• Apparel - Retail
  • Consumer Cyclical
Ross Stores, Inc. logo
Ross Stores, Inc.
ROST · US · NASDAQ
139.64
USD
+0.42
(0.30%)
Executives
Name Title Pay
Mr. Michael K. Kobayashi President & Chief Capability Officer 1.17M
Mr. Adam M. Orvos Executive Vice President & Chief Financial Officer 2.1M
Mr. Ken Jew Group Senior Vice President, General Counsel & Corporate Secretary --
Mr. Ken Caruana Executive Vice President of Strategy, Marketing & Human Resources --
Ms. Barbara Rentler Vice Chairman & Chief Executive Officer 7.39M
Connie Kao Group Vice President of Investor & Media Relations --
Mr. Michael Balmuth Executive Chairman of the Board 10.1M
Mr. Stephen Brinkley President of Operations 1.71M
Mr. Michael J. Hartshorn Group President, Chief Operating Officer & Director 4.21M
Mr. Jeffrey P. Burrill Senior Vice President, Corporate Controller & Chief Accounting Officer --
Insider Transactions
Date Name Title Acquisition Or Disposition Stock / Options # of Shares Price
2024-06-03 GARRETT SHARON D director A - G-Gift Common Stock 1531 0
2024-06-03 GARRETT SHARON D director D - G-Gift Common Stock 1531 0
2024-05-31 Mueller Patricia H director D - G-Gift Common Stock 1531 0
2024-05-31 Mueller Patricia H director A - G-Gift Common Stock 1531 0
2024-05-28 Mueller Patricia H director D - S-Sale Common Stock 941 138.365
2024-05-22 Sutton Doniel director A - A-Award Common Stock 1293 0
2024-05-22 Mueller Patricia H director A - A-Award Common Stock 1293 0
2024-05-22 ORBAN GEORGE director A - A-Award Common Stock 1293 0
2024-05-22 BUSH MICHAEL J director A - A-Award Common Stock 1293 0
2024-05-22 GARRETT SHARON D director A - A-Award Common Stock 1293 0
2024-05-22 MILLIGAN STEPHEN D director A - A-Award Common Stock 1293 0
2024-05-22 BJORKLUND GUNNAR K director A - A-Award Common Stock 1293 0
2024-05-22 Cannizzaro Edward G director A - A-Award Common Stock 1293 0
2024-04-01 Fleming Karen PRESIDENT, CMO DD'S DISCOUNTS A - P-Purchase Common Stock 35.458 147.5063
2024-04-01 Fleming Karen PRESIDENT, CMO DD'S DISCOUNTS A - A-Award Common Stock 3447 0
2024-04-01 Fleming Karen PRESIDENT, CMO DD'S DISCOUNTS D - Common Stock 0 0
2024-03-28 RENDA LARREE M director D - S-Sale Common Stock 4168 147.8898
2024-03-28 KOBAYASHI MICHAEL K PRES., CHIEF CAPABILITY OFC'R D - S-Sale Common Stock 13860 147.4572
2024-03-27 Morrow Brian R. PRESIDENT, CMO DD'S DISCOUNTS D - S-Sale Common Stock 10734 146
2024-03-27 Hartshorn Michael J. GROUP PRESIDENT, COO D - S-Sale Common Stock 19014 146.3916
2024-03-22 Burrill Jeffrey P SVP, CAO & CORP CONTROLLER A - A-Award Common Stock 3670 0
2024-03-22 Burrill Jeffrey P SVP, CAO & CORP CONTROLLER D - F-InKind Common Stock 2420 145.37
2024-03-22 Hartshorn Michael J. GROUP PRESIDENT, COO A - A-Award Common Stock 44022 0
2024-03-22 Hartshorn Michael J. GROUP PRESIDENT, COO D - F-InKind Common Stock 19534 145.37
2024-03-22 KOBAYASHI MICHAEL K PRES., CHIEF CAPABILITY OFC'R A - A-Award Common Stock 18342 0
2024-03-22 KOBAYASHI MICHAEL K PRES., CHIEF CAPABILITY OFC'R D - F-InKind Common Stock 14238 145.37
2024-03-22 Morrow Brian R. PRESIDENT, CMO DD'S DISCOUNTS A - A-Award Common Stock 18342 0
2024-03-22 Morrow Brian R. PRESIDENT, CMO DD'S DISCOUNTS D - F-InKind Common Stock 10659 145.37
2024-03-22 Orvos Adam M EVP, CHIEF FINANCIAL OFFICER A - A-Award Common Stock 9172 0
2024-03-22 Orvos Adam M EVP, CHIEF FINANCIAL OFFICER D - F-InKind Common Stock 2313 145.37
2024-03-22 RENTLER BARBARA CHIEF EXECUTIVE OFFICER A - A-Award Common Stock 121058 0
2024-03-22 RENTLER BARBARA CHIEF EXECUTIVE OFFICER D - F-InKind Common Stock 60473 145.37
2024-03-18 Mueller Patricia H director D - S-Sale Common Stock 2265 145.3838
2024-03-18 Hartshorn Michael J. GROUP PRESIDENT, COO D - S-Sale Common Stock 21056 145.14
2024-03-13 Burrill Jeffrey P SVP, CAO & CORP CONTROLLER A - A-Award Common Stock 1700 0
2024-03-13 RENTLER BARBARA CHIEF EXECUTIVE OFFICER A - A-Award Common Stock 27875 0
2024-03-13 Orvos Adam M EVP, CHIEF FINANCIAL OFFICER A - A-Award Common Stock 6799 0
2024-03-13 BALMUTH MICHAEL EXECUTIVE CHAIRMAN A - A-Award Common Stock 10198 0
2024-03-13 Hartshorn Michael J. GROUP PRESIDENT, COO A - A-Award Common Stock 10878 0
2024-03-12 Morrow Brian R. PRESIDENT, CMO DD'S DISCOUNTS D - F-InKind Common Stock 1381 146.49
2024-03-12 BUSH MICHAEL J director D - G-Gift Common Stock 400 0
2023-10-30 Brinkley Stephen C PRESIDENT, OPERATIONS A - A-Award Common Stock 52311 0
2023-10-30 Brinkley Stephen C - 0 0
2023-10-06 KOBAYASHI MICHAEL K PRES., CHIEF CAPABILITY OFC'R D - S-Sale Common Stock 20749 111.7333
2023-09-15 KOBAYASHI MICHAEL K PRES., CHIEF CAPABILITY OFC'R D - F-InKind Common Stock 4324 118.17
2023-09-15 Hartshorn Michael J. GROUP PRESIDENT, COO D - F-InKind Common Stock 3603 118.17
2023-09-15 Orvos Adam M EVP, CHIEF FINANCIAL OFFICER D - F-InKind Common Stock 4842 118.17
2023-09-01 BALMUTH MICHAEL EXECUTIVE CHAIRMAN A - A-Award Common Stock 28760 0
2023-09-01 BALMUTH MICHAEL EXECUTIVE CHAIRMAN D - Common Stock 0 0
2023-08-29 RENTLER BARBARA CHIEF EXECUTIVE OFFICER D - S-Sale Common Stock 10091 120.1121
2023-08-25 RENTLER BARBARA CHIEF EXECUTIVE OFFICER D - S-Sale Common Stock 20000 119.0676
2023-08-28 RENTLER BARBARA CHIEF EXECUTIVE OFFICER D - S-Sale Common Stock 23254 120.0211
2023-08-23 Morrow Brian R. PRESIDENT, CMO DD'S DISCOUNTS D - S-Sale Common Stock 25945 121.5284
2023-06-01 Mueller Patricia H director A - G-Gift Common Stock 1914 0
2023-06-01 Mueller Patricia H director D - G-Gift Common Stock 1914 0
2023-05-31 GARRETT SHARON D director A - G-Gift Common Stock 1588 0
2023-05-31 GARRETT SHARON D director D - G-Gift Common Stock 1588 0
2023-05-30 RENTLER BARBARA CHIEF EXECUTIVE OFFICER D - S-Sale Common Stock 11866 102.5376
2023-05-25 RENTLER BARBARA CHIEF EXECUTIVE OFFICER D - S-Sale Common Stock 30000 102.3936
2023-05-17 Sutton Doniel director A - A-Award Common Stock 1590 0
2023-05-17 ORBAN GEORGE director A - A-Award Common Stock 1157 0
2023-05-17 ORBAN GEORGE director A - A-Award Common Stock 1590 0
2023-05-17 Cannizzaro Edward G director A - A-Award Common Stock 1590 0
2023-05-17 BUSH MICHAEL J director A - A-Award Common Stock 1590 0
2023-05-17 BJORKLUND GUNNAR K director A - A-Award Common Stock 1590 0
2023-05-17 RENDA LARREE M director A - A-Award Common Stock 1590 0
2023-05-17 Mueller Patricia H director A - A-Award Common Stock 1590 0
2023-05-17 MILLIGAN STEPHEN D director A - A-Award Common Stock 1590 0
2023-05-17 GARRETT SHARON D director A - A-Award Common Stock 1590 0
2023-04-06 KOBAYASHI MICHAEL K PRES., CHIEF CAPABILITY OFCR D - S-Sale Common Stock 12221 106.0025
2023-03-31 Burrill Jeffrey P D - S-Sale Common Stock 3297 104.7278
2023-03-17 Morrow Brian R. D - F-InKind Common Stock 9887 102.06
2023-03-17 KOBAYASHI MICHAEL K D - F-InKind Common Stock 9134 102.06
2023-03-17 RENTLER BARBARA D - F-InKind Common Stock 48568 102.06
2023-03-17 Hartshorn Michael J. D - F-InKind Common Stock 14182 102.06
2023-03-17 Burrill Jeffrey P D - F-InKind Common Stock 1509 102.06
2023-03-17 Orvos Adam M D - F-InKind Common Stock 469 102.06
2023-03-08 Burrill Jeffrey P A - A-Award Common Stock 4586 0
2023-03-08 Orvos Adam M A - A-Award Common Stock 13757 0
2023-03-08 Hartshorn Michael J. A - A-Award Common Stock 14674 0
2023-03-08 RENTLER BARBARA A - A-Award Common Stock 37601 0
2023-03-06 Hartshorn Michael J. D - S-Sale Common Stock 20529 112.3684
2022-12-16 Burrill Jeffrey P SVP, CAO & CORP CONTROLLER D - Common Stock 0 0
2022-10-14 Cannizzaro Edward G director A - A-Award Common Stock 3315 0
2022-10-14 Cannizzaro Edward G None None - None None None
2022-10-14 Cannizzaro Edward G - 0 0
2022-10-03 Orvos Adam M EVP, CHIEF FINANCIAL OFFICER D - F-InKind Common Stock 3793 85.96
2022-09-16 Hartshorn Michael J. GROUP PRESIDENT, COO D - F-InKind Common Stock 2402 90.25
2022-07-15 Morrow Brian R. PRESIDENT, CMO DD'S DISCOUNTS A - A-Award Common Stock 19236 0
2022-06-08 BUSH MICHAEL J D - S-Sale Common Stock 1000 81.4559
2022-06-03 GARRETT SHARON D director A - G-Gift Common Stock 1014 0
2022-06-03 GARRETT SHARON D D - G-Gift Common Stock 1014 0
2022-05-26 GARRETT SHARON D director A - G-Gift Common Stock 546 0
2022-05-26 GARRETT SHARON D D - G-Gift Common Stock 546 0
2022-05-26 Mueller Patricia H director D - G-Gift Common Stock 1340 0
2022-05-26 Mueller Patricia H A - G-Gift Common Stock 1340 0
2022-05-18 BUSH MICHAEL J A - A-Award Common Stock 1725 0
2022-05-18 MILLIGAN STEPHEN D A - A-Award Common Stock 1725 0
2022-05-18 Sutton Doniel A - A-Award Common Stock 1725 0
2022-05-18 GARRETT SHARON D A - A-Award Common Stock 1725 0
2022-05-18 BJORKLUND GUNNAR K A - A-Award Common Stock 1725 0
2022-05-18 RENDA LARREE M A - A-Award Common Stock 1725 0
2022-05-18 ORBAN GEORGE A - A-Award Common Stock 1294 0
2022-05-18 Mueller Patricia H A - A-Award Common Stock 1725 0
2022-03-18 Orvos Adam M EVP, Chief Financial Officer A - A-Award Common Stock 4543 0
2022-03-18 Orvos Adam M EVP, Chief Financial Officer D - F-InKind Common Stock 452 93.33
2022-03-18 RENTLER BARBARA Chief Executive Officer A - A-Award Common Stock 99904 0
2022-03-18 RENTLER BARBARA Chief Executive Officer D - F-InKind Common Stock 62062 93.33
2022-03-18 KOBAYASHI MICHAEL K Pres., Chief Capability Ofcr A - A-Award Common Stock 15139 0
2022-03-18 KOBAYASHI MICHAEL K Pres., Chief Capability Ofcr D - F-InKind Common Stock 9736 93.33
2022-03-18 Hartshorn Michael J. Group President, COO A - A-Award Common Stock 30275 0
2022-03-18 Hartshorn Michael J. Group President, COO D - F-InKind Common Stock 14592 93.33
2022-03-18 Morrow Brian R. President, CMO dd's DISCOUNTS A - A-Award Common Stock 15139 0
2022-03-18 Morrow Brian R. President, CMO dd's DISCOUNTS D - F-InKind Common Stock 8684 93.33
2022-03-09 RENTLER BARBARA Chief Executive Officer A - A-Award Common Stock 36130 0
2022-03-09 Hartshorn Michael J. Group President, COO A - A-Award Common Stock 18065 0
2022-02-01 KOBAYASHI MICHAEL K Pres., Chief Capability Ofcr A - A-Award Common Stock 32475 0
2021-10-01 Orvos Adam M EVP, Chief Financial Officer A - A-Award Common Stock 38258 0
2021-10-01 Orvos Adam M EVP, Chief Financial Officer D - Common Stock 0 0
2021-09-23 QUESNEL GREGORY L director D - G-Gift Common Stock 8250 0
2021-07-02 KOBAYASHI MICHAEL K President, Ops. & Technology D - S-Sale Common Stock 63 125.13
2021-05-28 BALMUTH MICHAEL Strategic Advisor D - S-Sale Common Stock 1000 125.92
2021-05-28 BALMUTH MICHAEL Strategic Advisor D - S-Sale Common Stock 48377 126.0372
2021-05-27 GARRETT SHARON D director A - G-Gift Common Stock 587 0
2021-05-27 GARRETT SHARON D director D - G-Gift Common Stock 587 0
2021-05-26 Mueller Patricia H director D - G-Gift Common Stock 914 0
2021-05-26 Mueller Patricia H director A - G-Gift Common Stock 914 0
2021-05-25 GARRETT SHARON D director A - G-Gift Common Stock 1152 0
2021-05-25 GARRETT SHARON D director D - G-Gift Common Stock 1152 0
2021-05-19 QUESNEL GREGORY L director A - A-Award Common Stock 1279 0
2021-05-19 ORBAN GEORGE director A - A-Award Common Stock 959 0
2021-05-19 ORBAN GEORGE director A - A-Award Common Stock 1279 0
2021-05-19 BUSH MICHAEL J director A - A-Award Common Stock 1279 0
2021-05-19 MILLIGAN STEPHEN D director A - A-Award Common Stock 1279 0
2021-05-19 BJORKLUND GUNNAR K director A - A-Award Common Stock 1279 0
2021-05-19 Mueller Patricia H director A - A-Award Common Stock 1279 0
2021-05-19 RENDA LARREE M director A - A-Award Common Stock 1279 0
2021-05-19 GARRETT SHARON D director A - A-Award Common Stock 1279 0
2021-04-21 ORBAN GEORGE director D - S-Sale Common Stock 3250 126.6855
2021-04-14 ORBAN GEORGE director D - S-Sale Common Stock 3250 127.0397
2021-04-08 Morrow Brian R. President, CMO dd's DISCOUNTS D - S-Sale Common Stock 1462 127.28
2021-04-07 ORBAN GEORGE director D - S-Sale Common Stock 3250 123.3534
2021-03-31 ORBAN GEORGE director D - S-Sale Common Stock 3250 120.172
2021-04-01 KOBAYASHI MICHAEL K President, Ops. & Technology D - S-Sale Common Stock 53 121.35
2021-03-26 ORBAN GEORGE director D - S-Sale Common Stock 3250 120.1179
2021-03-23 KOBAYASHI MICHAEL K President, Ops. & Technology D - S-Sale Common Stock 1459 119.1681
2021-03-23 Hartshorn Michael J. Group President, COO D - S-Sale Common Stock 2625 119.2154
2021-03-19 KOBAYASHI MICHAEL K President, Ops. & Technology A - A-Award Common Stock 9641 0
2021-03-19 KOBAYASHI MICHAEL K President, Ops. & Technology D - F-InKind Common Stock 1434 121.31
2021-03-19 Marquette Travis EVP, Chief Financial Officer A - A-Award Common Stock 2894 0
2021-03-19 Marquette Travis EVP, Chief Financial Officer D - F-InKind Common Stock 300 121.31
2021-03-19 Hartshorn Michael J. Group President, COO A - A-Award Common Stock 17352 0
2021-03-19 Hartshorn Michael J. Group President, COO D - F-InKind Common Stock 2581 121.31
2021-03-19 Morrow Brian R. President, CMO dd's DISCOUNTS A - A-Award Common Stock 9641 0
2021-03-19 Morrow Brian R. President, CMO dd's DISCOUNTS D - F-InKind Common Stock 1431 121.31
2021-03-19 BALMUTH MICHAEL Chairman of the Board A - A-Award Common Stock 39520 0
2021-03-19 BALMUTH MICHAEL Chairman of the Board D - S-Sale Common Stock 11856 121.3642
2021-03-19 RENTLER BARBARA Chief Executive Officer A - A-Award Common Stock 53979 0
2021-03-19 RENTLER BARBARA Chief Executive Officer D - F-InKind Common Stock 8624 121.31
2021-03-22 RENTLER BARBARA Chief Executive Officer D - S-Sale Common Stock 7570 119.2583
2021-03-17 ORBAN GEORGE director D - S-Sale Common Stock 3250 123.312
2021-03-17 Morrow Brian R. President, CMO dd's DISCOUNTS D - S-Sale Common Stock 11289 124
2021-03-16 KOBAYASHI MICHAEL K President, Ops. & Technology D - S-Sale Common Stock 10160 123.3873
2021-03-16 Marquette Travis EVP, Chief Financial Officer D - S-Sale Common Stock 1749 124.2
2021-03-16 Hartshorn Michael J. Group President, COO D - S-Sale Common Stock 12351 123.4031
2021-03-12 RENTLER BARBARA Chief Executive Officer D - F-InKind Common Stock 49515 122.62
2021-03-15 RENTLER BARBARA Chief Executive Officer D - S-Sale Common Stock 45623 123.73
2021-03-12 KOBAYASHI MICHAEL K President, Ops. & Technology D - F-InKind Common Stock 7560 122.62
2021-03-15 KOBAYASHI MICHAEL K President, Ops. & Technology D - S-Sale Common Stock 12122 123.2628
2021-03-15 KOBAYASHI MICHAEL K President, Ops. & Technology D - S-Sale Common Stock 1286 125.4887
2021-03-15 KOBAYASHI MICHAEL K President, Ops. & Technology D - S-Sale Common Stock 136 125.04
2021-03-12 Marquette Travis EVP, Chief Financial Officer A - F-InKind Common Stock 2045 122.62
2021-03-15 Marquette Travis EVP, Chief Financial Officer D - S-Sale Common Stock 951 122.62
2021-03-12 Hartshorn Michael J. Group President, COO D - F-InKind Common Stock 9714 122.62
2021-03-15 Hartshorn Michael J. Group President, COO D - S-Sale Common Stock 12460 123.261
2021-03-12 Morrow Brian R. President, CMO dd's DISCOUNTS D - F-InKind Common Stock 8530 122.62
2021-03-12 Morrow Brian R. President, CMO dd's DISCOUNTS D - S-Sale Common Stock 5351 122
2021-03-15 Morrow Brian R. President, CMO dd's DISCOUNTS D - S-Sale Common Stock 19972 124.0122
2021-03-11 Sutton Doniel director A - A-Award Common Stock 2234 0
2021-03-11 Sutton Doniel director D - Common Stock 0 0
2021-03-10 Morrow Brian R. President, CMO dd's DISCOUNTS A - A-Award Common Stock 8226 0
2021-03-10 Hartshorn Michael J. Group President, COO A - A-Award Common Stock 12339 0
2021-01-30 ORBAN GEORGE director I - Common Stock 0 0
2021-01-30 ORBAN GEORGE director I - Common Stock 0 0
2021-01-30 ORBAN GEORGE director I - Common Stock 0 0
2021-03-10 KOBAYASHI MICHAEL K President, Ops. & Technology A - A-Award Common Stock 8226 0
2021-03-10 RENTLER BARBARA Chief Executive Officer A - A-Award Common Stock 26323 0
2021-03-10 Marquette Travis GSVP, Chief Financial Officer A - A-Award Common Stock 9871 0
2021-03-05 BUSH MICHAEL J director D - G-Gift Common Stock 1000 0
2021-03-05 BALMUTH MICHAEL Chairman of the Board A - S-Sale Common Stock 41901 112.1092
2021-03-05 KOBAYASHI MICHAEL K President, Ops. & Technology D - S-Sale Common Stock 200 113.79
2021-03-05 RENTLER BARBARA Chief Executive Officer D - S-Sale Common Stock 69407 111.7041
2020-09-11 Morrow Brian R. President, CMO dd's DISCOUNTS D - F-InKind Common Stock 4457 90.22
2020-09-11 Marquette Travis GSVP, Chief Financial Officer D - F-InKind Common Stock 636 90.22
2020-08-24 RENTLER BARBARA Chief Executive Officer A - A-Award Common Stock 60676 0
2020-08-24 RENTLER BARBARA Chief Executive Officer D - F-InKind Common Stock 9710 89.31
2020-08-24 KOBAYASHI MICHAEL K President, Ops. & Technology A - A-Award Common Stock 8496 0
2020-08-24 KOBAYASHI MICHAEL K President, Ops. & Technology D - F-InKind Common Stock 1263 89.31
2020-08-24 Hartshorn Michael J. Group President, COO A - A-Award Common Stock 8496 0
2020-08-24 Hartshorn Michael J. Group President, COO D - F-InKind Common Stock 1263 89.31
2020-08-24 Marquette Travis GSVP, Chief Financial Officer A - A-Award Common Stock 3641 0
2020-08-24 Marquette Travis GSVP, Chief Financial Officer D - F-InKind Common Stock 377 89.31
2020-08-24 Morrow Brian R. President, CMO dd's DISCOUNTS A - A-Award Common Stock 10316 0
2020-08-24 Morrow Brian R. President, CMO dd's DISCOUNTS D - F-InKind Common Stock 1649 89.31
2020-08-24 BALMUTH MICHAEL Chairman of the Board A - A-Award Common Stock 49755 0
2020-08-24 BALMUTH MICHAEL Chairman of the Board D - F-InKind Common Stock 40817 89.31
2020-05-20 GARRETT SHARON D director A - G-Gift Common Stock 1937 0
2020-05-20 GARRETT SHARON D director A - A-Award Common Stock 1761 0
2020-05-20 GARRETT SHARON D director D - G-Gift Common Stock 1937 0
2020-05-20 QUESNEL GREGORY L director A - A-Award Common Stock 1761 0
2020-05-20 ORBAN GEORGE director A - A-Award Common Stock 1761 0
2020-05-20 BUSH MICHAEL J director A - A-Award Common Stock 1761 0
2020-05-20 MILLIGAN STEPHEN D director A - A-Award Common Stock 1761 0
2020-05-20 FERBER NORMAN A director A - A-Award Common Stock 1761 0
2020-05-20 BJORKLUND GUNNAR K director A - A-Award Common Stock 1761 0
2020-05-20 GARRETT SHARON D director A - G-Gift Common Stock 1937 0
2022-05-20 GARRETT SHARON D director A - A-Award Common Stock 1761 0
2020-05-20 GARRETT SHARON D director D - G-Gift Common Stock 1937 0
2020-03-13 Morrow Brian R. President, CMO dd's DISCOUNTS D - F-InKind Common Stock 19335 92.83
2020-03-13 Morrow Brian R. President, CMO dd's DISCOUNTS D - F-InKind Common Stock 19335 92.83
2020-03-13 RENTLER BARBARA Chief Executive Officer D - F-InKind Common Stock 58215 92.83
2020-03-13 KOBAYASHI MICHAEL K President, Ops. & Technology D - F-InKind Common Stock 8721 92.83
2020-03-13 Marquette Travis GSVP, Chief Financial Officer D - F-InKind Common Stock 1319 92.83
2020-03-13 Hartshorn Michael J. Group President, COO D - F-InKind Common Stock 7781 92.83
2020-03-11 Morrow Brian R. President, CMO dd's DISCOUNTS A - A-Award Common Stock 15220 0
2020-03-11 BALMUTH MICHAEL Chairman of the Board A - A-Award Common Stock 21713 0
2020-03-11 Marquette Travis GSVP, Chief Financial Officer A - A-Award Common Stock 3044 0
2020-03-11 KOBAYASHI MICHAEL K President, Ops. & Technology A - A-Award Common Stock 8117 0
2020-03-11 RENTLER BARBARA Chief Executive Officer A - A-Award Common Stock 32468 0
2020-03-11 Hartshorn Michael J. Group President, COO A - A-Award Common Stock 15220 0
2020-03-11 Mueller Patricia H director A - A-Award Common Stock 2740 0
2020-03-11 RENDA LARREE M director A - A-Award Common Stock 2740 0
2020-03-11 RENDA LARREE M director D - Common Stock 0 0
2020-03-11 Mueller Patricia H director D - Common Stock 0 0
2020-02-01 Morrow Brian R. officer - 0 0
2020-02-01 GARRETT SHARON D - 0 0
2020-02-01 BALMUTH MICHAEL Chairman, Executive - 0 0
2019-08-16 Marquette Travis GSVP, Chief Financial Officer D - Common Stock 0 0
2019-08-16 KOBAYASHI MICHAEL K President, Ops. & Technology D - Common Stock 0 0
2019-12-16 Morrow Brian R. President, Merchandising A - A-Award Common Stock 13114 0
2019-09-30 RENTLER BARBARA Chief Executive Officer D - S-Sale Common Stock 25000 110.0145
2019-09-19 FASSIO JAMES S President, Chief Dev. Officer D - S-Sale Common Stock 15000 108.66
2019-09-13 Marquette Travis GSVP, Chief Financial Officer D - F-InKind Common Stock 622 109.13
2019-09-05 RENTLER BARBARA Chief Executive Officer D - S-Sale Common Stock 25000 107.0608
2019-08-16 Marquette Travis GSVP, Chief Financial Officer A - A-Award Common Stock 11631 0
2019-08-16 KOBAYASHI MICHAEL K President, Ops. & Technology A - A-Award Common Stock 14538 0
2019-08-16 Hartshorn Michael J. Group President, COO A - A-Award Common Stock 29076 0
2019-08-16 Marquette Travis GSVP, Chief Financial Officer D - Common Stock 0 0
2019-08-16 KOBAYASHI MICHAEL K President, Ops. & Technology D - Common Stock 0 0
2019-07-12 ORBAN GEORGE director D - S-Sale Common Stock 10000 105.8568
2019-07-11 ORBAN GEORGE director D - S-Sale Common Stock 1000 103
2019-07-12 ORBAN GEORGE director D - S-Sale Common Stock 18000 106.0667
2019-06-28 FASSIO JAMES S President, Chief Dev. Officer A - G-Gift Common Stock 66 0
2019-07-11 FASSIO JAMES S President, Chief Dev. Officer D - S-Sale Common Stock 10000 102.75
2019-07-12 FASSIO JAMES S President, Chief Dev. Officer D - S-Sale Common Stock 75238 105.1291
2019-06-28 FASSIO JAMES S President, Chief Dev. Officer D - G-Gift Common Stock 66 0
2019-07-10 ORBAN GEORGE director D - S-Sale Common Stock 1000 102.5
2019-03-29 FASSIO JAMES S President, Chief Dev. Officer A - G-Gift Common Stock 74 0
2019-06-19 FASSIO JAMES S President, Chief Dev. Officer D - S-Sale Common Stock 60000 103.38
2019-03-29 FASSIO JAMES S President, Chief Dev. Officer D - G-Gift Common Stock 74 0
2019-06-14 RENTLER BARBARA Chief Executive Officer D - S-Sale Common Stock 10000 100.51
2019-06-12 RENTLER BARBARA Chief Executive Officer D - S-Sale Common Stock 4570 99.5
2019-06-13 RENTLER BARBARA Chief Executive Officer D - S-Sale Common Stock 35430 99.12
2019-05-31 BALMUTH MICHAEL Chairman, Executive D - S-Sale Common Stock 34250 92.8507
2019-05-31 BALMUTH MICHAEL Chairman, Executive D - S-Sale Common Stock 46799 92.8777
2019-05-22 FERBER NORMAN A director A - A-Award Common Stock 1640 0
2019-05-22 ORBAN GEORGE director A - A-Award Common Stock 1640 0
2019-05-22 FERBER NORMAN A director A - A-Award Common Stock 100 0
2019-05-22 GARRETT SHARON D director A - A-Award Common Stock 1640 0
2019-05-22 BUSH MICHAEL J director A - A-Award Common Stock 1640 0
2019-05-22 BJORKLUND GUNNAR K director A - A-Award Common Stock 1640 0
2019-05-22 QUESNEL GREGORY L director A - A-Award Common Stock 1640 0
2019-05-22 MILLIGAN STEPHEN D director A - A-Award Common Stock 1640 0
2019-04-01 RENTLER BARBARA Chief Executive Officer D - F-InKind Common Stock 40430 94.26
2019-04-01 Brautigan Bernard G. President, Merchandising D - F-InKind Common Stock 18600 94.26
2019-04-02 Brautigan Bernard G. President, Merchandising D - S-Sale Common Stock 19384 93.56
2019-03-20 Hartshorn Michael J. GEVP, Finance & Legal, and CFO D - S-Sale Common Stock 9924 91.4805
2019-03-20 FASSIO JAMES S President, Chief Dev. Officer D - S-Sale Common Stock 50000 91.51
2019-03-19 Brautigan Bernard G. President, Merchandising D - S-Sale Common Stock 8612 91.1135
2019-03-19 Morrow Brian R. President, Merchandising D - S-Sale Common Stock 10000 92
2019-03-15 O SULLIVAN MICHAEL B President, Chief Operating Off A - A-Award Common Stock 63595 0
2019-03-15 O SULLIVAN MICHAEL B President, Chief Operating Off D - F-InKind Common Stock 9459 89.9
2019-03-15 CALL JOHN G Executive VP Finance & Legal A - A-Award Common Stock 8155 0
2019-03-15 CALL JOHN G Executive VP Finance & Legal D - F-InKind Common Stock 1213 89.9
2019-03-15 BALMUTH MICHAEL Chairman, Executive A - A-Award Common Stock 66856 0
2019-03-15 BALMUTH MICHAEL Chairman, Executive D - S-Sale Common Stock 20057 88.8162
2019-03-15 RENTLER BARBARA Chief Executive Officer A - A-Award Common Stock 77455 0
2019-03-15 RENTLER BARBARA Chief Executive Officer D - F-InKind Common Stock 12366 89.9
2019-03-15 Brautigan Bernard G. President, Merchandising A - A-Award Common Stock 13863 0
2019-03-15 Brautigan Bernard G. President, Merchandising D - F-InKind Common Stock 2037 89.9
2019-03-18 Brautigan Bernard G. President, Merchandising D - S-Sale Common Stock 12000 91.1791
2019-03-15 Morrow Brian R. President, Merchandising A - A-Award Common Stock 13863 0
2019-03-15 Morrow Brian R. President, Merchandising D - F-InKind Common Stock 2213 89.9
2019-03-15 FASSIO JAMES S President, Chief Dev. Officer A - G-Gift Common Stock 2098 0
2019-03-15 FASSIO JAMES S President, Chief Dev. Officer A - A-Award Common Stock 13863 0
2019-03-15 FASSIO JAMES S President, Chief Dev. Officer D - F-InKind Common Stock 2062 89.9
2019-03-15 FASSIO JAMES S President, Chief Dev. Officer D - G-Gift Common Stock 2098 0
2019-03-15 Hartshorn Michael J. GEVP, Finance & Legal, and CFO A - A-Award Common Stock 8155 0
2019-03-15 Hartshorn Michael J. GEVP, Finance & Legal, and CFO D - F-InKind Common Stock 4798 89.9
2019-03-15 Hartshorn Michael J. GEVP, Finance & Legal, and CFO D - G-Gift Common Stock 285 0
2019-03-13 Brautigan Bernard G. President, Merchandising A - A-Award Common Stock 13232 0
2019-03-13 FASSIO JAMES S President, Chief Dev. Officer A - A-Award Common Stock 11027 0
2019-03-13 BALMUTH MICHAEL Chairman, Executive A - A-Award Common Stock 15713 0
2019-03-13 Hartshorn Michael J. E.V.P., Finance and CFO A - A-Award Common Stock 13232 0
2019-03-13 Morrow Brian R. President, Merchandising A - A-Award Common Stock 15438 0
2019-03-13 RENTLER BARBARA Chief Executive Officer A - A-Award Common Stock 33080 0
2019-03-12 BALMUTH MICHAEL Chairman, Executive D - S-Sale Common Stock 25689 90.7657
2019-03-12 CALL JOHN G Executive VP Finance & Legal D - F-InKind Common Stock 10640 91.16
2019-03-12 FASSIO JAMES S President, Chief Dev. Officer A - G-Gift Common Stock 24965 0
2019-03-12 FASSIO JAMES S President, Chief Dev. Officer D - F-InKind Common Stock 24545 91.16
2019-03-12 FASSIO JAMES S President, Chief Dev. Officer D - G-Gift Common Stock 24965 0
2019-03-12 Morrow Brian R. President, Merchandising D - F-InKind Common Stock 20516 91.16
2019-03-12 O SULLIVAN MICHAEL B President, Chief Operating Off D - F-InKind Common Stock 25945 91.16
2019-03-12 RENTLER BARBARA Chief Executive Officer D - F-InKind Common Stock 35275 91.16
2019-03-12 Hartshorn Michael J. E.V.P., Finance and CFO D - F-InKind Common Stock 1669 91.16
2019-03-12 Brautigan Bernard G. President, Merchandising D - F-InKind Common Stock 14572 91.16
2019-02-02 CALL JOHN G officer - 0 0
2019-02-02 BALMUTH MICHAEL Chairman, Executive - 0 0
2019-02-02 FASSIO JAMES S President, Chief Dev. Officer I - Common Stock 0 0
2019-02-02 GARRETT SHARON D - 0 0
2018-10-12 RENTLER BARBARA Chief Executive Officer D - S-Sale Common Stock 20000 95.1499
2018-08-27 FERBER NORMAN A director D - S-Sale Common Stock 10144 94.9016
2018-06-21 FASSIO JAMES S President, Chief Dev. Officer D - S-Sale Common Stock 87769 86.61
2018-06-21 FASSIO JAMES S President, Chief Dev. Officer D - S-Sale Common Stock 88000 86.5234
2018-06-08 RENTLER BARBARA Chief Executive Officer D - S-Sale Common Stock 25000 85.4507
2018-06-11 BUSH MICHAEL J director D - S-Sale Common Stock 1500 85.7257
2018-06-01 FASSIO JAMES S President, Chief Dev. Officer A - G-Gift Common Stock 14809 0
2018-06-01 FASSIO JAMES S President, Chief Dev. Officer D - F-InKind Common Stock 14486 80.71
2018-06-01 FASSIO JAMES S President, Chief Dev. Officer D - G-Gift Common Stock 14809 0
2018-06-01 O SULLIVAN MICHAEL B President, Chief Operating Off D - F-InKind Common Stock 14486 80.71
2018-06-01 RENTLER BARBARA Chief Executive Officer D - F-InKind Common Stock 18659 80.71
2018-05-31 BALMUTH MICHAEL Chairman, Executive D - S-Sale Common Stock 33999 79.1028
2018-05-29 CALL JOHN G Executive VP & Corp Secretary D - F-InKind Common Stock 7632 77.98
2018-05-23 BALMUTH MICHAEL Chairman, Executive A - A-Award Common Stock 17250 0
2018-05-23 BUSH MICHAEL J director A - A-Award Common Stock 1816 0
2018-05-23 QUESNEL GREGORY L director A - A-Award Common Stock 1816 0
2018-05-23 PEIROS LARRY director A - A-Award Common Stock 1816 0
2018-05-23 MILLIGAN STEPHEN D director A - A-Award Common Stock 1816 0
2018-05-23 FERBER NORMAN A director A - A-Award Common Stock 1816 0
2018-05-23 GARRETT SHARON D director A - A-Award Common Stock 1816 0
2018-05-23 BJORKLUND GUNNAR K director A - A-Award Common Stock 1816 0
2018-05-23 ORBAN GEORGE director A - A-Award Common Stock 1816 0
2018-04-12 RENTLER BARBARA Chief Executive Officer D - S-Sale Common Stock 15000 78.25
2018-04-05 Panattoni Lisa R President, Merchanding D - S-Sale Common Stock 12471 79.4755
2018-04-05 RENTLER BARBARA Chief Executive Officer D - S-Sale Common Stock 32430 79.5316
2018-03-23 Panattoni Lisa R President, Merchanding D - S-Sale Common Stock 23573 75.4966
2018-03-26 Panattoni Lisa R President, Merchanding D - S-Sale Common Stock 8251 76.4665
2018-03-22 Brautigan Bernard G. President, Merchandising D - S-Sale Common Stock 9085 75.43
2018-03-23 Brautigan Bernard G. President, Merchandising D - S-Sale Common Stock 9086 75.99
2018-03-22 FASSIO JAMES S President, Chief Dev. Officer D - S-Sale Common Stock 40000 77.3442
2018-03-21 Hartshorn Michael J. E.V.P., Finance and CFO D - G-Gift Common Stock 77 0
2018-03-21 Hartshorn Michael J. E.V.P., Finance and CFO D - S-Sale Common Stock 5060 77.6274
2018-03-23 Hartshorn Michael J. E.V.P., Finance and CFO D - G-Gift Common Stock 110 0
2018-03-20 FASSIO JAMES S President, Chief Dev. Officer A - G-Gift Common Stock 23340 0
2018-03-20 FASSIO JAMES S President, Chief Dev. Officer D - F-InKind Common Stock 22950 77.31
2018-03-20 FASSIO JAMES S President, Chief Dev. Officer D - G-Gift Common Stock 23340 0
2018-03-20 Brautigan Bernard G. President, Merchandising D - S-Sale Common Stock 2787 77.47
2018-03-20 Brautigan Bernard G. President, Merchandising D - F-InKind Common Stock 17437 77.31
2018-03-20 CALL JOHN G Executive VP & Corp Secretary D - F-InKind Common Stock 4662 77.31
2018-03-20 O SULLIVAN MICHAEL B President, Chief Operating Off D - F-InKind Common Stock 31776 77.31
2018-03-20 RENTLER BARBARA Chief Executive Officer D - F-InKind Common Stock 34109 77.31
2018-03-20 Hartshorn Michael J. E.V.P., Finance and CFO D - F-InKind Common Stock 1847 77.31
2018-03-20 Panattoni Lisa R President, Merchanding D - F-InKind Common Stock 18950 77.31
2018-03-21 Morrow Brian R. President, Merchandising D - S-Sale Common Stock 18282 78.5
2018-03-16 Hartshorn Michael J. Group S.V.P., CFO A - A-Award Common Stock 6424 0
2018-03-16 Hartshorn Michael J. Group S.V.P., CFO D - F-InKind Common Stock 666 76.75
2018-03-16 Hartshorn Michael J. Group S.V.P., CFO D - S-Sale Common Stock 3361 76.9388
2018-03-16 FASSIO JAMES S President, Chief Dev. Officer A - G-Gift Common Stock 2753 0
2018-03-16 FASSIO JAMES S President, Chief Dev. Officer A - A-Award Common Stock 18198 0
2018-03-16 FASSIO JAMES S President, Chief Dev. Officer D - F-InKind Common Stock 2707 76.75
2018-03-16 FASSIO JAMES S President, Chief Dev. Officer D - G-Gift Common Stock 2753 0
2018-03-16 BALMUTH MICHAEL Chairman, Executive A - A-Award Common Stock 85628 0
2018-03-16 BALMUTH MICHAEL Chairman, Executive D - S-Sale Common Stock 25689 76.8401
2018-03-16 RENTLER BARBARA Chief Executive Officer A - A-Award Common Stock 98472 0
2018-03-16 RENTLER BARBARA Chief Executive Officer D - F-InKind Common Stock 15722 76.75
2018-03-16 Morrow Brian R. President, Merchandising A - A-Award Common Stock 18198 0
2018-03-16 Morrow Brian R. President, Merchandising D - F-InKind Common Stock 2905 76.75
2018-03-16 Panattoni Lisa R President, Merchanding A - A-Award Common Stock 18198 0
2018-03-16 Panattoni Lisa R President, Merchanding D - F-InKind Common Stock 2905 76.75
2018-03-16 Brautigan Bernard G. President, Merchandising A - A-Award Common Stock 18198 0
2018-03-16 Brautigan Bernard G. President, Merchandising D - F-InKind Common Stock 2673 76.75
2018-03-16 CALL JOHN G Executive VP & Corp Secretary A - A-Award Common Stock 10706 0
2018-03-16 CALL JOHN G Executive VP & Corp Secretary D - F-InKind Common Stock 1110 76.75
2018-03-16 O SULLIVAN MICHAEL B President, Chief Operating Off A - A-Award Common Stock 80275 0
2018-03-16 O SULLIVAN MICHAEL B President, Chief Operating Off D - F-InKind Common Stock 11940 76.75
2018-03-14 Brautigan Bernard G. President, Merchandising A - A-Award Common Stock 15549 0
2018-03-15 Brautigan Bernard G. President, Merchandising D - S-Sale Common Stock 8587 76.8
2018-03-14 Morrow Brian R. President, Merchandising A - A-Award Common Stock 18140 0
2018-03-14 O SULLIVAN MICHAEL B President, Chief Operating Off A - A-Award Common Stock 31097 0
2018-03-14 RENTLER BARBARA Chief Executive Officer A - A-Award Common Stock 38871 0
2018-03-15 GARRETT SHARON D director D - S-Sale Common Stock 26000 77.0677
2018-03-14 Hartshorn Michael J. Group S.V.P., CFO A - A-Award Common Stock 15549 0
2018-03-12 BALMUTH MICHAEL Chairman, Executive D - S-Sale Common Stock 59777 76.5265
2018-03-12 Brautigan Bernard G. President, Merchandising D - F-InKind Common Stock 4461 76.43
2018-03-12 Panattoni Lisa R President, Merchanding D - F-InKind Common Stock 10162 76.43
2018-03-12 CALL JOHN G Executive VP & Corp Secretary D - F-InKind Common Stock 2947 76.43
2018-03-12 FASSIO JAMES S President, Chief Dev. Officer A - G-Gift Common Stock 11977 0
2018-03-12 FASSIO JAMES S President, Chief Dev. Officer D - F-InKind Common Stock 7882 76.43
2018-03-12 FASSIO JAMES S President, Chief Dev. Officer D - G-Gift Common Stock 11977 0
2018-03-12 Morrow Brian R. President, Merchandising D - F-InKind Common Stock 13692 76.43
2018-03-12 O SULLIVAN MICHAEL B President, Chief Operating Off D - F-InKind Common Stock 24343 76.43
2018-03-12 RENTLER BARBARA Chief Executive Officer D - F-InKind Common Stock 32697 76.43
2018-03-12 Hartshorn Michael J. Group S.V.P., CFO D - F-InKind Common Stock 1764 76.43
2018-02-03 Hartshorn Michael J. officer - 0 0
2017-01-28 CALL JOHN G officer - 0 0
2018-02-03 FASSIO JAMES S President, Chief Dev. Officer I - Common Stock 0 0
2017-10-04 Morrow Brian R. President, Merchandising D - S-Sale Common Stock 6157 65.3003
2017-09-18 Morrow Brian R. President, Merchandising D - F-InKind Common Stock 7779 60.81
2017-09-12 RENTLER BARBARA Chief Executive Officer D - S-Sale Common Stock 15492 61
2017-06-01 O SULLIVAN MICHAEL B President, Chief Operating Off D - F-InKind Common Stock 15246 63.68
2017-06-01 RENTLER BARBARA Chief Executive Officer D - F-InKind Common Stock 19572 63.68
2017-06-01 FASSIO JAMES S President, Chief Dev. Officer A - G-Gift Common Stock 13974 0
2017-03-31 FASSIO JAMES S President, Chief Dev. Officer A - G-Gift Common Stock 95 0
2017-03-31 FASSIO JAMES S President, Chief Dev. Officer D - G-Gift Common Stock 95 0
2017-06-01 FASSIO JAMES S President, Chief Dev. Officer D - G-Gift Common Stock 13974 0
2017-06-01 FASSIO JAMES S President, Chief Dev. Officer D - F-InKind Common Stock 15246 63.68
2017-05-22 GARRETT SHARON D director A - G-Gift Common Stock 3024 0
2017-05-26 GARRETT SHARON D director D - S-Sale Common Stock 16130 63.2308
2017-05-22 GARRETT SHARON D director D - G-Gift Common Stock 3024 0
2017-05-22 CALL JOHN G Executive VP & Corp Secretary D - F-InKind Common Stock 4011 62.45
2017-05-17 ORBAN GEORGE director A - A-Award Common Stock 2357 0
2017-05-17 FERBER NORMAN A director A - A-Award Common Stock 2357 0
2017-05-17 GARRETT SHARON D director A - A-Award Common Stock 2357 0
2017-05-17 BUSH MICHAEL J director A - A-Award Common Stock 2357 0
2017-05-17 BJORKLUND GUNNAR K director A - A-Award Common Stock 2357 0
2017-05-17 QUESNEL GREGORY L director A - A-Award Common Stock 2357 0
2017-05-17 PEIROS LARRY director A - A-Award Common Stock 2357 0
2017-05-17 MILLIGAN STEPHEN D director A - A-Award Common Stock 2357 0
2017-05-04 ORBAN GEORGE director A - M-Exempt Common Stock 32376 8.1925
2017-05-04 ORBAN GEORGE director D - M-Exempt Non-Qualified Stock Option (right to buy) 32376 8.1925
2017-04-07 Morrow Brian R. President, Merchandising D - S-Sale Common Stock 3004 63.1576
2017-03-30 BUSH MICHAEL J director A - M-Exempt Common Stock 8762 8.1925
2017-03-30 BUSH MICHAEL J director D - S-Sale Common Stock 8762 66.5057
2017-03-30 BUSH MICHAEL J director D - M-Exempt Non-Qualified Stock Option (right to buy) 8762 8.1925
2017-03-24 BUSH MICHAEL J director A - M-Exempt Common Stock 6526 8.1925
2017-03-23 BUSH MICHAEL J director A - M-Exempt Common Stock 900 8.1925
2017-03-23 BUSH MICHAEL J director D - S-Sale Common Stock 900 66.53
2017-03-24 BUSH MICHAEL J director D - S-Sale Common Stock 6526 66.5041
2017-03-23 BUSH MICHAEL J director D - M-Exempt Non-Qualified Stock Option (right to buy) 900 8.1925
2017-03-24 BUSH MICHAEL J director D - M-Exempt Non-Qualified Stock Option (right to buy) 6526 8.1925
2017-03-23 Brautigan Bernard G. President, Merchandising D - S-Sale Common Stock 28434 66.2809
2017-03-22 RENTLER BARBARA Chief Executive Officer D - S-Sale Common Stock 50481 66.0965
2017-03-20 Hartshorn Michael J. Group S.V.P., CFO D - S-Sale Common Stock 3360 67.1105
2017-03-21 CALL JOHN G Executive VP & Corp Secretary D - S-Sale Common Stock 15243 65.8253
2017-03-20 Panattoni Lisa R President, Merchanding D - S-Sale Common Stock 14792 66.8828
2017-03-16 FASSIO JAMES S President, Chief Dev. Officer A - G-Gift Common Stock 7285 0
2017-03-16 FASSIO JAMES S President, Chief Dev. Officer D - F-InKind Common Stock 7947 67.31
2017-03-16 FASSIO JAMES S President, Chief Dev. Officer D - G-Gift Common Stock 7285 0
2017-03-16 O SULLIVAN MICHAEL B President, Chief Operating Off D - F-InKind Common Stock 24652 67.31
2017-03-16 Hartshorn Michael J. Group S.V.P., CFO D - F-InKind Common Stock 777 67.31
2017-03-16 RENTLER BARBARA Chief Executive Officer D - F-InKind Common Stock 31646 67.31
2017-03-16 Panattoni Lisa R President, Merchanding D - F-InKind Common Stock 5034 67.31
2017-03-16 CALL JOHN G Executive VP & Corp Secretary D - F-InKind Common Stock 2331 67.31
2017-03-16 Brautigan Bernard G. President, Merchandising D - F-InKind Common Stock 3927 67.31
2017-03-14 CALL JOHN G Executive VP & Corp Secretary A - A-Award Common Stock 12145 0
2017-03-14 CALL JOHN G Executive VP & Corp Secretary D - F-InKind Common Stock 9801 67.28
2017-03-14 BALMUTH MICHAEL Chairman, Executive A - A-Award Common Stock 84997 0
2017-03-14 BALMUTH MICHAEL Chairman, Executive D - S-Sale Common Stock 51207 67.293
2017-03-14 Panattoni Lisa R President, Merchanding A - A-Award Common Stock 20643 0
2017-03-14 Panattoni Lisa R President, Merchanding D - F-InKind Common Stock 24517 67.28
2017-03-14 RENTLER BARBARA Chief Executive Officer A - A-Award Common Stock 99567 0
2017-03-14 RENTLER BARBARA Chief Executive Officer D - F-InKind Common Stock 58865 67.28
2017-03-14 FASSIO JAMES S President, Chief Dev. Officer A - G-Gift Common Stock 25006 0
2017-03-14 FASSIO JAMES S President, Chief Dev. Officer A - A-Award Common Stock 20643 0
2017-03-14 FASSIO JAMES S President, Chief Dev. Officer D - F-InKind Common Stock 22747 67.28
2017-03-14 FASSIO JAMES S President, Chief Dev. Officer D - G-Gift Common Stock 25006 0
2017-03-14 Morrow Brian R. President, Merchandising A - A-Award Common Stock 20643 0
2017-03-14 Morrow Brian R. President, Merchandising D - F-InKind Common Stock 3189 67.28
2017-03-14 O SULLIVAN MICHAEL B President, Chief Operating Off A - A-Award Common Stock 78926 0
2017-03-14 O SULLIVAN MICHAEL B President, Chief Operating Off D - F-InKind Common Stock 43820 67.28
2017-03-14 Hartshorn Michael J. Group S.V.P., CFO A - A-Award Common Stock 7289 0
2017-03-14 Hartshorn Michael J. Group S.V.P., CFO D - F-InKind Common Stock 2292 67.28
2017-03-14 Brautigan Bernard G. President, Merchandising A - A-Award Common Stock 20643 0
2017-03-14 Brautigan Bernard G. President, Merchandising D - F-InKind Common Stock 21946 67.28
2017-03-10 Hartshorn Michael J. Group S.V.P., CFO D - S-Sale Common Stock 9585 66.9407
2017-03-08 Morrow Brian R. President, Merchandising A - A-Award Common Stock 5997 0
2017-03-08 Brautigan Bernard G. President, Merchandising A - A-Award Common Stock 17989 0
2017-03-08 FASSIO JAMES S President, Chief Dev. Officer A - A-Award Common Stock 17989 0
2017-03-08 Hartshorn Michael J. Group S.V.P., CFO A - A-Award Common Stock 17989 0
2017-03-08 RENTLER BARBARA Chief Executive Officer A - A-Award Common Stock 44971 0
2017-03-08 O SULLIVAN MICHAEL B President, Chief Operating Off A - A-Award Common Stock 35977 0
2017-03-03 Hartshorn Michael J. Group S.V.P., CFO D - F-InKind Common Stock 5925 67.07
2017-01-28 BALMUTH MICHAEL Chairman, Executive - 0 0
2017-01-28 GARRETT SHARON D - 0 0
2017-01-28 FASSIO JAMES S President, Chief Dev. Officer I - Common Stock 0 0
2016-04-06 FASSIO JAMES S President, Chief Dev. Officer D - S-Sale Common Stock 42798 58.41
2016-10-04 Panattoni Lisa R President, Merchanding A - A-Award Common Stock 18675 0
2016-10-03 QUESNEL GREGORY L director D - S-Sale Common Stock 16000 64.3885
2016-06-30 FASSIO JAMES S President, Chief Dev. Officer A - G-Gift Common Stock 106 0
2016-03-31 FASSIO JAMES S President, Chief Dev. Officer A - G-Gift Common Stock 114 0
2016-09-22 FASSIO JAMES S President, Chief Dev. Officer D - S-Sale Common Stock 12000 63.35
2016-06-30 FASSIO JAMES S President, Chief Dev. Officer D - G-Gift Common Stock 106 0
2016-03-31 FASSIO JAMES S President, Chief Dev. Officer D - G-Gift Common Stock 114 0
2016-09-22 RENTLER BARBARA Chief Executive Officer D - S-Sale Common Stock 12840 63.7611
2016-09-19 RENTLER BARBARA Chief Executive Officer D - S-Sale Common Stock 20000 62.5395
2016-07-08 ORBAN GEORGE director D - S-Sale Common Stock 35000 57.5481
2016-07-08 ORBAN GEORGE director D - S-Sale Common Stock 7000 57.46
2016-07-08 ORBAN GEORGE director D - S-Sale Common Stock 7000 57.46
2016-04-19 GARRETT SHARON D director A - G-Gift Common Stock 32376 0
2016-04-19 GARRETT SHARON D director A - M-Exempt Common Stock 32376 8.1925
2016-04-19 GARRETT SHARON D director D - G-Gift Common Stock 32376 0
2016-04-19 GARRETT SHARON D director D - M-Exempt Non-Qualified Stock Option (right to buy) 32376 8.1925
2016-06-01 BALMUTH MICHAEL Chairman, Executive A - M-Exempt Common Stock 116790 0
2016-05-31 BALMUTH MICHAEL Chairman, Executive D - S-Sale Common Stock 78194 53.3875
2016-06-01 BALMUTH MICHAEL Chairman, Executive D - S-Sale Common Stock 116790 53.494
2016-06-01 BALMUTH MICHAEL Chairman, Executive D - M-Exempt RSU 116790 0
