. So different brands are doing different things as the world keeps evolving. In terms of packaway versus closeouts versus flowing upfront, all the mixes of it, really, we don't see a major material change. Our main thing is that what we want to deliver are really being able to deliver the best branded bargains possible to the customer. And so that comes through different buying strategies, and we don't really see that mix as of today, changing that much. -------------------------------------------------------------------------------- Operator [36] -------------------------------------------------------------------------------- Your next question comes from the line of Janine Stichter from Jefferies. -------------------------------------------------------------------------------- Janine M. Stichter, Jefferies LLC, Research Division - Equity Analyst [37] -------------------------------------------------------------------------------- I wanted to ask a little bit about the complexion of the comp. It seems like the improvement in 3Q versus 2Q was mostly traffic driven, but I'm curious if you're seeing anything change in terms of either basket or conversion? -------------------------------------------------------------------------------- Travis R. Marquette, Ross Stores, Inc. - Group Senior VP & CFO [38] -------------------------------------------------------------------------------- Yes, sure. You're correct. The biggest change from Q2 to Q3 was on the traffic number, transaction side for us. There was not a -- yes, that was the biggest driver. -------------------------------------------------------------------------------- Michael J. Hartshorn, Ross Stores, Inc. - Group President & COO [39] -------------------------------------------------------------------------------- So not a significant change in basket. -------------------------------------------------------------------------------- Travis R. Marquette, Ross Stores, Inc. - Group Senior VP & CFO [40] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Janine M. Stichter, Jefferies LLC, Research Division - Equity Analyst [41] -------------------------------------------------------------------------------- Okay. And then just a follow-up. I apologize if I missed it, but I think on the last call, you talked about overall inventory availability being very strong, but there being some gaps in the assortment in some of the hotter categories. Are you still seeing that? Or do you feel like on a category basis, the availability is where you'd like it to be? -------------------------------------------------------------------------------- Barbara Rentler, Ross Stores, Inc. - CEO & Director [42] -------------------------------------------------------------------------------- I think there's some small inconsistencies now, not the way it was before. I think it's more broad-based now, but this -- in certain categories. But in every season, there are some uncertain categories, so. -------------------------------------------------------------------------------- Operator [43] -------------------------------------------------------------------------------- Your next question comes from the line of Paul Trussell from Deutsche Bank. -------------------------------------------------------------------------------- Paul Trussell, Deutsche Bank AG, Research Division - Research Analyst [44] -------------------------------------------------------------------------------- Good quarter. Just be looking for maybe just overall comments on the balance sheet and where we stand today, comments maybe on debt position, potential timetables and thought process around dividends and return of the buyback. And then separately, I'm just curious if you have any gauge or guess just on what percent of your core customers have returned to shop in the stores over the past few months? -------------------------------------------------------------------------------- Travis R. Marquette, Ross Stores, Inc. - Group Senior VP & CFO [45] -------------------------------------------------------------------------------- Yes. I'll start with the balance sheet. Again, we feel very good with our financial position. As I mentioned in the comments, $4.4 billion of unrestricted cash, about $5.2 billion in liquidity. So we feel very good about that. We talked about the debt actions that we took during the quarter. We refinanced a portion of our senior notes to significantly reduce the overall long-term cost of that. We feel good about that. I think as we talked about a little bit earlier on the call in terms of go-forward and dividends and buybacks and what not, again, our current focus remains on preservation of cash and liquidity. There's just a tremendous amount of uncertainty regarding the virus and how that will progress. -------------------------------------------------------------------------------- Michael J. Hartshorn, Ross Stores, Inc. - Group President & COO [46] -------------------------------------------------------------------------------- Paul, on the consumer, we, obviously, speak to our customers often through survey work. I would say at this point we don't have a comprehensive information to share at this time, but we know that she continues to prioritize value when deciding where to shop. And given, as I mentioned earlier, the large number of retail closures, that means she has fewer places to shop now, and that's benefited us. -------------------------------------------------------------------------------- Operator [47] -------------------------------------------------------------------------------- Your next question comes from the line of Lorraine Hutchinson from Bank of America. -------------------------------------------------------------------------------- Lorraine Corrine Maikis Hutchinson, BofA Merrill Lynch, Research Division - MD in Equity Research and Consumer Sector Head in Equity Research [48] -------------------------------------------------------------------------------- It looks like once we're in a post-vaccine environment, many of these COVID costs will fall off. But is there any reason why some of the gains you've seen in merchandise margins would necessarily