Ross Stores, Inc. (NASDAQ:ROST) Q4 2023 Earnings Call Transcript
Ross Stores, Inc. (NASDAQ:ROST) Q4 2023 Earnings Call Transcript March 5, 2024
Ross Stores, Inc. beats earnings expectations. Reported EPS is $1.82, expectations were $1.63. Ross Stores, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon, and welcome to the Ross Stores Fourth Quarter and Fiscal 2023 Earnings Release Conference Call. The call will begin with prepared comments by management followed by a question-and-answer session. [Operator Instructions] Before we get started, on behalf of Ross Stores, I would like to note that the comments made on this call will contain forward-looking statements, regarding expectations about future growth and financial results, including sales and earnings forecasts, new store openings and other matters that are based on the company's current forecast of aspects of its future business. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from historical performance or current expectations.
Risk factors are included in today's press release and the company's fiscal 2022 Form 10-K and fiscal 2023 Form 10-Qs and 8-Ks on file with the SEC. And now, I'd like to turn the call over to Barbara Rentler, Chief Executive Officer.
Barbara Rentler: Good afternoon. Joining me on our call today are Michael Hartshorn, Group President and Chief Operating Officer; Adam Orvos, Executive 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 fourth quarter and 2023 performance followed by our outlook for 2024. Afterwards, we'll be happy to respond to any questions you may have. As noted in today's press release, we are pleased with fourth quarter sales and earnings results that were well ahead of our expectations. Our above planned sales were driven by our customers' positive response to the improved assortments of quality branded bargains throughout our stores. Earnings per share for the 14-weeks ended February 3, 2024, were $1.82 up from $1.31 per share for the 13-weeks ended January 28, 2023.
Net income for the period rose to $610 million versus $447 million last year. Sales for the fourth quarter of 2023 grew to $6 billion driven by robust comparable store sales gain of 7%. For the 2023 fiscal year, earnings per share were $5.56 up from $4.38 for the 52-weeks ended January 28, 2023. Net income for the fiscal 2023 was $1.9 billion compared to $1.5 billion last year. Total sales for the year increased to $20.4 billion up from $18.7 billion in the prior year period. Comparable store sales for the 52-week ended January 27, 2024 grew a solid 5%. As noted in our press release, the sales results for both the 2023 fourth quarter and fiscal year included a $308 million benefit from the 53 week. Earnings per share for both periods also benefited from the extra week by approximately $0.20 per share.
Fourth quarter operating margin grew 165 basis points to 12.4%, up from 10.7% in 2022. This improvement was mainly due to the strong gains in same-store sales and lower freight costs that were partially offset by higher incentives. The 53-week also benefited operating margin by 80 basis points. Now let's turn to additional details on our fourth quarter results. For the holiday selling season, cosmetics, home and children's were the best performing merchandise areas, while geographic results were broad based, dd's discount sales trends slightly trailed Ross' growth. While dd's top line results were respectable in fiscal 2023, we are disappointed with the performance in newer markets. We are currently conducting an in-depth analysis of dd's to better understand and address the different wants and needs of their diverse customer base, particularly as we expand outside our current existing geographies.
Until this work is completed, we believe it is wise over the near-term to moderate dd’s store growth in newer markets and focus new store openings primarily in existing regions. Now let's turn to inventory. As we ended the quarter and the year, consolidated inventories were up 8%. Average store inventories were up 9% compared to 2022's holiday period, due primarily to the 53rd week shift. Packaway represented 40% of total inventories similar to last year. Regarding our store expansion program, we added 94 net new stores in 2023, including 71 Ross Stores, Ross Dress for Less and 23 dd's discounts. We ended 2023 with 2,109 stores, including 1,764 Ross Dress for Less and 345 dd's discount locations. As we noted in today's release, for the fourth quarter fiscal 2023, we repurchased a total of 1.9 million and 8.2 million shares of common stock, respectively, for an aggregate purchase price of $247 million in the quarter $950 million for the fiscal year.
These purchases were made pursuant to the 2 year $1.9 billion program announced in March 2022, which we have now completed as planned. Our Board of Directors also recently approved a new 2 year $2.1 billion stock repurchase authorization or approximately $1.05 billion for each fiscal year. This new plan represents an 11% increase over the recently completed repurchase program. In addition, the Board approved a 10% increase in our quarterly cash dividend to $0.3675 per share to be payable on March 29, 2024, to stockholders of record as of March 15, 2024. The increases to our stock repurchase and dividend programs reflect our continued commitment to enhancing stockholder value and returns given the strength of our balance sheet and our ongoing ability to generate significant amounts of cash after funding growth and other capital needs of the business.
Now, Adam will provide further details on our fourth quarter results and additional color on our outlook for fiscal 2024.