2016-05-18 CALL JOHN G Executive VP & Corp Secretary A - A-Award Common Stock 11048 0
2016-05-18 MILLIGAN STEPHEN D director A - A-Award Common Stock 2578 0
2016-05-18 PEIROS LARRY director A - A-Award Common Stock 2578 0
2016-05-18 QUESNEL GREGORY L director A - A-Award Common Stock 2578 0
2016-05-18 BJORKLAND K GUNNAR director A - A-Award Common Stock 2578 0
2016-05-18 BUSH MICHAEL J director A - A-Award Common Stock 2578 0
2016-05-18 GARRETT SHARON D director A - A-Award Common Stock 2578 0
2016-05-18 FERBER NORMAN A director A - A-Award Common Stock 2578 0
2016-05-18 ORBAN GEORGE director A - A-Award Common Stock 2578 0
2016-05-06 ORBAN GEORGE director A - M-Exempt Common Stock 37404 6.885
2016-05-06 ORBAN GEORGE director D - M-Exempt Non-Qualified Stock Option (right to buy) 37404 6.885
2016-03-31 Hartshorn Michael J. Group S.V.P., CFO D - S-Sale Common Stock 862 58.1558
2016-03-31 RENTLER BARBARA Chief Executive Officer D - S-Sale Common Stock 6856 58.5
2016-04-01 RENTLER BARBARA Chief Executive Officer D - S-Sale Common Stock 33144 58.2547
2016-03-30 O SULLIVAN MICHAEL B President, Chief Operating Off D - S-Sale Common Stock 5170 58.1544
2016-03-28 Brautigan Bernard G. President, Merchandising D - S-Sale Common Stock 2617 57.5735
2016-03-24 RENTLER BARBARA Chief Executive Officer D - F-InKind Common Stock 6034 57.41
2016-03-24 Brautigan Bernard G. President, Merchandising D - F-InKind Common Stock 2785 57.41
2016-03-24 BALMUTH MICHAEL Chairman, Executive D - S-Sale Common Stock 135128 57.5304
2016-03-23 Hartshorn Michael J. Group S.V.P., CFO D - G-Gift Common Stock 494 0
2016-03-24 Hartshorn Michael J. Group S.V.P., CFO D - F-InKind Common Stock 940 57.41
2016-03-24 FASSIO JAMES S President, Chief Dev. Officer A - G-Gift Common Stock 5170 0
2016-03-24 FASSIO JAMES S President, Chief Dev. Officer D - F-InKind Common Stock 5640 57.41
2016-03-24 FASSIO JAMES S President, Chief Dev. Officer D - G-Gift Common Stock 5170 0
2016-03-24 CALL JOHN G Executive VP & Corp Secretary D - F-InKind Common Stock 1879 57.41
2016-03-24 CALL JOHN G Executive VP & Corp Secretary D - S-Sale Common Stock 27000 57.4021
2016-03-24 Panattoni Lisa R President, Merchanding D - F-InKind Common Stock 5028 57.41
2016-03-24 O SULLIVAN MICHAEL B President, Chief Operating Off D - F-InKind Common Stock 5640 57.41
2016-03-22 O SULLIVAN MICHAEL B President, Chief Operating Off D - S-Sale Common Stock 38000 58.1334
2016-03-23 O SULLIVAN MICHAEL B President, Chief Operating Off D - S-Sale Common Stock 20163 58.0507
2016-03-21 Brautigan Bernard G. President, Merchandising D - S-Sale Common Stock 24586 58.3543
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2016-03-04 BUSH MICHAEL J director A - M-Exempt Common Stock 16188 8.1925
2016-03-04 BUSH MICHAEL J director D - S-Sale Common Stock 16188 57.5748
2016-03-04 BUSH MICHAEL J director D - M-Exempt Non-Qualified Stock Option (right to buy) 16188 8.1925
2016-01-30 FASSIO JAMES S President, Chief Dev. Officer I - Common Stock 0 0
2016-01-30 ORBAN GEORGE director I - Common Stock 0 0
Transcripts
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, 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 our fourth quarter sales and earnings results that were well ahead of our expectations. Our above-plan 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 weeks 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 53rd 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 53rd 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 DISCOUNTS locations. As we noted in today's release, for the fourth quarter and 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 and $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 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 and 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 environments. In addition, while inflation has moderated, prices for necessities like 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 and 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 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.
Operator:
[Operator Instructions] And the first question comes from the line of Lorraine Hutchinson with Bank of America.
Lorraine Maikis:
Barbara, I was hoping to better understand the dynamic around the sharply priced brands and their impact on merchandise margins. How big of the -- how large of a percentage of the assortment were you planning to take down to these sharper price points? And is there other opportunity to improve on the gross margins through domestic freight or other line items as the year progresses?
Barbara Rentler:
Sure, Lorraine. So let's just talk about the sharply priced brands. Obviously, I wouldn't talk about what type of penetration we're going to shift to. What I would say to you about the sharply priced brands is that during '23, we strengthened our value offerings. We kept saying that we were doing that, and we were doing that. And that really results in the acceleration of sales and started in Q2 and then persisted through the whole holiday season. And so that's really how we came up with in 2024, that we planned to build upon those successes that we had in '23 by offering more brands that are sharply priced to deliver that value proposition the customer wants. But what I would say to you also is it's a tiered strategy; a good, better, best strategy.
So in terms of gross margin expansion from the pure merchandising side. What I would say to you is this strategy really -- we really believe that this will drive sales and it will drive market share. And that's really how we're looking at it. Because that's what the customer has voted on all year, and we feel like it's a strategy that's broad-based in the entire box. Certainly, there are some businesses that have more opportunities than others. But that's really how we came to this conclusion and the customer has been voting, and that's really what she's been voting on.
Michael Hartshorn:
Lorraine, then on just the other margin opportunities from a freight standpoint, from a domestic freight standpoint, we do expect to see some improvement for the full year, but to a lesser extent than we saw last year.
Operator:
And the next question comes from the line of Matthew Boss with JPMorgan.
Matthew Boss:
And congrats on another great quarter. So Barbara, I guess maybe could you elaborate on drivers that you think really were behind? I think this is the best fourth quarter performance in more than 10 years, if I exclude the pandemic. Maybe what you saw across categories, do you think that you're attracting a new customer? And maybe just the decision to raise your initial comp view for 2024 to the 2% to 3% relative to historical 1% to 2%? And then just one for Adam. Any change to bottom line flow-through in the model for 2024 as we think about incremental comp potential upside?
Michael Hartshorn:
It's Michael Hartshorn. Just on the customer overall. It's hard to see whether it's a new customer or the existing customer is spending more. What we did see is our performance, as we said in the commentary was broad-based across region, but it was broad-based really across all aspects of our business, including geographically, income levels and age.
Barbara Rentler:
And in terms of -- Matthew, in terms of the drivers, the categories, the ones that I said, cosmetics, home and Children's were really the best, Accessories was slightly above the chain and apparel trailed the chain. But again, it performed above our plan. And I think part of the things that really drove it was we had a big push this year in home on gifting, and we added some new classifications and the customer responded.
Adam Orvos:
Yes. And on the flow-through question, this is Adam. Nothing has changed. We expect EBIT margin flow-through of about 10 to 15 basis points for each additional point of above-plan sales. And with our guide of plus 2% to 3%. And on a 52-week basis, you see margin rate expansion. We're getting some benefit also this year of lower incentive costs based on our outperformance from 2023.
Operator:
And the next question comes from the line of Mark Altschwager with Baird.
Mark Altschwager:
Maybe first, Barbara, just any hypothesis on what might be driving the weaker-than-expected dd's performance in newer markets? And maybe comment also on how the Ross Dress for Less stores in newer markets have been performing relative to your expectations?
Michael Hartshorn:
Just on -- I'll start with the Ross. The Ross new markets have been performing at or above our expectations. From a dd's standpoint, as we said in the commentary, the overall comp was just is slightly below Ross for both the quarter and the year. So while overall comps were respectable, we've been disappointed in the dd's new market performance. Our new markets tend to be more diverse based on ethnicity and income, and we clearly didn't satisfy them with the assortments we've been offering there.
Mark Altschwager:
Maybe just a follow-up. Can you comment on the buying environment and any changes you're seeing? And how is that impacting the expectations for the merchandise margin pressure this year, if at all?
Barbara Rentler:
Well, I think it's a positive buying environment. I mean there's still merchandise in the market. And I've said this on calls before, there are some vendors that are very aggressive in bringing in inventory as they're trying to gain market share and then others, it's more normalized. In terms of merchant margin, our strategy now is really to continue to offer the customer really great value because that is really, really what's working sharp prices. And so even if you're buying some of these really great opportunities, we are really thinking about passing along really that potential savings to the customer because we really do believe that is the best way to drive market -- to gain market share. And so that's really how we're approaching it at this point, and that is what the customer is responding to.
Operator:
And the next question comes from the line of Chuck Grom with Gordon Haskett.
Charles Grom:
Great results. From a category perspective, which categories do you view is the biggest opportunities in 2024? And curious, separately what you're seeing on the shrink front in the quarter and what your expectations are for '24? A couple of retailers, including Target today have called out improving shrink results lately.
Barbara Rentler:
Sure. In terms of categories for '24, I mean, with the brand strategy we're putting in place, I feel like there's -- it's pretty broad-based the opportunity. But obviously, our apparel business has been trailing the chain. And so we're focused on really trying to improve those assortments and to get the apparel business more in line with the other businesses.
Michael Hartshorn:
Chuck, on the shrink front, I would say we're not immune to the external theft and organized crime environment throughout retail. We do continue to invest in initiatives to hold shortage at bay. For 2023, our shrink levels were in line with 2022. Our guidance assumes that shrink is up a bit. So that's built into the guidance, but we'll continue to make investments there to keep it in line.
Operator:
And the next question comes from the line of Michael Binetti with Evercore ISI.
Michael Binetti:
Congrats on a really nice holiday. And I apologize if you said it, but did you mention how much the extra week impacted the gross margin in the fourth quarter? I heard the operating margin, but just housekeeping on that. And then, I guess, maybe we could talk a little bit about how you built to the comp guidance for the year with the 2% to 3% comp in the first quarter and in the year? I guess, as the comparisons get a little tougher, I think it implies the 2-year accelerates a little bit as we move through the year. So maybe just a little bit on how you were thinking about that. I'm wondering if that's maybe the sharp price merchandise assortment strategy accelerating through the year. Anything you could point to help us think alongside you on that, please?
Barbara Rentler:
Sure. So from the merchandise strategy, we do expect it to accelerate as we go. Obviously, we've been building the strategy off of starting in Q2 of 2023. And now -- I would say now it's more broad-based than we were as we were coming across. Maybe the words I want to use is it's a little more intentional in certain businesses than it was before. And so we do expect that as we come across. We are expecting that our Apparel business as we move through the year will improve.
Adam Orvos:
And Michael, on the 53rd week question, so we thought operating margin was worth 80 basis points in Q4 and about 25 for the year, and that was largely in gross margin versus SG&A.
Operator:
And the next question comes from the line of Alex Straton with Morgan Stanley.
Alexandra Straton:
Perfect. Super amazing [ trend ]. It looks like you guys are further closing the gap to pre-COVID EBIT with every passing quarter, even though fourth quarter still sits somewhat below. So can you just talk about what's hampering you from returning to the pre-COVID levels and how you think about recovering that gap from here? And then maybe Barbara, a big picture question for you. What are your key priorities for the year as you think about Ross?
Michael Hartshorn:
Alex, it's Michael Hartshorn. On the long-term kind of what it's going to take to close the EBIT margin gap. Obviously, the biggest drivers are where wages and freight has been over the last couple of years. I would say over the long term, we can -- we believe we can achieve gradual improvement in profitability. As always, EBIT growth will be highly dependent on sustained strong sales growth. We believe the improvements we've made and continue to make to strengthen our value offerings will lead to market share gains in the long run. I'll also say we're investing in capabilities to drive efficiencies and related cost savings that we believe will contribute to profitability as well over time. As you can see in this year's guidance, our EBIT leverage is around 3% with double-digit EPS growth at the top end of that 2% to 3% range on a 52-week basis. Over the long term, we think we can get leverage in the 3% to 4% comp range.
Barbara Rentler:
And in terms of priorities, our priority this year is really to gain market share through a diligent execution of the strategy. We've done a lot of work around what we believe we need to do to gain market share. And so on the Ross side, that really is mine and our key priority. And then on the dd's side to go off and to do some additional work, to understand that customer. So as we go into newer markets, we satisfy her needs.
Operator:
And the next question comes from the line of Adrienne Yih with Barclays.
Adrienne Yih-Tennant:
Great. And let me add my congratulations as well. Barbara, on the dd's, I was wondering if you could talk about sort of the new store strategy? Are you clustering them? What regions outside of California or is it within kind of the West Coast are seeing the differences? So any more detail on kind of your early thoughts on what's happening there other than sort of the broader demographic mix. And then Michael or Adam, on the transaction, can you talk about the fourth quarter, the holiday transaction growth versus the AUR component?
Michael Hartshorn:
Adrienne, on dd's. So our real estate strategy for dd's is a little different than Ross. It's not as a clustered strategy, as you said, as we see for Ross. There is -- after you get outside of our core markets in Texas, Florida and California, they are, as I said, distinct ethnicity differences, which means we have to find the right assortment that's different from our core markets. We'll know more after we go through the customer research, and then we'll make -- start making the adjustments we think we need to improve performance there.
Adam Orvos:
And Adrienne, on to your question on the components. Our 7% comp was all driven by traffic. Average basket was flat. So we had slightly higher AUR and slightly lower items per transaction.
Operator:
And the next question comes from the line of Brooke Roach with Goldman Sachs.
Brooke Roach:
I was hoping you could elaborate on the assumptions embedded in your outlook for SG&A expense for the year. What are you assuming for wage and other investments? And what are you seeing in the wage environment currently?
Adam Orvos:
I would say it's somewhat stabilized, Brooke. Really where we're taking wage increases is where the -- where we're required to by the minimum wage changes state by state. I would say from an SG&A standpoint, we'll get the benefit of anniversarying the higher incentive costs. And then, we've generally been able to do a good job while the minimum wage changes are putting pressure in the stores. Through some of the efficiencies that we've invested in, we've generally been able to offset that. So I'm not seeing much overall pressure on the store side on that front.
Operator:
The next question comes from the line of Ike Boruchow with Wells Fargo.
Irwin Boruchow:
Michael, maybe to you, I think to answering your question earlier, you had said that you expect freight to be a benefit this year but less so than in '23. Were you referring to domestic freight specifically? Are you talking to freight, including ocean freight within the merchandise margin loan?
Michael Hartshorn:
In that one, I was talking about domestic freight, but I'll let Adam take it to speak on this.
Adam Orvos:
Ike, this is Adam. So on the ocean freight side, we'll get a little bit of benefit in Q1, but kind of negligible over the course of the year. Obviously, this is going to be dependent on how the situation plays out in the Suez Canal. And the duration of that conflict if anything changes. But I would also say that impacts a very small portion of our freight, yet we're closely monitoring that situation. On the domestic side, that's what Michael was commenting on earlier because fuel prices are lower than where they were at least this time last year. And based on our contracted rates, we should see some slight benefit throughout the year on the domestic side.
Irwin Boruchow:
Got it. So slight benefits throughout the year on domestic. Adam, just based on the line of sight you have, is there any point in this year where ocean freight should flip to -- from a tailwind to a headwind? Or is it just kind of like flattening out for you guys?
Adam Orvos:
We'll have to see how that conflict plays out is probably the biggest variable hike. We have a fairly good line of sight other than that variable that we can't control.
Operator:
And the next question comes from the line of Simeon Siegel with BMO Capital Markets.
Simeon Siegel:
Nice job. Sorry, if I missed it, but did you talk about whether any of the transaction -- the traffic increases, are you seeing any trade down benefit? And then probably a dumb question, but does the sharply priced brands impact where you are at all, impact where you are or is it really -- is it just creating better value proposition without impacting AUR? And if it does, any order of magnitude we should keep in mind?
Michael Hartshorn:
Simeon, on the trade down customer, we did -- I'll just repeat that for us, it's hard to see whether there's a trade down customer performance. Was broad-based, as we said, across geographies, but it was also broad-based across income levels. So hard to really tease out any impact to the trade down. On the transaction data, the comp was entirely driven by traffic or transactions for us. The average basket was flat as slightly higher average unit retails were offset by slightly lower units per transaction. And then on the weather front, it was neutral for us.
Simeon Siegel:
So the sharply priced brands impacting going forward? Should we think about that from an AUR context? Or is that just changing the concentration of brands?
Barbara Rentler:
It's -- the AUR fluctuates. It's based on the mix and the value of the goods that we're buying. So there's not a specific AUR pricing strategy. It's really a value strategy as we buy goods and put them at the sharpest price as we can to offer great value. So it's not like we're trying to hit a specific AUR or -- it could move as we go through the year and as we go through different closeouts, products and all of that, we're expecting it to move around.
Operator:
And the next question comes from the line of Paul Lejuez with Citi.
Paul Lejuez:
At dd's, I'm curious how many stores are in region where you considered disappointing and what percentage of the store base do they represent? I'm curious if they didn't open as strongly as you thought? Or are they not comping as quickly as you thought? And also curious how the Ross Stores are performing in those same regions?
Michael Hartshorn:
Paul, I mean there are certain stores outside of our core markets, that's what I would say on number of stores. So you can see our store map. As far as Ross, Ross is performing fine in these markets. And it's really how they opened. Some of them are comping well, but they're comping off a low sales base.
Paul Lejuez:
Got it. And then you mentioned, I think, 10 to 15 store closings. How did that break down, dd's versus Ross?
Adam Orvos:
Store closings. So we talked about -- Paul, we talked about 10 to 15 either relocated or closing stores, and we won't get into Ross versus dd's on that front.
Michael Hartshorn:
Nor have we decided yet. Usually, these are stores, I think, Paul, as you know, these are at the end of the lease term or starting a new option period where we'll make that judgment as we progress through the year.
Operator:
And the next question comes from the line of Marni Shapiro with The Retail Tracker.
Marni Shapiro:
Congrats on a really nice quarter. And I'm going to hop in on the pricing question. I'm really sorry. But I want to just clarify the sharp price pricing because it sounds like Barbara, you're thinking about this a little bit more holistically, sort of getting to a better balance of really sharp opening prices and then layering that next level and the next level, versus looking at what you purchased and maybe taking a shorter margin here and a longer margin there. Is that right? Am I hearing that right?
Barbara Rentler:
Whenever you're pricing goods, Marni, you're always doing what you're saying. You're looking at the product and you're looking at the value, right? So it doesn't necessarily always have to do with what you're paying for a product, right? The merchants are looking at it and saying this is the right value and they're doing it. I think the sharp pricing that we're talking about is really adding more brands at all 3 levels, good, better, best, assessing those brands and then putting them out at the values that the customers really responded to. So it's -- it's really built on the products themselves.
I don't know how else to say that to you. We have the brands we want to have. We have [ visits and ] people who are growing. We've opened a lot of new resources this year. The merchants have been out really looking for new resources, looking to expand, looking to remix the products and labels themselves and then to put that mix out at sharp prices. So it's not like I'm looking to have x price point or x in each thing. It is really a value strategy, not a pricing strategy. It's a value strategy.
Marni Shapiro:
And where does beauty -- because it sounds like you had a nice quarter in beauty that typically carries a lower AUR, but can drive a lot of traffic? Does beauty carry a good margin? And where does beauty fit into the strategy for '24?
Barbara Rentler:
Well, Beauty has so many components in there from a margin perspective. Overall, the beauty margins are fine or good. In every business we went in and looked at what our values were, what our brands were, what our product offerings were and we went in and said, some businesses we thought were on track and we're fine. In some businesses, we're learning we have more opportunity after what we've learned starting in Q2 all the way through Q3 and Q4 and building on that. So it's kind of an evolving process. But there's -- again, it's really a merchant-driven process and making sure that we put out the best possible value in the things that the customer wants and that we have the right brands, the right recognizable brands at each level; good, better and best.
Operator:
And the next question comes from the line of Aneesha Sherman with Bernstein.
Aneesha Sherman:
I have two, please. I'm curious about -- can you talk about the cadence of comps through the quarter, particularly coming out of holiday into January and where you were exiting the quarter? And I have another one on stores. You talked about initiatives in the stores, and you've talked about it for the last couple of quarters. Do you see more structural benefits to store 4-wall margins over the next year or so from the store initiatives that you've been rolling out?
Michael Hartshorn:
Aneesha, it's Michael. On both of those. So we typically don't talk about inter-quarter trends. I will say, on a stack basis, comps were the -- slightly stronger during the peak holiday period, holiday selling period. On the 4-wall margin, so the type of investments we're making in stores, we're making a number of investments to improve efficiencies in the stores. In many cases, that's just offsetting some of the minimum wage -- statutory minimum wage increases we've seen. Some of the things we're doing are technology investments for instance, we're piloting self-checkout in all stores. We don't ever think that that's going to be a full chain rollout, but we'll see how that goes. We've put in place more efficient handheld devices and it's used to check inventory, take markdowns, manage tasks and eventually even allow associate scheduling within the store, all drive efficiency that help us offset the rising minimum wages.
Aneesha Sherman:
Sorry, just a quick follow-up, Michael. Can you give us a sense of how much of that has already been rolled out versus how much is to come over the next fiscal year?
Michael Hartshorn:
Well, I mean there are things beyond that. This fiscal year, we have a number of rollouts. And as Adam said earlier, that's fully offsetting the minimum wage increase. And we continue to have new initiatives in the pipeline going forward.
Operator:
And the next question comes from the line of Dana Telsey with the Telsey Advisory Group.
Dana Telsey:
Congratulations on the very nice results. As you think about the store profile in 2024 for both dd's and Ross, any changes in how you're thinking about it in terms of size? And then Barbara, you've always talked in the past about adding to the merchant team. What does it look like this year in terms of number of buyers, merchants added to the team or how you're thinking about it?
Michael Hartshorn:
Staying on the store profile, I'll give you the easy answer on that one. No, we're not thinking of any changes to the store prototype as we move into '24.
Barbara Rentler:
And in terms of the size of the merchant team, we have over 900 merchants. So every year, we -- every year, we promote people, move people. But in terms of saying, am I going out to take up the head count substantially? I think it's just -- I think it's more of a normal cadence that we would have. We feel like we have a pretty large team between the two companies.
Dana Telsey:
Just one follow-up. As you went through the quarter in January, we know there were those two weeks that were very cold. Was that an impact for you and the comps and the comps would have even been stronger if you hadn't had that weather issue that happened mid-January?
Michael Hartshorn:
Dana, on the quarter overall, so we take puts and takes all the way November through December, we think the weather impact was neutral for us.
Operator:
And the next question comes from the line of Corey Tarlowe with Jefferies.
Corey Tarlowe:
Great. In the past, I know you've talked about 60% to 65% new store productivity. Given your comments on dd's, recognizing that it's a smaller portion of the fleet, is that a consistent assumption within your guidance for 2024?
Michael Hartshorn:
It continues to be because the vast majority of the new stores are Ross. That said, the stores that we are opening for dd's, we expect them to be similar to historical sales levels because they're in the existing markets. But overall, 60% to 65% of a comp.
Corey Tarlowe:
Great. And then just a brief follow-up. Other than new stores, what areas are you investing in, in the CapEx? And how are you thinking about leveraging AI in your business?
Michael Hartshorn:
So first on where else we're investing, about 40% of the capital this year is just expanded capacity. So we're opening a -- plan to open a new DC in early '25 in Arizona, and we have another one, a DC that we're going to start construction on later this year on our next distribution center. So 40% of that capital this year is on increased DC capacity. AI, I would say there's two parts of AI. We already use AI in some of the automated parts of our business. I think generative AI will be a journey for us like it is for others, but it is something we'll be looking at to find efficiencies in the business.
Operator:
And the next question comes from the line of John Kernan with TD Cowen & Co.
John Kernan:
Great job on the holiday quarter. Just going back to stores. Ross Stores banner grew 4% this year. I think that was the fastest store growth since pre-COVID, dd's is up over 7%. How do we think about store growth not just for fiscal '24, but also beyond that and how that fits into your long-term store targets?
Michael Hartshorn:
Sure. First of all, our long-term store target hasn't changed, and that's 2,900 Ross Stores and 700 for dd's. I think you'd expect about 100 stores a year, depending on how the dd's plays out beyond this. But I think we're comfortable with the 75 Ross stores annually. That's a good fit for us, and we'll see where the dd's roll out after we get through our strategy.
John Kernan:
You haven't seen any long-term change in terms of competition for real estate, your peers in off-price are growing a lot of stores, too. I think there's been concerns about some of the availability out there, but it doesn't sound like you have any concerns?
Michael Hartshorn:
Well, there is -- I would say there's a lot of -- there's a lot of competition for our locations. But I'd say overall, we feel good about the real estate landscape and have a healthy pipeline.
Operator:
The next question comes from the line of Laura Champine with Loop Capital Markets.
Laura Champine:
It's related to the way we're reading stores, which to us looks like you're making a conscious decision to sharply control inventories, to maximize profits and minimize markdowns. Are we reading that right? Or is this just a small sample size of stores?
Adam Orvos:
Laura, are you just talking about inventory levels at year-end? Is that your question?
Laura Champine:
I'm talking about inventory levels that we're seeing currently over the past couple of months in stores really post holiday.
Michael Hartshorn:
I would say post holiday for us is really a clearance period. So -- it is our lowest inventories of the year and it happens to be our lowest sales period. So we want to start off the year correctly. So it doesn't surprise me that it would feel that way if you're looking at the stores in January. I think as you progress through the spring, we manage our in-store inventories based on term, and we set it up. If we can beat the plan, then we can leverage markdowns. So that's the way we run the business, and we try to beat the turn from the previous year.
Operator:
And the next question comes from the line of Krisztina Katai with Deutsche Bank.
Krisztina Katai:
Congratulations on the strong quarter. So I wanted to ask in terms of the competitive backdrop, many of bigger general merchandise retailer are still look fairly lean on inventory, I think especially when we look at apparel and certain discretionary categories as we head into the spring. So I just -- I was just curious how that's sort of incorporated into your thinking on comps and maybe where you see some of the biggest opportunities in the first half to take share.
Barbara Rentler:
Krisztina, I'm not 100% sure what exactly -- what you're getting at exactly. Could you just say that again?
Krisztina Katai:
Sure. It's just that many of your bigger general merchandise peers are still planning inventories very cautiously and they're sort of lean on inventories in many discretionary categories. So as you're sort of planning your business, you're looking at your good, better, best sort of assortment, maybe just how you're thinking about your position for spring and then heading into the summer?
Barbara Rentler:
So the first part in inventory, as Michael just said, we plan our inventory based off of sales and turn. And so -- and we build that by business, really bottom up, just in terms of pure inventory level and then we drive receipts. We have the inventory base we think we need and then we go to chase, and we drive the receipts, which drives the sales which drives the profits. That's from basic inventory. In terms of which categories, that's a merchant-driven strategy in terms of what businesses we're going to go after, where we see the opportunity in the outside world, where we know we can show great value and where we can add assortment. So there are kind of two different levels of thinking. And remember, it's a flexible business model. So if business really takes off and as we've started to beat our sales plans, we have the ability to take the inventory up or drive the inventory down because the model is flexible, the stores are flexible and the products are flexible. So we go -- we start in with our base plan and then again, build up for sales turn and then we go -- then we react to what the customer is telling us. So it's kind of fluid.
Operator:
And our final question comes from the line of Jay Sole with UBS.
Jay Sole:
Barbara, you talked that one of your goals for the year was taking market share. Is your expectation that you're going to take market share from other off-price retailers or department stores or maybe just a little bit of everybody?
Barbara Rentler:
I just think -- look, I just think there's market share to be had. I mean, more stores keep closing. I mean -- and there's just less places for consumers to shop and our job is to satisfy the customer. And if we do that, there are consumers out there for us to pick up and to expand. So we want to be able to satisfy our current customers and get her to come back more. We want to be able to add additional customers because as we know, as there have been many store closures over the last few years, that's also helped to fuel off-price. So as that continues, this is a focus for us.
Operator:
And there are no further questions at this time. I'd now like to turn the floor back over to Barbara Rentler for any closing comments.
Barbara Rentler:
Thank you for joining us today and for your interest in Ross Stores.
Operator:
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
Operator:
Good afternoon, and welcome to the Ross Stores Third Quarter 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 third quarter performance followed by an update on our outlook for the fourth quarter and fiscal year. Afterwards, we'll be happy to respond to any questions you may have.
As noted in today's press release, we are pleased that both sales and earnings outperformed our expectations for the quarter as customers responded favorably to the terrific values we offer throughout our stores. Operating margin for the period was 11.2%, up from 9.8% last year. Leverage from the same-store sales gain and lower freight costs were partially offset by higher incentives and store wages. Earnings per share for the 13 weeks ended October 28, 2023, were $1.33 compared to earnings per share of $1 last year. Net income for the period rose to $447 million versus $342 million in the prior year period. Total sales for the quarter were $4.9 billion, up from $4.6 billion last year, with the comparable store sales gain of 5%. For the first 9 months, earnings per share were $3.74 on net earnings of $1.3 billion compared to $3.08 per share on net income of $1.1 billion for the same period last year. Sales for the year-to-date period grew to $14.4 billion with comparable store sales up 4% over last year. For the third quarter at Ross, cosmetic, accessories and shoes were again the strongest performing businesses, while geographic results were broad-based. Like Ross, dd's DISCOUNTS shoppers also responded favorably to its strong value offerings, driving improved sales trends during the quarter. At quarter end, total consolidated inventories were up 5% versus last year, while average store inventories were up 2%. Packaway merchandise represented 39% of total inventories versus 41% in the same period of the prior year. During the third quarter, we also completed our expansion program for 2023 with the addition of 43 new Ross and 8 dd's discounts. Over the year, we added a total of 97 locations comprised of 72 Ross and 25 dd's. We now expect to end the year with 1,764 Ross stores and 345 dd's DISCOUNTS for a net increase of 94 stores. Now Adam will provide further details on our third quarter results and fourth quarter guidance.
Adam Orvos:
Thank you, Barbara. As previously stated, comparable store sales rose 5% in the quarter, primarily driven by higher traffic. Operating margin increased 135 basis points to 11.2%. Cost of goods sold improved by 260 basis points in the quarter. Merchandise margin was the main driver with a 235-basis point increase, primarily from lower ocean freight costs.
Distribution expenses improved by 45 basis points, mainly due to favorable timing of packaway-related costs. Domestic freight and occupancy levered by 40 and 25 basis points, respectively. Partially offsetting these benefits were higher buying costs that increased 85 basis points, mainly from higher incentives. SG&A costs for the period increased by 125 basis points, primarily driven by higher incentive costs and store wages. During the third quarter, we repurchased 2.1 million shares of common stock for an aggregate cost of $239 million. We remain on track to buy back a total of $950 million in stock for the year. Now let's discuss our fourth quarter guidance. We continue to face macroeconomic volatility, persistent inflation and more recently, geopolitical uncertainty. In addition, we are up against our most difficult quarterly sales comparisons versus 2022 in the fourth quarter. As a result and while we hope to do better, we believe it is prudent to maintain a cautious approach in forecasting our business and reiterating our prior sales guidance for the fourth quarter. For the 13 weeks ending January 27, 2024, we continue to plan same-store sales to be up 1% to 2%. Earnings per share for the 14 weeks ending February 3, 2024, are projected to be in the range of $1.56 to $1.62 compared to $1.31 in the fourth quarter of 2022. This guidance range includes an approximate $0.02 per share unfavorable impact from the timing of expenses that benefited the third quarter. Based on our year-to-date results and our fourth quarter forecast, earnings per share for the 53 weeks ending February 3, 2024, are now expected to be in the range of $5.30 to $5.36 versus $4.38 last year. Incorporated in this guidance for both the fourth quarter and full year is an estimated earnings per share benefit of $0.16 from the 53rd week in fiscal 2023.
The operating statement assumptions that support our fourth quarter guidance include the following:
Total sales are projected to grow 8% to 10%, including an estimated $260 million benefit from the 53rd week. We expect operating margin to be in the range of 11.3% to 11.5% versus 10.7% last year. This range includes a 65-basis point benefit from the extra week. We are planning for higher merchandise margins, given lower ocean freight cost, though moderating from the improvement earlier this year.
In addition, lower domestic freight and distribution costs, partially due to favorable packaway timing are expected to benefit margin. Partially offsetting these lower costs are forecast for higher incentive compensation. Net interest income is estimated to be about $45 million as we continue to benefit from higher interest rates on our cash balance. Our tax rate is expected to be approximately 23% to 24%, and weighted average diluted shares outstanding are projected to be about 335 million. Now I'll turn the call back to Barbara for closing comments.
Barbara Rentler:
Thank you, Adam. Looking ahead, despite all the challenges in the external environment, we are encouraged by our healthy above-plan results to date this year. We also remain confident in the resilience of the off-price sector and our ability to operate successfully within it, especially given consumers' heightened focus on value and convenience. As a result, we remain optimistic about the company's future prospects and our ability to expand market share and profitability over time.
At this point, we'd like to open up the call and respond to any questions you might have.
Operator:
[Operator Instructions] And the first question comes from the line of Matthew Boss with JPMorgan.
Matthew Boss:
Congrats on another nice quarter. So Barbara, could you elaborate on changes across categories that you've made to increase your value focus? It seems like that was a clear takeaway from your comments. Maybe also if you could speak to the cadence of traffic that you saw as the third quarter progressed? And just how you see your assortments positioned in the holiday to take share.
Michael Hartshorn:
Matthew, I'll start with the traffic. As we said in the commentary, traffic was the primary driver of comp for the quarter on a stack basis. The comps were fairly consistent across the quarter with a couple of fits and starts late in the quarter regionally with weather as it always is this time of year. That said, for the entire quarter, weather was neutral.