fall off? I guess what I'm asking is, could margins over the long term exceed your prior peaks coming out of this? -------------------------------------------------------------------------------- Barbara Rentler, Ross Stores, Inc. - CEO & Director [49] -------------------------------------------------------------------------------- Well, part of -- Lorraine, I think a big piece of the margin that we're seeing in the off-price sector right now is the -- with the availability of goods and the chase back into Q3. I think over time as supply levels and vendors are more proactive, I think, in managing through different sectors of inventory in stores, I think the supply will become more normalized. And I think with that, the margins will become -- I'm not saying they couldn't be better than they were historically, but I think versus where they stand today, I just don't see that holding. -------------------------------------------------------------------------------- Operator [50] -------------------------------------------------------------------------------- Your next question comes from the line of Marni Shapiro from Retail Tracker. -------------------------------------------------------------------------------- Marni Shapiro, The Retail Tracker - Co-Founder [51] -------------------------------------------------------------------------------- Congrats and best of luck with the holiday, in case I forgot to add that at the end. Travis, I just wanted to clarify one thing you said about shrink. I think you said that the value was down, but that was due to the fact that what, I guess, went missing was already marked down. So if you can clarify that? And then, Barbara, I'm just curious at a high level, are you seeing sales also very strong? I think you called out home, but other -- what people are calling COVID categories like kids, beauty and active? -------------------------------------------------------------------------------- Travis R. Marquette, Ross Stores, Inc. - Group Senior VP & CFO [52] -------------------------------------------------------------------------------- Yes, sure. On shrink, you have it about right. So because of the significant markdowns that we took earlier in the year, that reduced the retail value of the items that we recorded in shrink during the quarter, which gave us a benefit. As I mentioned, if you look at it on a sort of unit basis compared to last year, it was relatively similar. -------------------------------------------------------------------------------- Barbara Rentler, Ross Stores, Inc. - CEO & Director [53] -------------------------------------------------------------------------------- And in terms of the classifications, Marni, those other classifications are strong also. Beauty continues to be strong, kids is strong as well as home. -------------------------------------------------------------------------------- Operator [54] -------------------------------------------------------------------------------- Your next question comes from the line of Jay Sole from UBS. -------------------------------------------------------------------------------- Jay Daniel Sole, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Softlines & Luxury [55] -------------------------------------------------------------------------------- Great. My question is about in-store inventory levels. How did you feel about the in-store inventory levels in the quarter? Did you feel like there was enough inventory in the store to capture all the demand? Or could have been opportunities to do even more sales had there been even more inventory in the store? -------------------------------------------------------------------------------- Michael J. Hartshorn, Ross Stores, Inc. - Group President & COO [56] -------------------------------------------------------------------------------- On inventory, as you know, historically, we've managed our in-store inventory levels very conservatively, and that's not going to change going forward. I'd say we got inventory levels to where we wanted them during the quarter. We're, obviously, trying to manage the business very conservatively. I'm sure there's pockets of inventory or areas of the store where if we had more, we could have turned faster. But overall, we were pleased with the inventory levels. -------------------------------------------------------------------------------- Barbara Rentler, Ross Stores, Inc. - CEO & Director [57] -------------------------------------------------------------------------------- I think the way we should think about it is -- the way we think about it is because we chased the sales to above plan, we drove a lot of fresh receipts into the store. So the customer could come every week and see something new and something different. And so every business might not have been positioned exactly the way -- I'm not even sure the way I'd say we'd want it to because I think the off-price customers are used to coming into a store and seeing variances in inventory levels and products. But I think the thing that helped to drive the quarter sales was really the fresh receipts and the fact that she could come in every week into the treasure hunt and find something different. -------------------------------------------------------------------------------- Operator [58] -------------------------------------------------------------------------------- Your next question comes from the line of Simeon Siegel from BMO Capital Markets. -------------------------------------------------------------------------------- Simeon Avram Siegel, BMO Capital Markets Equity Research - Analyst [59] -------------------------------------------------------------------------------- Sorry if I missed it, how was AUR this quarter? And then, Barbara, do you have a view on the industry-wide promotional cadence for holiday? And how you see your AUR opportunity for holiday and into next year? -------------------------------------------------------------------------------- Travis R. Marquette, Ross Stores, Inc. - Group Senior VP & CFO [60] -------------------------------------------------------------------------------- Yes. Sure. AUR was down. It was down