Adam Orvos: Thank you, Barbara. As previously mentioned, comparable store sales rose a strong 7% for the quarter, entirely driven by higher traffic and shoppers' positive response to our improved assortments throughout our stores. As Barbara noted earlier, fourth quarter operating margin of 12.4% was up 165 basis points from 10.7% in 2022 and included about an 80 basis point benefit from the 53rd week in 2023. Cost of goods sold as a percent of sales improved by 265 basis points versus last year benefiting from a combination of factors. Merchandise gross margin increased by 110 basis points, primarily due to lower ocean freight costs. Distribution costs declined by 75 basis points, partially driven by favorable timing of packaway related costs.
Domestic freight and occupancy costs levered by 75 45 basis points respectively. Partially offsetting these benefits were buying costs that increased 40 basis points mainly from higher incentives. SG&A for the period delevered by 100 basis points mostly driven by higher incentive costs and wages. Now let's discuss our outlook for fiscal 2024. As mentioned in our press release, we are encouraged by the sustained sales momentum that began in the second quarter of 2023 and continued through the holiday season. That said, there remains ongoing uncertainty in the macroeconomic and geopolitical environment. In addition while inflation is moderating price is per necessity by housing, food and gasoline remain elevated and continue to pressure the low to moderate income customers' discretionary spend.
While we hope to do better, we believe it is prudent to continue to take a conservative approach to forecasting our business in 2024. For the 52-weeks ending February 1, 2025, we are planning comparable store sales to increase 2% to 3% on top of a solid 5% gain in 2023. If sales perform in line with this plan, we expect earnings per share for 2024 to be in the range of $5.64 to $5.89 compared to $5.56 in fiscal 2023. As a reminder, fiscal 2024 is a 52-week year compared to 53-weeks in 2023. As previously mentioned, our 2023 earnings per share benefited from an additional $0.20 of EPS from the extra week. Turning to our guidance assumptions for the 2024 year. Total sales are planned to grow by 2% to 4% for the 52-weeks ending February 1, 2025 versus the 53-weeks ended February 3, 2024.
This year-over-year increase in total revenue is affected by last year's 53rd week, which added approximately $308 million to sales in the fourth quarter fiscal year of 2023. If same-store sales perform in line with our plan, operating margin for the full year is expected to be in the range of 11.2% to 11.5% compared to 11.3% last year, which benefited by 25 basis points from the 53rd week. This year-over-year change also includes the benefit of anniversarying higher incentive costs in 2023 given our outperformance. In addition, for fiscal 2024, we expect merchandise margins to be pressured as we plan to offer even more brands that are sharply priced to deliver the strong value proposition that our customers expect from us. For 2024, we expect to open approximately 90 new locations comprised of about 75 Ross and 15 dd's discounts.
These openings do not include our plans to close or relocate about 10 to 15 older stores. Net interest income is estimated to be $143 million, depreciation and amortization expense inclusive of stock-based amortization is forecast to be about $610 million for the year. The tax rate is projected to be about 24% to 25% and diluted shares outstanding are expected to be approximately $332 million. In addition, capital expenditures for 2024 are planned to be approximately $840 million as we make further investments in our stores, supply chain and merchant processes to support our long-term growth and to increase efficiencies throughout the business. Let's turn now to our guidance for the first quarter. We are planning comparable store sales for the 13-weeks ending May 4, 2024 to be up 2% to 3% versus a 1% gain in last year's first quarter.
If sales perform in line with this range, we expect earnings per share for the first quarter of 2024 to be $1.29 to $1.35 versus $1.09 last year. The operating statement assumptions that support our first quarter guidance include the following. Total sales are planned to be up 6% to 8% versus last year's first quarter. We would then expect first quarter operating margin to be 11.1% to 11.4% compared to 10.1% last year. The expected increase mainly reflects our forecast for lower incentives and freight costs that are partially offset by lower merchandise margin and higher wages. We plan to add 18 new stores consisting of 11 Ross and 7 dd's discounts during the period. Net interest income is estimated to be $44 million, our tax rate is expected to be approximately 24% to 25% and diluted shares are forecasted to be about $335 million.
Now, I'll turn the call back to Barbara Rentler for closing comments.
Barbara Rentler: Thank you, Adam. To sum up, as Adam noted, while we hope to do better than our forecast this year, the external environment remains uncertain, and our low- to moderate income customers' discretionary spend continues to be impacted by elevated cost of living. Despite these headwinds last year, our shoppers responded positively to the strong values we offered across our stores, which drove our better than expected sales and earnings growth throughout 2023. In 2024, we plan to build upon these efforts and offer even more brands that are sharply priced to deliver the strong value proposition that our customers expect from us. We believe the diligent execution of this plan will result in increased market share gains this year and in the future. At this point, we'd like to open the call and respond to any questions you may have.
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