Barbara Rentler:
And Matt, by change across categories, do you mean performance?
Matthew Boss:
More the value -- I think you talked about a greater value focus starting in the second quarter. It sounds like it resonated further in the third quarter. So just maybe changes that you've made as it relates to that.
Barbara Rentler:
Well, the value changes that we made are across the entire box. So the merchants are out there really looking for great branded products where they can offer compelling values. So that's really -- it's not in any one area. It's across the box. Obviously, some businesses are further along than others as you would expect. But that's a company-wide focus now to offer the most compelling value to the customer at this time. And changes to the assortment of the fourth quarter or just share is really after gifting. We've expanded some of our products in gifting categories, which I wouldn't talk about on the call but it's really a focus on gifting.
Matthew Boss:
Great. And then maybe as a follow-up, Adam, how best to think about merchandise margin recapture opportunity in the fourth quarter just given the environment a year ago? And any change in terms of flow-through in the model on 3% to 4% same-store sales as we think more multiyear.
Adam Orvos:
Yes. On the latter part, no change in the flow through in the model, right? We still expect to lever on the 3% to 4% comp. And your question on merchandise margin was fourth quarter specific?
Michael Hartshorn:
Yes.
Adam Orvos:
Yes. So ocean freight, which we benefited from all year, will still be a benefit in the fourth quarter. But as we said in the call comments, we'll moderate considerably. We started to see pretty significant rate reductions about this time last year. So there'll be further benefit in fourth quarter, but not like we have seen in the first 3 quarters of the year. I would expect that really to be the main driver on merchandise margin. All other components should be pretty consistent with last year.
Operator:
The next question comes from the line of Mark Altschwager with Baird.
Mark Altschwager:
Great. I guess, first, your plan for the fourth quarter top line hasn't really changed despite comps exceeding the high end of your plan by a couple of hundred basis points in the third quarter. Curious, does that give you more confidence in the upside case? Or are there things you've seen in recent trends that would suggest a more material quarter-over-quarter deceleration is the right expectation?
Michael Hartshorn:
It's Michael again. I would say, for the most part, it's -- there's a lot going on in the external environment, whether it's a macro economy. We expect it to be a very promotional retail environment and now you have geopolitics into the mix, and it is our toughest compare for the year. So given everything going on externally, we think it's prudent to remain very conservative in running the business in the fourth quarter.
Mark Altschwager:
And maybe a follow-up for Barbara. The North American wholesale channel continues to be challenging for many vendors, given the dynamic macro. I'm curious what you're hearing with respect to product availability heading into calendar '24?
Barbara Rentler:
Well, currently, there's a lot of availability in the market, as I know you know that. Here's a look at availability at this point. Vendors -- in this environment, vendors are really looking for ways to increase their market share. And so they've shifted some of their business towards the growing retail channels. So if, in fact, they get less bookings, we talked about them having less bookings for fall and there's still availability. So bookings are one thing. Then how much they decide to bring in to drive market share or to shift channels is an other things.
So I don't necessarily think they're the -- you can judge just by bookings what they say about their bookings. And therefore, frankly, there are some vendors that are really looking to gain market share in this period in time and are taking greater risk on bringing in more goods. So it's kind of a mixed bag but they're really looking to expand who they do business with and to shift channels. So I think that's the reason why goods continue to become available.
Operator:
[Operator Instructions] The next question comes from the line of Paul Lejuez with Citigroup.
Paul Lejuez:
Sorry if I missed it, but could you talk about performance in the home category? And then also I was curious about store performance based on income, demographic, locations. Any change in terms of how any specific income cohort behaved during the quarter?
Michael Hartshorn:
Paul, on the income, as we said in the commentary, the comp performance was fairly broad-based across geographies, but also what I'd say is trade area demographics, including income. So your bigger question is, are you seeing a trade down? We saw very broad-based performance across income levels.
Barbara Rentler:
And in terms of the home performance, home performed slightly below the chain average.
Paul Lejuez:
Got it. And then just a follow-up. On the merch margin, I think you mentioned freight is a big driver but can you talk about pure merch margin outside of freight? Just IMUs, markdowns, what the out-the-door merch margin was on a pure product basis?
Adam Orvos:
Yes, Paul. I won't go through a component by component but merch margin in addition to the ocean freight benefit, but if you back ocean freight out of it, we were better than last year as we anniversary the markdowns that we took last year. So third quarter last year was kind of our peak quarter for incremental markdowns last year.
Operator:
And the next question comes from the line of Lorraine Hutchinson with Bank of America.
Lorraine Maikis:
What were the drivers of dd's improved sales trends during the quarter? And is that now running in line with Ross?
Michael Hartshorn:
Sure, Lorraine. As -- dd's, as we said, also improved and were relatively in line with performance at Ross. We believe the improved performance here like it is at Ross is the customers responding to the broad assortment of values throughout the stores. And I'd also add easing inflation certainly doesn't hurt this customer.
Lorraine Maikis:
And then any update on shrink from your recent physical inventory?
Adam Orvos:
Yes. Lorraine, in third quarter -- so we took our second physical inventory over the year in third quarter and trued up those results, the results were in line with our expectations and in line with last year.
Operator:
[Operator Instructions] The next question comes from the line of John Kernan with TD Cowen.
John Kernan:
Excellent. Nice job in 3Q. Barbara, your buyers are obviously doing a great job passing on value to the consumer. I'm wondering how initial markup trends are as we -- as you focus on value?
Barbara Rentler:
Well, obviously, we're not going to talk about but IMU. But I think as the merchants are in the market and they are really looking for compelling deals, they obviously have metrics that they should hit, and I would say that they do that. But if there's a really unbelievable deal, we're going to price it the way we think we need to price it. Our strategy now is really to continue to deliver value. And so again, they have metrics, everyone is hitting their metrics, but that's the focus. What is the right price, what is the right value to drive the customer into the store to gain market share. So that's the hit that everyone does.
John Kernan:
Understood. And Adam, when you look at the model, what do you think is the line item in either COGS or SG&A that has the most potential for improvement if you maintain the 3% to 4% same-store sales going forward?
Adam Orvos:
We're just getting into the -- we're working our way through the planning process. We'll come back and talk at the end of the year and kind of frame up how we see the go forward at that point in time. I think just to give you some generalities, I feel like we've recaptured most of the ocean freight at this point. When we look at container rates now are very similar to where they were in 2019. So we think by the end of the year, we'll capture all that benefit.
On the domestic side of freight, we've recaptured some but certainly not at 2019 levels, given the elevated fuel cost and elevated driver wages since 2019. So pushing very hard on the other components. We'll come back and tell you more about the puts and takes at the end of the year.
Operator:
And the next question comes from the line of Chuck Grom with Gordon Haskett.
Charles Grom:
Congratulation. Can you provide color on the trend of basket size and the composition between AUR and UPT this quarter and if you see that changing going forward over the next few quarters?
Michael Hartshorn:
Sure. And as we said, traffic was the primary driver of the 5% comp. Average basket was up just slightly as an increase in the units per transaction was partially offset by slightly lower average unit retails. And if we think about it going forward, we'd like to be driven by traffic but we don't plan our business around the components. We plan the business on offering the best value. And if we get traffic and a basket size increase, that's great for the business.
Operator:
And the next question comes from the line of Brooke Roach with Goldman Sachs.
Brooke Roach:
I was hoping you could discuss the puts and takes behind your SG&A growth now that we've moved through the periods of elevated incentive comp investment this summer. How should we be thinking about the growth of that line item going forward? And in particular, can you elaborate on what you're seeing in terms of store wage rate inflation?
Adam Orvos:
Brooke, this is Adam. Yes. So store wage, as we said in the comments, they'll continue to put pressure on us. That's largely driven by minimum wage changes that we need to take in the marketplace. But I would say overall on SG&A, the biggest moving part this year has been incentive comp, right? So as you'll remember, very little incentive comp last year. And not only did we have to reset the bar this year but we're obviously outperforming our financial plan. So that's the biggest kind of volatility in the SG&A line.
Michael Hartshorn:
I'll just add on the wage front. I mean, generally speaking, wages have stabilized throughout the stores and the DCs and any increases we're seeing are really driven by minimum wages. On SG&A going forward, I think we'd expect that we'd be able to lever between the 3 and 4 comp as we have in the past.
Operator:
And the next question comes from the line of Michael Binetti with Evercore.
Michael Binetti:
Congrats on a great quarter. I just want to ask, do you think -- Michael or Adam, jump ball, what do you think about -- what do you look at today to inform us whether there's some opportunity in the pure merch margin for next year, puts and takes that you're thinking about?
Barbara, you mentioned seeing some -- you mentioned some great comments on some of the brand availability. Is there an opportunity for AUR as you guys get better access to quality brands? And then I noticed you opened a bunch of the handful stores in Michigan a few months ago and 1 single store in Minnesota. These are new markets, even though we've heard you guys talk so favorably about how the Midwest has gone since you launched it maybe 12 years ago. It Seems like you're starting to move into some new markets, some fairly big ones, maybe just some thoughts around the new market strategy.
Michael Hartshorn:
Sure. On merchant margin for next year, we're in the middle of our planning process now. So I'd wait until our year-end call, and we can give you some more feedback on that. As you mentioned, we entered Michigan and Minnesota during the third quarter. It's very early on those. So hard to comment at this stage other than we're very optimistic about our new market growth..
Barbara Rentler:
And in terms of brands and AUR increase. Really, I know it sounds like I'm going back to same thing. We really are looking at every deal based on the value we put out on the floor. And so obviously, if they're higher on brand, those goods would -- even at great values would have higher AUR. But it's really a mix of all brands, whether they're moderate, they're better, they're good, better, best, where they're best. That's how we're really approaching it in terms of just saying I'm going to raise the AUR because we increased we [ debt ] in total. That's not how we're thinking about it. We're thinking about it more holistically, and that's the piece that customers responding to.
Operator:
And the next question comes from the line of Adrienne Yih with Barclays.
Adrienne Yih-Tennant:
Great. And I'll add my congratulations. Barbara, I often -- I am on the topic of your packaway and your short stay. Historically, when we have sort of disruptive weather and kind of like the unseasonable weather in the early in the quarter, you're able to use your short-stay flexibility to kind of pace into that. I'm just wondering how advantageous has that been this season? Or is the macro -- kind of more challenging macro sort of overwhelming that?
Barbara Rentler:
I just want to make sure I understand what you're saying. You're saying that did we get seasonal products early and [indiscernible] closing the fourth quarter?
Adrienne Yih-Tennant:
Yes, yes. I think it's more that weather has not transitioned to cold for any long permanent period of time, so we're hearing frontline retailers talk about that lower their fourth quarters, and there's a disconnect between how much they've ordered and what things that they need to get rid of. So I'm wondering if that's been a benefit to you.
Barbara Rentler:
At this point in time, there's -- the goods are obviously building because the weather has been warmer than people anticipated. But there is a moment in time when vendors decide to really move the goods and that really -- becomes really more longer-term packaway. So if you're thinking outerwears, whether its classifications like that, that really would be longer term versus shorter term deals.
I could still get deals in front of us. But really, that's really more of a longer-term play that vendors at the end of the year decided what they want to do when they're figuring out what they're going to buy for the next year. So short term, I think people are just coming to -- having a reality check of where they are with some of those classifications of products. So the real answer, I guess, is more news to follow. But at this moment in time, it hasn't been -- they haven't had a big movement if that's what you're looking for, a big movement on the...
Operator:
And the next question comes from the line of Alex Starton with Morgan Stanley.
Alexandra Straton:
Great. Maybe for Barbara, some peers have highlighted opportunities in new or adjacent categories. So I'm just wondering, has Ross entered any newer categories recently? Or what kind of thoughts do you have on opportunities in general and then any changes in category mix shift that you guys have done?
Barbara Rentler:
Sure. Yes, we have entered into some new categories. Obviously, I'm not going to talk about it on the call. But yes, for the fourth quarter, we entered some different categories for gifting, which are going on the floor now and into December. And then just opportunities in general as we move into next year. I think we have some opportunities in expanding certain businesses and then also coming back into some businesses that we exited, I would say, sometime during COVID.
So I think there is an opportunity for us to have more newness on the floor, which is really what the customer love plus value is really what the customers responding to. So every year, we go in and look and say, what else can we expand, what else can we do? But this year, we have, yes, we have our categories in mind if [ we were ] not in mind and where we are going to [ spring ].
Operator:
And the next question comes from the line of Marni Shapiro with Retail Tracker.
Marni Shapiro:
Congratulations. And if I forget, best of luck for the holiday season. But I'm curious, just on dd's, if we can dig in a little bit there. Are you -- with people looking to trade down with their wallets a little tighter, are you finding that you are attracting more new customers into that brand and the traffic trends that drove the comp in the quarter, whether this -- was that also true for dd's? And then I recall dd's tends to have more -- a little bit more family focused, you tended to have a little bit more kids and toy focus even. I'm curious how you feel about the lead-up to holiday with the assortments and values there? And is that still the case in dd's actually?
Michael Hartshorn:
Marni, on traffic. So traffic like Ross, the comp for dd's was entirely driven by traffic.
Barbara Rentler:
And then in terms of assortment, yes, it is a family-focused box and the dd's customer does have more children. So businesses like toys in the fourth quarter becomes very important [ for the toys ].
Marni Shapiro:
Also holiday dresses do you do that business as well in dd's ?
Barbara Rentler:
We do all those businesses. All the traditional businesses you would expect, you would expect holiday dresses, you would expect toys, you expect anything, also family photo shoots and then toys or other little things that they give to kids but...
Marni Shapiro:
And can I just ask a follow-up on that? Are you seeing at dd's that the customer is now coming to dd's for these big holiday events like for Halloween, for Christmas? Does that customer come to dd's more regularly? Is it part of their regular trip of stores to go to?
Barbara Rentler:
I think it's part of the regular stores to go to. And do they like seasonal products, Halloween harvest, Christmas. Obviously, Christmas is very big. Yes. dd's, I don't think they'll get up in the morning and say, I need to go buy some Halloweens. I think there is always [indiscernible] they're going to stores, they are seeing things that they like and I think it's simple purchases probably for everyone.
Operator:
The next question comes from the line of Dana Telsey with the Telsey Advisory Group.
Dana Telsey:
Congratulations on the nice results. Can you give some color on the regional performance and what you saw California, maybe Texas and any of the other areas? And then also on categories, I think last time -- on last quarter's call, you mentioned that apparel trailed but improved sequentially. What did you see this quarter?
Michael Hartshorn:
Regionally, Dana, our largest markets, California was above the chain average. Texas and Florida were in line. And as we mentioned on the call, it was very broad-based across the country.
Barbara Rentler:
And then in terms of apparel, it's slightly trailed the chain average and the comps were relatively similar between Q2 and Q3, but they did exceed plan.
Operator:
And the next question comes from the line of Aneesha Sherman with Bernstein.
Aneesha Sherman:
So Barbara, as retailers and brands have been talking about clearing excess stock. Are you seeing any change in your inventory mix and your percent of closeout? Like through the year, are you seeing more importing and more upfront buying? And I have a quick follow-up for Adam. You mentioned labor costs and wages stabilizing. Can you talk about some of the new labor cost saving models you've been piloting like self-checkout and any updates you can share on the rollout of those?
Michael Hartshorn:
On the self-checkout, we're in a very small number of stores. And as you can imagine, we're going very slowly to make sure we get it right. We're in about 100 stores right now, and we're going to continue to pilot the operating model that we have there, and we're very cognizant of the shrink environment, so we're going to go slow.
Barbara Rentler:
And then in terms of upfront versus closeouts, as the year progressed, I mean it's pretty similar. It can peak up and down a little bit in the fourth quarter. You have more home business, some of that's more DI, so that gets bigger versus the rest of the year. But I would say it's similar. I think closeouts have come across all year pretty much in most businesses. And so I think -- yes, I don't see a bigger shift. It could have gone up or down 2 or 3 points, but nothing major.
Adam Orvos:
And Aneesha, just building on those comments, within our CapEx, we're definitely investing in technology, more automation in our distribution centers. We're spending money in our stores just to automate. A lot of our noncustomer-facing tasks in more efficient ways to take markdowns and check inventory and also just investing in more analytics in the business.
Operator:
And the next question comes from the line of Corey Tarlowe with Jefferies.
Corey Tarlowe:
Great. I was wondering if you could talk a little bit about what you saw in footwear? I'm not sure if you did highlight it or if I missed it, but it would be great to get color there.
Barbara Rentler:
Sure. Shoes, again, was one of our best-performing businesses. And that was pretty -- that was broad-based across all the shoes.
Corey Tarlowe:
Got it. And then just as it relates to higher buying costs, I believe you highlighted. Could you discuss what drove that?
Adam Orvos:
The higher buying was all incentive cost related.
Operator:
And the next question comes from the line of Laura Champine with Loop Capital Markets.
Laura Champine:
It's really about California wage rates, not just with the minimum wage increase but also the fast-food wage increase slated for the new year. How much of that -- how much of a material impact do you think that might have on your expense lines for next year?
Michael Hartshorn:
Laura, obviously, we've been tracking up in California for some time with their minimum increases there. It's been a competitive market for us for a long time. I think in regards to the fast-food workers, we'll have to see how that spills over, but we believe we recruit from a different pool than the fast-food industry.
Laura Champine:
That's helpful. If I could get a clarification of a general sense of what percentage of your employees -- of your store-level employees are in California? Will that line up with your store count?
Michael Hartshorn:
It will be a little higher than our store count because those tend to be higher-volume stores but slightly above our store count, I would say.
Operator:
And the last question comes from the line of Bob Drbul with Guggenheim Securities.
Arian Razai:
This is Arian Razai on for Bob. It looks like inventories are up 5 -- on a 5% comp increase. Could you please expand on packaways, given the great brand availability, the reason of packaways have been trending down a couple of percentage points below last year and every quarter this year? Any changes in approach, a factor of higher deployment of product? Is it like better inventory productivity at stores? Any additional color would be super helpful.
Barbara Rentler:
Really no change to how we're running packaway. Sometimes when your business is very good, and we've been chasing a lot of business this year [indiscernible]. So we've been in a constant chase. And the thing about packaways, when you're buying goods that you're going to hold, you have to be absolutely sure that the values are correct. So the merchants are very discerning in what they buy when they put in packaway because when you're bringing it back out, we want to make sure that the value is right.
So I don't think there's any way to look at packaway, there's a lot of goods out there. It could be packaway, just put more goods into our packaway we could. I think it's a merchant's job to really put the best product in there at the best possible values, and we're focused -- very focused on value. And so I don't think there's anything to read into it. But We feel -- actually, we feel very good about our content in the packaway that we own this shift because there's been a lot of very good deals and a lot of good products out there. So we have plenty of money to buy packaway if we'd like to buy some, but that is really comes to the merchant team. It's their call on what they believe is the right value. And then that's why, therefore, can fluctuate that plus the chase that we had in sales in the quarter.
Arian Razai:
Got it. Got it. So would you say that the product this year resonates better with the consumer like from the value perspective?
Barbara Rentler:
You mean the packaway product or just products in general?
Arian Razai:
Just products in general.
Barbara Rentler:
I think the customer is really responding to the better values. Clearly, she's financially pressed. And even though inflation is easing, she's still under pressure. And so whenever you can give the customer a better branded bargain at an unbelievable value, she's going to respond, which is why we're highly focused on that, and that would therefore take us through stronger market share.
Operator:
And ladies and gentlemen, there are no further questions at this time. I'd like to pass the call back over to Barbara Rentler for any closing comments.
Barbara Rentler:
Thank you for joining us today and for your interest in Ross Stores. Happy holidays.
Operator:
And this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Operator:
Good afternoon, and welcome to the Ross Stores Second Quarter 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 in the company's fiscal 2022 Form 10-K and fiscal 2023 Form 10-Q and 8-Ks on file with the SEC. And now I would 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, 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 second quarter 2023 performance, followed by our updated outlook for the second half and fiscal year. Afterwards, we'll be happy to respond to any questions you may have.
As noted in today's press release, we are pleased with our second quarter results with both sales and earnings well above our expectations. Along with easing inflationary pressures, customers responded well to our improved value offerings throughout our stores. Total sales for the period were $4.9 billion, up from $4.6 billion last year, while comparable store sales rose 5%. Earnings per share for the 13 weeks ended July 29, 2023, were $1.32 on net income of $446 million. These results compared to $1.11 per share on net earnings of $385 million in the prior year's second quarter. For the first 6 months, earnings per share were $2.41 on net income of $818 million. These results compared to earnings per share of $2.08 on net earnings of $723 million in the first half of 2022. Sales to 2023 year-to-date period were $9.4 billion, with comparable sales up 3% versus a 7% decline in the first half of last year. Cosmetics and accessories were the strongest merchandise areas during the quarter, while performance across geographic areas was broad-based. Similar to Ross, dd's DISCOUNTS performance also improved due to better merchandise assortments and the aforementioned moderating inflation. At quarter end, total consolidated inventories were down 15% versus last year, while average store inventories were up 4%. Packaway merchandise represented 38% of total inventories versus 41% in the same period of the prior year. Turning to store growth. We opened 18 new Ross and 9 dd's DISCOUNT locations in the second quarter. We remain on track to open a total of approximately 100 locations this year comprised of about 75 Ross and 25 dd's. As usual, these numbers do not reflect our plans to close or relocate about 10 stores. Now Adam will provide further details on our second quarter results and additional color on our updated outlook for the remainder of fiscal 2023.
Adam Orvos:
Thank you, Barbara. As previously mentioned, our comparable store sales were up 5% for the quarter, driven by higher traffic. Second quarter operating margin was flat compared to last year at 11.3%. Cost of goods sold during the period improved by 185 basis points. Merchandise margin increased 200 basis points, primarily due to lower ocean freight costs. Domestic freight declined 60 basis points while occupancy and distribution costs improved by 20 and 5 basis points, respectively.
Partially offsetting these benefits were buying expenses that delevered by 100 basis points mainly due to higher incentives. SG&A for the period increased 180 basis points as higher incentive costs and store wages more than offset the leverage from higher sales. During the second quarter, we repurchased 2.2 million shares of common stock for an aggregate cost of $230 million. We remain on track to buyback a total of $950 million in stock for the year. Now let's discuss our outlook for the remainder of 2023. As Barbara noted in today's press release, despite the recent moderation in inflation, our low to moderate income customer continues to face persistently higher costs on necessities. As a result, we believe it is prudent to continue to plan the business cautiously. However, given our improved second quarter performance, we are raising our second half sales and earnings outlook. We are now planning comparable store sales for the third and fourth quarters of 2023 to be up 2% to 3% and 1% to 2%, respectively. As noted in our press release, if the second half performs in line with these updated sales assumptions, earnings per share for the third quarter is projected to be $1.16 to $1.21 versus $1 last year, and $1.58 to $1.64 for the fourth quarter compared to $1.31 in 2022. Based on our first half results and second half guidance, earnings per share for fiscal year 2023 are now planned to be in the range of $5.15 to $5.26 versus $4.38 last year. Incorporated in this updated guidance range is an estimated benefit to earnings per share of approximately $0.16 from the 53rd week in fiscal 2023. Now let's turn to our guidance assumptions for the third quarter of 2023. Total sales are forecast to increase 4% to 6% versus the prior year. We expect to open 51 stores during the quarter, including 43 Ross and 8 dd's locations. Operating margin for the third quarter is planned to be in the 10.3% to 10.5% range versus 9.8% in 2022 as the benefit from lower ocean and domestic freight costs more than offset an increase in other expenses, primarily related to incentive compensation and store wages. Net interest income is estimated to be approximately $34 million versus $2.8 million last year as we continue to benefit from higher interest rates on our cash balance. The tax rate is projected to be about 25% and diluted shares outstanding are expected to be approximately 337 million. Now I will turn the call over to Barbara for closing comments.
Barbara Rentler:
Thank you, Adam. While we are pleased with our above-plan results in the second quarter, the macroeconomic, geopolitical and retail environments remain uncertain. Moving forward, we remain keenly focused on delivering the most compelling bargains possible as our customer is more motivated than ever to seek the best branded value as prolonged inflation remains an issue. We will also carefully manage our expenses and inventory to maximize our potential for both sales and earnings growth. Longer term, we believe the rigorous execution of our off-price business model will allow us to consistently deliver solid results.
At this point, we'd like to open up the call and respond to any questions you may have.
Operator:
[Operator Instructions]
And the first question comes from the line of Matthew Boss with JPMorgan.
Matthew Boss:
Great. Thanks and congrats on a really nice quarter. So Barbara, could you just elaborate on the improved value offerings that you cited in the release and just proactive assortment changes that you've made in stores that you think are contributing to the improved performance. If any way to speak to trends that you're seeing with traffic versus basket as the second quarter progressed and into August, that would be really helpful.
Michael Hartshorn:
Matthew, let me start on overall trends for the quarter on sequential trends. We wouldn't provide specifics, but I would say comps were relatively strong across the quarter, both on a single year comp basis in a multiyear basis. On the components, as we said in the commentary, traffic was the primary driver of the 5% comp. That was true for both chains. Average basket was flat with an increase -- slight increase in the units per transaction and a lower AUR, which offset the units per transaction.
Barbara Rentler:
And then, Matt, in terms of the improved value offerings, as we said before, we are really striving to offer better branded value margins to the customer. I mean, our customer is a low to moderate income customer and the merchants have been out there really chasing the business, buying closeouts really looking for compelling, compelling values in bargains, and that's across all areas in the company. It's not just one particular area. It's everywhere because that's really what the customers are responding to and because the amount of availability of the market, we've been able to do that.
Matthew Boss:
Great. And then just as a follow-up, could you expand on gross margin for the balance of this year, meaning how best to think about the opportunity to recapture markdown headwinds that we saw a year ago as the year progresses within merchandise margin? And then just multiyear, are there any structural impediments to returning to pre-pandemic operating margin levels, which I think were in the mid-13s?
Adam Orvos:
Yes, I'll take the first piece. Matt, this is Adam. Thanks for the question. Third quarter, from an operating margin standpoint, the components will look similar to second quarter. So ocean freight was a significant tailwind for us will continue in third quarter. But I'll remind you that in fourth quarter last year, we started to see the benefits of ocean freight. So it will moderate considerably in fourth quarter. But again, to answer -- third quarter versus second quarter should be comparable on that standpoint. From a domestic freight standpoint, again, we commented in the call on 60 basis points of good news, assuming fuel costs stay the same, we'd expect that to continue through the balance of 2023.
Other big movers, we've commented a lot about incentive cost. We knew that would be a headwind coming into the year as we outperform this year and go up against an underperforming 2022. So that was a big moving part, and that will continue in the third quarter and fourth quarter, but would also comment the way we flowed incentive costs last year's second quarter was the most impactful quarter. So it'll still be a significant headwind, but in third quarter and fourth quarter, but not as significant as second quarter.
Michael Hartshorn:
Matthew, on the long-term growth algorithm. We still believe we can achieve gradual improvement in profitability over time. In general, EBIT growth, though, will be highly dependent on sustained strong sales growth and certainly how the macroeconomic and geopolitical factors, including inflation may continue to unfold. To achieve this, obviously, strengthening our price value offerings across our entire assortment is going to be key to that success. I'd say outside top line, we continue to believe there are opportunities throughout the P&L that can help drive comp growth and EBIT margin expansion over time.
Adam Orvos:
And I think you also asked markdown so we didn't answer that question. So given the elevated levels last fall, should expect some benefit as we move through the second half, obviously, assuming we deliver our sales expectations.
Matthew Boss:
Great color. Congrats again.
Operator:
The next question comes from the line of Lorraine Hutchinson with Bank of America.
Lorraine Maikis:
I wanted to focus on SG&A for a minute. Understanding this year, there's a rebuild of incentive comp. How are you thinking about that line item over the longer term? And what comp would you expect to need to leverage SG&A in the out years? .
Adam Orvos:
Lorraine, this is Adam. So SG&A, we knew would be pressured due to incentive costs coming into this year, and it clearly was. But most of our SG&A deleverage in the second quarter was driven by incentive costs, although higher store wages played a part in that. Also I think your kind of longer-term leverage question, 4% comp is where we think we can clearly lever in SG&A, and that fundamentally hasn't changed for us.
Lorraine Maikis:
And then any change to your outlook on wage pressures either for this year or for the coming years? .
Michael Hartshorn:
Sure, Lorraine. Generally speaking, wages in our stores and DCs are relatively stable. So there was no change to the outlook for 2023. We continue to take a market-by-market approach to staffing and we do adjust wages where appropriate in individual markets. I say longer term, I think it's going to be dependent on the statutory environment that's really what's driven our wage growth over the last few years.
Operator:
[Operator Instructions]
And the next question comes from the line of Mark Altschwager with Baird.
Mark Altschwager:
Back to the top line for a moment, just with the positive inflection you're seeing in comps, what's your level of confidence that the business can return to a 3%, 3% plus next year? And bigger picture, do you think you've hit the point where the value is resonating in a way that it can trump the inflationary pressure your consumer is feeling elsewhere. I guess, asked another way, tough times is when we would think more customers would need Ross and the trade down can drive the top line. Do you think that's where we are today?
Michael Hartshorn:
Here's how I'd answer that. Generally speaking, we can control what we can control. We know that we made some progress improving our assortments during the second quarter. We also know there's -- we can make significantly more improvements. And with that, I think that gives us confidence or that we can continue to grow comp. Longer term, when we start talking about next year, I think we'll be in a better position to see what the outlook is when we give our earnings guidance early next year. So we'll continue to monitor the economy. It still remains very uncertain, and we'll do what we can to offer the customer the best possible value possible in this environment, which is very important to our customers.
Barbara Rentler:
I think the other piece, Mark, is that if we continue to improve on our value offerings, we really think that, that's the way to gain share across all customer income demographics. So if we do a good, better, best strategy, and we have incredible values, we have more of an opportunity to gain more customers.
Operator:
And our next question comes from the line of Chuck Grom with Gordon Haskett.
Charles Grom:
Can you guys hear me?
Adam Orvos:
We can.
Charles Grom:
I wanted to see if you guys are talking about the home category a little bit. You called out cosmetics and accessories being areas of strength, your largest peer at the end of the day, you talked about home being strong. And I was wondering if you could talk about that and also tie in what's happened with the bath.
Barbara Rentler:
I'm sorry. I didn't catch the last piece you said. With?
Charles Grom:
If you could just tie in any benefit you think you saw in the quarter and could expect to see in the coming quarters from bed, bath and beyond.
Barbara Rentler:
From bed, bath and beyond. Okay, sorry. Home also performed above the chain average. And so we feel that there's a lot of growth still left in home for us, pretty broad-based across the board. In terms of bed, bath and beyond, two thoughts. One is that they lost a lot of volume prior to that even happening and the classification that they carried where we have overlap.
I think over time, we could pick up more volume perhaps, but I think that's very hard to measure. And you have to have overlap of the locations. So I think there's some opportunity how to measure that. I'm not really sure how to measure it. I think of it more as a total home package. We feel like we have a lot of growth in home still ahead of us. And again, I think that's pretty broad-based.
Charles Grom:
And just as a quick follow-up. Do you like the home category is starting to form a base after several quarters now of attrition?
Barbara Rentler:
You mean specifically to us or you mean in the world.
Charles Grom:
I guess both because it seems like more people are starting to talked about the home category starting to form the bottom.
Barbara Rentler:
Yes. Look, I think it depends on where you are in your development of the home business. So we have some businesses that are more developed than others. And so I think as we develop some of those other businesses, it will help us to continue to grow that as opposed to if we were in every business and everything was developed. So all businesses within our home business are not created equal. And so I think, Ross, we still see opportunity. In terms of the outside world, yes, there are a lot of people in home, and it goes back to what you're offering. So if I take the whole value equation for us in the entire box that would include home and making sure that we have the right values to continue to grow that business and then to maximize the areas where we are still what I would call underdeveloped.
Operator:
And the next question comes from the line of Paul Lejuez with Citigroup.
Paul Lejuez:
Curious how dd's performed relative to Ross. I think you said you saw improvement at both. But curious on an absolute basis how dd's performed. I think it's been underperforming for about a year now. And so also curious if you think that underperformance continues or perhaps do easier comparisons cause dd's to start to outperform the Ross concept just whatever is built into your assumption?
Michael Hartshorn:
Paul, I would say, as we mentioned in the commentary, dd's performance also improved during the quarter versus first quarter, and we believe that's a combination of better assortments and like Ross moderating inflation. That said, dd's sales trends continued to trail Ross. As a reminder, the dd's average household income is more impacted by the inflation, especially on necessities, their average household income is $40,000 to $45,000 compared to $60,000 to $65,000 for Ross. Our strategy here is very similar. We are very focused on offering strong values, which is very important to the dd's customer today.
Operator:
And the next question comes from the line of Adrienne Yih with Barclays.
Adrienne Yih-Tennant:
Great. Thank you very much. Barbara, I wanted to ask you about the packaway merchandise. I mean, a shade lower than last year. I was just wondering if you can talk about how much of that packaway is actually short stay intra-season versus kind of annualized, I know you tend to do more of the short stay. And then the supply chain sort of being unlocked. Obviously, I would assume that, that allows you to play in that kind of short stay much more effectively.
My second just follow-up question is on the direct import side, you don't do as much direct imports. So I'm just curious how much of the ocean -- sort of the model mix ocean air versus domestic, right? Sort of that outbound, I suppose, rail trucking. Is that rail trucking the domestic portion of it outweighing the ocean air, if I could ask that.
Michael Hartshorn:
I'll answer the question on the transportation. Ocean freight, despite the fact that direct imports is a smaller part of our business, Ocean freight had a larger impact than the domestic transportation. The domestic transportation, you can see it separately within our gross margin was driven by better rates, but within the year, fuel rates have come down versus our expectations, which is where we saw a benefit in the first quarter -- our second quarter, sorry.
Barbara Rentler:
And then in terms of short stays of packaway, it means the mix of what we would define or guess what you're defining as longer stays versus short stays of product. And that very much depends on when you're buying, right? So if you're buying packaway for next year, that would be something that would be happening more along the lines of this -- kind of this time frame. So again, there's always a mix and it fluctuates based off of what we find, what we want to pack, what that looks like.
So there's no formula to that. It's really about what's the best possible deal, the possible value we can get for the customers. So that moves around. But it is a combination of both. And at this particular time, it's kind of like you haven't necessarily put out all your call, and you haven't necessarily put in all your spring if you were talking on the apparel side. The supply chain unlock in terms of a short stay in the hotel, are you implying on our direct imports or you implying in the outside world?
Adrienne Yih-Tennant:
In either. Probably both, if you can share that? .
Barbara Rentler:
Yes. So the short stays in terms of putting in the hotel, we don't necessarily put goods that we bring in ourselves in the hotel in any big way unless we have to. Now a year ago, when we handle the carrier issues. Obviously, the goods arrived early, we took the goods in, we released them. Sometimes we do -- we put goods in there for short stays for a variety of reasons. Container side, there's a variety of reasons why we do it. But it's not something that we like to do as a big -- as a large strategy in home with our own imports, but we do, do some.
So the supply chain timing of the unlock for, I'll call it, business as usual prior to the casual, the carrier issues. Again, we manage that very closely. It really was last year in this time frame where all those goods came in, we had to put it in and then metered out at the appropriate time for the customer. Otherwise, we would have been off seasonality and a variety of other issues along with that.
Operator:
And the next question comes from the line of Brooke Roach with Goldman Sachs.
Brooke Roach:
Barbara, you talked about the opportunity to continue to improve your assortment as you move forward following some early gains. Was there any change in your mix this quarter between good, better, best. And how are you planning those buys between the assortment of good, better, best into the second half of the year?
Barbara Rentler:
Change in good, better, best. I don't really think there was a significant change in our good, better, best strategy. Best has been out there in the market a while. There's been a lot of availability. So a lot of what for this past quarter that would have affected what you would have seen on the floor in terms of the three buckets was the amount of merchandise that we chased based -- and the availability in the market. And so since the availability in the market is pretty broad-based between good, better, best, I mean, as usual, not every class, every price point. I think the assortments are more reflective of what we've been able to chase.
And I would say the same thing for fall. Obviously, we have a strategy around balance. But when you're chasing as much as we're chasing, that kind of really goes to what the customer is voting on, and what we can get in the market. And I think the merchants in Q2 did a very good job of getting values on the floor, chasing back into more of what you wanted and trying to hit the appropriate levels of each one of those buckets because the customer votes every day. So we could want a particular good, better, best on the floor. That's not necessarily what the customer wants. So I think the merchants have really been out in the market and really, really looking for great deals, which have been out there. And so it fluctuates. And I would expect it would fluctuate in Q3 and Q4. But we are looking for each one of those buckets and great deals in all of them.
Operator:
And the next question comes from the line of Dana Telsey with Telsey Advisory Group.
Dana Telsey:
Nice to see the nice results. As you think about the current environment, I believe last time, Barbara, you had mentioned the focus on value that the consumers are searching for and you could do a better job of it. How much is the improvement that we saw this quarter? Is the comparison given the increase in traffic, how much of it was the consumer? And how much of it on your journey of better value for better brands? How much of it is your progress there? And where are you versus relative to where you want to be? And then just any updates on new store productivity levels, how those are doing versus your plan?
Michael Hartshorn:
Dana, on the productivity levels, they haven't changed. They've averaged between 60% and 65% of an average mature store for the chain, and that has not changed over time.
Barbara Rentler:
I'll talk about traffic.
Michael Hartshorn:
Traffic. So on traffic -- your question on traffic. So traffic was the main driver of the comp for the quarter.
Barbara Rentler:
And where is the customer on the journey. Look, I think the customer with moderating inflation is feeling a little bit little bit more room to spend money. But again, our customer is moderate to low income customers. So they still faces inflation in front of her because she has just the higher cost of the necessity she has to spend. So I think on our journey with the customer in terms of better value and better values on the floor, I think, it's a continual process, right? The customer votes and the merchants are out buying goods and responding to what she's voting on. So I think from -- in second quarter versus first quarter, I think the merchant team did a better job of offering her broader assortments and better values.
And I think we'll continue to make progress on that, and it will seek its own level. It's not really a target or a level that we have in mind. It's just how the customer responds. And obviously, we want to put out the best possible values we always can. And so the merchants have that mind and now they have really heightened awareness and the ability to chase goods has really given us an opportunity to perhaps accelerate some of those things. So again, it will continue. I don't have a beginning or an end amount that we think you should ask because I think the customer will decide for us and our job and the merchant team's job is to respond to that and satisfy her on whatever level that is.
Operator:
And the next question comes from the line of Alex Straton with Morgan Stanley.
Alexandra Straton:
Great. Congrats on a nice quarter. I wanted to talk about the competitive landscape. On our end, we've witnessed the rise of these low-priced e-commerce players in recent years like even Shein. So I'm just wondering like how maybe, Barbara, you think about those types of businesses, what they mean for Ross or even how the competitive landscape has changed now versus a few years ago?
Barbara Rentler:
Sure. Well, obviously, Shein's doing a lot of business, and they offer great value. We have a -- our junior business is a pretty large business for us in ladies apparel. So I think that would be most comparable. I don't think I can really compare myself to Shein. I think the reality of it is there's a lot more competition in that arena, whether it's Shein, whether it's Primark, whether -- so I think it's just our job to be able to offer assortments that satisfy the customer.
And again, they're just like another competitor. In terms of -- if you think about all the competitors, right? Department stores years ago had a lot more share so that would have been a major competitor for us. I think -- I mean, you would know better than I would know, you're watching the world evolve and different segments of the market are more challenging than others. And so I think one of the best parts about being in off-price is that we have a unique opportunity to satisfy all types of customers. This is why we want the assortments to be broad. This is why we want the values to be strong. And everyone keeps asking about the trade down customer. I think just getting more customers is really by broadening your assortment. And I think off-price has a unique opportunity to do that, versus if I mean, another particular segment. So if the merchants obviously study Shein, they study all the other retailers and their job is to understand what they offer and what we can offer and to give the best product and the best value that we can. And I think there's been -- if we looked at this and had this discussion 10 years ago, it would be a very different discussion than where we are today. So retailing is -- I think we probably all agree dynamic. And so -- but I do believe that off-price has this unique opportunity because it carries lots of products, and it has the ability to flex based off of the customer and you're not kind of pigeonholed into one view of who you are, you can flex and move with what the customer wants. So I think off-price is in the right place at the right time.
Operator:
And the next question comes from the line of Ike Boruchow with Wells Fargo.
Unknown Analyst:
This is Julianna on for Ike. Congrats on a good quarter. Maybe just a quick follow-up on AUR. Is the moderation we're seeing there more result of mix shift towards cosmetic and accessories. For example, we saw this quarter. And as we see home performance improving, do you see that driving an upside there?
Michael Hartshorn:
On the AUR, it was a combination of mix shift and us providing better values to the customer. The way we think about it going forward is we really don't plan the business on traffic or transactions. We think if we offer the best values that will have an impact on both traffic and basket size. AURs will fundamentally be dependent on the mix of sales in the business.
Barbara Rentler:
And in terms of home, listen, I feel like we -- what I said, we have opportunity in home. And so that compared to the company is there are upside versus other businesses, I think, over time. Home is not -- home is longer lead time type businesses and things, but I do believe there is upside.
Operator:
And the next question comes from the line of Marni Shapiro with The Retail Tracker.
Marni Shapiro:
Congratulations on a great quarter. I'm curious, in most of your regions or a lot of your regions, students are back-to-school. I'm curious if you saw early pickup for traffic for back-to-school and what the trends were looking like? And just in general, I'm curious if you guys are seeing sort of the peaks and valleys in your traffic around holidays where holiday weekends or holiday events, the traffic is much higher. And when it's in the valley, it's lower? Or has it evened out a little bit?
Michael Hartshorn:
Hi, Marni, we wouldn't talk about intra-quarter trends for back-to-school. In terms of traffic, I would say in our business, it's been very steady versus peaks and valleys that you mentioned.
Operator:
And the next question comes from the line of Laura Champine with Loop Capital Markets.
Laura Champine:
I noted that this was the third quarter in a row of inventories down double digits, which seems just to be normalization. But do you have enough inventory in your opinion, given the current improvement in sales trend?
Michael Hartshorn:
Laura. Yes, the reduction in inventory was down 15%, as we mentioned in the release, and that was really about the comparison versus last year where we had as Barbara mentioned, substantial amount of early receipts that we had to store in our packaway facilities and also higher end transit inventory. So we're up against those larger numbers last year. We feel good about our overall inventory levels. We actually ended up 4% in our stores. So I would say, overall, the level and content of the inventory we're happy with.
Operator:
And the next question comes from the line of Edward Yruma with Piper Sandler.
Edward Yruma:
Just quickly, I know you cited strength in cosmetics and accessories. Kind of curious on inventory availability there if you're chasing there. Obviously, there's a proposed M&A in this space, would that impact, in your opinion, kind of accessory availability long term?
And then just a model housekeeping question. I noticed that accrued payrolls were up pretty materially year-over-year and sequentially. Any driver you'd like to call out there would be great.
Adam Orvos:
On the last piece, accrued payroll, it's really our financial performance. So incentive costs are up. And when you look at that this year versus last year comparison.
Barbara Rentler:
And I just want to make sure on the cosmetic and accessory question, you want to know what the availability is.
Edward Yruma:
Yes. Just kind of curious if you're seeing good product in the market and if you're willing to opine on this M&A that may happen in the space, like would that hamper your availability in accessory space longer term?
Barbara Rentler:
Look, there's availability in almost every market, as I said in the beginning, I mean, not every class in every business in every market has availability. But both cosmetics and accessories have availabilities just depending upon what it is you're looking for. The second piece of the question, I'm not sure...
Michael Hartshorn:
We wouldn't comment on the M&A in the market.
Operator:
And the next question comes from the line of Aneesha Sherman with Bernstein.
Aneesha Sherman:
So similar to last quarter, your new guidance also models a comp acceleration on a 4-year stack. Can you talk about what makes you confident about that acceleration going into the second half? Is it more about external factors like inflation moderating? Or is it about internal execution and bringing a better product to the market?
And then second, some other discount retailers have talked this week about absorbing inflation and doing price rollbacks for back-to-school. Do you expect fall and back-to-school to become quite promotional across the sector?