during the quarter. -------------------------------------------------------------------------------- Simeon Avram Siegel, BMO Capital Markets Equity Research - Analyst [61] -------------------------------------------------------------------------------- Any thoughts on just -- yes, I'm sorry. -------------------------------------------------------------------------------- Barbara Rentler, Ross Stores, Inc. - CEO & Director [62] -------------------------------------------------------------------------------- Go ahead. Go ahead. -------------------------------------------------------------------------------- Simeon Avram Siegel, BMO Capital Markets Equity Research - Analyst [63] -------------------------------------------------------------------------------- No, no. I was just going to ask about the holiday, just how you're viewing the broad promotion. -------------------------------------------------------------------------------- Barbara Rentler, Ross Stores, Inc. - CEO & Director [64] -------------------------------------------------------------------------------- Yes. Well, we think it's going to be a very promotional holiday season. I mean, it's been promotional for a number of years, and I don't expect this year to be any different. I think the most important thing for us to do is to be able to deliver really compelling bargains to the customer. And if we do that, we'll do fine. In terms of the AUR, the AUR moved a lot with the deals that you get based on the values you put on the floor, and we are highly focused on value because that's what the customer is focused on. And also, the AUR also can move around within the total box based on the businesses that you're driving. So in terms of as we go forward, we are going to buy and to drive into the businesses that the customer is responding to, and the AUR will move with that. -------------------------------------------------------------------------------- Operator [65] -------------------------------------------------------------------------------- Your next question comes from the line of Laura Champine from Loop Capital. -------------------------------------------------------------------------------- Laura Allyson Champine, Loop Capital Markets LLC, Research Division - Director of Research [66] -------------------------------------------------------------------------------- When you were contemplating your inventory plan for this holiday period, how are you thinking about the potential for store closures, capacity limitations? And how quickly can you adjust, assuming there are adjustments needed given the congestion? Do you think that you run the risk of missing out on sales because inventories are just too light? -------------------------------------------------------------------------------- Michael J. Hartshorn, Ross Stores, Inc. - Group President & COO [67] -------------------------------------------------------------------------------- Yes. I mean, the way we approach the holiday season is very cautiously. Especially with the recent upsurge and restrictions, we're going to balance sales with managing the business, managing our liquidity and managing inventory. So there is a chance that we could miss some sales, but we're going to take a very cautious approach and make sure we're positioned well to react to what's in front of us. -------------------------------------------------------------------------------- Operator [68] -------------------------------------------------------------------------------- Your next question comes from the line of Bob Drbul from Guggenheim. -------------------------------------------------------------------------------- Robert Scott Drbul, Guggenheim Securities, LLC, Research Division - Senior MD [69] -------------------------------------------------------------------------------- Just a couple of quick questions. On the home category, can you maybe -- I think you called it out as strong. I'm just wondering if you can maybe give us a little more color in terms of really what you're seeing in home and maybe even inventory availability around the home. And also separately, just wage rates. I think you talked about higher wages and some of the staffing levels throughout the supply chain. Just generally, in terms of what you're seeing overall throughout the staff would be very helpful in the stores. -------------------------------------------------------------------------------- Barbara Rentler, Ross Stores, Inc. - CEO & Director [70] -------------------------------------------------------------------------------- In terms of the home business, the business is healthy across all classifications. I think as the customer is home and they're not going to work and they're working from home, I think every classification is good. I mean, maybe with the exception of probably the weakest business would be travel as it would make sense because people aren't really traveling, but it's very broad-based. In terms of availability, part of the home business is a direct import business. So some lead times have gotten longer in some of those businesses for future. And then for shorter term, we did -- the merchants did a very good job of getting closeouts, some closeouts in the third quarter which we were pleased with. But that business is really much more of an upfront business and it's laid further out. -------------------------------------------------------------------------------- Michael J. Hartshorn, Ross Stores, Inc. - Group President & COO [71] -------------------------------------------------------------------------------- On wages, where we're seeing the most market pressure, as I mentioned, is in our distribution centers and supply chain. And as I mentioned, we did make base wage increases. We also have COVID incentive for the DC associates. And in stores, both stores and DCs, we're very happy with our staffing levels and have been able to staff up for holiday in both areas. -------------------------------------------------------------------------------- Operator [72] -------------------------------------------------------------------------------- Your next question comes from the line of Alexandra Walvis