Michael Hartshorn:
On the guidance, Aneesha, I think it's a function of how we performed in the second quarter and our confidence in the assortments we're providing the customer. I'd say that's what's driving our guidance in the third quarter. In the fourth quarter, we actually see a deceleration, and we'll update that as we get closer. We think the fourth quarters could be a very promotional holiday season.
Operator:
And the next question comes from the line of Corey Tarlowe with Jefferies.
Corey Tarlowe:
You talked about cosmetics and accessories and a little bit on home. I was wondering if you could also touch on footwear and apparel, anything you're seeing there? How did that perform relative to the chain average? And then just on real estate, what's the availability look like? And is there any impact that you're seeing as you look down your real estate pipeline in terms of the impact from potentially higher rates on -- higher interest rates on either rental agreements or returns that you're seeing?
Michael Hartshorn:
Sure. Merchant-wise, let me talk about the category performance. Merchandise-wise, cosmetics and accessories, as we mentioned, we're again the best performing businesses. Shoes and Home were above the chain average. Apparel trailed the chain, although it performed above our plan and improved versus Q1. .
On real estate availability, I'd say, overall, there's been an increased interest from other retailers and the types of real estate that we typically prefer. That said, our team has a very methodical process of developing a healthy real estate pipeline to support our long-term growth plans. And in terms of rent, obviously, we're under contract and have option renewals, and we're not seeing, at this point, major increases in our rent costs.
Operator:
And the next question comes from the line of John Kernan with TD Cowen.
Krista Zuber:
This is Krista Zuber on behalf of John. Just given the still broadly highly promotional environment across retail heading into the second half in your sharper value proposition. I wonder if you could just talk to rather broadly or directionally, how you see sort of your merchandise margin in relation to your Q3 operating margin guidance.
Adam Orvos:
Krista, merchandise margin will continue to be primarily driven by ocean freight benefit. I mentioned earlier, we'll have a little bit of tailwind just from as we had elevated markdown levels, that will be helped to us. And really, that's all we see as major moving components within merchandise margin.
Operator:
We have time for one final question coming from the line of Jay Sole with UBS.
Jay Sole:
I guess if you just take a step back and just give us an idea of how the overall inventory buying environment compares right now to a year ago? Because if you go back a year ago, it was really a time where a lot of retailers and just the whole industry realized how much excess inventory had been built up post reopening and I think sort of the slowdown as inflation really started to kick in. So could you just give us an idea of how you think about the environment now relative to them? Is it as good? Is it better? Is it a little bit worse? Is it a lot worse? Any kind of context there would be helpful.
Barbara Rentler:
There was a lot of availability last year, and there's a lot of availability now. And again, it's broad-based, obviously, again, not every single classification of business. But there is definitely supply, it was there last year and it's there again this year.
Operator:
There are no further questions at this time. I'd now like to turn the floor back over to Barbara Rentler for any closing comments.
Barbara Rentler:
Thank you for joining us today and for your interest in Ross Stores.
Operator:
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.
Operator:
Good afternoon, and welcome to the Ross Stores' First Quarter 2023 Earnings Release Conference Call. [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 8-Ks on the file with the SEC. And now I'd like to turn the call over to Barbara Rentler, Chief Executive Officer. Please go ahead.
Barbara Rentler:
Good afternoon.
Joining me on our call today are Michael Hartshorn, Group President, 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 first quarter 2023 performance, followed by our outlook for the second quarter and fiscal year. Afterwards, we'll be happy to respond to any questions you may have. As noted in today's press release, despite continued inflationary pressures impacting our low to moderate income customers, first quarter sales were relatively in line with our expectations. Total sales of $4.5 billion, up from $4.3 billion last year, while comparable store sales rose 1%. Earnings per share for the 13 weeks ended April 29, 2023, are $1.09 on net income of $371 million. These results compare to $0.97 per share on net earnings of $338 million for the 13 weeks ended April 30, 2022. Cosmetics and accessories were the strongest merchandise areas during the quarter, while the Midwest was the top-performing region. dd's DISCOUNTS performance in the first quarter continued to trail Ross, reflecting the aforementioned inflationary pressures that continues to have a larger impact on our lower income households. At quarter end, total consolidated inventories were down 16% versus last year. Average store inventories were up 2% at the end of the quarter. Packaway merchandise represented 42% of total inventories versus 43% last year. Turning to store growth. We opened 11 new Ross and 8 dd's DISCOUNTS locations in the first quarter. We continue to plan for approximately 100 new stores this year comprised of about 75 Ross and 25 dd's. As usual, these numbers do not reflect our plans to close or relocate about 10 stores. Now, Adam will provide further details on our first quarter results and additional color on our outlook for the remainder of fiscal 2023.
Adam Orvos:
Thank you, Barbara.
As previously mentioned, our comparable store sales were up 1% for the quarter, driven by an increase in transactions. First quarter operating margin of 10.1% was down from 10.8% in 2022. As expected, this decline primarily reflects higher incentive compensation versus last year when we underperformed our expectations. Cost of goods sold improved by 50 basis points due to a combination of factors. Merchandise margin was up 120 basis points, primarily due to lower ocean freight costs, while domestic freight costs declined by 60 basis points. Partially offsetting these 2 favorable items were higher distribution expenses of 65 basis points, driven primarily by unfavorable packaway-related costs and deleverage from the opening of our Houston distribution center. Buying increased by 60 basis points due to higher incentive compensation and occupancy deleveraged 5 basis points. SG&A for the period rose 115 basis points, mainly due to higher incentive compensation and store wages versus last year. During the first quarter, we repurchased 2.2 million shares of common stock for an aggregate cost of $234 million. We remain on track to buy back a total of $950 million in stock for the year. Now let's discuss our outlook for the remainder of 2023. For the 13 weeks ending July 29, 2023, comparable sales are forecast to be relatively flat. Second quarter 2023 earnings per share are projected to be $1.07 to $1.14 versus $1.11 for the 13 weeks ended July 30, 2022.
Our guidance assumptions for the second quarter of 2023 include the following:
total sales are forecast to increase 1% to 4% versus the prior year. We plan to open 27 locations in the second quarter, including 18 Ross and 9 dd's DISCOUNTS locations. Operating margin for the second quarter is planned to be in the 9.8% to 10.1% range, down from 11.3% in 2022 as higher merchandise margin from lower ocean freight cost is forecast to be offset by an increase in expenses, primarily related to incentive compensation and store wages.
We expect net interest income to be approximately $31 million. The tax rate is projected to be about 25%, and diluted shares outstanding are expected to be approximately 339 million. Now turning to the full year. Based on our first quarter results and guidance for the second quarter, comparable store sales for the 52 weeks ending January 27, 2024, are still planned to be relatively flat. We now project earnings per share for the 53 weeks ending February 3, 2024, to be $4.77 to $4.99 compared to $4.38 for the 52 weeks ended January 28, 2023. This guidance includes an estimated benefit to full year 2023 earnings per share of approximately $0.15 from the 53rd week. Now I'll turn the call back to Barbara Rentler for closing comments.
Barbara Rentler:
Thank you, Adam.
As noted on our last earnings call, we had expected fiscal 2023 to be another challenging year. This was especially true given the continued uncertainty in the macroeconomic, geopolitical and retail environment. As a result of today's uncertain external landscape, especially the prolonged inflationary pressures negatively impacting our customers' discretionary spend, shoppers are seeking even stronger values when visiting our stores. In response, we remain focused on delivering the most compelling bargains possible while diligently managing expenses and inventory to maximize our opportunities for growth. At this point, we'd like to open up the call and respond to any questions you may have.
Operator:
[Operator Instructions] And the first question comes from the line of Matthew Boss with JPMorgan.
Matthew Boss:
So Barbara, maybe given the pressure on your low to middle income or low to moderate income customer base that you cited, how do you feel today about your merchandise assortments across categories from that value perspective? And then how are you managing buys in the marketplace just given the current level of disruption across the apparel landscape today?
Barbara Rentler:
The merchandise assortments from value perspective -- first, let me lead with, we weren't really satisfied with our results. So as I look across the different businesses, we had some businesses where the business didn't perform as well as we had expected, and we're addressing those issues. So let me start with that. As I look at value across the store, that has been a main focus for the merchants for the last few months. So I'd say that we've made progress across the board, but I still think that that is a major focus for us, offering the customer the best branded bargains possible at the best possible values we can put out there.
So I would say we're on a journey, and everyone is -- really, the merchant team is highly focused on this. And I really think that that's an important part, especially for our mid- to lower-income customers. And then in terms of managing -- you're saying in terms of managing supply in the marketplace, is that how I interpret that question?
Matthew Boss:
Yes, just how you're managing buys given how much disruption there is in the overall apparel landscape? How much you're leaving, thinking about current open to buy and relative to maybe things opportunistic from a packaway perspective.
Barbara Rentler:
Okay. Well, we have enough open to buy for both packaway and to chase the business. So right now, the plan is postured that we would chase the business as we're coming across and we're monitoring the speed of spending. And the hotel, same scenario. Hotel inventories are basically at the same rate as they were last year. And so the merchants are out in the market seeking out deals and based on those deals, we make those decisions. So if a deal comes in one business and that wasn't really even planned for that business, we might take that plan up.
So we're really looking for with the overarching idea that what we want to do is get best possible values on the floor. So the merchants go to the market, and then there's discussions about what's out there. I know you know that there is pretty broad-based availability out there, maybe across most businesses anyway, in most brands in the market because as you know, supply fluctuates by type of product and vendor. But you have to kind of be out there and be in it to really see what's out there and then come back and then decide where do we want to take the deal. But that is our focus in both companies, delivering the best branded bargains that we possibly can.
Operator:
And the next question comes from the line of Mark Altschwager with Baird.
Mark Altschwager:
So you're holding your comp guide for the year, though, you noted the consumer is looking for a deeper value and your merchants are focused on that. So I guess I'm wondering how the expected makeup of that flat comp has changed versus your expectations at the start of the year? And to the extent that there's perhaps some lower ticket involved, are there any margin implications we should be aware of?
Michael Hartshorn:
Mark, it's Michael Hartshorn. Let me start by just talking a little bit about the first quarter. The comp in the first quarter was driven by a number of transactions, and that was -- for us, that's our proxy for traffic. It was up versus a year ago. So that's a good sign on customer traffic returning. The average basket was flat and it was flat on units per transaction, up on a lower AUR.
As far as how we're looking at the year, our outlook has not changed. We'll continue to manage the business with a conservative posture and be in a position to chase trends, chase the business and manage expense and inventory very conservatively. On a stack basis as we move through the quarter, and as weather became more favorable, we did see trends improve on a multiyear basis. So what that says to us is, obviously, healthy traffic and a trend that, in our mind, hasn't changed and hasn't changed our outlook for the year.
Operator:
And the next question comes from the line of Paul Lejuez with Citigroup.
Paul Lejuez:
Curious about geographic dispersion, maybe if you could talk about some of your big states performance in those states, specifically California. How the trends look from the beginning of the quarter to the end of the quarter? And if maybe you could talk about apparel versus home performance.
Michael Hartshorn:
Sure, Paul. On trends during the quarter, as I just mentioned, on a stack basis, we did see -- and stack basis versus pre-COVID, we did see trends improve as we moved through the quarter with April being the strongest. Geographically, we mentioned the Midwest with the top-performing region for our larger markets. Texas was above the chain average. Florida was in line and California underperformed the chain average given the difficult weather throughout the quarter in the West. Merchandise-wise, accessories and cosmetics were the best-performing businesses as we said in the script. Overall, shoes performed above the chain average, while home was in line and apparel trailed.
Paul Lejuez:
Michael, can you just -- a little bit more on California. Any quantification of how much of it was below the chain? And did that gap close that between California and the rest of the chain by the end of the quarter?
Michael Hartshorn:
It did close, it was -- we wouldn't get into the specifics, but it did underperform the chain average and it improved as weather improved.
Operator:
And the next question is from the line of Lorraine Hutchinson with Bank of America.
Lorraine Maikis:
As you move through the quarter, did you see any signs of customers trading down into Ross or any other notable changes in consumer behavior?
Michael Hartshorn:
I'd say overall, Lorraine, it was -- it's hard -- there's so many factors that go into sales. Obviously, the low-end customer continues to be pressured, whether it's ongoing inflation, reduction in SNAP benefits, lower tax refunds, but it was hard to see whether there's a trade down customer in that data.
Lorraine Maikis:
And the lower AUR in the quarter, was that all moving towards sharper price points? Or is there a mix component to that that we should factor in?
Barbara Rentler:
That's really off of a sharper price point. It wasn't generated by mix.
Operator:
And the next question is from the line of Chuck Grom with Gordon Haskett.
Charles Grom:
The merchandise margin had a nice uptick here in the first quarter relative to the last quarter. Can you talk about the drivers? I think you called out freight and then how you're thinking about that line item over the balance of the year?
Adam Orvos:
Yes. Chuck, this is Adam. So I mentioned the merchandise margin grew by 120 basis points in Q1. Ocean freight was clearly the most impactful component here driving the improvement. Our performance in merc margin was in line with what we embedded in our guidance for Q1. And assuming rates stay where they are, I expect that to continue as we move through the year.
Operator:
And the next question is from the line of Adrienne Yih with Barclays.
Adrienne Yih-Tennant:
Barbara, I want to ask you about packaway, the 42% this year versus 43%. First and foremost, it sounds like you believe that your assortment is on trend, and then typically, when there are these kind of late weather breaks to kind of warmer weather across retail, it gives you the opportunity to chase into sort of known winters. Do you feel better about the assortment heading into the second quarter? And then, Adam, or Barbara, with frontline still being very promotional, does that somehow impede the ability to drive maybe higher AURs because the value is not as evident as it may be when frontline is a little bit less promotional?
Barbara Rentler:
Okay, Adrienne. So let's start with packaway, I think the first question was about packaway, the content at packaway? So the content at packaway, we feel good about that content at packaway. Last year at this particular moment in time was when we started to bring in goods because of all the carrier issues that went on with whenever things speeded up, we took good and put them into packaway as we told all of you that we use later on in the year, really our direct imports. So the packaway that we have in there now is really closed out great deals that we feel very good about. So the percent might be the same, but the content is different. So that's the first one.
The second one, in terms of the late weather break, I'm not sure I 100% understand what you mean by that.
Adrienne Yih-Tennant:
So oftentimes when it's been cold in the Northeast and many people were sort of -- retailers were sort of missing plan for -- just because it was colder than for longer. And in the past, it seems like those types of poor weather transitions have given you the opportunity, but I think you just answered it in your first one.
Barbara Rentler:
Yes. Yes, you're saying were there additional great deals out there because weather is good. That's kind of ongoing. And the merchants, yes, are in the market, looking close out facing the business and all of that. So that's very different by type of business. Yes, there are -- so that's part of the supply availability that's out there.
Adrienne Yih-Tennant:
And the spread, the kind of wide the spread from frontline to your pricing?
Barbara Rentler:
I think you're just saying that they are promoting now, it's more promotional than it's been and then what's our relationship to the promotional environment?
Adrienne Yih-Tennant:
Yes. Does it make it harder to create that value notion when the frontline retailers are sort of every day sitting on the 50 half.
Barbara Rentler:
Yes. Listen, look, I think the promotional environment is still very -- is still competitive. It's still a competitive market. We watch people get more promotional in the last few months. I don't think that that's going away. I think what has to happen is and what is happening is that the buyers have to be in the market, constantly working with vendors to understand 2 things. One, not only just brand availability, but also pricing because they need -- they know that they need to get -- they need to have their values be sharper. So they're competitive shopping, seeing what's going on in stores and then they're in the market and vendors are giving them the lay of the land, availability, I have -- what you're talking about the excess goods close out and also kind of where the pricing is, they're keeping that in mind because they're studying that.
So for a while, the world's got very different and there was much more regular price selling, particularly in department stores. We're watching as you're watching that erode and it's becoming more promotional. So those have been best practices for the company for years. And so that's what the merchants are doing to ensure that if they're watching it and then making some assumptions about what they believe could happen in front of them, which would be -- but traditionally done enough price prior to all of the things that have gone on since COVID has started and more regular price selling and all of that.
Operator:
And the next question comes from the line of Ike Boruchow with Wells Fargo.
Kate Fitzsimons:
This is Kate on for Ike. I guess just to hone in on the gross margin piece, you guys had a decent amount of volatility in both distribution and buying buckets last year within COGS. Can you walk us through how you think those line items progress through the rest of the year, maybe direction or magnitude?
Adam Orvos:
Yes. Kate, this is Adam. So we'll take them individually. So ocean freight costs, a significant tailwind in Q1. Again, given all the volatility we've seen over time, don't want to get too far ahead of ourselves, but kind of what's embedded in the guidance is we'll continue to see that as a tailwind as we go through the balance of the year. Domestic freight, we called out the 60 basis points of improvement year-over-year. Again, highly dependent here on fuel prices. And obviously, there's wage increases embedded in those costs. But assuming those things stay stable, would continue to expect that to be a tailwind for us as we go forward.
The biggest piece that we've called out for some time, offsetting those benefits are incentive costs. So we gave you the details of that approximately in the call comments, I would also say in the second quarter, when we look at it, will probably be the most impactful quarter for us from an incentive cost increase this year versus last year. We also commented on distribution expenses. So again, driven by timing of packaway and then the planned deleverage from our newer distribution center in Houston.
Operator:
And the next question comes from the line of Alex Straton with Morgan Stanley.
Alexandra Straton:
Great. So it feels like this is kind of an ongoing narrative for the last year that you're not super happy with the value you're offering the customer. Though historically, I think you've proven super consistent and successful there. So I'm just wondering, has anything changed in the buying organization? Or what do you think the buying team is getting wrong now? And maybe how you're thinking about correcting this or putting initiatives in place to perhaps get this back on track?
Barbara Rentler:
Look, I think the value equation we've been working on for the last few months -- over the last year, moving towards getting to that value point, I think we're kind of at a different place now than where we were a few months ago, both in brands and in values on the floor. So I don't see it kind of the merchants aren't doing their job. I kind of see it as an evolution. And so we are very, very highly focused now on delivering compelling value as we watch our customers in both companies struggle with all the inflation and all the things that are going on around them, we've gotten pretty beary.
Let me put this way, we're very highly focused on delivering those values. So where we were, let's say, 6 months ago and how we're thinking about it now, continues to evolve. And so we want to make sure that we have a really wide assortment, fresh receipts, branded merchandise and where it's appropriate that we're sharpening our branded values to strengthen the offerings because of the competitive retail environment. So I don't feel like it's not necessarily working, I feel like it's evolving, and I think our business last year evolved as we went along, and it's important for us to make sure that we deliver really sharp value to our customers, particularly in this time frame. And now that the world is getting even more competitive and more promotional, we have to look through that lens also. So I think that we need to stay focused on it and do a better job on this and making sure that we really understand where it's appropriate that we are sharpening out our branded values. And so I don't think it's not working. I think it's much more of an evolution in all of our businesses.
Operator:
And our next question comes from the line of Simeon Siegel with BMO Capital Markets.
Simeon Siegel:
Any change in the percent of sales being driven by top vendors versus last year and then just versus a historical trend. Just wondering if concentration of the largest vendors has changed at all? And then just because it's coming up fairly frequently, any updated thoughts on shrink.
Michael Hartshorn:
I'll start. It's Michael, Simeon. On shrink, we -- the shrink was a little bit higher for us last year, wasn't meaningfully higher. We've assumed that it will stay at or slightly above those levels in our estimates, but no updates -- we typically update the financial impact of that when we take true up our physical inventory in the third quarter.
Barbara Rentler:
And the percentage of our top vendors versus historical, I mean, that moves based up of supply, right? So one year, we could have a great deal of merchandise from one vendor, top vendor and then the next year, a little bit less, but a little bit more from someone else. So I think that it kind of moves around. I don't think it's changed that much. I don't know if we're defining as top vendors, but it hasn't changed that much. It changes more by the vendor itself and the availability that's out there.
Operator:
[Operator Instructions] Our next question comes from the line of Dana Telsey with the Telsey Advisory Group.
Dana Telsey:
As you think about the performance of dd's and what's happening in the environment, was there any differential in dd's performance in the fourth quarter to the first quarter and what you saw? And then just lastly, on the Bed Bath & Beyond locations that are available, if you were to get any, would that be in addition to the current run rate of store openings this year? Or would it be part of it?
Michael Hartshorn:
Dana, on dd's, the sales trends continue to trail Ross' results during the first quarter. I wouldn't comment on the differential between fourth and first. Obviously, their customer faces even more macro headwinds relative to Ross', which is, I think, reflected in their underperformance. I would also say, though, similar to Ross, we are sharply focused on offering better values to help drive improved sales performance there.
On Bed Bath & Beyond, it will no doubt provide opportunities for new store locations. We'll have to review each potential new site on a case-by-case basis to see if it's appropriate for us. But I would say, it's not going to impact our 100 store opening plan for this year.
Operator:
And our next question comes from the line of Bob Drbul with Guggenheim.
Robert Drbul:
I guess just a question for me is as you think about what's happening in the macro, when you look at your good, better, best mix, are you migrating your offering to the lower end of the spectrum? I'm just curious just in terms of the buys or how you're thinking about the merchandising piece of it.
Barbara Rentler:
Sure. So we have a good, better, best strategy, and that is really driven by the assortment that we put on the floor and the values we put out there. So we want a tiered strategy because we're going to track much more broader set of customers. But that can move based on supply, based on availability, based on our purchases. So it fluctuates as you go.
Robert Drbul:
And your -- as you think about the rest of the year, you're not really buying for sort of more of a good environment versus a better versus best in your offering?
Barbara Rentler:
I think that depends by business. I think that I can't tell you that that is a company-wide strategy. I think that moves by business based on what the business is. And clearly, the dd's customer, in particular, is very price-sensitive, so really paying attention to the values we're putting on the floor or the pricing we're putting on the floor, both. So -- but even at dd's, these things, it moves around. So we are obviously conscious there, particularly with that customer.
Operator:
And the next question comes from the line of Brooke Roach with Goldman Sachs.
Brooke Roach:
Given the ongoing inflationary pressures in the macro, I'm wondering if you can provide updated thoughts on the longer-term path to recapturing pre-COVID operating margins? Are there any initiatives that you're contemplating to help drive that recovery outside of sharpening values and driving additional market share capture?
Adam Orvos:
Brooke, this is Adam. Thanks for the question. So our long-term operating margin improvements are to be highly dependent on us delivering strong sales over a sustained period of time. And then the question on how long do inflationary pressures persist, but -- over the longer term, we believe we can achieve gradual improvement in profitability. I think if you get into like, are there any structural questions related to that? We're seeing tangible benefit in freight cost, but we're still -- these costs still are not at pre-pandemic levels. And then we're seeing some wage pressures in the stores.
When you talk about -- we've guided to CapEx of $810 million. So a big component of that in addition to distribution center capacity, in addition to investing in the 100 new stores, a big chunk of that is technology investments that will drive further efficiencies within the stores and in our distribution centers. So more automation in our distribution centers and some store initiatives that we've touched on in the past.
Operator:
And the next question comes from the line of Laura Champine with Loop Capital.
Laura Champine:
It's about the weather's impact on your comp in Q1. Is that something you can quantify or maybe if that's a tough one, maybe give us the discrepancy roughly between California and the rest of the chain?
Michael Hartshorn:
Laura, it's hard to calculate. I mean, I think it -- suffice it to say, it didn't help our business. I would say California was slightly under the -- trailed the chain average and did improve as weather improved is what we'd say.
Operator:
And the next question comes from the line of Marni Shapiro with Retail Tracker.
Marni Shapiro:
I just wanted to clarify. I think you said the 53rd week adds about $0.15. Could we expect between like $350 million to $400 million in sales? Is that a decent number to use for that week? Or is it a little less because it's a January week? Just curious.
Adam Orvos:
Probably a little bit less than that, Marni, given that it's, as you said, given that it's January, early February.
Marni Shapiro:
That's what I figured. And then this came up on other calls, it looks like your traffic is good that people are looking for sharper deals, but you obviously called out accessories and cosmetics beauty, which tends to have a lower AUR. Are people gravitating towards the lower-priced items? Or as you've seen the weather improve, have you seen apparel come back in slightly higher AUR, but they're looking for the apparel items that are on sale or just at the better prices. I'm curious sort of what the dynamic is there.
Barbara Rentler:
So apparel struggled in Q1. So I don't necessarily think it was driven off the prices. I think that the assortments were not necessarily where we wanted them to be. So depending upon what this discussion, that could have been the price, that could have been the product because there's a variety of factors in there. So I don't think I could take it down to a common denominator price or say, was it driven by markdowns or was it driven -- it really -- I would say, it was driven by the assortment when it's all said and done. Certainly, the weather didn't help, but I don't think the weather is a big enough impact, so I could sit here and say that. I think our assortments weren't necessarily where we wanted them to be. And so we're working on that, and we're going to continue to work on that. But it's not really based off of a price or one thing or -- we have our work cut out for us and the merchants are working on that now.
Michael Hartshorn:
It wasn't driven by mix. It was driven -- being sharper priced across the assortment.
Marni Shapiro:
So it was across -- you saw the softness across the assortment in apparel. It wasn't specific -- AUR?
Michael Hartshorn:
You asked that was AUR driven by mix in the business. It was not driven by mix.
Marni Shapiro:
But on the apparel side, was the softness across the board, whether it was men's Polo shirts or women's dresses or kids, every department across the board was soft? Or were there certain spots even without disclosing if you don't want to, were there certain spots that were -- that really need a lot of work and other spots that were okay.
Barbara Rentler:
Well, obviously, we're not going to get into details, but within all the apparel businesses, like common sense to tell you that some businesses are better than others, right? So with that, we wouldn't get into specifics, but there's no -- you're asking is there like you're [indiscernible]. In one particular area? I don't know. I know what you're referring [indiscernible] there.
Marni Shapiro:
I was kind of thinking on the positive. Was there something that you're saying -- dress were killer.
Barbara Rentler:
Couldn't decide where you were going with that. Every business has businesses that were performing, some businesses didn't and so we're not going to get into specifics on that. What I would say is that the merchants are very diligently working on the assortments, whether it's delivering the right products, whether it's the values, I mean they're really highly focused on that right now.
Operator:
And the next question comes from the line of Corey Tarlowe with Jefferies.
Corey Tarlowe:
Barbara, just on the availability across your good, better, best spectrum that you have. Is there any better availability within any one of those 3 segments as you speak to your merchants?
Barbara Rentler:
You're just saying where does the supply -- the supply is pretty broad-based. I mean supply in most businesses, there's always more one vendor than the other, more on product than the other. I mean, it fluctuates overall, there's still a lot of supply. I wouldn't say it's bucketed in one of those 3 buckets. No, I would still say it's pretty broad-based.
Corey Tarlowe:
Got it. And then just on the lower AUR common being driven by sharper price points. I guess within the context of the guide for the full year for flat comps, is the expectation that the AUR is likely to be lower throughout the rest of the year as well?
Barbara Rentler:
The -- putting out better value doesn't necessarily mean that your AUR is going down. But what we're focused on is we're focused on delivering really sharp value. So depending upon what -- you're -- using your example of the good, better, best depending upon what that mix looks like, that doesn't necessarily mean the AUR is going down. What we're really trying to do is we're really trying to focus on sharpening our branded values for the customer. And so we think that's our path to driving sales, and we think that's our path ultimately to gaining market share. So those 2 don't necessarily go hand in hand.
Operator:
And the next question comes from the line of Jay Sole with UBS.
Jay Sole:
It looks like you beat the low end of your -- the guidance that you gave for EPS in the first quarter by about $0.10, but you're raising the low end of the full year guidance by about $0.12. Can you just tell us what the extra $0.02 is, where that's coming from?
Michael Hartshorn:
Yes. I think the better way to look at it is what we did on the top end. We beat the top end by 4, you lose a quarter in that, and then we raised the full year by the $0.04.
Operator:
And the next question comes from the line of Aneesha Sherman with Bernstein.
Aneesha Sherman:
So your guidance implies -- your 2-year stack comp for this quarter was minus 6%, and your guidance implies a deceleration of that stack to about minus 7% for Q2 and then a pickup in the back half to get kind of closer to 0 to your stack. Can you talk about how you're thinking about the progression through the year? And why are you more cautious about Q2 and then a little bit more optimistic for the back half of the year?
Michael Hartshorn:
Sure, Aneesha. I think it's hard to look at these on a 2-year stack with all the fiscal stimulus and COVID. So we're really looking at it, pre-COVID, what's changed on a 4-year stack and how that's progressed over time. And we went into the year and had a plan in the first quarter. What we saw is that 4-year stack improved as we move through the quarter and weather improved and exited in a place that would support that stack guidance for the year.
Aneesha Sherman:
Okay. So just to clarify, you are embedding an improvement in the 4-year stack through the course of the year?
Michael Hartshorn:
Correct, yes.
Operator:
And the next question comes from the line of Krista Zuber with TD Cowen.
Krista Zuber:
It's Krista on for John. Just a quick question. On inventory, you've had several -- at least 2 quarters here of a fairly sizable declines. Just wondering how you're thinking about it through the balance of this year. And should we continue to expect declines on a quarterly basis through the end of the year? Or do you think at some point, you sort of pull in line with your sales growth expectations.
Michael Hartshorn:
Sure. It's -- if you look at the first quarter, for instance, we were down 16%, but we were up against elevated inventories last year when supply chain lead times eased, and we had a surplus of early receipts. So what you'd expect as we move through the year with the -- with that elevated inventory last year, it started to recede, in the third and fourth quarter and you get more comparable, but we should be lower given the excess inventory we had last year in the first half of the year.
Operator:
And at this time, I'm seeing no further questions. I'd like to pass it back over to Barbara Rentler for any closing comments.
Barbara Rentler:
Thanks for joining us today and for your interest in Ross Stores.
Operator:
Thank you, everyone. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.
Operator:
Good afternoon, and welcome to the Ross Stores Fourth Quarter and Fiscal 2022 Earnings Release Conference Call. [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 2021 Form 10-K and fiscal 2022 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:
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 2022 performance, followed by our outlook for 2023. Afterwards, we'll be happy to respond to any questions you may have.
As noted in today's press release, during a very competitive holiday season, our fourth quarter sales and earnings results exceeded our guidance due to customers' positive response to our improved assortment and stronger value offerings. Earnings per share for the fourth quarter were $1.31 on net income of $447 million. These results compare to earnings per share of $1.04 on net earnings of $367 million for the 13 weeks ended January 29, 2022. Sales for the fourth quarter of 2022 were $5.2 billion with comparable store sales up 1% on top of a 9% increase for the same period in 2021. For the 2022 fiscal year, earnings per share were $4.38 on net income of $1.5 billion compared to $4.87 per share on net earnings of $1.7 billion in 2021. Sales for 2022 were $18.7 billion, with comparable store sales down 4% versus a robust 13% increase in the prior year. Fourth quarter operating margin was 10.7% compared to 9.8% in 2021. This improvement was mainly driven by lower freight and incentive costs that were partially offset by unfavorable timing of packaway-related expenses. Now let's turn to additional details on our fourth quarter results. For the holiday selling season, shoes was the best-performing merchandise area, while Florida was the strongest region. Similar to Ross, dd's DISCOUNTS sales trends improved compared to the prior quarter but continue to trail Ross' results primarily due to ongoing inflationary pressures that are continuing to have a larger impact on dd's lower-income customers. Inventory levels moderated significantly from the first half of 2022 with consolidated inventories down 11% versus last year. Average store inventories during the quarter were down slightly compared to 2021 holiday period, while packaway merchandise represented 40% of total inventories similar to last year. We also believe we are well positioned to take advantage of the numerous buying opportunities in the marketplace. As noted in today's release, the company repurchased a total of 2.1 million and 10.3 million shares of common stock, respectively, for an aggregate purchase price of $231 million in the quarter and $950 million for the fiscal year. These purchases were made pursuant to the 2-year $1.9 billion program announced in March of 2022. We expect to complete the $950 million remaining under this authorization in fiscal 2023. Our Board also recently increased our quarterly cash dividend by 8% and to $0.335 per share to be payable on March 31, 2023, to stockholders of record as of March 14, 2023. Our stock repurchase and increased dividend program reflects our continued commitment to enhancing stockholder value and returns as well as our confidence in the strength of our balance sheet and projected future cash flows. Now Adam will provide further details on our fourth quarter results and additional color on our outlook for fiscal 2023.
Adam Orvos:
Thank you, Barbara. As previously mentioned, comparable store sales rose 1% for the quarter on top of a 9% gain in the prior year. This slight increase was due to growth in the size of the average basket as traffic was relatively flat compared to last year. As Barbara discussed earlier, fourth quarter operating margin of 10.7% was up 90 basis points from 9.8% in 2021. Cost of goods sold grew 15 basis points versus last year due to a combination of factors. Distribution expenses rose 90 basis points primarily due to timing of packaway-related costs and deleverage from the opening of our Houston distribution center earlier in the year, while domestic freight and occupancy delevered by 20 and 5 basis points, respectively. Partially offsetting these costs with higher merchandise margin, which grew by 15 basis points as the benefit from lower ocean freight costs more than offset somewhat higher markdowns. Buying expenses also improved by 85 basis points due to lower incentive compensation. SG&A for the period levered by 105 basis points, again, primarily due to lower incentive expense.
Now let's discuss our outlook for fiscal 2023. As Barbara noted in our press release, the macroeconomic and geopolitical environments remain highly uncertain. As a result, we believe it is prudent to remain conservative when planning our business. While we hope to do better for the 52 weeks ending January 27, 2024, we are planning comparable store sales to be relatively flat. If sales perform in line with this plan, we expect earnings per share for 2023 to be in the range of $4.65 to $4.95 compared to $4.38 in fiscal 2022. It is important to note that fiscal 2023 is a 53-week year. Incorporated in this guidance range is an estimated benefit to earnings per share of approximately $0.15 from the extra week.
Our guidance assumptions for the 2023 year include the following:
Total sales are planned to grow by 2% to 5% for the 53 weeks ending February 3, 2024. Comparable store sales for the 52 weeks ending January 27, 2024, are planned to be relatively flat. Based on these sales plans, Operating margin for the full year is expected to be in the range of 10.3% to 10.7%. This reflects the resetting of the baseline for incentive compensation, higher wages, the deleveraging effect on flattish same-store sales and lower freight costs. Also incorporated in this operating margin guidance is an estimated benefit of about 20 basis points from the 53rd week.
For 2023, we expect to open approximately 100 new locations comprised of about 75 Ross and 25 dd's DISCOUNTS. As usual, these openings do not include our plans to close or relocate about 10 older stores. Net interest income is estimated to be $115 million. Depreciation and amortization expense inclusive of stock-based amortization is forecast to be about $570 million for the year. The tax rate is projected to be about 24% to 25% and diluted shares outstanding are expected to be approximately $339 million. In addition, capital expenditures for 2023 are planned to be approximately $810 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. Elevated inflation continues to impact our low to moderate income customer. As such, we are also planning comparable store sales to be relatively flat for the 13 weeks ending April 29, 2023. This compares to a 7% decrease and a 13% gain in the first quarter of 2022 and 2021, respectively. If sales perform in line with this plan, we expect earnings per share for the first quarter of 2023 to be $0.99 to $1.05 versus $0.97 last year. The operating statement assumptions that support our first quarter guidance include the following:
Total sales are planned to be up 1% to 4% versus last year's first quarter. We would then expect first quarter operating margin to be 9.6% to 9.9% compared to 10.8% last year. The expected decline reflects the deleveraging effect of same-store sales perform in line with our plan, unfavorable timing of packaway-related costs and higher wages. Further, merchandise margin is forecast to benefit from lower freight costs. We plan to add 19 new stores consisting of 11 Ross and 8 dd's DISCOUNTS during the period. Net interest income is estimated to be $28 million. Our tax rate is expected to be approximately 24% to 25% and diluted shares are forecast to be about $341 million.
Now I will turn the call back to Barbara Rentler for closing comments.
Barbara Rentler:
Thank you, Adam. To sum up, over the past 3 years, we have faced a wide range of unprecedented challenges from the COVID pandemic, supply chain disruptions as well as ongoing inflationary headwinds. These factors have not only negatively impacted our own business, but also our customers' household budgets, their discretionary income and their shopping behaviors. As a result, our shoppers today are seeking even stronger values when visiting our stores. In response, our merchants are fine-tuning our assortments with an increased focus on delivering the most competitive bargains available while continuing to adjust our product mix based on our customers' evolving preferences. Looking ahead, we have significantly increased our focus on strictly controlling inventory and operating expenses throughout the company. We strongly believe that these measures will enable us to maximize our potential for both sales and profit growth in 2023 and beyond.
At this point, we'd like to open up the call and respond to any questions you may have.
Operator:
[Operator Instructions] And our first question comes from the line of Lorraine Hutchinson with Bank of America.
Lorraine Maikis:
I wanted to ask about freight, both of the components within gross margin. How much recovery do you have baked into your guidance for this year versus pre-COVID levels? And then how much opportunity remains for the next year and the year after?
Adam Orvos:
Yes. So Lorraine, this is Adam. Thanks for the question. related to merchandise margin, Q1 and fiscal 2023 will clearly benefit from lower ocean freight costs as we anniversary the significantly higher cost from last year. While these costs will drop, they'll likely still be higher than pre-pandemic levels in the short term. But on the ocean side, they've clearly dropped dramatically and we'll harvest a significant portion of the increase we've faced over the last 3 years. On the domestic side, because of wages -- elevated wages and still higher fuel cost than pre-pandemic, we'll harvest back some of the domestic freight, but not as tangible in 2023 as it will be on the ocean side.
Lorraine Maikis:
So you'd say some opportunity will remain for fiscal '24?
Adam Orvos:
Probably not prudent to go that far ahead, but it clearly will be a tailwind on both sides for us in 2023. And depending on how much they move in 2023. That I'll kind of see what's left for 2024.
Operator:
And the next question comes from the line of Matthew Boss with JPMorgan.
Matthew Boss:
Congrats on a nice quarter. So Barbara, on fourth quarter same-store sales inflecting back to positive territory, maybe can you just speak to the cadence of traffic that you saw during the quarter? And then on the outlook for flat comps in both 1Q and for the year relative to historically a 1% to 2% starting plan. Have you seen a material change in customer behavior post-holiday? Or is this more just taking a prudent stance given the volatility that you cited?
Michael Hartshorn:
Matthew, it's Michael Hartshorn. On the guidance for the first quarter, as we said in our commentary, with the lasting inflation and highly uncertain macro economy ahead of us, we firmly believe it's prudent to be conservative in planning the business. Internally, this puts us in a chase mode to start the year, both from an inventory open-to-buy perspective and in managing the underlying cost in the business. It's a playbook that we're familiar with. We know well and believe it will allow us to, as we said in the commentary, maximize both the top line and the bottom line in an uncertain environment, and we'll have to see how it plays out for the year. In terms of traffic data, as we said in the commentary, traffic was relatively flat in the quarter, and that was relatively consistent across the fourth quarter.
Matthew Boss:
Great. And then maybe just a follow-up on gross margin. So if we exclude the freight recovery, how are you thinking about underlying merchandise margins within this year's guide? Meaning, is there any impact we need to think about with some of the changes in mix that you cited? Maybe how best to think about price. I mean, what I'm really trying to get at is beyond this year, do you think there's any structural underlying change to double-digit earnings growth in this model if we can get back to that 3% to 4% comp algorithm?
Michael Hartshorn:
Let me talk a little bit about the long-term operating model. We certainly, with ocean freights coming down, we'd expect to see a big benefit this year. Longer term, the margin improvements will be highly dependent on sustained strong sales growth, but also, as we mentioned, to a large extent, the persistence and the inflationary costs in the business. We, again, expect to see ocean freight costs preceding this year, but they still remain above pre-pandemic levels and a number of transportation lanes. So that could be a benefit beyond 2023.
We also expect to see lower domestic freight rates this year, and that's embedded in our guidance. But we see these pressures easing over a longer horizon and is somewhat dependent on fuel costs. Wage costs have risen, but are growing at a slower pace than they did during the pandemic. We expect from a wage perspective that it will be an ongoing pressure, but we are finding ways to be more efficient in the business that's offsetting some of those costs. So all of those taken together, we believe we can grow our EBIT margins and profitability over time, but it will be very important to drive top line sales growth in that equation.
Operator:
And the next question comes from the line of Mark Altschwager with Baird.
Mark Altschwager:
In terms of the competitive backdrop, some of the bigger general merchandise retailers look leaner on inventory, especially apparel and discretionary categories heading into the spring. Just curious how that's incorporating into your thinking on comps and potential for some recapture of market share cycling last year?
Barbara Rentler:
Sure. I think -- then pulling back on general merchandise potentially gives sense gives us an opportunity to grow those businesses since it's such a big part of our business. But I really think regaining, capturing market share, however we want to say that, it really depends on driving sales, and we think that the best way to drive sales is for us to continue to focus on value for our customer. I mean that's really what helped us perform in the fourth quarter is really making sure that we're delivering the best brand of organ possible throughout the entire store. And that really is our focus. That compounded with the fact that there's a lot of merchandise in the marketplace, which will enable us to do that. I think that's really what will help us gain back that market share, whether it's coming from a big box or it's coming from other parts of retail departmental stores whatever it is. I think that's really the key for our success go forward to drive top line sales.
Operator:
[Operator Instructions] Our next question comes from the line of Paul Lejuez with Citigroup.
Paul Lejuez:
Are you seeing any signs of a trade-down customers showing up in your stores? I know you said transactions traffic was flat, but curious if the customer base is changing at all or maybe you're seeing some higher income folks show up, maybe some of the lower income folks shop less. I'm also curious how you're thinking about the drivers of comp in F '23 from a traffic versus ticket perspective.
Michael Hartshorn:
Paul, on the trade-down customer, there isn't what we see in our data, a material shift in spending trends across the different income demographics. So at this point for us, we don't see any evidence that the trade down -- that there is the trade down customers impacting our business. On how we're thinking about the business going forward. We don't typically plan the business based on the components of the transaction. As Barbara said, our focus is on value and off-price value will lead to a better traffic, it will lead to a higher basket if you offer great deals to the customer, and that's how we're thinking about the business going forward.
Paul Lejuez:
Got it. And can you just share what your home versus apparel comps were in 4Q? Also curious about California, Florida, Texas performance.
Barbara Rentler:
Sure. The home sales were slightly above the chain average. And then overall, apparel, non-apparel performance was relatively similar. And the thing that part of what's really drove home is that Home has the highest penetration of gifting and that part of our business performed well.
Adam Orvos:
And Paul, on the geography side, Florida, as we mentioned, it was the strongest market. Regarding our other large markets, California performed slightly above the chain average and Texas tracked in line with the change average. With all that said, we did not see a lot of deviation in the numbers by geographic area.
Operator:
The next question is from the line of Michael Binetti with Credit Suisse.
Michael Binetti:
Could you unpack how you're thinking about the merch margin, excluding the freight here for the year, I guess, the product margin. Just trying to think -- just trying to marry up what you guys are seeing on inventory buys and how pricing can lead us to the product margin this year? And then I guess, pretty simple one, Michael, when you guys think about the puts and takes on -- or Michael or Adam, I should say, puts and takes on the margins and the buckets that you pointed to resetting the incentive comp, the higher wages, the flat same-store sales impact and the lower freight cost. Can you speak to how the upside would flow through on 1 point of comp this year? I know you always give us some -- the framework of about 15 basis points, I think, for memory, what's better in the composition of the model this year? What's worse than normal on a 1 point of upside in the comp?
Michael Hartshorn:
Michael, you got it exactly right. 1 point of comp is approximately 10 to 15 basis points of EBIT margin expansion. So that hasn't changed.
Adam Orvos:
And Michael, I'll jump in. So like on operating margin, the moving parts in 2023. So first of all, we're planning the flat comp, which will cause some amount of deleverage. As you mentioned, we have to reset our incentive cost at target levels. So 2022 was clearly an underperforming year for us, and that was on top of a 2021 where we significantly overperformed our plan. So for 2023, we will reset that baseline at target levels. Michael mentioned earlier, we've seen wage increases, both in our stores and our distribution centers. And while that's easing we've not been able to fully mitigate those increases within the stores by driving other efficiencies. And then my earlier comments on freight, we expect good news on both sides but more dramatic improvement on the ocean side.
Barbara Rentler:
And then in terms of buying, Michael, I know you know there's a lot of merchandise out in the marketplace. But the way we're way we're looking at that now is we are really highly focused on value and giving our customers the best value possible. And -- so that very much depends on our mix on the buys, what we're doing and really driving broad-based across the company. I can't emphasize this enough, the best value possible that we can because that really -- our customer is under such inflationary pressures that it definitely is impacting on her spend and so her discretionary spend. And so that's really how we're thinking about that, making sure that our values are correct and that we have a good, better, best strategy and that she really feels great about what she buys and that it's compelling to come to the store. And so those AUR since it would take us down the path of AUR is not a direct opening price point strategy. It really is good, better, best strategy based on brands that we have out there so that she can really get the value that she's come to expect from us.
Michael Binetti:
Barb, could I chase that with a question on how you think about what are the biggest opportunities that you see to go after some market share this year to help -- if there is an opportunity to drive comp above flat, maybe it's from the ability to compete better, anything that stands out to you early in the year?
Barbara Rentler:
I think -- well, I think there's a few things. Just internally, we had our own internal issues, obviously, last year within our assortments. So correcting those issues right now is important to us just from a balance and mix perspective. Based off of the carrier issues and the things that went wrong last year, I think that's probably first and foremost, getting that corrected and then really rightsizing again, our values that we're offering the customer and understanding what our pricing strategy really is and hitting all 3 customers.
Then outside of that is if we execute better, history would tell us and we chase, which is what we do best, in a time where there's a lot of merchandise in the market, which there is, we should be able to drive sales and take market share. And that market share, as you know, can come from any bucket of merchandising now since everyone is -- whether it's big boxes or everyone is in the game now. So I think that's kind of the formula for us to correct our issues from last year to get our value straight and so that the customer really is getting a great deal maximizing those closeouts in the market. And listen, remember, we have a very large merchant team. We have 900 merchants. And so -- and strong relationships in the market. So now is the time for us to maximize on that and to really give the customer what she's come to expect from us and to get ourselves set. And if we do those things, then I think we'll get ourselves on the track we want to be on and continue to grow and gain market share.
Operator:
[Operator Instructions] Our next question comes from the line of Alex Straton with Morgan Stanley.
Alexandra Straton:
It sounds like sales recovery is key to returning to pre-COVID margin and the earnings algorithm, but are you exploring ways to kind of offset that while top line growth is underperforming that typical algorithm? Maybe put differently, what specific levers do you have in COGS or SG&A to offset some of the freight and wage headwinds you're seeing this year? I know you mentioned some efficiencies, but any examples there -- levers broadly would be helpful to hear.
Michael Hartshorn:
Sure. You'll see in our capital spend this year, we have about $810 million included in that and one of the biggest increases there are technology investments that we're making. And some examples of that would be automation in our distribution centers. It would be looking at store level activities and providing technology to make those more efficient in all of our stores, for instance, how our associates mark down goods, how they receive in the back room and making sure we can continue to have associates focusing on customer facing and activities. So those are a few of those examples. And we have -- as we have over the years, have a road map of efficiencies that will continue to work on as an organization and drive into the P&L.
Operator:
And the next question comes from the line of Ike Boruchow with Wells Fargo.
Jesse Sobelson:
This is Jesse Sobelson on for Ike. I believe at the beginning of last year's first quarter, the buying environment was just beginning to turn into a tailwind for you guys. So how does the environment look today versus this time last year and then versus maybe 6 months ago?
Barbara Rentler:
Sure. The buying environment right now is very good. I mean there's a lot of merchandise. It's very broad-based. It's across all different classifications and types of products. So the buying environment is probably as good as it gets right now. I would say that, that environment has been there, though for the last few months and started at the beginning of last year, just timed perhaps differently depending upon what type of product it was and when it came in, all going back to the carrier issue, right? So everyone was kind of -- vendors were kind of late in receiving their goods because people couldn't really control the way the freight came in. So it's been here for a while. I would think at this point in time, a lot of stores have promoting to get their inventories in line in-store, but the vendor community still has a lot of merchandise that they'd like to move through and take them forward to newness to the next year.
So I think it's I think it's very good now. I think it's been good, and I think it will be good for a while as the vendors are trying to work through that and understand what that looks like and then understand what kind of inventory position they want to take go forward as opposed to having a result and that coming from the carrier issues that everybody kind of felt at the same time. So...
Operator:
And the next question comes from the line of Adrienne Yih with Barclays.
Adrienne Yih-Tennant:
Great. First, just a housekeeping. Is it fair to use $200 million to $250 million in sales for that 53rd week? And then Barbara, I think, maybe this for you. What is the issue with sort of the packaway timing. And I know packaway ended up at 40% but that's still below kind of run rate norm. And I'm just thinking if the environment is super conducive, would you not want to kind of have that short stay because I know you guys do it more on a 4-month or less or whatever shorter duration.
And then last one is for the shrink. I think you do it once a year, but what shrink as a percent of sales in a normal backdrop, where is it today? Sorry to interrupt.
Barbara Rentler:
Okay. No problem. So the packaway is 40%, overall deals that we feel very, very good about. And you have to remember that in the beginning of last year, and you'll see this as we go along, we had all those late goods that were home goods that we took into our DCs, which would have increased part of our packaway. The 40% that we have in there right now, we feel very good about. And buying packaway is an art, you can buy a lot of packaway time you want, right? But the packaway you put in there, you have to feel it's great product at great values. And right now, with the buying environment being very favorable with really, quite frankly, broad access to some really key brands, you're going to be very judicious about what you put in packaway and how you time that and what that looks like. So I'd say we feel good about the position we're in today. We have a tremendous amount of liquidity and we really feel like we're in a good place.
Michael Hartshorn:
Adrienne, on shrink. So our strength, we don't disclose what it is externally, but it is a place where we constantly invest, whether it's security tags or no equipment in the stores. If you've been in our stores, you see we have people in front of the store and our shrink was slightly higher this year as we closed out the year.
Adam Orvos:
And Adrienne...
Barbara Rentler:
Yes, go ahead.
Adam Orvos:
Well, I was just going to jump in on the 53rd week. So a little bit higher than what you said. You can think about it as an additional week, somewhat pro rata, but then downward calibrated a little bit that it's, call it, in January, February week and lighter than an average week.
Operator:
And the next question comes from the line of Chuck Grom with Gordon Haskett.
Charles Grom:
Curious if stores in higher demographic markets performed better and store in lower income demographic markets. And a second follow-up, there's a lot of talk about SNAP cuts next month and lower tax refunds this year versus last. Curious how much of a potential headwind that could be for you guys over the next couple of months.
Michael Hartshorn:
Yes, we'll have to see. On the tax refunds, they just started to come out last week, and that does have an impact, especially for our dd's business, but we'll have to see how that plays out. We certainly where we're coming into it, the tax refunds could be lower. So we'll have to see how it plays out. But certainly, that is a customer that can be impacted by both the tax refunds and the SNAP benefits. On your other question, I think you asked a question around demographics. And I think I answered this earlier with Paul, we have not seen a material shift in spending across different income demographics.
Operator:
And the next question comes from the line of Brooke Roach with Goldman Sachs.
Brooke Roach:
Barbara, it sounds like you continue to see opportunities to rightsize the value that you offer the consumer to go after that market share that's available to you and that you're still looking to optimize that value. Can you talk a little bit more about the actions that your buying team can take to ensure that you're offering that value? And can you contextualize that with the higher rate of markdowns that you also saw in the quarter?
Barbara Rentler:
Sure. Well, obviously, when there's a lot of merchandise in the marketplace, the buyers are out looking for really great deals. So it starts with being in the market, having good relationships and really getting the deals at the prices that the customer wants and then offering that value to the customer. So I think that's critical for what's going on in the world today. It's always been critical for us delivering branded bargains. And I think today it's even more important than it's been before.
In terms of just -- rightsizing the value just as a concept of rightsizing the value. I think that's really from putting things out there and watching things turn, watching things -- watching the customer vote and then making the adjustments based off of what she's telling us, whether it's in the assortment and the products that she want or whether it's in the retail that we put it in. And Brooke, what was the second question?
Brooke Roach:
The second question was just how to think about the time line of getting that from a markdown perspective. It sounds like making those adjustments does require some markdown. And so does the markdown have to increase year-on-year as you move through 2023?
Barbara Rentler:
We took -- okay, I understood. So we took somewhat slightly higher markdowns in the fourth quarter. And we made sure that when we came out of the fourth quarter that we really came out of everything clean that we took everything. And if the value wasn't right, we didn't wait, we took markdowns, they were somewhat higher, they weren't that much higher, they were somewhat higher. And so if you're rightsizing your values going forward, you wouldn't expect to be taking additional markdowns. The key is to drive receipts, which drives sales. So if we have the right values and return quick enough, we'll drive receipts, which will drive sales, which will put us in a healthy position.
Operator:
And our next question comes from the line of Dana Telsey with the Telsey Group.
Dana Telsey:
As you think about the real estate portfolio in the stores, we obviously have heard about some of the space availabilities from the Bed Bath or a Party City. Is this an opportunity for you? And does it all change the cadence of store openings or the locations or regions for either 2023 or 2024 in your outlook?
Michael Hartshorn:
Dana, certainly, Bed Bath, Beyond and Party City, like they have been historically, any time there's retail bankruptcies that's provided us opportunities for new store locations. I would say at this point, it hasn't changed our outlook. We will review potential new site on a store-by-store basis. And if it's appropriate for Ross and dd's location, we can certainly add it to our portfolio. But as we think about 2023, as we said in the commentary, we think it's about 100 new locations, about 75 Ross and 25 dd's.
Dana Telsey:
Got it. And then, Barbara, just on the category mix, what was the weakest? And what do you see as opportunities on the category side as we go through 2023?
Barbara Rentler:
The business pretty much performed at the same level. I mean, obviously, some things are better. I mean home and gifting was very good, shoes was very good. If I look at shoes from a 2-year basis, the year before we had carrier issues, which also helped us to drive some sales this year. I think the key is to get the category mix balance to what the customer wants. And I think last year with the carrier issues and with some of the things that went on in our assortments, that we didn't have that. So I think now it's really identifying what she wants, making those move to ensure that we are delivering the products that she's moving towards as things continue to evolve in her assortment and just being on target with that, making sure we're making moves quick enough, fast enough and the advantage when there's a lot of goods in the marketplace, it allows you to do more of these things and oftentimes, sometimes be able to make some bolder moves.
So I think that's kind of how I'm thinking about it. I'm thinking about just getting our inventories and classifications in line and then more fine-tuning to what -- if we were talking about this a few months ago, we would be saying people now want career pants versus casual, right? But I'm thinking more broader that with all the carriers that went on and delivery issues and everything else, that things were not exactly the way we would like them to have been even if we wanted them to be there. It just -- it wasn't balanced. So I think that's our number 1 thing is getting ourselves back in line. We made a lot of those moves into the fourth quarter and getting ourselves repositioned to where we want to be. And then going again hand-in-hand with making sure we come in clean -- into the year clean from an inventory position and then giving ourselves the flexibility to go in the market and buy it the way the customer wants it and sees it.
Operator:
And our next question comes from the line of Simeon Siegel with BMO Capital Markets.
Simeon Siegel:
Could you discuss what like-for-like AUR look like versus mix shift driven AUR maybe? And then a dumb question. I think interest income came in nicely higher this quarter. And if I heard correctly, I think you're expecting a pretty nice jump or a nice number this year as well. Is that just a function of higher rates? And does it impact your capital return strategy? And maybe just given how large the cash balance is, any broader thoughts on your use of cash with all the moving pieces?
Michael Hartshorn:
Sure. The interest income is entirely driven by our cash balances. That's invested in government-backed securities. So as interest rates have risen, we're getting a benefit there. In terms of how we're thinking about use of cash, and I guess just general capital allocation, we will, as we always do, first invest in the business to support profitable growth. We also plan to pay down COVID-related debt that begins to mature over the next few years in '24 and '25 as when those first tranches mature. And then we'd expect to grow our shareholder payouts as the business grows, as I said, deliberately over time, and we do that in a very deliberate and reliable manner over time.
Barbara Rentler:
And then in terms of our AUR, our AUR has been relatively flat despite all the different shifts and moving parts in the business. So some of that comes from valuing some areas differently or products differently in other businesses coming up because obviously, shoes has a higher AUR than some of our other businesses. So that's really where we stand today, how we're thinking about it.
Operator:
And our next question comes from the line of Jay Sole with UBS.
Jay Sole:
Great. I'm wondering if you can elaborate a little bit on some of the higher wages that you mentioned as a driver of the EBIT margin in the first quarter this year. Can you just talk about the impact on what you're seeing at the store level versus like, say, a warehousing level versus at a corporate level, that would be helpful.
Michael Hartshorn:
Sure. I mean it's been a competitive market across all 3 of those for some time. What we saw during COVID is the biggest pressure we had was in the distribution center, line item and that we've seen the pressure there slow down considerably. And for the stores, we continue to take a market-by-market approach to staffing them and increasing wages where appropriate. In addition, as you know, there's growing statutory minimum wages for us in almost half of our store base, and that includes both statewide and local municipality minimum wages. But overall, it's really driven at this point by those minimum wages -- wage increases. I would say we feel good about the workforce in totality and are confident about what we have in place for the year.
Operator:
And our next question comes from the line of Laura Champine with Loop Capital.
Laura Champine:
Crossing my fingers, you'll answer this one, but are you currently trending in line with your first quarter guide?
Michael Hartshorn:
We wouldn't. Our practice is, Laura, to not comment on inter-quarter trends.
Laura Champine:
Understood. Is the guidance for the full year comp to be flat would that assume that traffic is roughly flat this year?
Michael Hartshorn:
We -- again, we don't plan the business around traffic or transaction. Our view has always been if we provide the great branded bargains to the customer, that will be a combination of, one, bringing more customers to the store and two, when they're in the store, increasing the size of the average basket. What's happened over the last several years is that basket has grown and even into last year, on top of the stimulus year the customer is buying more when they're coming to the store.
Laura Champine:
Let me see if I can get this one. The gross margin, and this is last -- the gross margin commentary that you've made, is that consistent with taking more markdowns this year for the year as a whole compared to last year?
Adam Orvos:
Laura, we don't guide really at that component level of merchandise margin, but obviously, our markdown levels will be highly dependent on if we deliver our sales plan and by the right goods. The biggest moving part as we said, in merchandise margin will be the ocean freight cost reductions that we're seeing in the marketplace.
Operator:
And our next question comes from the line of Aneesha Sherman with Bernstein.
Aneesha Sherman:
So the comp guidance for the full year implies a 4-year stack of 10 a CAGR of just over 2%, which is quite a bit lower than your historical pre-COVID performance. Are you still -- do you still believe in the medium term, algo being kind of a little bit higher than that around the 3% comp algo? Or is there something structural about the comps that you think will decelerate even beyond this year?
And then, Michael, you talked about the sensitivity of margins to comp, but with higher wages now embedded into your cost structure, has that sensitivity changed? Or is it still a similar sensitivity as what you've talked about in the past?
Michael Hartshorn:
Aneesha, on the guidance, it's hard to comment on structural in this environment. As we guide the year, it's really a function of us wanting to be very conservative in a blasting inflationary environment and a macro economy that we'll see how that plays out later in the year. So I don't think there's anything to read into that at this point. Obviously, we hope to beat the guidance. We think it's a good way to run our business in an uncertain environment. In terms of the long-term algorithm, it certainly doesn't change as I said earlier, that a beat to comp is 10 to 15 basis points upside. And then longer term, we think if we can grow the 3% to 4% comp as we did historically prior to COVID that we'll be able to leverage the P&L.
Operator:
And our final question comes from the line of Corey Tarlowe with Jefferies.
Corey Tarlowe:
You mentioned that shoes had done pretty well a few times. Is there any way to parse out maybe whether it was in formal or casual, what did better? And then I know availability is quite robust, but across your good, better, best strategy, is there any particular segment within those 3 that's maybe you're seeing a little bit better availability. And then just lastly, on CapEx. Historically, you're usually around, I think, like $500 million or so in CapEx. And now I think in this year, you're expecting to do $800 million and in this coming year as well, another $800 million. So could you just parse out maybe what the incremental spend is really going to be? I know you talked a little bit about automation, but just curious what else there is in there.
Barbara Rentler:
So let me start with shoes. So the shoe business is pretty broad based. I would say that athletic performed slightly better than brand shoes, but the shoe business, again, the shoes industry had issues delivering, we remember that in 2021 with the whole carrier issue. So it is pretty broad-based and meeting customers' demands that they want not just athletic, but other brands shoes to wear. That's the first thing. In terms of a good, better, best, the availability is pretty broad-based in all 3 buckets. So I think that's a little unusual, but that is what -- that's kind of going on out there right at this moment.
Adam Orvos:
And Corey, on CapEx. So our $810 million will roughly be 40% new in existing stores, 40% distribution centers and about 20% technology and other investments. And I would say with our new store opening plan of 100 new stores, that's -- those levels are consistent with pre-pandemic levels from a mix standpoint, the distribution line, probably a little bit inflated as we ramp up capacity to support our long-term growth and then the technology side is a ramp-up as we're making investments not only from a customer convenience standpoint in the stores, but also building capabilities and additional tools in the merchandising organization.
Operator:
And at this time, we have reached the end of the question-and-answer session. And now I would like to turn the call back over to Barbara Rentler for closing remarks.
Barbara Rentler:
Thanks joining us today and for your interest in Ross Stores.
Operator:
That concludes our conference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.
Operator:
Good afternoon, and welcome to the Ross Stores Third Quarter 2022 Earnings Release Conference Call. [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 2021 Form 10-K and fiscal 2022 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. Thank you, ma'am. Please go ahead.
Barbara Rentler:
Good afternoon. Joining me on our call today are Michael Hartshorn, Group President, 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 third quarter performance, followed by an update on our outlook for the fourth quarter and fiscal year. Afterwards, we'll be happy to respond to any questions you may have.
As noted in today's press release, third quarter results were above our expectations as we delivered stronger values throughout our stores. Operating margin for the period was 9.8% versus 11.4% last year, reflecting the deleveraging effect from the comparable sales decline as well as pressure from higher markdowns and unfavorable timing of packaway-related costs. Earnings per share for the 13 weeks ended October 29, 2022, were $1 on net income of $342 million. This compares to $1.09 per share or net earnings of $385 million for the 13 weeks ended October 30, 2021. Total sales for the quarter were $4.6 billion, in line with the prior year, with comparable sales down 3% on top of a robust 14% gain in the third quarter of 2021. For the first 9 months, earnings per share were $3.08 on net earnings of $1.1 billion compared to $3.82 per share on net income of $1.4 billion for the same period in 2021. Sales for the year-to-date period totaled $13.5 billion with comparable store sales down 5% versus a strong 14% increase last year. For the third quarter at Ross, shoes was the best-performing business, while Florida and Texas were the top-performing regions as they were bolstered by the outperformance of border and tourist locations. At dd's DISCOUNTS, sales trends improved versus the first half, but continued to trail Ross' results due to ongoing inflationary pressures that are having a larger impact on dd's lower-income customers. Inventory levels moderated significantly from the first half of the year, with total consolidated inventories at the end of the quarter up 12% compared to last year. Average store inventories during the quarter were up 4% versus 2021 and down compared to pre-pandemic levels. Packaway merchandise represented 41% of the total compared to 31% last year when we used packaway merchandise to fuel robust sales gains. Turning to store growth. We completed our expansion program for 2022 with the addition of 28 new Ross and 12 dd's DISCOUNTS in the third quarter. For the year, we added a total of 99 locations comprised of 71 Ross and 28 dd's DISCOUNTS. We now expect to end the year with 1,693 Ross stores and 322 dd's DISCOUNTS locations for a net increase of 92 stores. Now Adam will provide further details on our third quarter results and fourth quarter guidance.
Adam Orvos:
Thank you, Barbara. As previously stated, comparable store sales were down 3% in the quarter. Although traffic improved from the second quarter, it still declined versus the prior year. Partially offsetting these declines was a higher average basket size.
Operating margin of 9.8% for the third quarter was down 160 basis points from last year. Cost of goods sold grew by 230 basis points in the quarter. Merchandise margin declined 165 basis points, primarily due to higher markdowns. Distribution costs were up 140 basis points, mainly due to unfavorable timing of packaway-related costs and deleverage from our new distribution center, while occupancy delevered by 20 basis points. These higher expenses were partially offset by a 75 basis point decrease in buying costs, mainly from lower incentives. Lastly, pressure from domestic freight expenses eased in the third quarter and improved 20 basis points as we anniversaried the freight headwinds that began in the second half of last year. SG&A for the period improved by 70 basis points as deleverage from the negative comparable sales was more than offset by lower incentives. During the third quarter, we repurchased 2.8 million shares of common stock for an aggregate cost of $244 million. We remain on track to buy back a total of $950 million in stock for the year. Now let's discuss our fourth quarter guidance. We continue to expect a very promotional holiday selling season and ongoing inflationary headwinds to pressure our low- to moderate-income customers. That said, we face our easiest sales and earnings comparisons in the fourth quarter and are raising our guidance, given our third quarter sales momentum and improved holiday assortments. For the 13 weeks ending January 28, 2023, we now expect comparable store sales to be flat to down 2% on top of a 9% gain in the prior year. As a result, earnings per share are forecasted to be in the range of $1.13 to $1.26. The operating statement assumptions that support our fourth quarter guidance include the following. Total sales are projected to be flat to up 3%. We expect operating margin to be in the range of 9.7% to 10.5% versus 9.8% last year. This mainly reflects the anniversarying of significant cost pressures from ocean freight and lower incentives, partially offset by the deleveraging effect from lower same-store sales, unfavorable timing of packaway-related costs and higher markdowns. Net interest income is estimated to be about $14 million. Our tax rate is expected to be approximately 23%. And weighted average diluted shares outstanding are projected to be about 342 million. Based on our year-to-date results and fourth quarter guidance, earnings per share for fiscal 2022 are now projected to be in the range of $4.21 to $4.34 compared to $4.87 last year. Now I'll turn the call back to Barbara for closing comments.
Barbara Rentler:
Thank you, Adam. Despite the many challenges over the last few years, coupled with today's uncertain macroeconomic and geopolitical environment, we remain optimistic about our future growth prospects. Our top priority is and always will be delivering fresh and exciting named brand merchandise at compelling discounts every day in our growing store base of over 2,000 locations.
With consumers' heightened focus on value and convenience, this bodes well for our ability to expand our market share and profitability in the future. At this point, we'd like to open up the call and respond to any questions you may have.
Operator:
[Operator Instructions] And our first question comes from the line of Matthew Boss with JPMorgan.
Matthew Boss:
Congrats on a nice quarter. It's great to see the return to beat and raise. So Barbara, maybe relative to your internal expectations, what did you see from traffic? Or maybe could you speak to the cadence of comp trends as the third quarter progressed? And then could you just elaborate on the improved holiday assortments that you cited in the release?
Michael Hartshorn:
On the traffic trends, as we mentioned -- this is Michael Hartshorn, Matt. As we mentioned in the prepared comments, with the comp down 3%, as we mentioned, traffic did improve for the quarter, but it still declined versus the prior year. So offsetting the traffic decline was a higher average basket.
The basket was driven by higher AURs, while UPTs were flattish. The increase in the average basket was more than offset by the decline in the number of transactions. As we move through the quarter, what we saw on a stacked basis, so compared to 2019, our trends improved as we progressed through the quarter.
Matthew Boss:
Great. And then just a follow-up. Maybe relative to the third quarter, could you just elaborate on maybe the macro or the competitive landscape assumptions that you embedded in your fourth quarter comp guide? It does embed a moderation? Is that prudence? Is it something that you've seen? Or are you embedding more competitive backdrop and maybe a deterioration in the macro in the fourth quarter?
Michael Hartshorn:
I would say the -- from our point of view, the macroeconomic environment obviously remains uncertain, but we do think that the holiday period is going to be very promotional. So that's what we've embedded into the guidance. And then just as a reminder, last year, sales at the end of the quarter did trail off. It's our easiest quarterly compare. Trailed off for 2 main reasons. One was the spike in Omicron cases. And then at this point last year, the supply chain continued to be a real challenge for us and other retailers.
Matthew Boss:
Great color. Congrats again. Sorry. Go ahead, Barbara.
Barbara Rentler:
Okay. The holiday assortment, so look, we believe our holiday assortment this year, we really have an improved offering of both branded bargains based off of availability in the marketplace and also particularly our gift giving, because of the imbalances we had from the supply chain congestion, as Michael just alluded to. So we feel between the 2 of those, we'd be able to offer great brands, strong values and a broader assortment.
Operator:
And our next question comes from the line of Alex Straton with Morgan Stanley.
Alexandra Straton:
Great. Just as it relates to the updated guidance, perhaps could you kind of talk about what the key swing factors are there that could drive you either to the higher or the lower end of that new range?
Adam Orvos:
Yes, sure. Alex, this is Adam. So given our guidance of flat to minus 2% comps, we'll have some deleverage impact from sales. Markdowns will be higher than last year in fourth quarter, but not as impactful as in third quarter. Domestic freight, we see as slightly neutral, seeing some benefit in rate, but offset by still elevated fuel prices. Ocean freight will probably be the most tangible tailwind for us.
As you remember, last year, we were getting into the period where rates were escalating significantly, demand was high. So that will be a tailwind for us. And then given our outperformance last year and our underperformance this year, incentive costs will be lower in Q4 versus last year. And then finally, depending how the end of the year plays out, we'll likely see some pressure from packaway timing in fourth quarter also.
Alexandra Straton:
Great. That's super helpful. Maybe could I just follow up on your inventory levels? I think you said they were up low double digits year-over-year exiting the quarter, which seems like a pretty lean level. So maybe could you tell us, do you feel like you have enough heading into the fourth quarter? Or how are you feeling about the levels and then just the broader assortment?
Michael Hartshorn:
Overall, we feel really good about where we are at the end of the third quarter. As we said in the prepared remarks, we ended up about 12%, which was a big improvement when we -- from the second quarter when we were up 55%. And the increase over the last year is really packaway inventory. So we were at 41% versus 31% last year. And last year was relatively low versus our historical levels because we used a substantial amount of our packaway to chase sales that were well above our plan.
Operator:
And our next question comes from the line of Mark Altschwager with Robert W. Baird.
Mark Altschwager:
What do you view as the key drivers to the improving comp trends you saw this quarter? Are you seeing evidence that the trade-down is now occurring? Do you think this is a reflection of the AUR strategy you outlined last quarter? Just if you could expand on your overall assessments there, that would be great.
Barbara Rentler:
Sure. From the second quarter to the third quarter, from an assortment perspective, we went in and reset our values and got them to where we believe they need to be in this very promotional environment. So we rightsized our values through some markdowns in some places. And in some places, we rightsized some of our inventory as we were watching shifts go on in the business.
And the other big shift is apparel and home for us in the quarter performed relatively the same, but our shoe business, which was our best performing business, was really, really fueled by strong values on branded products and availability in the market.
Michael Hartshorn:
And in terms of the trade-down customer, with so many moving parts in the economy, it's difficult to parse out the individual drivers of the improvement. We have not seen a material shift with spending trends across different income demographics, but delivering better bargains to our consumer likely played the most significant role as it typically does.
Operator:
And our next question comes from the line of Lorraine Hutchinson with Bank of America.
Lorraine Maikis:
I was just hoping you could square a couple of comments for us. You talked about resetting values and really focusing on the sharp price points, and your AUR was up. So can you talk about the drivers of AUR in the quarter and then your views on the pricing strategy on a go-forward basis?
Barbara Rentler:
Sure. So Lorraine, value and price are 2 different things. So the merchants are out constantly assessing what's going on from pricing and competitive shopping and seeing what that is. So in some places, where we felt that our AUR was just too high, we went in and took markdowns. But in other places, based off of assortments and opportunities that we've gotten in the marketplace, the AUR might be higher, but the value is different.
And then the last component would be some of the shift in the mix of some of the businesses themselves. So for example, our shoe business has been strong. And shoes, obviously, runs a much higher AUR. So there's a variety of things. But what I would say in total is that, with back to being such a highly promotional environment that we're in, the merchants will be in the market, really assessing where the values are moving and what that looks like and trying to stay ahead of that. So with -- again, back to the AUR question, that could depend on mix, and that can depend on brand. So there's a variety of issues involved there.
Operator:
Our next question comes from the line of Chuck Grom with Gordon Haskett.
Charles Grom:
You called out Florida and Texas as being strong regions, but you didn't call out California, which is a little bit surprising, given the checks that were sent out in the month of October. So I just wonder if you could just give us a little bit more color on geographic performance in the quarter.
Adam Orvos:
Yes. This is Adam, Chuck. Yes, Florida and Texas clearly outperformed for us. We're seeing the benefit in border locations. We're seeing the benefit in tourism locations. And those were clearly the outperformers. On the flip side, California underperformed in the quarter.
Michael Hartshorn:
And on California, the checks didn't come out till the end of the quarter, so it didn't have a material impact on Q3. In California, fuel prices have remained significantly more elevated than the rest of the country. That is, we believe, squeezing the lower- to moderate-income customer.
Operator:
And our next question comes from the line of Paul Lejuez with Citigroup.
Paul Lejuez:
Curious on what's going on from a shrink perspective. We've had a couple of companies call out, I think, a drag from shrink. I think you guys usually do a physical count in 3Q. So curious what you're seeing on that front.
And then also just on inventory. Typically, third quarter inventory is a few hundred million bucks above 2Q. Now that's a few hundred million below. So I'm just kind of curious about what your thinking is in terms of quantity and quality and how you're thinking about inventory levels relative to sales going forward.
Michael Hartshorn:
Well, on physical inventory, we did take a physical inventory during the third quarter, and it was slightly higher than last year. And then on inventory levels in Q2, we were -- we believe we had too much inventory, which is why it's down versus the second quarter.
Paul Lejuez:
And then go forward, Michael?
Michael Hartshorn:
I wouldn't comment on the -- on year-end, but it's going to be dependent on packaway opportunities in the marketplace.
Operator:
And our next question comes from the line of Brooke Roach with Goldman Sachs.
Brooke Roach:
Barbara, I was wondering if you could contemplate and reflect on -- based on the availability of branded goods in the market today, can you talk to the outlook that you see for merch margins for the next few quarters? How are you thinking about taking that mark on and passing that along through the P&L versus passing that value on to the consumer and competing for additional comp opportunity over the next few quarters?
Barbara Rentler:
Sure. As you know, there's a lot of availability in the market, and it's really broad-based. And all categories, all brands, it's really broad. In terms of margin, I think the way we think about it now is the customer, our customer, especially the moderate- to low-income customer, is really focused on value. So we'll look at every brand based off of how that brand sits in the world and the competitive nature of the pricing of that brand, and then we'll value it appropriately.
Because that's really what the customer told us when we went in and we rightsized some of our values that we weren't as competitive as we would have been historically. So I would look at it more from the opportunity of getting great brands on the floor, putting better values out there to make -- to please the customer and then, ultimately, to drive sales.
Brooke Roach:
Great. And then just one quick follow-up. I think in the prepared remarks, you mentioned a sequential improvement at dd's. Can you talk to the drivers of that and any change that you're seeing in the behavior of your low-income customer versus maybe more of a middle- to high-income customer within your portfolio?
Michael Hartshorn:
Sure. On dd's, the improvement from Q2 to Q3 was similar than Ross, although it continued to trail. As a reminder, the dd's customers' average household income is $40,000 to $45,000 versus $60,000 to $65,000 for Ross. So very similar improvement between Q2 and Q3.
Operator:
[Operator Instructions] Our next question comes from the line of Michael Binetti with Credit Suisse.
Michael Binetti:
Congrats on a great quarter. You guys are typically really conservative when it comes to the forward guidance. And others today and yesterday have spoken to a softer start to fourth quarter. Michael, I know you won't speak specifically about intra-quarter, but you mentioned maybe that fuel is going to neutralize some of the stimulus benefit in your biggest market, [ a few of your ] macro thoughts there. But what gives you the confidence to raise in the fourth quarter, knowing what we know about the industry here, a little different than how you approached a couple of the most recent quarters?
And then, I guess, Michael, you've also saw spoken to us in the past about what your view is of a normal algorithm for this business, what flow-through looks like on your normal sales target. Any initial thoughts on how flow-through could look next year, if we're lucky enough to be back to a conducive market for a normal comp?
Michael Hartshorn:
Sure. On what gives us confidence on the guidance, so the multiyear stack in the Q4 is lower than what we actually achieved in the third quarter. We're confident about the assortment that we have for the holidays. And any conservatism would be based on the macroeconomic environment and what we think is going to be a very, very promotional holiday.
In terms of the flow-through for next year, as you would expect, operating margin improvements will be highly dependent on sustained strong sales growth over time and then how quickly some of the inflationary cost pressures subside. But I'd say, over the longer term, we think we can achieve gradual improvement in profitability. As for 2023 specifically, we're in the midst of our budgeting process for next year currently. And we'll be able to provide an update on our year-end call when we'll have a better sense of the macro economy entering the year and to the opportunities we have in places like ocean and domestic freight. I would say also, keep in mind, with lower incentive costs that had benefited our profitability this year, will reset the baseline next year. And thus, incentives will be a headwind in SG&A.
Operator:
And our next question comes from the line Adrienne Yih with Barclays.
Adrienne Yih-Tennant:
Barbara, can you talk about the buying environment and how much better it has gotten perhaps in the past 60 to 90 days since last quarter? And then how long does it take from, say, a contract negotiation to being able to get that product ready and available for sale in your stores?
Barbara Rentler:
Sure. Yes, the buying environment has gotten even better, broader, more brands, [ more ] classification. So it has -- absolutely, in the last 60 to 90 days, more vendors want to move more merchandise and also some new resources that perhaps we weren't doing business with before also want us to purchase the merchandise. So yes, there's a lot of supply out there. Adrienne, just say the second part of your question again.
Adrienne Yih-Tennant:
Yes. I was wondering from the time that you actually negotiated...
Barbara Rentler:
Well, it depends how quickly a vendor can ship, right? So assuming I buy the goods on Monday and the vendor could ship in a week, probably takes about 3 to 4 weeks, depending upon what -- there's a lot of variables here, Adrienne, where they're shipping from, what DC, but basically as a general rule, I would say, somewhere between 3 to 4 weeks.
Adrienne Yih-Tennant:
Okay. Fantastic. Best of luck for holiday. Congrats.
Operator:
And Our next question comes from the line of Laura Champine with Loop Capital.
Laura Champine:
I'm interested in the contrast between what looks like more promotional department stores this year versus last and the off-price kind of effort to raise the ring a bit. How is your pricing umbrella holding up versus those mall-based stores this year?
Barbara Rentler:
Well, Laura, we went in and actually went in and rightsized some of our values, and we'll continue to do that in the fourth quarter, which is why we're saying, built into our guidance, we have some additional markdowns in there. The promotional calendar, I mean, you know what's going on out there, you can see it as everyone is trying to move through inventory.
And some places, that -- the promotional calendar looks as sharp as '19, as deep as '19. A couple of businesses, you say to yourself, it's a little deeper than '19. But -- so the merchants are out there assessing that. And then we're either buying to the values that we think we need to be based off of all the supply that's out there, or we are going in and revaluing some of the things that we have that we think we need to get to the right price value. But it is just as promotional as it's been historically. And so that's kind of the heads-up the merchants have as they're out there now making purchases in the outside world. And then, of course, the logic of every value is dependent upon the brand and how that fits in the outside world.
Operator:
And the next question comes from the line of Marni Shapiro with Retail Tracker.
Marni Shapiro:
Congratulations on a great quarter, and best of luck for holiday. If you could just -- I know you're not giving guidance yet for '23, but is it fair to assume that store openings will be about the same for next year? Or is there any change to your thinking on dd's, given the environment?
And then I think, Barbara, just wanted to chase a little bit more into the improved mix you said for the holiday season. Clearly, there's a lot of product out there. But were you referring to improved mix versus '21, versus the first half, versus the third quarter or just in general, there's so much inventory and we're having a good time?
Michael Hartshorn:
Marni, on the real estate front, we remain very confident in both chains and currently have no changes to our expansion plans. Certainly, we'll provide more details for '23 when we report year-end earnings.
Barbara Rentler:
Okay. And in terms of the mix, Marni, I would say, going back to Q4, we missed a lot of gifting opportunity last year because of the whole supply chain carrier issues. So specifically to Q4, that's one piece of it. In terms of versus the entire year, there's just a lot more brands out there. So I think it's a combination of both, being able to get really great closeouts and better pricing and better brands and the other piece of where there are just holes -- literally holes in our assortment. So it's both.
Operator:
And our next question comes from the line of John Kernan with Cowen.
John Kernan:
Congrats on the momentum into holiday. So Michael, if we look at your sales productivity just simply through sales per square foot, sales per store, it's above pre-COVID levels. The operating margin obviously is below, but it seems like there's momentum into the fourth quarter and next year, and you might have line of sight in terms of how to get back to pre-COVID levels of operating margin.
What do you think is -- where do you have the clearest line of sight in terms of -- is it freight? Is it merchandise margin? Is it SG&A leverage? What do you think creates the clearest path back to pre-COVID levels of profitability?
Michael Hartshorn:
Well, sales, number one. There are structural changes in wages across the U.S., but I don't think you're going to get that back to the labor that you had pre-COVID. Certainly, ocean freight is going to be a tailwind for us going into 2023. I would say domestic freight should be a tailwind as well, but that will be partly dependent on diesel fuel prices that are above $5 now. And so it will be partly dependent on what happens with fuel. But most importantly, it will depend on top line sales.
Operator:
And our next question comes from the line of Jay Sole with UBS.
Jay Sole:
My question is just, with all the inventory out there, not just in terms of apparel and footwear, but many categories, are you seeing any opportunities to expand the business into some new areas and new categories that maybe you have it before just because the buys are so good?
Barbara Rentler:
Look, I would say, the merchants are out there looking for all kinds of buys. And yes, that does happen. Often you wind up opening up some new resources, which we have, as there's availability and the vendors are looking to partner with people. So it's both. I mean we're absolutely doing that, and that's a piece of it.
Jay Sole:
And Barbara, do you think that can continue?
Barbara Rentler:
Well, I think once you open up a resource or even start shopping a resource, even if the resource doesn't have merchandise that minute, usually, things over time, if you keep going back, you'll open the resource up. I think after this supply double really, really died down, and we do expect it to go into next year because there is so much merchandise, then I think there's a lot of -- we don't really have full line of sight to what will be full product set that's in front of us since this November.
Yes. I just -- I think there's just -- yes, I don't know if -- I think there's opportunities and there are some businesses we could go into in some different categories, not whole businesses, but categories within businesses that we could expand upon.
Operator:
And our next question comes from the line of Ike Boruchow with Wells Fargo.
Jesse Sobelson:
This is Jesse Sobelson on for Ike. We were just wondering, as we look to pre-COVID margins, I think it was mentioned a little bit earlier in the Q&A, you're hovering around 13% pre-COVID. But you mentioned some higher structural costs such as wages. This pre-COVID margin is still attainable sometime over the next few years? Or should we be thinking about a recovery, but maybe landing somewhere below those pre-COVID levels? How are you guys thinking about it?
Michael Hartshorn:
Sure, Jesse. I wouldn't predict where it's going to land other than any return would happen over a number of years and wouldn't happen overnight. We would expect it to have improved profitability over time is the way I'd answer that question.
Operator:
And our next question comes from the line of Aneesha Sherman with Bernstein.
Aneesha Sherman:
Barbara, on your point about resetting the value proposition, have you seen turns pick up sequentially through the quarter? And is that what drove the in-store inventories to be so lean as you continued to lean in on markdowns?
And then, Adam, you mentioned earlier on an expectation of an easing of markdowns in Q4. Should we interpret that you're now reaching the level of turns that continue to be strong through the quarter and now you're happy with where your value proposition is? Have you seen the turns stay strong kind of exiting the quarter and into Q4?
Michael Hartshorn:
Aneesha, on absolute inventory levels, these are the inventory levels we've been running throughout the year. We always prefer to be in the chase. And this is the way we'll -- we typically run the model and will continue to do so going forward. But the inventory levels, again, in-store, in front of the customer were up over last year, but down versus pre-pandemic level.
Adam Orvos:
Yes. And, Aneesha, building on that a little bit. Your question about the markdowns, we've layered some additional markdowns versus last year into our fourth quarter guidance. And that's really largely driven. We know this is going to be a highly promotional environment, and we'll see how highly promotional it is, but just want to be prepared for that.
Aneesha Sherman:
But can I clarify, Adam, so it's up versus last year, but is it right to say that it's easing sequentially versus where you were this quarter?
Adam Orvos:
Yes, absolutely.
Operator:
And our next question comes from the line of Corey Tarlowe with Jefferies.
Corey Tarlowe:
Congrats on the quarter. So on new stores, I was wondering if you -- I know you talked about completing your 2022 store growth plans. I was wondering if you could discuss a little bit about new store productivity, how that's looking versus what your benchmarks are and any additional color that you can add specifically on just the new store performance.
Michael Hartshorn:
Sure. So for us, a new store overall in the fleet of stores will typically come out of the box at 60% to 65% of the chain average. And that continues to be the case, even on the new store openings over the last couple of years.
Operator:
And our next question comes from the line of Bob Drbul with Guggenheim Securities.
Robert Drbul:
Just 2 quick questions. On, I guess, dd's versus Ross, are the state performances, Texas, Florida versus California, what you said, is that holding true for both formats in terms of the sales performance? And then just on the other side of it, in terms of your mix or your opportunity in categories, what do you think in terms of where you outperformed your expectation in the third quarter, like which categories surprised you the most, I would say? Could you share that with us?
Michael Hartshorn:
Sure. On the dd's question, we typically -- the state performance is really on a consolidated basis, which is what we discussed. We don't get into the dd's -- again, I would just reiterate that overall, dd's improvement, I would say, across the board was very similar to Ross, but continued to trail.
Barbara Rentler:
And in terms of merchandise mix of performance, it outperformed -- I mean shoes really outperformed. The other businesses that outperformed would be some of the standard core businesses. From a term perspective, [ that would be ] the plan.
Operator:
And our final question comes from the line of Simeon Siegel with BMO Capital Markets.
Daniel Stroller:
This is Dan Stroller on for Simeon. On the topic of margin recapture, I think in the past, you've talked about leveraging added technology in-store or at the DCs for efficiency and cost reductions. Just wondering where you stand in that regard, or if there's more to come, basically what inning you're in, in that chapter.
Michael Hartshorn:
I would answer that by saying we're constantly in the third or fourth inning. So we always have new investments we're making. Those include automation in the DCs, in stores. They're ranging from automated robotics in the DCs. We're piloting self-checkout in the stores, and also in the stores, more efficient ways to check inventory and take markdowns for our store associates. And we constantly have investments where we're trying to be more productive and efficient in the business.
Operator:
There are no further questions at this time. And now I would like to turn the floor back over to Barbara Rentler for any closing comments.
Barbara Rentler:
Thank you for joining us today and for your interest in Ross Stores.
Operator:
Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.