from Goldman Sachs. -------------------------------------------------------------------------------- Alexandra E. Walvis, Goldman Sachs Group, Inc., Research Division - Research Analyst [73] -------------------------------------------------------------------------------- I had a question also on categories. You mentioned outperformance of home and active and underperformance elsewhere. As you move through the quarter and you saw the improvement in the comp, did that improvement come from incremental strength in the strong categories or a little bit of recovery in some of those weaker categories? And then second question is any thoughts on freight costs as you head into next year? -------------------------------------------------------------------------------- Barbara Rentler, Ross Stores, Inc. - CEO & Director [74] -------------------------------------------------------------------------------- In terms of the comp and the trending businesses, as the quarter went on, those businesses got stronger as we chased after them more aggressively when we saw the customers' trend. And so those businesses, obviously, best -- home was our best-performing business. So those businesses helped to drive the comp forward. -------------------------------------------------------------------------------- Michael J. Hartshorn, Ross Stores, Inc. - Group President & COO [75] -------------------------------------------------------------------------------- On transportation and freight charges, obviously, the significant -- both import and domestic congestion is driving up freight costs now. We're paying surcharges to make sure we can get freight through the supply chain and onto the stores. Our expectation would be that that would continue likely through the first quarter because that's the expectation for congestion. We'll have more to say on the full year impact in our year-end conference call. -------------------------------------------------------------------------------- Operator [76] -------------------------------------------------------------------------------- Your next question comes from the line of Jamie Merriman from Bernstein. -------------------------------------------------------------------------------- Jamie Susan Merriman, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [77] -------------------------------------------------------------------------------- Can you just update us on where home is now as a percentage of the mix? And whether you see any limit on that as a category? Could it get to 40% of sales at some point? Or would you view that as too big? And then in terms of store planning, I appreciate it's too early to say what your plan is for 2021. But can you remind us how you've thought historically about what your sort of capacity constraint is around opening new stores faster? -------------------------------------------------------------------------------- Barbara Rentler, Ross Stores, Inc. - CEO & Director [78] -------------------------------------------------------------------------------- Sure. In terms of home, the home business escalates in the fourth quarter and gets much closer to 30% mark, 31% mark. It's traditionally around 25%, 26% for us. It comes up. As we go forward, our expectation is that business will continue to grow at a faster rate than the rest of the company because that's what the customer is after. And also, there is a lot of businesses in home that you can drive. -------------------------------------------------------------------------------- Michael J. Hartshorn, Ross Stores, Inc. - Group President & COO [79] -------------------------------------------------------------------------------- Could you repeat your question on the store growth? -------------------------------------------------------------------------------- Jamie Susan Merriman, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [80] -------------------------------------------------------------------------------- Sure. So historically, when you've talked about how you think about the pace of store openings, I think you've talked about wanting to have management attention around number of stores that you're opening. Can you just remind us what the sort of capacity constraints are as a business in terms of ability to accelerate store openings to the extent that there are more opportunities in 2021 or 2022? -------------------------------------------------------------------------------- Michael J. Hartshorn, Ross Stores, Inc. - Group President & COO [81] -------------------------------------------------------------------------------- Yes. I would -- for us, our historical level of store openings is around 100 per year. Typically, 80% Ross, 20% dd's. That's a level that we're comfortable with. We like our ability to execute at that level, both in getting the right site and also open the stores successfully from a store operations standpoint. So I'd say that's a level that we're comfortable with. -------------------------------------------------------------------------------- Operator [82] -------------------------------------------------------------------------------- Your next question comes from the line of Dana Telsey from Telsey Advisory Group. -------------------------------------------------------------------------------- Dana Lauren Telsey, Telsey Advisory Group LLC - CEO & Chief Research Officer [83] -------------------------------------------------------------------------------- Wanted to get some color on how you're thinking about occupancy costs and the ability given lease renegotiations to leverage those costs. Is that an SG&A tailwind for you going into 2021? And are you at all thinking about any adjustments in store size or the structure of the store in 2021 and beyond for Ross or dd's? And how you're seeing the real estate landscape? -------------------------------------------------------------------------------- Michael J. Hartshorn, Ross Stores, Inc. - Group President & COO [84] -------------------------------------------------------------------------------- Sure, Dana. I think it's too early to predict what's going to happen in the -- in terms of occupancy costs. Just so you