Operator:
Good afternoon, and welcome to the Ross Stores Second Quarter 2022 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 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 2021 Form 10-K and fiscal 2022 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:
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 second quarter 2022 performance, followed by our updated outlook for the second half and fiscal year. Afterwards, we'll be happy to respond to any questions you may have. As noted in today's press release, we are disappointed with our sales results, which were impacted by the mounting inflationary pressures our customers faced as well as an increasingly promotional retail environment. Earnings came in above our guidance range, primarily due to lower incentive costs resulting from the below-plan top line performance. Total sales for the period were $4.6 billion versus $4.8 billion in the prior year period. Comparable store sales were down 7% compared to a robust 15% increase in last year's second quarter, which was our strongest period of 2021. Earnings per share for the 13 weeks ended July 30, 2022, were $1.11 on net income of $385 million. These results compared to $1.39 per share on net earnings of $494 million for last year's second quarter. For the first 6 months, earnings per share were $2.08 on net income of $723 million. These results compared to earnings per share of $2.73 on net earnings of $971 million in the first half of 2021. Sales for the 2022 year-to-date period were $8.9 billion with comparable sales down 7% versus a strong 14% gain in the first half of 2021. Shoes and men's were the strongest merchandise areas during the quarter. Both Florida and Texas were the top-performing regions, mainly due to the outperformance of our border and tourist locations. We are making merchandising adjustments to meet changing customer demand. That said, the actions we have taken thus far were unable to offset the mounting financial pressures on our low- to moderate-income consumers and the impact on our business from an increasingly promotional retail environment. Similar to the first quarter, dd's DISCOUNTS performance in the second quarter continued to be well below Ross's, mainly due to today's escalating inflationary pressures that are having a larger impact on dd's lower-income customers. At quarter end, total consolidated inventories were up 55% versus the same period in 2021. While average store inventory during the quarter were up 15% versus last year, we operated with very similar levels when compared to pre-pandemic. Packaway merchandise represented 41% of total inventory versus 30% in the same period of the prior year when we used a substantial amount of packaways to meet robust consumer demand. Additionally, supply chain congestion continued to ease during the second quarter, resulting in above-plan early receipts of merchandise that we stored in packaway and will flow to stores throughout the fall season. Looking ahead, we expect these early receipts to wane and to have the appropriate inventory levels in the fourth quarter. Turning to store growth. Our 2022 expansion program is on schedule with the addition of 21 new Ross and 8 dd’s DISCOUNTS locations in the second quarter. We remain on track to open a total of approximately 100 locations this year comprised of about 75 Ross and 25 dd. As usual, these numbers do not reflect our plans to close or relocate about 10 stores. Now Adam will provide further details on our second quarter results and additional color on our updated outlook for the remainder of fiscal 2022.
Adam Orvos:
Thank you, Barbara. As previously mentioned, our comparable store sales were down 7% for the quarter as a decline in the number of transactions versus the prior year was partially offset by an increase in the size of the average basket. Second quarter operating margin was 11.3% compared to 14.1% in 2021. This decline was due to a combination of deleveraging effect on expenses from the decrease in same-store sales, higher markdowns and ongoing headwinds from higher freight costs that did not begin to escalate until the second half of 2021.
These expense pressures were partially offset by lower incentive costs that were much higher last year when we significantly outperformed our plans. We also saw a decline in COVID expenses versus last year's second quarter. Cost of goods sold during the period increased by 320 basis points. Merchandise margin declined 205 basis points due to both higher ocean freight costs and markdowns. Distribution costs increased 85 basis points due to a combination of unfavorable timing of packaway-related expenses and deleverage from our new distribution center, while occupancy and domestic freight rose by 55 and 35 basis points, respectively. Partially offsetting these higher costs were buying expenses that improved by 60 basis points, again due to lower incentives. SG&A for the period levered by 40 basis points as deleverage from the lower comparable sales was more than offset by lower incentive and COVID costs. During the second quarter, we repurchased 2.9 million shares of common stock for an aggregate cost of $235 million. As previously announced, we expect to buy back $950 million of common stock during fiscal 2022 under our 2-year $1.9 billion repurchase program that extends through fiscal 2023. Now let's discuss our outlook for the remainder of 2022. As Barbara noted in today's press release, given our recent results as well as the increasingly unpredictable macroeconomic landscape in today's more promotional retail environment, we believe it is prudent to adopt a more conservative outlook for the balance of the year. We are now forecasting comparable sales for the 13 weeks ending October 29, 2022, to decline 7% to 9% on top of a strong 14% gain last year. For the fourth quarter, same-store sales are planned to be down 4% to 7% versus a 9% increase in the last quarter of 2021. As noted in our press release, if the second half performs in line with these updated sales assumptions, earnings per share for the third quarter is projected to be $0.72 to $0.83 versus $1.09 last year and $1.04 to $1.21 for the fourth quarter compared to $1.04 in 2021. Based on our first half results and second half guidance, earnings per share for fiscal 2022 are now planned to be in the range of $3.84 to $4.12 versus $4.87 last year. Now let's turn to our guidance assumptions for the third quarter of 2022. Total sales are forecasted to decline 4% to 7% versus the prior year. We expect to open 41 locations during the quarter, including 29 Ross and 12 dd's DISCOUNTS locations. Operating margin for the third quarter is planned to be in the 7.8% to 8.7% range versus 11.4% in 2021, primarily reflecting the deleverage on the same-store sales decline. In addition, merchandise margin is forecast to be pressured by ongoing increases in ocean freight costs. We are also projecting higher markdowns to right-size our inventory levels given the lower revenue forecast and adjust pricing as we expect an increasingly promotional retail environment. Lastly, third quarter operating margin also reflects unfavorable timing of packaway-related costs. Interest expense is estimated to be approximately $400,000. The tax rate is projected to be about 24% to 25% and diluted shares outstanding are expected to be approximately 345 million. Finally, I want to emphasize that Ross continues to be in a strong financial position with significant resources to manage through today's challenging economic and retail landscape. Our healthy balance sheet includes $5.2 billion in total liquidity with $3.9 billion in cash and $1.3 billion in untapped borrowing capacity. We also continue to return large amounts of cash to stockholders with a cumulative total of $1.4 billion expected to be paid out under our stock repurchase and dividend programs in 2022. Now I will turn the call over to Barbara for closing comments.
Barbara Rentler:
Thank you, Adam. We are facing a very difficult and uncertain macroeconomic environment that we expect will continue to strain our customers' discretionary spending. Though 2022 will likely remain a challenging year for our company, we believe our value-focused business model and our strong financial position will enable us to manage through these economic pressures and rebound over time. At this point, we'd like to open up the call and respond to any questions you may have.
Operator:
[Operator Instructions] Our first question comes from the line of Lorraine Hutchinson with Bank of America.
Lorraine Maikis:
So you've included a better fourth quarter comp versus 3Q in your guidance. Can you talk about the areas of opportunity that you see in the fourth quarter? And also, what gives you confidence that things will improve?
Michael Hartshorn:
It's Michael Hartshorn. First, on the fourth quarter guidance alone, if you look at the multiyear compare, we did a 9% last year. So it's one of the easiest compares, which is really the driver of the 4% to 7% comp this year in guidance.
Barbara Rentler:
So Lorraine, in terms of opportunities in terms of the fourth quarter, I think that would be around gifting -- that we didn't maximize some of our gifting areas last year.
Operator:
Our next question comes from the line of Paul Lejuez with Citigroup.
Paul Lejuez:
Sorry if I missed it, but curious about the performance of home versus apparel and if there were any notable trends in those categories, how they trend throughout the quarter, get worse, get better. And I'm also curious if you think the comp shortfall was all macro driven or if you attribute any sort of execution issues that might have also factored in.
Barbara Rentler:
Home sales are relatively in line with the chain average and the performance of home and apparel was pretty similar for the quarter. Both businesses had areas of business that were strong and areas of business that were weaker, so they were relatively in line.
Michael Hartshorn:
Paul, on the macro, I mean, of course, there are things that we know we could have done better in the business. In terms of trends during the quarter, we outperformed earlier in the quarter, both on a single-year and a multiyear basis.
And I think if you looked across retail, I think people weakened in the back half of the quarter. Obviously, fuel prices peaked in June so a portion of the performance is certainly driven by the macroeconomic environment.
Paul Lejuez:
I think some have also seen a little bit of an improvement at the end of July into August. Anything you can share on that front?
Michael Hartshorn:
Yes. We wouldn't comment on trends within this next quarter.
Operator:
Our next question comes from the line of Kimberly Greenberger with Morgan Stanley.
Kimberly Greenberger:
Okay. Great. Barbara, on the last call, you talked about the very significant shift you were seeing in the kinds of categories and the types of products that Ross shoppers were buying and how much that had changed by April and May compared to when we started the year.
I know you were working here through the second quarter to reposition inventory and sort of pivot toward those categories. I'm wondering if you can just talk about where you are on that journey, the progress you made in the second quarter and what -- where you sit today, what's your evaluation of the progress? And is there still more to go in the second half of the year?
Barbara Rentler:
Sure. The pivot was to take us out of casual product into more things that the customer wanted. So more wear-to-work in men's and ladies, more social, more going out-type products, whether that would have been in shoes or ready-to-wear.
That's really where the main shift was on the apparel side. We've made some progress there, but we certainly have a longer way to go. But I feel much better about where we were -- from where we were in Q1 to where we are now because we've really been able to expand some of those assortments when I felt like we were a little bit behind. So -- and then in terms of go forward, we're going to meet whatever the customer demand is. So with everything that is so difficult out there, a highly promotional environment, we're going to see where the customer tells us, where and when what she wants, and then we'll make the shift from there. But we feel like we're in a better state of balance between, let's say, casual and more wear-to-work products in men's and ladies.
Kimberly Greenberger:
Fantastic. That's really helpful, Barbara. And just one follow-up on the product. Are you starting to see new vendors come to Ross? Maybe vendors that you didn't work with last year or in 2020? I'm just wondering if the more robust buying environment is yielding an opportunity to maybe work with additional vendors that you haven't seen for the last year or 2.
Barbara Rentler:
The answer to that is yes. Both new vendors or vendors that perhaps, we hadn't seen availability from for an extended period of time, the availability out there is pretty broad-based right now in all products and a good -- better basket. There's just a lot of merchandise in the country.
And so I think vendors themselves are looking to expand their business. And if they haven't been doing business with us, at least it was an opportunity. So yes, I think that -- and I think that probably will continue based on the amount of inventory that's in the country.
Kimberly Greenberger:
Terrific.
Operator:
Our next question comes from the line of Chuck Grom with Gordon Haskett.
Charles Grom:
Barbara, how do you balance taking advantage of the great deals in the marketplace today versus waiting for better deals down the road? Because I imagine the deals today look a lot better than they did a few months ago than those you're getting today. And I guess as a follow-up, when should we expect those to start showing up in the P&L for you, guys? Is that a third and fourth quarter phenomenon? Or do we start to see that in '23?
Barbara Rentler:
Okay. Just first, in terms of the deals, it was a good deal today just to get better as we go. The merchants are really out there in the market shopping to see what's out there, shopping to see what the availability is. And to assess where the product is the best product is [ going to happen ]. There is a lot of product out there. What you really want to do is get the best product at the best price, so the merchants are out there assessing what that looks like. And then you really want to get the most desirable product, right?
So if it's the best product and you think that's a really sharp price and something you haven't been able to really get or [ deploy ], you're going to pull the trigger and buy it. If there's a lot of -- if there's products where there's lots and lots of availability, you might buy some metered in, you might pack some away for the following year. I mean, it's not just one kind of cookie-cutter answer here. I think that the key thing now for the merchants is really to be out there understanding the promotional environment, right? So when you're buying goods now, what you really have to be attuned to is what is the right value. So the buyers have to be very strategic in terms of buying the right merchandise at the appropriate value for customers, given the current inflationary environment. So I think it's supply, and it's really studying what's going on in the outside world with so much inventory sitting in retail stores, with the inflated inventory and a more promotional environment, which I think we all believe is probably going to get more heightened in the fourth quarter. So there's a variety of things that need to happen there, so I don't think it's quite the cookie-cutter. So to get to, I think we'll see some for this year. I think there'll be some packaway for spring, and there may even potentially be some packaway for fall. But we have to wait and see what that looks like.
Operator:
Our next question comes from the line of Matthew Boss with JPMorgan.
Matthew Boss:
Great. Barbara, so larger picture, on the mounting inflationary pressure that you cited on your customer, how does this affect the value and convenience elements of your model? Or is there anything that you're seeing today that's different than past times of consumer disruption where your model actually outperforms over time?
And then Adam, while sales are below your target model today, are there any structural underlying changes to the models margin as we think about multiyear in your view?
Barbara Rentler:
So Matthew, in terms of mounting inflation, I think over the last few months, we had initially made strategic price increases. And I think with the slowing consumer demand and the escalating inflationary pressures, it all comes down to value. And so for us to be successful, we really need to make sure that we understand the value of what's going on around us and get ourselves really highly focused on that because that really, in the end, is what will make us successful.
Our customer is looking for branded bargains, great values every day. That's what she's come to expect for 40 years, and that's what she expects from us now. So I think that really comes down to the merchants being in the market, understanding the availability, understanding what's going on and then knowing when to pull the trigger and to drive it because that's what helped us from 2008 to 2009. And I think that, that will help -- what will help us here also in getting ourselves in the right value when the customer is under so much pressure with all the macroeconomic issues that are out there.
Adam Orvos:
And Matthew, this is Adam. So we don't see anything structurally different in our model, still feel bullish about the environment, the retail environment in our model going forward. When we talk about multiyear and think about 2023, specifically, I think the key is we're going to have to see how the inflationary aspects play out in the second half. That's obviously a critical variable. How we plan sales next year, profitability will be highly dependent on that kind of top line assumption.
Michael Hartshorn:
Matthew, just to add to that, obviously, since the pre-pandemic, the changes have been really around the cost in the business, and those are acutely in 2 different places with wages and transportation, whether domestically or on imports. I think what we expect to see is both the domestic and import costs to come down over time.
We're already starting to see some break in those costs here in the back half, especially on the import costs. So I think those will come down, which will be a benefit to us. On the wage front, I think the increases we saw during COVID are structural at the current levels and are at least at this level. What I'd say about the wage market right now is it's still tight, but it is stable, which is much different from where we were last year when we were getting people back to work and there was frenzied demand in the U.S. So I think there is going to be some opportunity in cost as the transportation comes down with the lower demand in the U.S.
Matthew Boss:
Great color. Best of luck.
Operator:
Our next question comes from the line of Adrienne Yih with Barclays.
Adrienne Yih-Tennant:
Great. Barbara, this is sort of more of an opinion question for you. I'm wondering if you believe that the aggressive discretionary promotions at Walmart and Target are maybe temporarily taking some market share away.
And I guess in the past, when they aren't as promotional, might that alleviate kind of some of the kind of market share shifts that are going on? So that's my first question. And then for Michael, can you talk about any price pass-through attempts, if any? And I know that you guys have been very, very careful about that. And what does your average unit cost look like at this point kind of heading into holiday?
Barbara Rentler:
Adrienne, as it pertains to Walmart, look, I think we look at everyone as a competitor, whether it's Walmart, whether it's the other off-pricers, whether it's Macy's. I think there's a lot of opportunities for the consumer to buy bargains now and whether it's Walmart or Target, whoever it is, and so it's hard for us to measure that.
I think the most important thing that we can do now is really, we need to understand value. And we need to understand where we need to be on the value equation with the customer. And that is a shift from where we were. So I think it's very -- it's hard for us to measure that. But again, it's more competition. And they have both been very aggressive in their pricing, as we all know, to move through some goods. So that's our job to understand it.
Michael Hartshorn:
On pricing, what we saw during the quarter on AUR, so AURs were up during the quarter. As we said in the commentary, the minus 7% comp was a function of lower traffic and higher basket. The basket was really driven by a higher AUR.
What we'd expect for the fall season with us really trying to drive value and with our additional markdowns, we'd expect AURs to moderate versus the first half over the balance of the year.
Operator:
Our next question comes from the line of Mark Altschwager with Baird.
Mark Altschwager:
I guess for Michael or Adam, the sales outlook is slightly better in Q4 versus Q3, though the magnitude of the implied margin inflection, I think, is fairly significant if I'm reading it all correctly.
Is that primarily markdowns in Q3 that are expected to be kind of cleared through by Q4? Or are there kind of other things that are going on there?
Michael Hartshorn:
Just on Q4, as I mentioned in Lorraine's question, that was our lowest comp last year, and that was a function of, one, with supply chain congestion, we didn't get all the goods we wanted to in the stores before the holiday, and there was also an Omicron spike leading up to Christmas that dampened traffic a bit. So that should be a benefit versus last year.
And then the fourth quarter was the peak of our cost increases, including incentives, and cost in the business, whether it was ocean freight or wage increases to staff in the store and the DCs for holiday. So we're up against that, and that will be a benefit versus last year.
Adam Orvos:
And Mark, this is Adam. Just to build on that, I think when you look at timing in third quarter versus fourth quarter, ocean freight probably is still headwinds as we move into third quarter just based on the comparison to LY and then probably some favorability, specifically in ocean freight in fourth quarter, and then probably a little bit more timing impact from our packaway cost in third quarter versus fourth quarter.
Operator:
Our next question comes from the line of Brooke Roach with Goldman Sachs.
Brooke Roach:
Barbara, I'd like to ask you if you're seeing any evidence of trade-down in your business. Are you seeing any new customer acquisition above and beyond traditional levels from customers that typically don't shop Ross Stores?
And then maybe as a follow-up, you commented on plans to adjust pricing and markdowns in the third quarter. Can you comment on the magnitude and the time line to achieve a more normalized markdown level and when you might be a little bit more clean?
Michael Hartshorn:
On the consumer, we're not seeing any change, certainly. Since -- if I take the first to the second quarter with our comps, they've been relatively consistent. The composition of comps have been relatively consistent. If I compare it to when we started to lap the stimulus from last year, and our customer surveys and our own performance would suggest that where we're really seeing pressure is the lower-end consumer. But on the trade-down customer, there's no indication that is in our data that would suggest that that's happening.
Barbara Rentler:
But we do serve a wide range of customers. Today, we serve a wide range of customers. So we're going to watch trends closely and then we'll make merchandising adjustments accordingly. So it would probably take us some time to see because our range of customers is so broad.
Operator:
Our next question comes from the line of Michael Binetti with Credit Suisse.
Michael Binetti:
I just want to make sure I have -- I understand. I'm thinking alongside you guys on the model. I think that as we look at like the 3-year growth rate in third quarter -- in the fourth quarter, take like a 2- to 3-point step down in the way that you're guiding fourth quarter is -- but you're expecting markdowns to ramp, which I would assume are going to give you a good shot of bringing in a new customer.
Is that deceleration? I'm curious what the deceleration is based on. Is that based on your insights for the industry slowing? Or Barb, you just mentioned you're hopeful that trade-down can start to happen after some period of time. Do you not bake that in, in fourth quarter? Maybe some help on how you're thinking about that deceleration.
Michael Hartshorn:
Michael, it's really a function -- it's our biggest quarter. It bodes -- serves us well to be very cautious, especially after missing 2 quarters in a row on top line, so we are being cautious in the fourth quarter. And we do think it's going to be a very promotional environment, so that's what it's based on.
Barbara Rentler:
Right. And also, based off the supply lines in the world, if, in fact, the trends line turns out to be better than we think it is, we're going to be able to chase some of that.
Operator:
Our next question comes from the line of Ike Boruchow with Wells Fargo.
Irwin Boruchow:
I just want to talk about the packaway inventory, up in year-over-year as a percent of inventory and in dollars, up pretty meaningfully. I know you're not going to go into specifics. But just curiously, maybe at a high level, can you talk about the buying margins, the closeout margins you guys are basically seeing today versus, I don't know, 12 months ago, 18 months ago? Are they starting to ramp up?
Where -- how does that look maybe versus, again, like I said, 12 months ago or maybe versus history? Just any kind of color at a high level would be interesting.
Michael Hartshorn:
Ike, first, on the -- on what we have in packaway. We are up as a percentage of total inventory, but that is up against last year when we were using a lot of our packaway in the frenzied demand in the second quarter, which was our top comp for 2021.
And then also, packaway right now includes early receipts of merchandise, and that's mainly home product. And what happened there is that last year, we're experiencing longer lead times. We were having difficulty getting products on time and on plan. So what we did this year is extended our lead times coming into the first quarter in our ordering cycle. What we saw in the first quarter is those -- surprisingly, lead times improved, but we kept the longer lead times in the second quarter because we were concerned about port labor negotiations in L.A. and also COVID -- continuing COVID shutdowns in China. Neither of those risks played out and with lower demand in the U.S., lead times actually improved. So we have stored in packaway early receipts of home that will flow in the back half of the year.
Barbara Rentler:
In terms of margins on closeouts and upfront, it's hard to compare 1 year to another based on -- it's hard to compare what I bought this year versus what I had historically, so it's not necessarily quite as simple as just as going, here's the pitch on it.
So I think it remains to be seen on the closeout rates. We've seen what kind of values we need to put on the floor and what availability, when people want to move it. It's a measured balance.
Operator:
Our next question comes from the line of Jay Sole with UBS.
Jay Sole:
Great. I just want to dig into the AUR strategy for the back half of the year. Are you saying that you're going to use AUR as a lever to try to take share and alleviate some of the traffic issue that you've had recently?
Barbara Rentler:
Yes. Listen, we're in the value business. And in the last couple of quarters, we've really -- we've made some strategic price increases. And the customer, based on slowing demand and inflationary pressures, has voted that she doesn't necessarily think the value is where it needs to be.
So yes, if we could get -- we want to get our AUR more in line, and we want to offer the customer more value. And the AUR can move around based off of mix, right, because it doesn't necessarily mean depending upon what types of products you have on the floor, the AUR can move. I think the word we're looking here is for value. And clearly, the more value we offer the customer, history would tell us that we would perform better. So that is our strategy. I mean based off of where she is and the pressure that the customer is under, that's really what we need to do. We need to understand what the outside world is doing and we need to offer better value.
Operator:
Our next question comes from the line of Dana Telsey with Telsey Advisory Group.
Dana Telsey:
Good afternoon, everyone. As you see the differences between the Ross and the dd's chain, what are the differences between the 2? And whether it's traffic or whether it's product sell-through and what you're saying? And is your AUR strategy at all different with dd's and Ross in terms of magnitude for the back half of the year?
Michael Hartshorn:
Dana on dd's, so similar to Q1, dd's performance in Q2 continued to be well below Ross, although up against very robust comps last year. The inflationary pressure here has even a larger impact on the dd's low-income customer.
dd's average household income is $40,000 to $45,000. Therefore, this customer is obviously more sensitive to the pressures in fuel and food costs and other inflationary purchases. I would say like Ross, our focus is on delivering the best bargains, but we need to even provide greater value to the dd's customer. And like Ross, we built in higher markdowns in the back half of the year.
Operator:
Our next question comes from the line of Laura Champine with Loop Capital.
Laura Champine:
I've got a couple. So when do you think that logistics costs will start to ease? And then secondly, you mentioned more clearance activity in Q3. When do you think that inventories come more in line with sales trends, assuming that's a goal given the packaway opportunities you see?
Michael Hartshorn:
Laura, it's Mike. On logistics cost, we're already seeing them. They already seemed to have peaked and have started to come down. I think it's different between domestic and ocean freight. I think ocean freight, there are a lot of long-term contracts that it may take some time to come down. But certainly, the current noncontract market is below the contract rate. So we're starting to see some movement even on contract rates.
Domestic, at least for us, we expect domestic costs to be relatively neutral in the back half because we started seeing them rising in the back half of last year. But I suspect over time, both of them will come down and maybe not to the levels that we saw pre-pandemic though.
Barbara Rentler:
And then in terms of the inventory level coming down, we see that moving as it goes throughout the fall. But with that, we have liquidity, and we're comfortable with our liquidity. And so we have -- open to buy to take advantage of opportunities. So it's kind of 2 things going on at the same time.
Operator:
Our next question comes from the line of Aneesha Sherman with Bernstein.
Aneesha Sherman:
So if I heard it right, the in-store inventory levels at the moment are about in line with what you saw pre-pandemic. So just trying to understand the rationale for the higher markdowns you're doing now as well as into the second half. Is it about your product mix and you're seeing slowing trends in certain categories in the rebalancing? Or is it more about benchmarking to the external environment that's becoming more promotional? What's the bigger driver of the markdowns you expect?
Barbara Rentler:
I think it's a combination of both. But I think the promotional environment has gotten so aggressive in such a short period of time that we need to make the move on the goods. Otherwise, we're not offering the customer the value that she wants and needs, and so that's played a big part of it.
And then there's always -- there always is. There's always businesses that aren't good or they need to take markdowns more aggressively. But that's really -- it's the promotional cadence and just really watching where the AUR is in the outside world and being very, very conscious of that and understanding that. So getting -- the faster we get to the value equation that she really wants, the better our performance will be.
Operator:
Our next question comes from the line of Corey Tarlowe with Jefferies.
Corey Tarlowe:
Barbara, you mentioned realigning the value equation to where you think it needs to be. And with that, are there any cost savings initiatives that you have in place to help to kind of underpin the profitability and the profit goals that you have for the remainder of this year?
Michael Hartshorn:
I would say from an expense structure standpoint, we absolutely have put in places, whether using technology in the stores or automation in our distribution centers, which is our big pockets of expense, we've continued to add new capabilities in stores and in the distribution centers to increase efficiency and reduce costs.
Corey Tarlowe:
Great. And then as it relates to the store opportunity and real estate and the rent structures and your lease renewals, are you seeing anything incrementally helpful on the expense side there as well?
Michael Hartshorn:
I wouldn't say there's anything material in that renewal process, but we will continue to open stores. As we said in the comment, we'll open 100 stores this year.
And at this point, don't see any changes in our expansion plans. But I would say overall on the renewals and the new rents, there's nothing that I'd call out specifically.
Corey Tarlowe:
Great. Very helpful. Best of luck.
Operator:
Our next question comes from the line of Simeon Siegel with BMO Capital Markets.
Simeon Siegel:
Did you or could you, I guess, qualify like-for-like AUR versus maybe the mix shifts-driven AUR? Just trying to align the AUR with the markdown color. And then sorry for what's probably a dumb question, but just can you help parse out the comment, that earnings beat, because of the lower incentive cost on the lower sales?
I guess -- just trying to understand what it means that you made more money on the bottom line because sales missed plan and how to think about maybe what levers you have at your disposal if top line pressures get worse.
Michael Hartshorn:
On the comment on incentive costs, it was a function of lower earnings. If we would have been at this comp level, we would have been fairly close to the low end of the earnings range.
In terms of cost structure, certainly, there are other things we can do in the cost structure if we saw a greater decline in sales. They probably wouldn't be great decisions for the long term or going into 2023, but we could certainly get more stark with our expense structure.
Barbara Rentler:
And could you just repeat the first question about the AUR markdowns? Could you just say that again?
Simeon Siegel:
Yes, sure. So just within AUR, I guess, any way to think through like-for-like is tough given your product offering. But just if AUR -- how much may have been driven by mix shift versus like-for-like?
Barbara Rentler:
Part of it was driven by mix shift because there were businesses that we didn't maximize last year because of supply lines or, for example, things like shoes, which runs a higher AUR. So part of it comes from mix, where we couldn't get the supply we needed last year fast enough to drive the sales higher.
But the other part of it just comes from -- strategically, we strategically increased some prices where we have other, potentially, assortment shifts within the mix. And so it's kind of hard to really quantify that in saying because we're comparing casual product to wear-to-work product now. Wear-to-work product has higher AURs than active wear. So I would -- all I could tell you really is it's a mix. It's really a mix of both. Certainly, apparel raises the AUR compared to casual. And definitely, shoes helped to raise the AUR because it's just a different product base, and we couldn't get the supply we needed last year. So those would be my 2 main call-outs on that.
Operator:
Our final question comes from the line of Marni Shapiro with Retail Tracker.
Marni Shapiro:
Can you just give a quick update? Are there any changes on the store openings for this year? And then, Barbara, I have a bigger picture question just about the use of packaways in back-to-school. As kids are going back to school, do you think you are well set up in uniform and what they need for back-to-school?
And are you seeing a difference in the way she's shopping? Meaning is she buying what she needs and holding off on what she wants? Maybe the new fashion top, but her kids are getting her back-to-school clothing.
Michael Hartshorn:
Marni, on real estate, no change. We expect to open 100 locations, and that's 41 stores over the balance of the year.
Barbara Rentler:
And in terms of back-to-school, I would -- she bought -- she's buying definitely the necessities. She is buying uniforms and backpacks and all of those products. I also think that part of what she bought for back-to-school was she might have bought her child shorts when people started taking markdowns on, let's say, denim shorts earlier.
So I think it's kind of a mixed bag. But I think if we were historically talking about back-to-school over time, the customer has bought merchandise much closer to the time they go to school or immediately after they get in school. It's hard to tell now with the pandemic, right? So that would also [indiscernible] and so I think it's a combination of both. But it's been very hard to read without having 2 or 3 years of any real history on it. So...
Marni Shapiro:
Right. I guess that makes sense. It feels like it's going to be a later back-to-school this year anyway with pressure on her. And so it feels like she's buying what she needs, and everything else could kind of take a pause. And so maybe there's a break in weather or whatever it is.
And then just one last. On holiday traffic, last year, you had -- your inventories were clean. But also, we had Omicron hit at some point in December. And so it feels like there's a real opportunity even in just driving traffic to the stores for gifting and -- during that period of time, assuming there's not some, I don't know, new variant, the gamma 5 variant or whatever it is.
Michael Hartshorn:
You're right, Marni. Last year, we were impacted, especially approaching Christmas with Omicron. And then within our own performance, we had difficulty getting good holiday goods through the supply chain.
Marni Shapiro:
Okay. I just wanted to confirm. Great. Best of luck, guys, with the rest of back-to-school and fall.
Operator:
Ladies and gentlemen, we have reached the end of the question-and-answer session. I will now turn the call back over to Barbara Rentler for closing remarks.
Barbara Rentler:
Thank you for joining us today and for your interest in Ross Stores.
Operator:
This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.
Operator:
Good afternoon, and welcome to the Ross Stores First Quarter 2022 Earnings Release Conference Call. [Operator Instructions] Please be advised that today's call is being recorded.
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 2021 Form 10-K and fiscal 2022 8-Ks on file with the SEC. Now I would like to turn the call over to Barbara Rentler, Chief Executive Officer. Please go ahead, ma'am.
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 first quarter 2022 performance, followed by our outlook for the second quarter and fiscal year. Afterwards, we'll be happy to respond to any questions you may have. As noted in today's press release, we are disappointed with our lower-than-expected first quarter results. We knew 2022 would be a difficult year to predict, especially the first half when we were facing last year's record levels of government stimulus and significant customer pent-up demand as COVID restrictions eased. The external environment has also proven extremely challenging as the Russia-Ukraine conflict has exacerbated inflationary pressures on the consumer not seen in 40 years. As a result of these factors, our first quarter results underperformed our expectations. Total sales for the first quarter were $4.3 billion with comparable store sales down 7% on top of a robust 13% gain in the first quarter of 2021 that were versus 2019. Earnings per share for the 13 weeks ended April 30, 2022, were $0.97 on net income of $338 million. The quarter includes an approximate benefit of $0.06 per share from the favorable timing of expenses that are expected to reverse in subsequent quarters. These results compared to $1.34 per share on net earnings of $476 million for the 13 weeks ended May 1, 2021. Men's was the strongest merchandise area during the quarter, while Florida was the top-performing region. dd's DISCOUNTS performance in the first quarter trailed that of Ross, as the significant benefit of last year's stimulus and escalating inflationary pressures had a larger impact on lower income households. At quarter end, total consolidated inventories were up 57% versus the same period in 2021, mainly from higher packaway inventory. Packaway merchandise represented 43% of total inventories versus 34% last year when we used a substantial amount of packaway to meet robust consumer demand. Additionally, supply chain congestion eased somewhat during the first quarter, resulting in the early receipt of merchandise that we stored in packaway and will flow to stores later in the year. Average store inventories during the quarter were up, though we still operated with significantly less inventory in store than we did pre-pandemic. Turning to store growth. Our 2022 expansion program is on schedule with the addition of 22 new Ross and 8 dd's DISCOUNT locations in the first quarter. We remain on track to open a total of approximately 100 locations this year, comprised of about 75 Ross and 25 dd's. As usual, these numbers do not reflect our plans to close or relocate about 10 stores. Now Adam will provide further details on our first quarter results and additional color on our outlook for the remainder of fiscal 2022.
Adam Orvos:
Thank you, Barbara. As previously mentioned, our comparable store sales were down 7% for the quarter as average basket growth was more than offset by the decline in transactions versus the prior year. First quarter operating margin of 10.8% was down from 14.2% in 2021, mainly due to the deleveraging effect of the same-store sales decline, along with ongoing cost pressures from higher freight and wages that began to escalate in the second half of 2021.
As Barbara commented earlier, the quarter benefited from the favorable timing of expenses, most of which were in gross margin. Cost of goods sold in the first quarter increased by 295 basis points due to a combination of factors. Merchandise margin declined 170 basis points, primarily due to higher ocean freight costs. Domestic freight rose 80 basis points while occupancy delevered 40 basis points on the same-store sales decline. Distribution costs increased 25 basis points, mainly due to wage actions taken last year. These unfavorable items were partially offset by buying expenses that improved by 20 basis points. SG&A for the period rose 50 basis points due to higher wages and the deleveraging effect of lower comparable sales. During the first quarter, we repurchased 2.5 million shares of common stock for an aggregate cost of $240 million. We remain on track to buy back a total of $950 million in stock for the year. Now let's discuss our outlook for the remainder of 2022. As Barbara noted in today's press release, given our first quarter results and today's increasingly uncertain macroeconomic and geopolitical environment, we believe it is prudent to adopt a more conservative outlook for the balance of the year. We are now forecasting comparable sales for the 13 weeks ending July 30, 2022, to decrease 4% to 6% on top of a very strong 15% gain in the prior year period. Second quarter earnings per share are projected to be $0.99 to $1.07 versus $1.39 last year.
Our guidance assumptions for the second quarter of 2022 include the following:
Total sales are forecast to decline 1% to 4% versus the prior year. We plan to open 29 locations in the second quarter, including 21 Ross and 8 dd's DISCOUNTS locations. Operating margin for the second quarter is planned to be in the 10.4% to 10.8% range, down from 2021 due to deleverage on lower same-store sales and ongoing expense headwinds that are expected to continue through the first half of 2022. Net interest expense is expected to be approximately $15 million. The tax rate is projected to be about 25%, and diluted shares outstanding are expected to be approximately 348 million.
For the full year, we are now planning comparable store sales to decline 2% to 4% and earnings per share in the range of $4.34 to $4.58. As Barbara mentioned, this reflects our continued expectation for sales and profitability to improve as we move through the balance of the year. Now I will turn the call back to Barbara Rentler for closing comments.
Barbara Rentler:
Thank you, Adam. Looking ahead, while the landscape in early 2022 has been tougher than expected and the year may prove to be more difficult than initially anticipated, we remain confident in our ability to successfully navigate through this period. We have shown in the past that our value-focused business model has served us well in both healthy and more uncertain external climates and believe the current challenging conditions will be no different. Despite the slower-than-expected start to 2022, we operate in an attractive sector of retailing. Our mission continues to be delivering the best bargains possible to leverage our favorable market position. As demonstrated by our long successful track record, we believe our steadfast focus on the execution of this core strategy will be the key driver of our success.
At this point, we'd like to open up the call and respond to any questions you may have.
Operator:
[Operator Instructions] Your first question comes from the line of Kimberly Greenberger with Morgan Stanley.
Kimberly Greenberger:
Barbara, I wanted to ask about product and merchandise execution. Could you just comment on how you feel the team is executing in merchandising? And how did merchandise margin perform here in the quarter, if you exclude, let's say, inbound freight and domestic transportation costs? Are there any pockets of inventory where you wish you had a little bit more and how in aggregate are you feeling about your overall inventory position?
Adam Orvos:
And Barbara, this is Adam. I can jump in on the merchandise margin question, and then throw it back to you. So Kimberly merchandise margin, as stated in the comments, has dropped 170 basis points versus last year. But we would have been flat versus last year's significant gain without the impact of ocean freight.
Barbara Rentler:
In terms of -- let's start with the pockets of inventory in aggregate. At this stage, Kimberly, in the market, there's a lot of availability. And it's very broad based, whether it's in home or whether it's in apparel, there's a lot of supply out there. So I wouldn't really say that there are problems in any pockets of inventory that we have.
In terms of execution in products -- in merchandise, here's what I would say. I would say that we didn't execute at the level that we're capable of. We're digging into the business now and we feel that we can improve the assortments and we can improve our execution. So at this point, it's really about us. It's about us taking different actions in some of our assortments overall, I would say.
Operator:
Your next question comes from the line of Mark Altschwager with Baird.
Mark Altschwager:
Obviously, a very tough environment out there, especially for lower-income consumers. We've heard from other retailers that the initial shock of inflation following Russia and Ukraine led to a pause. Curious if you've seen any notable change in trend, a positive change in trend as you move through April and into May.
And then bigger picture, Ross has navigated weaker economic environments in the past, benefited from the trade down to value. Just how do you view the potential for that as the year unfolds?
Michael Hartshorn:
Mark, it's Michael Hartshorn. On our trend during the quarter, ours was, we -- following a fairly strong start to the period -- the start to the quarter, for us, sales underperformed over the balance of the quarter. And I think, most importantly, there was us anniversarying the government stimulus and customer pent-up demand last year. We also didn't see a pickup during Easter that we had planned into the business. And we wouldn't comment on inter-quarter trends at this point.
On the trade-down customer, it's hard to say. Obviously, with higher fuel and food prices, discretionary spending for the lower-end customer is being squeezed. We saw customers at both chains pull back on spending in the first quarter. In terms of trade down, the best proxy we would have, although every recession is different, would be 2008, when the fall of 2008 was very difficult and we started to see some improvement in the first half of 2009.
Operator:
Your next question comes from the line of Lorraine Hutchinson with Bank of America.
Lorraine Maikis:
I wanted to follow up on your comment, Barbara, that sales and profitability -- within your guidance, sales and profitability will improve as the year progresses. Can you just provide us with just some context on what gets you comfortable, especially on the top line, that things will improve as the year goes on?
Michael Hartshorn:
Lorraine, on the top line, the guidance assumes a fairly steady pace. In the fourth quarter, we know -- for instance, we have opportunity because we're up against Omicron, and we had supply chain congestion that we know we lost business in the fourth quarter last year.
In terms of profitability, as we said, when we started the year, we do have -- we did make wage increases in the back half of 2021. And we also -- that is also where we started to see the freight increases. So the guidance assumes that we lap those increases from last year. Overall, what you see in our changed guidance is really just sales. We haven't changed our expense assumptions. When we came into the year, we thought we had a good grasp on freight, ocean freight, wages. And the only thing that's slightly changed there is fuel, but we've been able to offset those in other costs in the business. So the updated guidance really is a sales flow-through.
Barbara Rentler:
And Lorraine, in terms of the assortment, what happened last year is that merchandise slid, as I'm sure it did for all retailers. Different product categories created real gaps in the assortment. So as you get into fall and the inventories catch up with where those gaps were gives you the confidence in certain businesses that the performance should be better.
Operator:
Your next question comes from the line of Matthew Boss with JPMorgan.
Matthew Boss:
So Barbara, on the magnitude of the comp slowdown as the quarter progressed, I guess, were there any notable changes by category or specific geographical call-outs as you dissect the first quarter? And then just looking back, if we take maybe a broader picture thought process, are there any time frames that you'd compare the magnitude of this sharp slowdown? How many quarters or how long did it take for your model to respond? Just kind of thinking about the duration in the past, and then the subsequent improvement that you're baking in as the year progresses?
Barbara Rentler:
In terms of a slowdown, Michael, from one quarter to another, I can't really think of a period of time were we baked in that other than in 2016, where we had difficulty in the ladies business, where we had a slowdown...
Michael Hartshorn:
Yes. I mean, Matthew, we knew there was going to be a slowdown, at least on a comp level with all the government stimulus that came out last year. So we had actually planned that in the business and also with the customer pent-up demand as COVID restrictions ease.
So even in our initial guidance, the low end of the range was a minus 4, so we missed that by about 3 points. In terms of where in the business has slowed down, it was pretty broad-based. We did see pockets of opportunity. If you look at our larger markets, Texas and Florida outperformed. We had expected, as the border opened up, that we'd see improvement there. We, in fact, did in Florida as tourism and travel started to increase. We had planned increases there, and we saw improvement.
Barbara Rentler:
And then in terms of the assortment, apparel outperformed home. We were up against very large comps in home in Q1. And so that's really where we saw a large difference in performance.
Operator:
Your next question comes from the line of Michael Binetti with Credit Suisse.
Michael Binetti:
So I guess as we look at the quarter on paper, this is -- it looks pretty far from where we were on the narrative in early April. I think there's been a pretty consistent narrative that you felt good on inventory. And I think you felt like it came into spring with the right mix of goods for the categories. The consumer is clearly drawing the line between wanting back-office apparel dresses for women, those kinds of things. So it does sound like demand was the issue.
I think you did, however, talk about, in the initial guidance, an acceleration through the year. And I think at the time, one of the inputs was, by 2Q last year, once stimulus kind of cleaned out some of the inventory, you were in chase mode on some real meat and potatoes items that were just stocked out. And I think that fueled a lot of your optimism baked into the acceleration through the year. So it seems like the demand line has changed quite a bit here and that just having inventory may not be sufficient at this point. But how do you true that up and bring that forward and say, "Look, we were missing some categories a year ago in 2Q versus the expectation for sales to continue to be very, very slow here in the second quarter?"
Michael Hartshorn:
Michael, I would just say overall, I mean, it serves us well to be given our underperformance in Q1 to be cautious with the rest of the year. And that's why you saw us bring down the guidance. And that's true from buying inventory to running the company with lower expenses. So we'll see how it plays out. I mean it's very uncertain out there. The inflationary environment was much more than we expected when we entered the year, and we're going to put ourselves in a position to chase business and to chase trends, and we think that will allow us to maximize our potential in this environment.
Barbara Rentler:
And as we dig into the opportunities of the businesses that we did miss and that we didn't have last year, that would be part of what we're looking at to improve the business. So making the shift in your example into more dress versus casual and making the appropriate move. So we're digging into that piece now.
Michael Binetti:
Okay. And can I -- if I could follow that. Is it safe to say the AUR strategy you might have rolled it back a little bit given some of the commentary we've heard across the space at this point? And it sounds like a sharper focus on value versus what you were thinking from the consumer.
Barbara Rentler:
Sure. The AUR strategy, we strategically increased prices. So we didn't do it just straight across the board. So what we really did was make sure that there was appropriate price separation from traditional retailers. And so we monitor that very, very closely.
And so the merchants can see on the term line every single week whether something is working or not. And so that piece will continue to do in both companies really with a high focus on value, right? So that a slightly higher AUR might be a very strong value based on what's going on in the rest of the world. So I think the value equation, to your point, is really what our customer looks for and comes to expect from us. And so we are highly focused on the value equation. But that doesn't mean that potentially an AUR could be higher. So they're not mutually exclusive. It could be both ways. You really have to know where and what.
Operator:
Your next question comes from the line of Chuck Grom with Gordon Haskett.
Charles Grom:
It seems like the buying environment is about to turn from just okay to potentially extremely good given where retail inventory levels are going to exit the first quarter, particularly in home. So I'm curious how quickly the merchant buying teams can take advantage of this? And have you baked any of that into the guide for 2Q and beyond?
Barbara Rentler:
Well, the merchants can take advantage of the closeout opportunities as they become available. And there are closeouts in home, and that's more unusual than it is in apparel. Supply lines right now are very broad-based based of all the things that you know. Goods coming in early. People bringing in fall early. So it's kind of all collided at the same time into the marketplace. But the merchants can take advantage of that as quickly as possible, if it's the right merchandise and right product. So there's nothing in their way to keep them from doing that.
Michael Hartshorn:
And we -- on your question on the guidance, we have not built any upside on that into our guidance.
Operator:
Your next question comes from the line of Ike Boruchow with Wells Fargo.
Irwin Boruchow:
Just 2 quick ones. Just on the merchandise margin in the quarter, so 170 was fully ocean freight. Can you -- based on the contracts and the visibility you have, what should that headwind kind of look like big picture or specific as you guys can get as we move into Q2 and beyond?
And then to Michael's question on AUR, can you kind of help us with the inventory? I mean it looks heavy, but it's hard to kind of read between the lines sometimes. Are you guys comfortable with your inventory position? Do you see a need to maybe need to clear more product in Q2? Just kind of trying to make -- trying to understand where exactly your comfort is on the inventory right now?
Michael Hartshorn:
I'll start with the -- your last question first on inventory there. So overall, the growth in inventories was really packaway. We ended with 43% of the total inventories versus 34% last year. And if you can remember from last year, we used a substantial amount of that packaway to backstop the demand we saw at the end of the first quarter when the stimulus came out. So the 34% was lower than our historical levels.
The second piece relates to supply chain congestion. When we came into the year, we planned longer lead times based on what we saw in the fourth quarter. So what that meant for us, for businesses where we directly import mainly in home, what happened in Q1 is the supply chain eased somewhat and we received early second quarter goods in home, and we stored them in packaway and will flow them later in the year. As far as in-store inventories, we operated up from last year, but remember, again, they were lower than we had anticipated with the frenzied demand, but well below pre-pandemic levels. And so I would say, overall, we're happy with our overall inventory levels.
Adam Orvos:
Yes. And touching on the ocean freight question, they will remain elevated throughout the balance of 2022. But as we anniversary that spike that we had in the second half last year, they remain elevated but improved through the balance of the year.
And on the domestic freight side, as Michael commented, fuel costs are higher than our expectations at the beginning of the year, but we've offset that in the guidance that we've provided to you. And by the second half, we don't really -- we don't see any pressure on domestic freight.
Barbara Rentler:
In terms of packaway, we're very comfortable with the content of packaway also.
Operator:
Your next question comes from the line of Simeon Siegel with BMO Capital Markets.
Simeon Siegel:
A few quick ones, if possible. Do you know inventory growth in units versus dollars? And then what percent of the freight costs generally are ocean versus domestic?
Michael Hartshorn:
We wouldn't give you the unit growth. That's not something we disclose.
Simeon Siegel:
Okay. And freight costs, just ocean versus domestic in general?
Michael Hartshorn:
Can you repeat the question?
Simeon Siegel:
When you think about your total freight costs, just roughly what is the ocean versus domestic breakdown? So what percentage of your freight costs tend to be ocean versus domestic?
Michael Hartshorn:
We don't disclose that externally.
Simeon Siegel:
Okay. All right. I'll try one last one then. I think you talked about deleverage. What do you -- can you -- what do you expect for SG&A dollar growth to look like for the year, built into that or embedded in the comments you gave?
Michael Hartshorn:
Could you repeat that question?
Simeon Siegel:
Embedded -- yes, sure. So embedded in the full year guide, just how are you thinking about SG&A dollar growth?
Michael Hartshorn:
I don't know. Can we -- why don't we call you after the call and get specific modeling questions for you?
Simeon Siegel:
Sounds good.
Operator:
Your next question comes from the line of Adrienne Yih with Barclays.
Adrienne Yih-Tennant:
Barbara, I wanted to dig into the comment on kind of redirecting or reallocating some of the penetration. What is or was home penetration during the quarter maybe versus ladies apparel? Because I'm assuming that, that apparel piece was the stronger piece of it. And then secondly, how are store traffic trends over the -- pacing over the quarter? If you can help us with those 2, that would be great.
Michael Hartshorn:
In terms of overall home apparel, I think Barbara mentioned earlier that apparel outperformed home, although home was up against very strong comps last year. Adrienne, we also talked a little bit about the trend, and that was similar for traffic in that we had a strong start to the year, so year-over-year growth. And then that dropped in later in the quarter as we started to anniversary the stimulus and also customer pent-up demand.
Barbara Rentler:
And home penetration is around 25% of the company's...
Adrienne Yih-Tennant:
Similar to pre-pandemic, in that range. And then I guess on packaway, so there's a portion of the packaway -- so the number, I think, if I got it correctly, was 43% at the end of this quarter. Some of that is obviously the early receipts in home goods. Were you able to take advantage of any of the unfavorable kind of transition to spring?
And I know you don't have a large exposure to the Northeast, but picking up some of those goods off of Northeast retailers. We've seen this happen in the past for you, where that short really does work to your benefit as you redeploy it in 2Q? Is that an opportunity?
Barbara Rentler:
I think that doesn't just come from Northeast retailers. I think there's a lot of spring goods that came into the country and spring -- last fall, plus early spring kind of all collided and came into the country pretty much at the same time. So part of it, I'm sure, comes from Northeast retailers. And part of it just comes in from the supply that came into the country as the congestion eased all at the same time. And we've been able to buy appropriately the things we want in spring products. So yes, there will be spring products that we can use from Q1 into Q2.
Operator:
Your next question comes from the line of Marni Shapiro with Retail Tracker.
Marni Shapiro:
One clarification. I think someone on the call mentioned you did not see the lift around Easter that you normally do. And I was curious if that was related to traffic or assortment? I'm just trying to think it through to other holidays that are coming up and the more traditional cadence of retail business getting back to where it was.
And then if you could just talk a little bit about any excess you have going into the second quarter? Will it be liquidated in the second quarter? Or is it current enough that it doesn't have to be marked down? And is this contemplated in the operating margin guidance?
Michael Hartshorn:
Marni, on the inventory, we actually ended with store inventory where we wanted them. So there isn't any liquidation past the first quarter.
And then on Easter -- I commented earlier on Easter, and that was versus our expectations. Typically, when there's a later Easter, you have less weather. So we missed our own expectations there in our plan.
Marni Shapiro:
Well, I'm just curious, do you think -- was that -- because overall traffic was lower? Or was it the assortments? Do you think it was more specific to just traffic in general and the late Easter or the assortments that you had in place for Easter?
Barbara Rentler:
What you would define as the Easter assortments, Marni, dresses, dress shoes, children's dresses, those just were fine.
Marni Shapiro:
So that was fine. So you had the lift for that, but the overall traffic lift, as people kind of have a little bit of time off or holidays coming up, that you didn't see?
Michael Hartshorn:
I would say, overall, the traffic is probably a large function of the consumer being squeezed with inflation.
Operator:
Your next question comes from the line of Aneesha Sherman with Bernstein.
Aneesha Sherman:
I have two, please. So I'm trying to square the model of your FY guide versus the Q2 guide, implies that you're modeling about flat comps in the second half of the year. And I'm trying to square that with your view of you're lapping assortment gaps last year, so you should be able to pick up more in the back half of the year. So how does that square with the view of flat comps?
And then my next question is around packaway. So you picked up a lot of packaway in Q4. When does that start to flow through? Is that fall/winter assortment that we should start to see that margin benefit from that flowing through in the second half?
Michael Hartshorn:
On the back half, that it does include our easiest compare in the fourth quarter. So fourth quarter would be the stronger comp. On packaway, on average, packaway, we hold it for about 4 months. So that's the way you should think about the timing on when we typically flow goods.
Aneesha Sherman:
But so just to follow up on the packaway. So if you -- the packaway that you're picking up in Q4, most of that will have already flowed through. Is that right?
Barbara Rentler:
It depends on the product. So the packaway that we picked up in Q4, so you're thinking it's like outerwear. So if it was outwear, it's seasonal. That packaway would obviously ship from the vendor when -- at the end of December, let's say, and would release in the fall season. But if you get -- there are other classifications of products like denim, like fleece, like knits or parts of home that are seasonless that can flow all along. So that can flow in Q1, can flow in Q2. A lot of packaway products are seasonless. So depending on the product itself.
Operator:
Your next comes from the line of Dana Telsey with Telsey Advisory.
Dana Telsey:
Last quarter, we had talked about taking price. Where are we in that journey given the slowdown? Is that being adjusted at all? What are you seeing? And how does it differ for dd's versus the Ross brand?
Barbara Rentler:
Sure. So as we've talked about before, we started to increase some of our AURs. Keeping in mind that it has to be the appropriate value separation from traditional retailers and in both companies. And we're strategically doing it. It's not just straight across the board and obviously examining that very closely, does it make sense or not. And you can do that simply by how quickly the goods turn and the markdown rate.
So the merchants are managing that every week while they're going through their selling. And then we're reviewing it, obviously, at a higher level to make sure that, that hasn't been an issue. But in both companies and particularly in dd's where the customer is very price sensitive, we really look at that at a pretty low level.
Dana Telsey:
Got it. And then just the health of your consumer, what are you seeing there? And how do you define the household income of dd's and Ross customers?
Michael Hartshorn:
Sure. On the -- first of all, our overall customer is very broad, age-wise, ethnicity, and income-wise. On average, the Ross customer makes between 60 -- household income, $60,000 to $65,000. And the dd's customer is south of that, in the $40,000, $45,000 range. But I would say the health of our customer, they're being squeezed. Food and fuel prices with inflation there means they have less to spend on discretionary items.
Dana Telsey:
And then just lastly, as you think about the real estate portfolio, so then keep maintaining the same level of new store openings. Is there anything that would make you adjust your rate of new store openings? Or given that's a glide path for the future, no adjustment in the strong balance sheet that you have? How do you think of that real estate portfolio?
Michael Hartshorn:
Yes. At this point, Dana, we wouldn't change our glide path. We're planning to open 100 this year, and we will execute to that. And then we'll revisit our long-term plans. But we think there's market share available. We think there's market share opportunities.
We think value will becoming increasingly important for the customer as it has over the last number of years. And we think we have a great opportunity ahead of us. So we would continue with our store opening plan.
Operator:
[Operator Instructions] Your next question comes from the line of Laura Champine with Loop Capital.
Laura Champine:
I'm wondering if weather had an impact on your comp this quarter. The strength of Florida would seem to point to that, but the comment that the comp decelerated as the quarter progressed sort of fights against that theory.
Michael Hartshorn:
Laura, the weather did not have a material impact on the business in the quarter.
Laura Champine:
How are your more mature markets, like some of the California markets holding up relative to the whole?
Michael Hartshorn:
California was relatively in line with the chain and then -- of our bigger markets, which you mentioned, Texas and Florida.
Operator:
Your next question comes from the line of Mauricio Serna with UBS.
Mauricio Serna Vega:
I was wondering if you could comment on the divergence and performance between Ross stores and the dd's DISCOUNTS? Curious one on one began slowing down earlier than the other?
And then maybe about a question on the second half. I'm looking into the numbers, it implies roughly second half of the year flat comp sales, but I think it also implies double-digit EPS growth. So I'm wondering like what are the puts and takes there to drive the EPS growth in the second half of the year?
Michael Hartshorn:
On dd's, dd's did trail Ross, but they were up against stronger gains last year, especially with the government stimulus that has an outsized impact on that consumer and also last year's stimulus, with -- at their income levels, they were also more impacted by inflation than the Ross customer.
Adam Orvos:
Yes. And later in the year, profitability improvement really on that flattish sales. We're going to go up against the anniversary of not only the wage side of it, but also domestic and ocean freight costs. So we'll anniversary those significant increases versus last year. So that's really providing the lift that you're seeing in the model.
Operator:
Your next question comes from the line of Corey Tarlowe with Jefferies.
Corey Tarlowe:
I believe in the prepared remarks, you talked about supply chain congestion easing somewhat. I was wondering if you could provide some incremental details about what you meant by that, what you witnessed in the quarter and then perhaps maybe what you're expecting going forward.
Michael Hartshorn:
Sure. We -- it's best to start from last year. So last year, the lead times degradated as we move through the year, so they got longer. So we planned the year based on what we saw in the fourth quarter. And what we saw in the first quarter is it did ease somewhat, which meant we received goods early.
Expectations for going forward, I think, will be highly dependent on how China comes back from their shutdown. So we're watching that very closely. We're going to be very cautious with our lead times, but I think it's going to be dependent on whether when they open back up and the timing of when it opens back up, what type of congestion that causes.
Operator:
And your last question comes from the line of Daniel Hofkin with William Blair.
Daniel Hofkin:
You may have addressed this earlier, so I apologize if this has already been asked. But when you talked about execution issues, is that strictly a matter of kind of not enough of -- better selling products, too much of slower selling product? Or are there other issues you would point to? And then second would be, how would you break down sales shortfall between execution and consumer slowing down?
Michael Hartshorn:
Yes, I think what we're saying is we know we can do better. So in this environment -- inflationary environment, I mean, none of us have been in this for 40 years. So we know we can offer our customer better bargains, and we'll do that. So it's -- we wouldn't be able to break out execution versus the impact on inflation in the consumer.
Daniel Hofkin:
And then in terms of just the nature of the missed execution, was it all related to heaviness or how much of the better selling product you had are held or light on it or was it also pricing in some cases, just so we -- it would helpful understand that?
Barbara Rentler:
I think it goes back to what Michael was saying. It's not -- we had one major mistake or one major business that's really underperforming. We don't feel that we executed at the level that we're capable of. And so that might be something as simple as we should have bought more career versus casual, a shift of penetration of a few points, Filling up the delivery of something. It's just not quite as crisp as we normally are. There's no -- if the real question is, are there any real assortment issues in select businesses, there aren't. We need to execute at a higher level, and we need to -- to the level that we're capable of doing and that we have been doing. And so that's really what we need to do as an organization.
Operator:
And that concludes our question-and-answer session for today. I will now turn the call back over to Barbara Rentler for final remarks.
Barbara Rentler:
Thank you for joining us today and for your interest in Ross Stores.
Operator:
And ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
Operator:
Good afternoon, and welcome to the Ross Stores Fourth Quarter and Fiscal Year 2021 Earnings Release Conference Call. [Operator Instructions] Please be advised that today's call is being recorded.
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, COVID-related costs 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 2020 Form 10-K and fiscal 2021 Form 10-Qs and 8-Ks on file with the SEC. Now I would 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 Betty Chen, Vice President, Investor Relations. We will begin our call today with a review of our fourth quarter and 2021 performance, followed by our outlook for '22 and the longer term. Afterwards, we'll be happy to respond to any questions you may have.
As noted in today's press release, we achieved strong sales results in the fourth quarter despite the negative impact from both the surge in Omicron cases during the peak holiday selling period and continued supply chain congestion. Earnings per share for the 13 weeks ended January 29, 2022, were $1.04 on net income of $367 million. This compared to $1.28 per share on net earnings of $456 million for the 13 weeks ended February 1, 2020. Total sales for the fourth quarter were $5 billion with comparable store sales up 9% versus the same period in 2019. For the 2021 fiscal year, earnings per share were $4.87 on net income of $1.723 billion, up from $4.60 per share on net earnings of $1.661 billion in 2019. Total sales for 2021 rose 18% to $18.9 billion with comparable store sales up 13%. Now let's turn to additional details on our fourth quarter results. For the holiday selling period, the best performing larger merchandise areas were children's and men's, while the Midwest and Southeast were the strongest regions. Similar to Ross, dd's DISCOUNTS trends remained solid during the period. However, their profitability was also negatively impacted by cost pressures related to freight, wages and COVID. At quarter end, total consolidated inventories were up 23% versus 2019, mainly from an increase in in-transit merchandise due to longer lead times from the industry-wide supply chain bottlenecks. Average store inventories were down slightly versus 2019, while packaway merchandise represented 40% of total inventories versus 46% 2 years ago. As noted in today's release, we are pleased to report that our Board recently authorized a new 2-year program to repurchase up to $1.9 billion of our common stock through fiscal 2023. This authorization replaces the $850 million remaining under the prior buyback we announced in May of last year. A total of $650 million of common stock was repurchased under the previous program in fiscal 2021. The Board also increased our quarterly cash dividend by 9% to $0.31 per share to be payable on March 31, 2022, to stockholders of record as of March 15, 2022. The increases to our stock repurchase and dividend program reflects our ongoing commitment to enhancing stockholder value and returns as well as our confidence in the strength of our balance sheet and projected future cash flows. Now Adam will provide further details on our fourth quarter results and additional color on our outlook for fiscal 2022.
Adam Orvos:
Thank you, Barbara. As previously mentioned, our comparable store sales increased 9% for the quarter. This gain was driven by growth in the size of the average basket, partially offset by a decline in transactions. Fourth quarter operating margin of 9.8% was down 350 basis points from 13.3% in 2019, mainly due to ongoing expense headwinds. Cost of goods sold increased 210 basis points due to a combination of factors. Domestic freight rose 100 basis points, and distribution costs increased 70 basis points, primarily due to the previously mentioned supply chain challenges, in addition to higher wages. Merchandise margin declined 50 basis points due to higher ocean freight costs, while buying expenses grew 20 basis points. Occupancy levered 30 basis points on higher sales volume. SG&A for the period rose 140 basis points, again, due to pressure from the holiday-related pay incentives, plus higher wages and COVID costs. Total net COVID-related expenses for the quarter were approximately 35 basis points with a higher impact to SG&A than cost of goods sold.
Now let's discuss our outlook for fiscal 2022. As Barbara noted in our press release, 2022 is a difficult year to predict for numerous reasons. We are up against last year's record government stimulus and the lifting of COVID restrictions that led to unprecedented consumer demand, which fueled extraordinary sales gains in the spring of 2021. In addition, we continue to face industry-wide supply chain headwinds as well as external risks from the effects of inflation, both on consumer demand and on costs within our business. As a result, comparable store sales for the 52 weeks ending January 28, 2023, are planned to be flat to up 3% versus a 13% gain in 2021. Earnings per share for 2022 are projected to be $4.71 to $5.12 compared to $4.87 in 2021. This reflects our expectation for sales and profitability to improve as we move through the year given the substantial cost increases we incurred in the fall of 2021. Our guidance assumptions for the 2022 year include total sales are forecast to grow by 2% to 6%. We plan to return to our more normal opening cadence of 100 new locations in 2022 comprised of about 75 Ross and 25 dd's DISCOUNTS. As usual, we expect to close about 10 older stores. Operating margin for the full year is planned to be in the 11.6% to 12.1% range, down slightly from 2021 due to deleveraging on lower same-store sales gains, and again, ongoing expense headwinds, especially in the first half of 2022. Net interest expense is estimated to be $70 million. Depreciation and amortization expense, inclusive of stock-based amortization, is forecast to be about $560 million for the year. The tax rate is projected to be about 24% to 25%, and diluted shares outstanding are expected to be approximately 348 million. In addition, capital expenditures for 2022 are planned to be approximately $800 million. This outlay will fund further investments in our supply chain to support long-term growth and in technology to increase efficiencies throughout the business in order to maximize our prospects to capture profitable market share going forward. Let's now turn to our guidance for the first quarter. In addition to the aforementioned stimulus benefits and strong pent-up demand early last year, we also faced larger headwinds from higher freight and wage costs early in the year. As a result, we are forecasting comparable store sales for the 13 weeks ending April 30, 2022, to be down 2% to down 4% on top of a 13% gain for the 13 weeks ended May 1, 2021. Earnings per share for the 2022 first quarter are projected to be $0.93 to $0.99 versus $1.34 in the prior year period.
The operating statement assumptions that support our first quarter guidance includes the following:
Total sales are forecast to be down 2% to up 1% versus last year's first quarter. We plan to add 30 new stores, consisting of 22 Ross and 8 dd's DISCOUNTS during the period. We project first quarter operating margin to be 10.2% to 10.6% compared to 14.2% last year. The expected decline reflects the deleveraging effect from the negative same-store sales assumption as well as ongoing expense pressure from freight and wage costs early in the year. Net interest expense is estimated to be $19 million. Our tax rate is expected to be approximately 25%, and diluted shares are forecast to be about $350 million.
Now I will turn the call back to Barbara Rentler for closing comments.
Barbara Rentler:
Thank you, Adam. As mentioned in our press release, given consumers' increased focus on value and convenience, we have seen favorable sales trends in both our new and infill market stores. As a result, along with the large number of retail closures and bankruptcies over the last several years, we now believe that Ross Dress for Less can expand to about 2,900 locations, up from our prior target of 2,400 and that dd's DISCOUNTS can eventually become a chain of approximately 700 stores versus our previous projection of 600. This represents an overall 20% increase in our forecasted potential to 3,600 stores, providing substantial runway for expansion relative to our year-end store count of 1,923 locations.
We operate in attractive sector of retail, and our mission continues to be delivering the best bargains possible to leverage our favorable market position. Looking at 2023 and beyond, we are targeting a return to double-digit earnings per growth driven by a combination of same-store sales gains, operating margin, improvement accelerated new store openings and our ongoing stock repurchase program. In closing, we especially want to thank our approximately 100,000 talented associates throughout the company whose dedication has enabled us to successfully navigate through the unprecedented challenges of the past 2 years. We believe their continued efforts will enable us to capitalize on our opportunities for future sales and earnings growth while also delivering strong returns to stockholders over the coming years. At this point, we'd like to open up the call and respond to any questions you may have.
Operator:
[Operator Instructions] Your first question comes from the line of Kimberly Greenberger with Morgan Stanley.
Kimberly Greenberger:
Okay. Great. I wanted to just ask about the guidance here for Q1 and if you have seen perhaps a better start to the quarter, better -- expecting deceleration as we get through the stimulus lap. I'm just wondering how you're planning the quarter.
And then if I could just sneak one more in, I just wanted to ask Barbara about what you're seeing in terms of inventory availability in the market and whether you have been able to capitalize on perhaps some of the supply chain volatility that's causing late deliveries elsewhere.
Michael Hartshorn:
Kimberly, I'll start with the first quarter guidance, it's Michael Hartshorn. The first quarter last year, we saw a significant acceleration in March and April last year. As a reminder, the government stimulus hit in the -- started being disbursed to taxpayers in the third week. So that -- we're planning around that with our guidance. We had a slower start to the year last year and then had a significant acceleration as we move through the quarter.
Barbara Rentler:
And then as it pertains, Kimberly, to availability, there is definitely availability. But what I would say is it's not consistent across all merchandise departments and classifications. As goods come in from the supply chain congestion and there's issues, it's not always as broad-based in every business. But with that, yes, I would say we've been able to capitalize on the volatility in the supply chain, just given our increase in packaway, how much it's gone up in the last few months. And we see more potential opportunities in front of us from closeout -- there's a lot of that merchandise that vendors are still moving is not necessarily even in the country.
Operator:
Your next question comes from the line of Mark Altschwager with Baird.
Mark Altschwager:
So with the inflationary backdrop getting tougher, I was hoping you could give us some perspective on how your customer has responded to the inflation in the past. And as you're planning for the spring season, how are you thinking about the share gain opportunity as consumers seek value versus the risk of a near-term pullback in spending as consumers digest some of the price hikes in Essentials categories?
Michael Hartshorn:
Obviously, we don't have -- it's been 40 years since the U.S. has seen this type of inflation, so we don't have a ton of experience on how the customer will react. So I'd be speculating as inflation appears at this point to be with us for a while, in general, I'd say the consumer seems to be healthy coming into the year, given higher wages and savings. But obviously, with this level of inflation throughout the economy, they're going to have to make choices how and where they spend their money, and it's highly likely the consumer will be seeking value, and that would be positive for us.
Operator:
Your next question comes from the line of Matthew Boss with JPMorgan.
Matthew Boss:
Great, and congrats on the next quarter. So Barbara, maybe could you elaborate on the behavioral changes that you cited tied to value and convenience, when you saw this potentially accelerate, how you think the model is positioned? And then just on the profitability front, as you cited in 2023 and moving forward, operating margin improvement, help us to think about the drivers of that as we think about the return to double-digit earnings growth annually going forward?
Michael Hartshorn:
Let me -- on the way we're thinking about this year, I'll just go through the components of expenses and then talk through the long-term model. Overall, like everyone in the U.S. economy, we're seeing cost inflation throughout the business. For us, it's most acutely felt in transportation, both domestic and ocean freight markets and also on the wage front. In those 3 areas, we have a very good line of sight on ocean freight and we know that they will remain elevated through 2022.
On the domestic freight, we don't expect the same type of headwinds on core domestic freight, although we do expect, especially with the current geopolitics, we do expect volatility in fuel-related costs. And then on wages with low unemployment rates, the overall labor market continues to be very tight, although the warehousing labor market has been the most competitive over the last year. All that said, we believe we're well positioned to start the year, especially given the wage actions we took in the back half of 2021. On the long-term model, given our market share opportunity with the consumers' heightened focus on value and convenience and given the fact that we're facing less brick-and-mortar competition, we believe we have a market share opportunity going forward. So looking into 2023, we're -- as you mentioned, we're targeting double-digit earnings per share growth. And the model or the formula looks very similar to what it looked like prior to the pandemic, and that's a combination of new store growth around 5%, comp sales of 3% to 4% with EBIT margin expansion at the high end of that range. And with the stock repurchase program, that adds up to the double-digit EPS growth.
Operator:
Your next question comes from the line of Chuck Grom with Gordon Haskett.
Charles Grom:
Earlier today, Cole spoke to an improving traffic picture in the month of February and also noted that they've begun to see some trade down in certain categories, suggesting that the focus on value that you guys are suggesting has actually already started to begun. So I'm just curious if you've seen that thus far and how it bodes for the balance of the year.
Michael Hartshorn:
We wouldn't comment on inter-quarter trends for us. Obviously, the latest information we can talk about is in January, what we did see during the quarter, as Omicron spiked, surged right before Christmas, we did see a falloff on traffic, but the customer with their fewer trips bought more per transaction as we progressed through the remainder of the quarter.
Barbara Rentler:
And the focus on value, our customer has always been focused on value. But as the world is evolving and the inflation, we actually feel we have an opportunity to gain a trade-down customer at the same time. So value has always been critical for us, and it's something the merchants are constantly watching and evaluating, especially as retails have gone up in the outside world, understanding where our price value relationship is with everything. So value is critical to us always, and it'll just be more important go forward.
Operator:
Your next question comes from the line of Lorraine Hutchinson with Bank of America.
Lorraine Maikis:
Just following up on that. You had discussed last quarter some limited pricing actions in certain categories. Can you update us on the success of that and if you plan to continue to broaden that out through more of the store?
Barbara Rentler:
Sure. We have put in a strategic process where we actually go in and the buyers are constantly assessing the market to understand pricing and where there were there potentially opportunities to increase that pricing. And we started that last quarter, and it continued through this quarter. And the average price per SKU was up somewhat during the quarter. The way we're looking at it is we've had successes in many areas now compared to where we were, and we are watching it and evaluating it and I would say being cautious about moving the needle based off of where we sit in the food chain. So we're evolving and testing in certain commodities -- not even testing, buying it in certain commodities where it's been successful.
But I think the most important thing for us to remember is that value to our customer, the real definition for her is the appropriate separation of price between ourselves and mainstream retail. So we'll continue to do that, and we'll watch things as they evolve and move on from there.
Operator:
Your next question comes from the line of Michael Binetti with Credit Suisse.
Michael Binetti:
Just to follow that a little bit, I mean, it does seem like -- I know, at first, you're fairly resistant to talking about AUR increases. But I guess, 2 quarters has gone by now, and the rest of the world is going to be taking some pretty meaningful price increases. I mean, do you see the opportunity improving versus where you were 1 and 2 quarters ago as far as the ability to take price? And I guess also, as you look through the store, are you starting to see any evidence of a new customer coming in that would point to evidence to you of a trade down?
I know during the great recession, it was a long time ago now, but I know you guys benefited from a lot of customers coming in from channels like department store and specialty apparel. Wondering if you're seeing any evidence like that of -- among the new customers coming in.
Barbara Rentler:
Well, Michael, first, let's talk about the pricing. So right, for the last 2 quarters, we've really been watching it. We've got a process in place. We are watching the retails move in our competition and all types of competition because the merchants are studying that and where we think we have that opportunity, and we can still offer unbelievable value to the customer, we're taking it. If we don't feel like we can offer that value to her at this point, we're not taking it.
What I would also say is, it's kind of hard to predict where mainstream retailers will be in the future and what they're going to do because prices can go up and go up and go up, and they might go up until they don't work at some point. And a traditional retailer can POS in any moment in time. So we are trying to really manage our way through giving the customer great value, increasing the AUR where it's appropriate and really making sure that we balance through where the future could go in terms of potential POS-ing at some point in time. So -- there's a lot of variables, which is why we have processes in place, and we're doing it strategically. But where we have done it strategically and continue to offer value to the customer, great values, it is working. And in terms of understanding of the trade-down customer, I think it's kind of hard to see if you're asking from specific types of products or retails. I wouldn't say we've seen anything specific along those lines to say that we're getting a trade-down customer at this point. But with inflation continuing, one would think that, that would be a logical conclusion that over time that we could potentially pick up additional market share.
Operator:
Your next question comes from the line of Marni Shapiro with Retail Tracker.
Marni Shapiro:
I have just a quick follow-up on the pricing question again, I'm sorry. But are you able to take prices up at dd's? I know those prices tend to be a little bit lower and the customer a little bit more sensitive.
And then if you could also just talk about past this year kind of longer term, you said there's a change out there in bricks-and-mortar, fewer competitors, potentially meaning a healthier retail environment in general. So is there an opportunity for you guys to push up the food chain a little bit with some better brands and some changes to the assortment just a little bit, especially at Ross Stores?
Barbara Rentler:
Okay. So 2 things. So at dd's, we have -- the customer is absolutely price sensitive and has lower price points -- but in duties, we're running the same process we're doing at Ross, we're studying it. The merchants are understanding it, they're understanding values because a lot of the competition for dd's is mass market, and a lot of those retails have gone up. And so we're running the same process in both companies to make sure that we have real sizes around it, we can understand it and make the right decisions. And dd's also had success in some areas where they have tried it. So I would say both companies, it's kind of -- it's an ongoing process, and it will be the same process that will continue.
In terms of longer, you're saying an assortment strategy, could we trade up into more better brands? Look, I think our better brand strategy that we have, we're comfortable with. We continue to test and try a set of brands to what the customers respond to -- so I would think we would continue to do that and then give her and offer her what she wants. But as it stands today, when it comes to brands and supply, as you know, -- it can also pick it out, right? So especially on better brands, they can be a lot and then it can temper they can come back up. So I think we're always looking to try to increase our brand strategy and try to offer the customer the best possible products and values that we can. And so that process would continue with over time, there were more opportunities and the customer was responding. We would continue to shift the assortment based on the customers' response.
Operator:
Your next question comes from the line of Beth Reed with Truist Securities.
Beth Reed Pricoli:
I want to ask about the lower income consumer. Do you see any changes in purchasing patterns related to this specific customer cohort? Or any color on trends at Ross versus dd's?
Michael Hartshorn:
I wouldn't make any call-outs, Ross versus dd. dd's performance has been in line to both actually performed better with government stimulus earlier in the year but has maintained levels that are similar.
And then -- in terms of changes, there are just so many factors that are happening with the consumer, whether it's COVID related, whether it's inflation, whether it's -- all the other things we're seeing, it would be hard to parse that specifically out on their behavior related to income factors.
Operator:
Your next question comes from the line of Dana Telsey with Telsey Advisory Group.
Dana Telsey:
As you think about the expanded opportunity for new store openings at both businesses, any adjustments in the size that you're making, how are you thinking about the regions where you're going to and expanding into and any framework this past fourth quarter of what you saw by region and how it was different by brand?
Michael Hartshorn:
On region performance, what we saw in the fourth quarter, as we said in the commentary, the top-performing regions included the Southeast and the Midwest. And then our largest regions, California, Florida and Texas. Texas was above the chain average, and California and Florida were slightly below.
But in terms of how we're thinking about long-term store potential, where we -- what gives us confidence in that is we -- as we do every year, we look at research on the store potential. And there's a couple of factors that are important. First of all, more broadly, the consumers focus on value and convenience and then the brick-and-mortar retail closures but also the changing traffic patterns for evolving customer behavior post-COVID, our ability to cluster stores together in high-density and high-volume trade areas. We've had success in our smaller markets. And then last but not least, we have a favorable growth trends in our targeted demographics. So those are the changes that gives us confidence to increase the store count potential to 3,600 locations.
Operator:
Your next question comes from the line of Laura Champine with Loop Capital.
Laura Champine:
It's about the long-term growth algorithm that you're laying out today, and it's more philosophical. Like why is now -- we're going into our third year where the comparables aren't exactly likely to live up to their name. Why is now the right time to lay out this long-term growth algorithm? And what gives you the confidence that you can put up sustainable comp growth? What kind of a macro do you need to hit your goals?
Michael Hartshorn:
Well, I'd say, number one, Laura, is what we've talked about is given the customers' continued focus on value and convenience, we're in the right sector of retail -- and we think we have a large market share opportunity ahead of us. I think this is the first time, 2022 is a difficult year to predict. But -- we think we can grow market share, and we think we have the strategies in place to be able to do that.
Laura Champine:
If I can get a quick follow-on, Will the growth -- I think what I heard was store growth of about 5%. Would that push your CapEx in the out-years up to more like 4% or 5% of sales compared to the 3%, 3.5% you have been running historically?
Michael Hartshorn:
It's -- there's a couple of factors that go into the CapEx. Certainly, one of the most important is new store growth. But it can get choppy with our distribution center capital as we're -- as last year, we added a new distribution center that is opening early this year. So it can get a bit choppy. But going forward, I think it remains at these levels, maybe slightly up in future years based on distribution center capacity growth.
Operator:
Your next question comes from the line of John Kernan with Cowen.
John Kernan:
Freight inflation and wage inflation isn't the only cost inflation out there. Product costs are higher. What's the outlook for merchandise margin this year and long term?
Michael Hartshorn:
Yes. John, I'll jump in on that. Consistent with the prior quarters and 2021, merchandise margin was strong. Without ocean freight, it improved every quarter versus 2019. So while we expect ocean freight costs to remain elevated through 2022, we're going to anniversary that initial spike in ocean freight costs in the fall. So as we look forward into 2022, again, without the impact of ocean freight, we feel like it's healthy and will continue to be strong and grow in 2022, obviously, dependent on sales and inventory turns but feel strong about that.
John Kernan:
Got it. Just maybe one quick follow-up. Where are we in the wage inflation cycle at Ross stores, you seem to imply that you've taken wages up both in stores and DCs. We've heard quite a bit from some of your big-box competitors out there about where they're taking wages. Where are we in the wage inflation cycle here? Do you feel comfortable where you are now in both DCs and stores.
Michael Hartshorn:
Yes. I would say, into the year, we feel good about the changes we made last year, but we -- our approach has been to look at wages on a market-by-market basis versus a blanket approach. But I would also add there are statutory increases. There's minimum wage increases. California has large bumps year to year, and there's other large states for us that have minimum wage increases. So we're keeping up with those, and then we're making decisions on a market-by-market basis to make sure we can hire great talent across the chain.
Operator:
Your next question comes from the line of Ike Boruchow with Wells Fargo.
Irwin Boruchow:
Just on freight, I think you gave on a LLY basis, it was a 100 basis point headwind in Q4. Can you just say what that was year-over-year, just to give some context. And then if there's any way you could explain what's embedded. I think you said the cost should get much better as you move through next fiscal year. But what is the year-over-year headwind that you're currently anticipating, whether it's first half, full year? Anything that would be helpful would be great.
Michael Hartshorn:
Ike, we wouldn't give specifics on the deleverage. We usually would do that after the fact. But as I explained the back half of last year is when we started seeing significant increases in ocean freight as lead times extended, and we had to pay more in the spot rate market, so we're up against that. We'll be up against that next year, so it will be less of a headwind this year.
Overall, we expect, though, that ocean freights will stay elevated all the way through the year and perhaps a bit higher, but the vast headwind will be in the first half of the year versus the second half of the year, if that makes sense.
Operator:
And we have no further questions at this time. I will now turn the call over back to Barbara Rentler for closing remarks.
Barbara Rentler:
Thank you for joining us today and for your interest in Ross Stores.
Operator:
And this concludes today's conference call. You may now disconnect.
Operator:
Good afternoon, and welcome to the Ross Stores Third Quarter 2021 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, COVID-related costs 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 2020 Form 10-K and fiscal 2021 Form 10-Qs 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:
Good afternoon. Joining me on our call today are Michael Hartshorn, Group President, Chief Operating Officer; and Connie Kao, Group Vice President, Investor Relations. And I'd also like to welcome Adam Orvos, our recently appointed Executive Vice President and Chief Financial Officer. We'll begin our call today with a review of our third quarter performance, followed by an update on our outlook for the fourth quarter and fiscal year. Afterwards, we'll be happy to respond to any questions you may have.
As noted in today's press release, third quarter sales and profitability significantly exceeded our expectations as consumers continued to respond favorably to our broad assortment of great bargains. We achieved these results despite waning government stimulus and uncertainties related to the spread of COVID variants. Earnings per share for the 13 weeks ended October 30, 2021, were $1.09 on net income of $385 million. This compares to $1.03 per share on net earnings of $371 million for the 13 weeks ended November 2, 2019. Total sales for the quarter rose 19% to $4.6 billion with strong comparable store sales increase of 14%. For the first 9 months, earnings per share were $3.82 on net earnings of $1.4 billion, up from $3.32 per share on net income of $1.2 billion for the same period in 2019. Sales for the first 9 months of this year rose 20% to $13.9 billion with comparable store sales up 14%. For the third quarter at Ross, children and men's were the best-performing businesses while the Midwest and Southeast were the top-performing regions. dd's DISCOUNTS trends remained strong during the period as their sales performance also significantly exceeded our expectations. However, like Ross, dd's profitability was negatively impacted by cost pressures related to freight, wages and COVID. At quarter end, total consolidated inventories were up 3%, while average selling store inventories were down 1% versus 2019. Packaway levels ended at 31% of the total compared to 39% for the same period in 2019 as we continued to use a substantial amount of packaway merchandise to support ahead of planned sales. In addition, there were receipt delays due to supply chain congestion. Turning to store growth. We completed our expansion program for 2021 with the addition of 18 new Ross and 10 dd's DISCOUNTS in the third quarter. For the full year, we added 65 locations comprised of 44 Ross and 21 dd's DISCOUNTS. Additionally, we plan to close 1 store by year-end. As previously mentioned, we expect to return to our normal annual opening program of approximately 100 stores in 2022. Now Adam Orvos will provide further details on our third quarter results, fourth quarter guidance and updated outlook for the year.
Adam Orvos:
Thank you, Barbara. As previously stated, comparable store sales were up 14% in the quarter. The increase was mainly driven by a larger average basket with traffic down slightly versus 2019. Operating margin of 11.4% was well above our guidance range. As expected, the decline in overall profitability versus 2019 was mainly due to ongoing headwinds from higher freight, wage and COVID-related costs.
Cost of goods sold grew by 85 basis points in the quarter. Domestic freight expenses increased 125 basis points, while higher ocean freight costs negatively impacted merchandise margin, which declined by 40 basis points. Buying also rose by 10 basis points. These higher expenses were partially offset by occupancy and distribution leverage of 65 and 25 basis points, respectively. SG&A for the period grew 15 basis points as leverage from the strong sales gain was offset by COVID expenses and higher incentive costs given our better-than-expected third quarter results. Total net COVID-related costs for the period were approximately 35 basis points, the vast majority of which impacted SG&A. During the third quarter, we repurchased 2.1 million shares of common stock for an aggregate cost of $241 million. We remain on track to buy back a total of $650 million in stock for the year. Now let's discuss our fourth quarter guidance. As a reminder, our projections compare to the same period in 2019. Looking ahead, while we are encouraged by the ongoing strength of consumer demand, there remains significant uncertainty related to the worsening industry-wide supply chain congestion as we enter the important holiday season. As a result and while we hope to do better, we are forecasting comparable store sales to be up 7% to 9% with earnings per share projected in the range of $0.83 to $0.93 for the 13 weeks ending January 29, 2022.
The operating statement assumptions that support our fourth quarter guidance include the following:
total sales are projected to grow 10% to 13%. We expect operating margin to be 8.1% to 8.8%. This forecast primarily reflects ongoing pressure from the previously mentioned supply chain headwinds as well as holiday pay incentives in our stores and distribution centers. In addition, COVID-related costs are projected to negatively impact EBIT margin by approximately 30 basis points in the period.
Net interest expense is estimated to be about $18 million. Our tax rate is expected to be approximately 22% to 23%, and weighted average diluted shares outstanding are projected to be about 352 million. Based on our year-to-date results and fourth quarter guidance, we are now forecasting full year comparable store sales gains of 12% to 13% and earnings per share in the range of $4.65 to $4.75 compared to $4.60 in 2019. Now I'll turn the call back to Barbara for closing comments.
Barbara Rentler:
Thank you, Adam. We're encouraged by our above-plan sales year-to-date. As Adam noted, uncertainty remains on how industry-wide supply chain congestion may negatively affect our business in the fourth quarter. That said, we believe we are well positioned as a value retailer and are confident customers will find broad assortments of great branded bargains in our stores for the holiday season.
Moving forward, consumers' increasing focus on value and convenience, along with a large number of retail -- recent retail closures and bankruptcies, make us confident about our prospects for continued market share gains in the future. At this point, we'd like to open up the call and respond to any questions you may have.
Operator:
[Operator Instructions] We have our first question coming from the line of Matthew Boss with JPMorgan.
Matthew Boss:
Congrats on a nice quarter. So Barbara, with 3 straight quarters, 13% to 15% 2-year comps, could you elaborate on market share gains tied to value and convenience that you're seeing? And then given the closures and bankruptcies that you cited, how would you best characterize product availability in the marketplace today?
Michael Hartshorn:
Matthew, it's Michael Hartshorn. On market share gains, longer term, we're very excited about the market share opportunity ahead of us. We're in a very healthy sector of retail with the consumer even more focused, as you mentioned, on value and convenience. We've clearly gained market share during the pandemic and are confident about our future prospects for further gains, given the significant number of retail closures and bankruptcies.
Barbara Rentler:
And Matthew, in terms of product availability, I have a [ good feeling ], it's a good time to be a buyer, maybe not in every category but some areas are very good. Others are inconsistent but overall, it's favorable. Even with store closures, one would expect that over time, as -- after COVID as retail settles, that the market will get more bullish on creating more goods. But right now, we really feel good about market availability.
Operator:
We have our next question coming from the line of Mark Altschwager with Baird.
Mark Altschwager:
Welcome, Adam. I'm curious, just with the more inflationary backdrop, are you seeing more opportunities to raise ticket while still maintaining the strong value proposition? Or how are you thinking about this lever to offset some of the ongoing freight and expense pressures?
Barbara Rentler:
Sure. Look, our pricing model is really built off of other mainstream retailers and then we provide a discount. So we're very aware of pricing at different levels of distribution and we watch it closely. With that, we've continued to experiment with higher retail in all areas in the new organization. In some cases, it's been absolutely fine, and in some cases, not quite as fine. And I wouldn't elaborate more on that in this forum. But what I would say is we would adjust pricing over time once we understand it. We don't know where it's really all going at this point, but we are definitely experimenting with different retails.
Operator:
We have our next question coming from the line of Paul Lejuez with Citi.
Paul Lejuez:
You referenced ongoing strength of consumer demand. I was curious if that was a comment on the fourth quarter to date, if you're seeing that continue. You also referenced worsening industry-wide supply chain congestion, and I'm curious if that's hurting you thus far in 4Q to a greater degree than what you saw in 3Q. And big picture, I'm wondering if you think that congestion will ultimately be good for your business, either in fourth quarter or into '22.
Michael Hartshorn:
Paul, we are seeing a very healthy consumer. When we came into the quarter, we were worried about the Delta variant and also the receding government stimulus. But we've continued to see a very healthy consumer with strong demand for us across geographies, merchandise areas, and you can see relatively across retail, one that is increasingly focused on price value.
On the freight front, we've taken a number of actions to ready ourselves for the holiday selling period, including adjusting our ordering times. We chartered our own ocean vessel, and we've been purchasing at market rate capacity to make sure we have enough ocean freight to move goods. You can see that certainly in our margins for the quarter. Our merchant margin was impacted by ocean freight that we weren't able to offset, with merchant margin down about 40 basis points. I wouldn't comment on the impact in the third quarter. The congestion right now is squarely focused on the port and getting goods out of the port.
Paul Lejuez:
And the merchandise margin, you said it was down 40 basis points. What -- you said that was impacted by ocean. Can you separate the pure merch margin versus the ocean piece?
Michael Hartshorn:
We wouldn't break that out separately. Ocean freight is actually included in our merchant margin. Merchant margin ended up better than we expected for the quarter as we had more full-price selling and faster turns with the inventory ahead of plan -- our sales ahead of plan.
Barbara Rentler:
And then I would say, as it pertains to the supply chain congestion, it should create more closeout opportunities for us in the future.
Operator:
We have our next question coming from the line of Lorraine Hutchinson with Bank of America.
Lorraine Maikis:
Barbara, I know you said it's a good time to be a buyer, but I just wanted to focus in on any risk around receipt timing ahead of holiday. And then what are you hearing from your vendors going into the spring of next year vis-à-vis product availability and the categories you really want to focus on?
Barbara Rentler:
On receipt timing ahead of holiday, I think we've taken all the appropriate actions as it pertains to receipt timing, whether Michael just said chartering the vessel, building in longer lead times, everything to get goods through the port. But with that, we have concerns, not a given but we have some concerns. As we think about product for spring, I think vendors have gotten very aggressive in terms of pricing goods. I think there are some vendors that are really looking to gain some market share in this time frame and have taken bigger risk in terms of making commitments. So I think it's very much on who the vendor is and what their strategy is. But in terms of -- again, in terms of timing for holiday, we've taken the assets we think we need to take. But again, we have some concerns but it's not a given.
Operator:
We have our next question coming from the line of Kimberly Greenberger with Morgan Stanley.