know, the occupancy for us is in cost of goods sold not in the SG&A line. But I think it's too early to predict what's going to happen. Obviously, with the store closures, there's going to be -- we think there's going to be plenty of opportunities. So I think it's too early to call at this point. -------------------------------------------------------------------------------- Dana Lauren Telsey, Telsey Advisory Group LLC - CEO & Chief Research Officer [85] -------------------------------------------------------------------------------- Got it. And just when you're thinking about the buying for next year and planning for Easter or the other holidays going forward, how do you see the overall change in inventory levels compared to what you have now? Are you seeing differences in vendor assortments? Are you seeing differences in terms of what you'll be able to get your hands on for goods in the first half of 2021? -------------------------------------------------------------------------------- Barbara Rentler, Ross Stores, Inc. - CEO & Director [86] -------------------------------------------------------------------------------- Sure. So buying for Easter -- obviously, Q1 is normally a tough quarter. And with the unknown of what will happen with the virus and the pandemic, I would envision us having a very conservative plan in Q1, particularly inventory since we don't know really how things will be playing out. Buying for Easter, I think that Easter -- if people really can't go out and celebrate holidays still at that point, I think Easter will not be quite as big as it normally historically has been. So that whole first quarter period, I think, is just a conservative period that we'll have to see how big we want that to be. In terms of vendor assortments, yes, look, we have a very large merchant team. We have really very strong relationships in the market. We've tried to be very good partners during this period of time. And I see the assortment for 2021 being pretty balanced in terms of a good, better, best and the brands that we want. There'll always be -- in a vendor assortment, there'll always be certain things you don't have. There'll always be certain times you don't have it and all of that, but I don't see any major shift in the brands and the values that we can offer the customer. -------------------------------------------------------------------------------- Operator [87] -------------------------------------------------------------------------------- Your next question comes from the line of Chuck Grom from Gordon Haskett. -------------------------------------------------------------------------------- Charles P. Grom, Gordon Haskett Research Advisors - MD & Senior Analyst of Retail [88] -------------------------------------------------------------------------------- Great recovery on the business. A quick one for me. Just you spoke that longer hours of operation as one of the drivers of the sales recovery as the quarter progressed. Curious if you're back to normal hours at this point in time? Or if that's still a potential tailwind to come? -------------------------------------------------------------------------------- Michael J. Hartshorn, Ross Stores, Inc. - Group President & COO [89] -------------------------------------------------------------------------------- Sure. Yes, during the third quarter, we returned to normal operating hours. Going into the holiday season, we historically have extended them further, and we plan to do the same this holiday season where allowed to do so. -------------------------------------------------------------------------------- Operator [90] -------------------------------------------------------------------------------- Your last question comes from the line of Roxanne Meyer from MKM Partners. -------------------------------------------------------------------------------- Roxanne Felice Meyer, MKM Partners LLC, Research Division - MD & Senior Research Analyst for Specialty Retail [91] -------------------------------------------------------------------------------- Congrats on the improvement you saw. Kind of building off of that, I wanted to see how good do you feel about your ability to process traffic you do get, assuming the pandemic doesn't disrupt that? I imagine that you're putting incremental safeguards in your stores, logistics to move people through the store. But how should we think about the overall capacity in that you're able to get -- process people through that want to get in your store? -------------------------------------------------------------------------------- Michael J. Hartshorn, Ross Stores, Inc. - Group President & COO [92] -------------------------------------------------------------------------------- Yes. It's a good question, Roxanne. I'd say store capacity limits are changing on a daily basis. It's very dynamic based on local restrictions. A 25% occupancy is pretty common, but we feel good about the changes we made. We're certainly going to invest in front-end cashiering to make sure we move people through the lines, but there is peak days and peak hours during the days where we expect to have lines, and we'll do our best to move people through. That's mainly in high-volume stores and again, on peak days. But we feel good about the strategies we put in place during the holidays. -------------------------------------------------------------------------------- Operator [93] -------------------------------------------------------------------------------- I will turn the call back over to Barbara Rentler for closing remarks. -------------------------------------------------------------------------------- Barbara Rentler, Ross Stores, Inc. - CEO & Director [94] -------------------------------------------------------------------------------- Thank you for joining us today and for your interest in Ross Stores. We wish all of you and your families a happy, healthy and safe holiday season. -------------------------------------------------------------------------------- Operator [95] -------------------------------------------------------------------------------- Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.