Kimberly Greenberger:
Okay, great. I just wanted to follow up on Lorraine's question just about holiday, Barbara, and just want to make sure I understand you clearly. So how are you feeling about your in-stock levels currently here, call it, middle of November? And how do you feel about your inventory position here for the next sort of 6 weeks of holiday selling? If you could just give us a little bit of color just on the short term. And then I wanted to ask a couple of other questions, if I could.
Michael Hartshorn:
Kimberly, on inventory position currently, we're in a good shape. We ended the quarter with average in-store inventories down about 1%, which is where we wanted them to be, and we continue to have a fresh flow of product. There are a lot of receipts between now and the next 6 weeks. And there could be some risk in areas like home that, as Barbara mentioned, they're not a given but we reflected that risk in our guidance at 7% to 9%.
Kimberly Greenberger:
Okay, got it. And is it -- are the receipts risk concentrated in home because that's where you would have, call it, more of a direct import or more of the direct imports would be impacting that area and those would be the items that would be either stuck in ports or on ocean-going vessels?
Michael Hartshorn:
Correct, right. Mainly -- we have 6 weeks left mainly stuck in ports.
Kimberly Greenberger:
Okay, mainly stuck in ports. Okay, perfect. That is great, okay. And then on the quarter, Michael or Adam, whoever wants to address this, you talked about larger basket size. I'm wondering if you can talk about the average unit retail versus the units per transaction, what's driving that? And then just longer term, following up on the question with regard to pricing. I'm not sure if you have taken a look at where you're sitting competitively versus peers. But is there -- I know there are some of your peers looking at some surgical price increases in some categories. I'm just wondering if you've taken a look at your pricing and re-benchmarked it recently, if you have any thoughts on that.
Adam Orvos:
Yes, this is Adam. Let me jump in on the first part of that question. So our strong comps were driven by size of basket, which was primarily driven by a number of units per transaction. We did have a slight increase in AUR, driven by the better full-price selling, given the above-plan sales. And then as we mentioned, there was a slight decline in traffic in the quarter.
Barbara Rentler:
And then as it pertains to the pricing issue, we are definitely experimenting with higher retails. And I said in some areas, it's working, it's fine. In some areas, it's not fine. I think we'll continue to do that, Kimberly, and fine-tune what the customer is willing to accept as we watch what goes on in mainstream retailers and where their AURs sit. And after we get comfortable, over time, we would consider adjusting the pricing once we really understand it.
But as we get ready to enter into Q4, we're not expecting mainstream retailers to promote but we don't really know that as you get into Q4, and there's really this compressed period of time. So with that, again, merchants are out there trying new things, trying retail, seeing what the customer is willing to accept. But we kind of need to see both of those things to take, I would say, a larger step.
Kimberly Greenberger:
Perfect. Makes perfect sense.
Operator:
We have our next question coming from the line of Chuck Grom with Gordon Haskett.
Charles Grom:
I was wondering if you guys could speak to the trend of your comp there in the quarter. And if you think weather had any impact, adverse impact, particularly in September and October? And any early thoughts on the first couple of weeks of November? It sounds like the trend has stayed strong but just wanted to confirm that.
Adam Orvos:
This is Adam, I can take that. So comps were strong throughout the quarter and really no -- weather impact was very immaterial in the quarter.
Michael Hartshorn:
And we wouldn't comment on intra-quarter trends.
Operator:
We have our next question coming from the line of Michael Binetti with Credit Suisse.
Michael Binetti:
I'm just curious, as you look at the guidance, what you guys are seeing in the business that helped you build to a 7% to 9% guidance for fourth quarter. I think the last prior 2 quarters, it was 5% to 7%. Just any change on how you built up with it. But then, I guess Michael, when you -- can you help -- I know you won't give us a number to Paul's question earlier, but when you think about what you baked into freight in the fourth quarter, maybe just some directional idea of how that looks relative to third quarter.
And then as you look out, maybe just -- thinking about when your contracts roll, how much visibility you have into the first half of next year and help us understand if it's -- if we should think that, that's still going to be an incremental headwind into the first half based on what you guys know today.
Michael Hartshorn:
Sure, Michael. Let me generally talk about the fourth quarter guidance. Obviously, in these uncertain times, we believe it's prudent to be conservative, as we always have with our guidance, and hope to exceed these estimates. Obviously, the large difference between Q3 is a cautious comp estimate, given the potential impact of unpredictable supply chain congestion.
The guidance also includes ongoing freight pressure related to the congestion. I would say it's not significantly worse than it was in Q3. It also includes elevated wage-related costs due to holiday incentives in both our stores and distribution centers to acknowledge our associates' extraordinary dedication throughout the pandemic. What we'd expect on that is above -- sales above the estimates, we'd expect 15 to 20 basis points of leverage. On freight congestion, I think our view at this point is we would not expect freight to subside probably through the first half of next year. And then we'll have to see how it trends after that. In terms of what impact that could have, we'll have more to say in our year-end call as we finish up wrapping up our budget cycle.
Michael Binetti:
Okay. If I could follow that. Just as you look at some of the AUR initiatives that you are seeing success with, Barb, do you feel like you have enough at this point to combat that freight pressure in the first half as needed?
Barbara Rentler:
No. I think where we are now is that we will continue to test the AUR and then make probably slower moves so we really understand what that looks like in mainstream retailers.
Operator:
We have our next question coming from the line of Jay Sole with UBS.
Jay Sole:
Great. I just want to know if you can share with us, high level, I'm not looking for any specific guidance, but going into first quarter next year, lapping the stimulus. How much of a benefit do you think you got from the stimulus in the first quarter of this year? And how do you think it might play out next year as you lap that, what kind of impact would it have on sales?
Michael Hartshorn:
Yes. At this point, we wouldn't comment on next year. As I said, we'll have more to say after we wrap up the fourth quarter and provide guidance in our year-end call in early March.
Jay Sole:
Okay. And maybe if I can just ask one more then. There's a lot of talk about how the pandemic has changed shopping and consumers may be adopting more of an omni-channel method. If you look at the operating income growth for your department store competitors over the last 3 quarters, it's up over 100%. Versus off-price, it's up more like 10%. Do you feel at all like something has changed where maybe the department stores are catching up a little bit? And if not, why not?
Michael Hartshorn:
Catching up in what regard?
Jay Sole:
Just catching up in a way that like you've outgrown them in terms of sales. You mentioned the market share gains that you've taken, outgrown them in terms of profit, but maybe they're getting closer to competing and being able, maybe not necessarily maintain the same level of sales, but maybe getting more profitable, which ultimately could be an advantage they could use to sort of catch up in other ways as well.
Michael Hartshorn:
Yes. I think overall, we'll have to see how it plays out. I mean, we're still in this burst of economic activity where demand is exceeding supply. I think we have to understand what happens when it's a more -- a greater balance between supply and demand, which we'll see if that's first quarter or second quarter of next year. So it's hard to say at this point.
Operator:
We have our next question coming from the line of Marni Shapiro with Retail Tracker.
Marni Shapiro:
Congratulations. Could we just talk a little bit about 2 things? As the consumer's back out and about, working events, parties, have you seen a shift in what she's buying or are you continuing to see strength across the board? And then if you can also just touch on, with all of the late deliveries in the market, have you been able to still get in the very holiday-rich type of items, Christmas-themed items? Or were you able to tap into packaways from last year's holiday to make sure that, that was on the floor in time?
Barbara Rentler:
Sure, Marni. We have seen a shift with the customers. Look, we've always had a big casual business, let me tell you that. That's always been a big business for us. And certainly during the pandemic, that business got even bigger and stronger for us. But what we have seen is we have seen the customer make a shift back into what you're looking for as holiday, glitz, dress-up, specials [ ongoing there ]. We have seen the customer make that shift into holiday product and also just more into more mainstream sports brands. So a little bit of both. So casual is still very good, still a business that we believe and it will expand and get greater, but she is making a shift, whether it's back to work or she's going out for easing, whatever she's doing, we have seen that, yes.
Marni Shapiro:
What about like in the home and like bags, like those kinds of bags to go back to work or the home area, if she's going back to work and not thinking about her home as much? I don't know.
Barbara Rentler:
You're saying like in handbags?
Marni Shapiro:
Yes. Has she shifted into handbags as she's going out again or out of home and into apparel more? Those kinds of bigger shifts as well?
Barbara Rentler:
I think anything where she is leaving her house in -- on the apparel side has taken a shift, whether it's in footwear, whether it's in handbags. She hasn't replenished, replaced a lot of those products in a long time. So yes, we are seeing a shift back into some of those businesses as she goes out. She wants new stuff. So whether it's home or apparel though, Marni, I would say both businesses have been relatively similar in sales gain. So she's kind of traveling between both worlds now. I think the surge in apparel is because she just doesn't own it.
Marni Shapiro:
Yes, that makes sense. And then just on the packaway?
Barbara Rentler:
And then on packaway, we -- and how it's just -- just do me a favor, just remind me that piece again on packaway because I think I might have interpreted it as the holiday piece. Hit me back with that question again. Marni?
Operator:
We have our next question coming from the line of Laura Champine with Loop Capital.
Laura Champine:
Should we hold up and try to get Marni back or would you prefer I fire ahead?
Michael Hartshorn:
Fire ahead. We'll call Marni later.
Barbara Rentler:
Go ahead. We'll find Marni later.
Laura Champine:
Okay, here goes. I thought the SG&A expense level was really impressive, given that I think you're saying that COVID is still an incremental hit. Are we -- is this kind of a base level that we can look at as we start to model for next year? What are kind of some of the puts and takes that are keeping, despite really strong top line, that SG&A expense is staying fairly flat?
Michael Hartshorn:
Yes -- go ahead.
Adam Orvos:
Yes. No, I was just going to jump in and say, COVID's been a pretty consistent impact throughout the year and will be in fourth quarter. We talked about the actions we've taken from a wage standpoint and from an incentive standpoint in our DCs and our stores. Those are clearly kind of the biggest movers within SG&A.
Michael Hartshorn:
And then obviously, I would say the 14% comp helps us leverage the SG&A significantly.
Operator:
[Operator Instructions] We have our next question coming from the line of Bob Drbul with Guggenheim.
Robert Drbul:
Just wondering if you could maybe spend a little bit more time on the labor component and just sort of the wage pressures that you're seeing in labor availability. Maybe just give us some insights on that. That would be helpful.
Michael Hartshorn:
Sure, Bob. It's a very competitive market for talent, and we've seen the most competition in our distribution centers. We made some permanent wage increases early this year. We also have some retention and incentives to get us through the peak. We're in really good shape. We've been able to staff up the peak. The distribution centers are where they need to be in the stores. Obviously, we have holiday selling ahead of us. We also have incentive -- hiring incentives there to make sure we can staff up for peak, and we're confident that we're in a good place there as well. Given the competition, we'll remain competitive to make sure that we can -- we'll remain competitive with our pay to make sure we can attract talent, and we feel really good about the workforce right now.
Operator:
We have our next question coming from the line of Adrienne Yih with Barclays.
Adrienne Yih-Tennant:
Congratulations on the progress on the top line in the quarter. Barbara, you made a comment during the prepared remarks. You said you should see improvement in kind of closeout buying. And I'm wondering, are you seeing any incrementality in that, in increased supply flow from either canceled orders or stranded inventory that could be used for short-stay buys and redeploy it earlier next year? And then just a clarification question on the, Adam, on the freight. The 160 basis points of freight pressure this quarter, fourth quarter is similar and then carrying that same level through the first half of '22? Is that the implication that you were intending?
Adam Orvos:
I'll start with the freight. I was making no commentary on what the freight cost level will be next year. I was really answering that in terms of what congestion could look like. Obviously, we'll have some other different options first quarter versus the fourth.
Barbara Rentler:
And then in terms of the content of the closeout buying, certainly, our expectation is that there will be full product as retailers have canceled goods because they're late and they can't get to the selling floor. So that would be real packaway for fall for Q3, Q4 of next year. But we do see opportunities on, I would guess what you're thinking of as kind of seasonless apparel that we could flow now through Q1. I believe it's a combination of both.
Adrienne Yih-Tennant:
Okay, fantastic. Last question, if you would. Where is the average hourly rate? I seem to recall a few years ago, maybe 2018 or '19, you had sort of committed to this $12 number, and that was typically almost $1 higher than the average across the nation. I know you're at the better end of pay. I'm just wondering where that number sits today maybe relative to where Walmart, Target and some others are in that mid-teen range.
Adam Orvos:
Yes. We don't disclose the specific wage. We do have a base level at $11, but a significant portion of the chain is under minimum wage. California, for instance, is at $15, so the average wage is well above that baseline.
Adrienne Yih-Tennant:
Fair enough. Thank you very much and best of luck for holiday.
Operator:
We have our next question coming from the line of Simeon Siegel with BMO Capital Markets.
Simeon Siegel:
Sorry if I missed it, did you say where you expect inventory to end 4Q and then over the next few quarters? And then to the earlier point about outperforming despite waning stimulus, have you guys quantified what you think the benefit was from stimulus? And just how you're thinking about the potential impacts as we cycle through that early next year.
Michael Hartshorn:
On next year, we wouldn't comment. We'll comment again at year-end. On inventory, we typically don't guide ahead on inventory levels.
Simeon Siegel:
So I guess for the stimulus, have you quantified what it was this year, how you think about the benefit this year?
Michael Hartshorn:
It's really hard because there's a lot of moving parts because it's not only stimulus, it's customer pent-up demand. We'll end up developing plans around it as we move into next year but we haven't quantified that.
Operator:
We have our next question coming from the line of Ike Boruchow with Wells Fargo.
Jesse Sobelson:
Hi, everyone. This is Jesse Sobelson on for Ike. And I was just wondering, as we look forward and begin to model next year, would you guys be able to quantify timing of when COVID costs might be able to revert? Or are you expecting that to sustain and these costs to just kind of be a part of the business going forward?
Michael Hartshorn:
We wouldn't comment specifically on next year, but we would expect -- I would say generally, we would expect COVID costs to come down. They are not wholly permanently part of the cost.
Operator:
We have our next question coming from the line of John Kernan with Cowen.
John Kernan:
Just curious on the margin picture. You obviously outperformed your comp guidance, and the EBIT margin was down roughly 100 basis points from the pre-COVID base in '19. You're guiding it much lower than that, albeit on lower comp guidance for the fourth quarter. Just curious, what do you think the biggest levers are to recapture that low teens operating margin that you generated in 2019? There's a lot of inflation across retail, the factories, your vendors, supply chain. Just curious how you think you're going to recapture that pre-COVID level of profitability? Is it really just through more comp store sales gains? How do we quantify that?
Michael Hartshorn:
Sure, John. As I said, obviously, we're in a very healthy sector of retail and are confident in our prospects for further market share gains. As we sit here today, it's difficult to predict how much of the inflationary cost headwinds we're experiencing from the burst of economic activity are transitory versus permanent. So margin recovery will be dependent on where and when those costs stabilize.
And of course, our sales volume, where we once again, we believe we have a long-range, large market share opportunity ahead of us. Over time, we would expect to return to double-digit EPS growth on the 3% to 4% comp. We do have initiatives in the company to try to increase efficiencies in our big areas of expense, including our stores and distribution centers, but it's going to be largely dependent on the transitory nature of the inflation that we're seeing today.
Operator:
We have our last question coming from the line of Tim Vierengel with Northcoast Research.
Timothy Vierengel:
Can you guys remind us of how you're thinking about store footprint and unit growth? And then maybe highlight for us if that environment or setup is getting easier or more difficult as you look forward?
Michael Hartshorn:
Sure. On the real estate front, as we said in our comments, we ended up -- we wrapped up our program for this year. We opened 65 stores. We also said that we expect to return to historical annual program in 2022 of opening 100 stores annually. Overall, the real estate market is good. And we would expect there to be increased supply of available sites, given the level of store closures.
Timothy Vierengel:
Good. Sorry I missed that.
Operator:
There are no further questions on queue. I would now like to turn the call back over to Barbara Rentler for any closing remarks.
Barbara Rentler:
Thank you for joining us today and for your interest in Ross Stores. Happy holidays.
Operator:
Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator:
Good afternoon, and welcome to the Ross Stores Second Quarter 2021 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, COVID-related costs 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 2020 Form 10-K and fiscal 2021 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:
Good afternoon. Joining me on our call today are Michael Hartshorn, Group President, Chief Operating Officer; and Connie Kao, Group Vice President, Investor Relations. We'll begin our call today with a review of our second quarter performance, followed by our outlook for the third quarter and fiscal year. Afterwards, we'll be happy to respond to any questions you may have.
As noted in today's press release, we are pleased that both second quarter sales and earnings substantially exceeded our expectations. Sales benefited from customers' positive response to our broad assortment of great bargains. In addition, our results were bolstered by a number of external factors, including ongoing government stimulus, increasing vaccination rates and diminishing COVID restrictions. Earnings per share for the 13 weeks ended July 31, 2021, grew 22% and to $1.39 on net income of $494 million. This compares to $1.14 per share on net earnings of $413 million for the 13 weeks ended August 3, 2019. Total sales for the quarter rose 21% to $4.8 billion with comparable store sales up a robust 15%. For the first 6 months, earnings per share were $2.73, on net earnings of $971 million, up from $2.29 per share on net income of $834 million for the same period in 2019. Sales for the first half of 2021 rose 20% to $9.3 billion with comparable store sales up 14%. For the second quarter, Ross' sales trends across merchandise areas and regions were fairly broad-based with children's and the Midwest performing the best. Additionally, dd's DISCOUNTS trends remained robust during the period as both sales and operating profit gains significantly exceeded our expectations. At quarter end, total consolidated inventories were down 5%, while average selling store inventories were up 3% versus 2019. Packaway levels ended at 30% of the total compared to 43% for the same period in 2019 as we use a substantial amount of packaway merchandise to support ahead-of-planned sales. In addition, there were receipt delays due to supply chain congestion. Turning to store growth. We now expect to open approximately 65 total locations this year, comprised of about 45 Ross and 20 dd's DISCOUNTS. As usual, these numbers do not reflect our plans to close or relocate about 10 stores. As mentioned in last quarter's call, in 2022, we expect to return to our normal annual opening program of approximately 100 new stores. Now Michael Hartshorn will provide further details on our second quarter results, third quarter guidance and updated outlook for the year.
Michael Hartshorn:
Thank you, Barbara. As we previously stated, comparable store sales increased 15% in the quarter, mainly driven by a larger average basket with traffic up slightly versus 2019. Operating margin was well above plan and up versus 2019 at 14.1%. Cost of goods sold decreased by 45 basis points in the quarter. Merchandise margin and occupancy improved by 80 basis points each, while buying costs declined by 10 basis points. Partially offsetting these items were higher distribution expenses which grew 40 basis points, primarily from wage increases, while worsening industry-wide supply chain congestion drove higher freight costs of 85 basis points.
SG&A for the period rose 5 basis points as leverage from strong sales gains was offset by COVID expenses and higher incentives given our better-than-expected second quarter results. Total net COVID-related expenses for the period were approximately 45 basis points, the vast majority of which impacted SG&A. During the quarter, we repurchased 1.4 million shares of common stock for a total purchase price of $176 million. We remain on track to buy back a total of $650 million in stock for the year. Now let's discuss our third quarter guidance. As a reminder, our projections compare to the same period in 2019. Looking ahead, there remains much uncertainty on the sustainability of the positive external factors that benefited our first half results as well as the potential risk we could face from the spread of COVID variants and worsening industry-wide supply chain congestion. As a result, we are forecasting comparable store sales to be up 5% to 7% for the third quarter, with earnings per share projected to be in the range of $0.61 to $0.69. The operating statement assumptions that support our third quarter guidance include the following. Total sales are projected to grow 9% to 12%. We expect operating margins to be 7.3% to 7.9%. This forecast reflects significant escalation of freight costs as well as higher distribution expenses. In addition, ongoing COVID-related costs are projected to negatively impact EBIT margin by approximately 45 basis points in the period. We plan to open 28 stores during the third quarter, consisting of 18 Ross and 10 dd's DISCOUNTS. Net interest expense is estimated to be about $19 million. Our tax rate is expected to be approximately 24% to 25%, and weighted average diluted shares outstanding are projected to be about 354 million. Based on our first half results and third quarter guidance, we now project full year comparable store sales gains of 10% to 11% and earnings per share to be in the range of $4.20 to $4.38 compared to $4.60 in 2019. Now I'll turn the call back to Barbara for closing comments.
Barbara Rentler:
Thank you, Michael. While we're pleased by the better-than-expected results we reported today, as Michael noted, there's a high level of uncertainty on a number of external factors and how they may affect our business over the balance of the year. That said, we believe we are well positioned as a value retailer and remain confident in our ability to continue to deliver great branded bargains.
Moving forward, we remain optimistic about our prospects for continued growth in both sales and profitability over the longer term, especially given consumers' increasing focus on value and convenience. Moreover, the significant number of retail closures and bankruptcies in recent years further enhances our ability to gain additional market share in the future. At this point, we'd like to open up the call and respond to any questions you might have.
Operator:
[Operator Instructions] Your first question is from the line of Lorraine Hutchinson from Bank of America.
Lorraine Maikis:
It's quite a different tone with the 2Q beat versus the 3Q guidance. I was just curious, how much of these sales and margin pressures are you seeing today versus how much you're baking in just in case things get worse?
Michael Hartshorn:
Kimberly (sic) [ Lorraine ], it's Michael. On the sales front, the guidance is really based on the high level of uncertainty and risk that could happen in the third and fourth quarter, and it's really based on the risk that the external factors that benefited the first half, how sustainable those are. And then also with the Delta variant and supply chain congestion, what other risks exist. That said, we hope to do better than the guidance as we have year-to-date thus far.
Operator:
Your next question is from Mark Altschwager from Baird.
Mark Altschwager:
So a lot of focus out there on kind of the cost side of the current kind of supply chain backdrop. I was hoping you could speak to some of the opportunities this is creating or expected to create in the months and quarters ahead just with canceled orders, late deliveries, inventory trapped in nodes throughout the system. Just how do you see this really playing out from an inventory availability standpoint in the coming quarters?
Barbara Rentler:
Well, listen, obviously, the supply chain congestion is causing all kinds of receipt delays right now, and we expect those actually to worsen as the year goes on. So at some point in time, those goods will back up, and we will see those as potentially an opportunity, either for packaway or to flow, depending upon business or what the types of products are. So at this moment, you would think that, that would happen probably either late in the year or the beginning of next year, if I had to pick a time frame.
Operator:
Your next question is from the line of Paul Lejuez from Citigroup.
Paul Lejuez:
Can you maybe talk about performance by state? Curious, your 3 big states, how different the performance was in the second quarter? And also curious if there are any states in particular where you might be seeing some sort of change in trend in the third quarter to date that's kind of guiding how you are thinking about comps in 3Q. And I was also curious if you could just talk about home versus apparel performance in the quarter.
Michael Hartshorn:
On the regional performance, so Texas, Florida, California, they make up about 50% of our sales, what we saw during the quarter. Texas and California were relatively in line with the chain. Florida, which trailed in the first quarter, saw a significant improvement as tourism increased, though still a bit below the chain in the second quarter. And we wouldn't comment on current quarter trends at this point.
Barbara Rentler:
And home versus apparel, home continues to be one of our top-performing merchandise areas similar to trends that we've seen throughout the entire pandemic. Apparel, however, continue to accelerate from Q1 to Q2. So I think what we're seeing in apparel is pre-COVID, there was already a shift towards casual wear and then active wear. And what's happening now is that more traditional sportswear classifications have also improved. So that's starting to make -- to build the sales from one quarter to the other.
Paul Lejuez:
Barbara, are you seeing the supply chain disruption impact certain categories more than others? Anything you can share there?
Barbara Rentler:
Look, overall, there's plenty of supply. It's not consistent, to your point, across merchandise departments. But in reality, what's happening is that merchandise deliveries are sliding. So it could slide 2 weeks, 30 days, they're sliding. And so what the merchants are really doing is they are constantly flexing based off of what they're seeing in the market, the availability. And they're chasing into classifications that they need. So it's a little bit of a moving target. But overall, there's plenty of supply.
Operator:
[Operator Instructions] Your next question is from the line of Kimberly Greenberger from Morgan Stanley.
Kimberly Greenberger:
Okay, great. I wanted to hear if you've given any further thought to potentially some price actions just to help absorb some of the higher costs, even if it's just a little bit here or there or sort of surgically done based on what comparison prices you're seeing in the marketplace? I just wanted to see if you had thought about that any differently as compared to your comments back in May. And then could I just get a clarification on the full year 10% to 11% comp guidance and what does that embed for the fourth quarter?
Barbara Rentler:
Okay. In terms of pricing, Kimberly, we still strongly believe that price value is critical to our customers. So as you know, we, over the years, talked about how the merchants comp shop regularly. And really, they really understand that our target shopper is really price-savvy. So she's not getting the best deal out there, she knows it. The higher prices at traditional retailers could increase the pricing gap that we offer and strengthen the values that we provide to our shoppers. And quite frankly, the merchants are constantly making those price value assessments of their assortments all the time. They're prioritizing, as we'll always prioritize, really having sharply priced assortments for our entire store. So at this point, I wouldn't talk anything more about it for competitive reasons. But the one comment that I would say is we won't be the leader in terms of raising prices. The merchants will do their job and they'll assess it and they'll price it the way they see it.
Michael Hartshorn:
Kimberly, on comp guidance. The fourth quarter looks very similar to the Q3 at the 5% to 7%.
Operator:
Your next question is from Chuck Grom from Gordon Haskett.
Charles Grom:
Just wondering if you guys could speak to the magnitude of the DC and freight costs that you're anticipating in the third quarter. It looks like over the past couple of quarters, it's been about a 100 to 125 basis point drag. Just wondering if you could speak to how big of a drag you're expecting here in this quarter?
Michael Hartshorn:
We didn't give specific guidance. In the second quarter, obviously, DCs were 40 basis points of drag and freight was 85 basis points. So we would expect both the DCs and the freight costs to worsen in the back half. Some of that is driven by the leverage on comp. But we would expect -- we've raised wages further in the DCs, and we're seeing specifically ocean freight costs significantly escalate in the back half. So those expectations for worsening are built into the guidance that we gave.
Operator:
Your next question is from the line of Matthew Boss from JPMorgan.
Matthew Boss:
Congrats on the nice quarter. So Barbara, any early thoughts on overall back-to-school trends, maybe what you've seen so far in August in some of the states that have gone back earlier? And then, Michael, on gross margin, have you embedded any change in the external promotional or pricing backdrop for the third quarter relative to what we saw in the front half of the year just in your merchandise margin outlook?
Barbara Rentler:
So Matt, the back-to-school trends. Look, we're -- we've been pleased with our younger businesses' performances for a while. And so that obviously bodes well for back to school. In terms of classifications, I would say the customer is still buying wear now but has started to make that conversion to go forward in a more traditional back-to-school fashion that we might have seen from a product perspective in, let's say, 2019. But we feel good about those businesses because, obviously, our younger businesses are doing well. Therefore, back-to-school, we feel pretty good about.
Michael Hartshorn:
And Matt, on margin, obviously, we have built in what we can see today with our current on order. I think our big opportunity as it was in the second quarter is if we can exceed the sales plans there, there should be a benefit as we turn faster and take lower margins.
Operator:
Your next question is from Janine Stichter from Jefferies.
Janine Stichter:
I wanted to ask about the COVID costs, if you had any thoughts about the time line for potentially starting to moderate the expense you're putting into the cleaning and sanitation aspect in the stores?
Michael Hartshorn:
Sure. I think that's changed over time. Obviously, if you would have asked me that 2 months ago, it would have been sooner than later. But right now, we have the cleaning aspects built in throughout the rest of the year, which we think is appropriate given the variant spread.
Operator:
Your next question is from Michael Binetti from Credit Suisse.
Michael Binetti:
Michael, I'm curious, what you think are the biggest opportunities to get the business -- if we try to look beyond a lot of the noise in the margin right now, to get the business back to that kind of 14% plus operating margin that you guys saw a few years back? It sounds like you -- I guess when you look at the pricing commentary in the soft lines group, you seem to think that there's no real urgency here to move towards it. So maybe that implies your thinking that some of these costs we're seeing are quite transitory. Do you -- within that -- if that's right, what do you think are the best ways for this business to get back to that 14-plus operating margin in the past from here?
Michael Hartshorn:
Sure, Michael. As you mentioned, obviously, we have transitory costs in the business right now, whether it's COVID. At some point, there will be some equilibrium in the freight world, especially with ocean freight that we expect to be an opportunity going forward. And then I would say the return to 2019 margin levels will be highly dependent on strong sales performance over time. And given we're in a very vibrant sector of retail, there's market share up for grabs with store closures and bankruptcies and the customer who's focused on value and convenience, we feel good about our opportunities. Now that is not to say that we don't have a lot of work going on in the business to find places to be more efficient to offset some of these costs. But I think it's dependent on how long some of this inflation lasts and then certainly on top line growth.
Operator:
Your next question is from John Kernan from Cowen.
John Kernan:
Just curious on the quantification of freight and distribution headwinds into next year. Is this -- the impact that you're guiding to in the back half of the year, is that -- ballpark just how we should think about it for the first half of next year?
Michael Hartshorn:
I wouldn't comment on next year at this point. In the DCs, the wages that we've made are permanent. And that said, we do have productivity initiatives that we'll build into our budgets and plans for next year. On the freight cost, I'd say, it's hard to say at this point. If I gave you my view at this point, I think some of the ocean and congestion will bleed into the first part of next year.
John Kernan:
Got it. One quick follow-up. Just as we stay on the theme of supply chain here, are you concerned at all about deliveries into holiday in the early part of next year, given some of the things we're seeing at ports, et cetera?
Barbara Rentler:
Well, I think we all know the supply chain problems and it's backed up and all the issues with COVID overseas, which kind of made all of the -- not all, but a large majority of goods coming out of China slide. I think the issues are real, and I think they'll continue for a while. And so what we have to do is really make sure that we're paying attention to what it is and that the merchants are adjusting and flexing based off of what they're seeing and what's happening around them. I mean, the majority of our business is closeout.
So a lot of these things are a timing issue of how goods will slide, what goods might be late that might be available for us to buy in season. It's kind of like a moving target. I think the challenge as you go into Q1 is that Chinese New Year is a couple of weeks earlier. So those 2 things are going to slide, I think, a little bit in terms of deliveries and the kind of goods that have to get out of China in particular. So I think the answer is we're going to watch it. We're going to adjust as we go. And we're in a flexible business model. So as long as we can offer a treasure hunt and a broad assortment, that's what we're going to do.
Operator:
[Operator Instructions] Your next question is from Adrienne Yih from Barclays.
Adrienne Yih-Tennant:
Barbara, I was wondering if you had seen any changes in basket or ATV this quarter versus first quarter. And then toward the end of the quarter, were you seeing any impact in particularly Texas and Florida of maybe the Delta variant on late July trends? I know that for a quarter, they seemed to be fine, but any trailing off at the end of the quarter?
Michael Hartshorn:
Adrienne, on the components of comp, it was mainly driven by the size of the basket. Traffic was up slightly. And the basket was driven -- AUR was up slightly, but it was basically driven by units per transaction. And that was a consistent trend with comps throughout the quarter. We wouldn't say specifically the sequential trend other than to say it was fairly robust throughout the quarter. May was slightly higher than the other months in terms of absolute comp.
Operator:
Your next question is from the line of Marni Shapiro from Retail Tracker.
Marni Shapiro:
Congrats on a great quarter. Could you -- I just want to clarify one thing, Michael, that you said. You said Texas, California and Florida made up what percent of your sales? You guys used to talk about this in the past. I just want to clarify the number that I heard.
Michael Hartshorn:
It's about 50% of it.
Marni Shapiro:
That's what I thought. Can we talk just a little bit about marketing? I know it's not a big ambitious push for you guys like it is for other retailers. So I'm curious just through COVID coming into this year, where was your marketing spend? Has it ticked up through this year as the stores have all now, for the most part, been open? And have you been spending against that? Or has demand been so strong that you haven't ticked up the marketing? And how should we think about it in the back half of the year? If you could just talk a little bit about that.
Michael Hartshorn:
In terms of marketing for competitive reasons, we wouldn't provide the details there, Marni. But we have made strategic investments. We made channel shifts, and we have used -- put more money into places like digital versus broadcast. So we have made some shifts during COVID, and we'll continue to find what works best for us going forward.
Marni Shapiro:
Has it picked up now that the stores are open compared to a year ago when, say, the first half of the year for sure, stores were...
Michael Hartshorn:
No doubt -- yes, Marni, no doubt about it. We -- when the stores were closed, we obviously took that as an opportunity to not spend when the stores were closed. So it certainly has picked up versus last year.
Marni Shapiro:
So that's all rolled back in here. Okay. And it should be about your usual levels then from hereon out with all the stores opened?
Michael Hartshorn:
That's correct.
Operator:
Your next question is from Laura Champine from Loop Capital.
Laura Champine:
Still trying to get my head around the significant decline, almost 50% sequentially in EBIT margins that you're sort of looking to in Q3. I certainly heard the 45 basis point of COVID costs. But are you expecting a big reversal in merchandise margin? Or what are some of the assumptions embedded within that EBIT margin assumption?
Michael Hartshorn:
On the EBIT margin in -- between Q2 and Q3, for instance, obviously, the 5% to 7% comp is lower than our year-to-date performance at 15% in the second quarter. So that drives a significant portion of it. And then as I mentioned, ocean freight costs, where we've embedded the assumption that, that will significantly escalate over Q2, and then we expect the higher wages in the DC to drive a bit more deleverage than we had year-to-date.
Laura Champine:
Got it. Do you have -- can you give me total logistics costs as a percentage of sales sort of normally and where it's tracking now?
Michael Hartshorn:
That's not something we provide. The best guidance I can give you at this point is, again, freight was 85 basis points worse in the second quarter, and we've embedded significantly a escalation from that. And then on the DCs, as I mentioned, it was 40 basis points, and we expect additional deleverage because of higher wages.
Operator:
Your next question is from Dana Telsey from Telsey Advisory.
Dana Telsey:
It seems like for a couple of quarters in a row now, dd's has had terrific performance. Anything to note there? And any changes to their plans in terms of what's driving that? Or is it the child tax credits and stimulus? And then secondly, just on packaway. I think it's 30% this quarter. I think it was 34% in the first quarter. How do you -- how are you thinking about packaway for the balance of the year and the rate it would be at?
Michael Hartshorn:
Sure, Dana. On dd's, as we mentioned, dd's continue to have a robust sales trend and like Ross EBIT margin improvement. I'd say relative to Ross, it's been fairly consistent throughout the pandemic. Obviously, the external stimulus has impacted the dd's customer but also helped the Ross customer as well. The one thing they have in common, though, is that, that customer is very focused on value. And they've been attracted to what we've had in the stores. So no changes that I would note in the second quarter.
On inventory levels, as you mentioned, packaway was at 30% of our total inventory. With ahead-of-planned sales, we obviously use some of that inventory to fuel some of the sales growth. It was also impacted by receipts, delayed receipts. So within the inventory number, we have a higher level of in transit than we have had historically. And then the return, we would expect to return to historical levels over time, but that's going to be somewhat dependent on how we perform on the top line and whether we beat the plan and then also what supply chain congestion looks like at the end of the year.
Operator:
Your next question is from Simeon Siegel from BMO Capital Markets.
Unknown Analyst:
This is [ Dick Patient ] on for Simeon. I'm just wondering if you could give some color potentially on where you're seeing the most opportunity to kind of capture that share. If that's with new customers or with expanding the current customer wallet within the current dd's and Ross customers and kind of what you're thinking about that going forward.
Michael Hartshorn:
Yes. I would say what we've seen during the pandemic is we've seen a younger customer. Part of that early on in the pandemic was driven by the older customer with restrictions and hesitancy to shop. As we moved along, we've seen in the customers that, that older shopper is actually returning back to the store. So I think we have an opportunity across our customer base to the extent that we can provide them the bargains that they've come to expect.
Operator:
Your next question is from Jay Sole from UBS.
Jay Sole:
Michael, is it possible to quantify for us the magnitude of the worsening of the inflationary pressures that you called out between Q2 and Q3?
Michael Hartshorn:
Yes, I would only point to the overall EBIT margin. It's a significant deescalation right now, the 7.3% to 7.9% is [ 450 ] to [ 510 ] versus 2019 of deleverage. So the main drivers out of that are obviously the comp difference between Q2 and Q3. The higher ocean freight is a significant portion of that. And then as I mentioned, the higher distribution expense. I'd say the highest -- the largest single deleverage is coming from ocean freight.
Operator:
Our last question is from Roxanne Meyer from MKM Partners.
Roxanne Meyer:
Congratulations on a solid 2Q. My question is on the merchandise margin. You delivered a very robust game there on top of a sizable gain in the first quarter, and really, on top of a significant increase in merch margin last year. Where is that coming from? Is that being helped by just utilizing packaway? And how should we think about merchandise margin going forward?
Michael Hartshorn:
Yes. In the quarter, the really -- the upside versus our original expectations and again versus last year is that we've been able to operate in a -- with inventory very close to need. We've operated with lower inventories in stores. We've been able to chase the business. And that has driven faster turns and lower markdowns. What we've done throughout the pandemic is tried to operate very close to need. And we think that we can do that not only during the pandemic, but post-pandemic which will benefit margins in the future. But that -- the lower markdowns and faster turns was the main driver of the margin improvement in the second quarter.
Operator:
There are no further questions at this time. I would now like to turn the call over to Barbara Rentler for her closing remarks.
Barbara Rentler:
Thank you for joining us today and for your interest in Ross Stores.
Operator:
This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator:
Good afternoon, and welcome to the Ross Stores' First Quarter 2021 Earnings Release Conference Call. [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, COVID-related costs 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 2020 Form 10-K and fiscal 2021 Form 8-Ks on file with the SEC. 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; Travis Marquette, 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 first quarter performance, followed by our outlook for the second quarter and fiscal year. Afterwards, we'll be happy to respond to any questions you may have. As noted in today's press release, first quarter sales significantly exceeded our expectations as we benefited considerably from a combination of government stimulus payments, ongoing vaccine rollout, easing of COVID restrictions and pent-up consumer demand. In addition, customers responded enthusiastically to the broad assortment of great bargains we offered throughout our stores. Earnings per share for the 13 weeks ended May 1, 2021, grew 17% to $1.34 on net income of $476 million. This compares to $1.15 per share or net earnings of $421 million for the 13 weeks ended May 4, 2019. Total sales for the quarter were $4.5 billion with comparable store sales up a robust 13% versus 2019. As previously announced, financial results and guidance throughout fiscal '21 will be compared against fiscal 2019. We believe the significant impact from the extended closure of our operations in the spring of 2020 and the disruptions caused by COVID-19 throughout last year make this a more relevant basis for comparison. For the first quarter, Home was the best-performing major merchandise area, while the Midwest was the strongest region. Similar to Ross, dd's DISCOUNTS business trends significantly improved during the quarter. Results were far above our expectations with outstanding sales gains and a rebound in operating profits for the period. At quarter end, consolidated inventories were down 6% versus 2019. Packaway levels ended at 34% of the total compared to 44% for the same period in 2019 as we use a substantial amount of packaway merchandise to support ahead of planned sales. Average selling store inventories were down 1% relative to 2019. As noted in today's release, our Board authorized a new program to repurchase $1.5 billion of our common stock through fiscal 2022, with plans to buy back $650 million this year and $850 million in 2022. The reinstatement of our share repurchase program reflects the current strength of our balance sheet, confidence in the company's ability to generate excess cash after funding growth and other capital needs of the business and our long-standing commitment to enhancing stockholder value and return. Turning to store growth. Our 2021 expansion program is unchanged with plans to open approximately 20 total locations comprised of 40 Ross and 20 dd's DISCOUNTS. As usual, these numbers do not reflect our plans to close or relocate about 10 stores. As a reminder, our conservative opening plans this year, especially for the spring season, were set in 2020 during the onset of the pandemic when it was impossible to predict when the health crisis would subside. Looking forward to 2022, we expect to return to our normal annual opening program of approximately 100 new stores. Now Travis Marquette will provide further details on our first quarter results, second quarter guidance and outlook for the year.
Travis Marquette:
Thank you, Barbara. As previously mentioned, comparable store sales increased 13% in the quarter, driven by a larger average basket. While traffic was down slightly compared to 2019, it accelerated significantly relative to the fourth quarter. Operating margin was well above plan at 14.2% compared to 14.1% for the same period in 2019. Cost of goods sold levered 35 basis points in the quarter. Merchandise margin was up 85 basis points and occupancy levered by 60. These improvements were partially offset by higher freight costs of 75 basis points, mainly driven by the ongoing industry-wide supply chain congestion.
In addition, distribution expenses grew 25 basis points primarily due to higher wages, while buying costs increased by 10. SG&A for the quarter delevered by 25 basis points, mainly due to the operating expenses associated with the pandemic and higher incentive costs given our better-than-expected first quarter results. Total net COVID-related expenses for the period were approximately 35 basis points, the vast majority of which impacted SG&A.
Now let's discuss our guidance. As Barbara just mentioned, our projections compared to the same period in 2019. For the 13 weeks ended July 31, 2021, we are forecasting comparable store sales to be up 5% to 7%. Earnings per share for the second quarter are projected to be in the range of $0.80 to $0.89. The operating statement assumptions that support our second quarter guidance include the following:
total sales are projected to grow 9% to 12%.
We are projecting operating margin to be 9.2% to 9.9% compared to 13.7% in 2019. This forecast reflects ongoing expense headwinds from increased freight costs and higher wages. In addition, COVID-related expenses are projected to negatively impact EBIT margins by approximately 100 basis points in the period as we return to pre-pandemic store operating standards, while still maintaining many of the extra cleaning routines. We expect to open 30 stores during the second quarter, consisting of 22 Ross and 8 dd's DISCOUNTS. Net interest expense is estimated to be about $19 million. Our tax rate is expected to be approximately 25% and weighted average diluted shares outstanding are projected to be about 355 million. For the full year, we are projecting annual comparable store sales gains of 7% to 9% versus 2019 and earnings per share of $3.93 to $4.20.
Operating statement assumptions that support our fiscal 2021 guidance include the following:
total sales are projected to grow 11% to 13%. We project that operating margin for 2021 will be in the range of 10.7% to 11.2% compared to 13.4% in 2019. The forecasted decline, again, reflects our expectations for continued freight, wage and COVID cost headwinds through the balance of the year. Net interest expense is estimated to be about $75 million.
Our tax rate is projected to be approximately 24% to 25%, and we expect average diluted shares outstanding to be about 354 million. Now I'll turn the call back to Barbara for closing comments.
Barbara Rentler:
Thank you, Travis. To sum up, we're optimistic about our prospects for the balance of the year and hope to do better than our forecast. This confidence is based on our recent results and ongoing improvement in the macroeconomic environment bolstered by vaccine rollouts and the easing of pandemic-related restrictions. That said, it's difficult to predict the lasting impact from the factors that benefited our first quarter sales results, especially the recent government stimulus payments.
As always, we'll remain nimble to address the dynamic consumer and retail landscape, while staying focused on delivering the great bargains our customer has come to expect from us. Longer term, we remain confident about our opportunity to gain market share as we expect to benefit significantly from a favorable competitive climate given the large number of retail store closures and bankruptcies in recent years. This, along with the consumers' heightened focus on value and convenience bodes well for our ability to achieve solid results into the future. At this point, we'd like to open up the call and respond to any questions you may have.
Operator:
[Operator Instructions] Your first question comes from Matthew Boss from JPMorgan.
Matthew Boss:
Great. And congrats on the really strong improvement. So Barbara, maybe could you speak to the cadence of business and any notable changes in traffic or category demand as the quarter progressed? And then Travis, on gross margin. I guess maybe just how best to think about the puts and takes in the second quarter that you're embedding relative to 2019?
Barbara Rentler:
Sure, Matthew. So let's start with category demand. There was really broad-based acceleration across all merchandise areas, with obviously Home having very strong performance for Ross and for other people across the country. But what we did see is a major improvement in apparel. And as we feel as the economy starts to open up, that apparel will continue to strengthen as time goes on. With a lot of change in trends, we're monitoring that. We're flexing and moving the business around based off of what the customer is telling us. So we feel -- in totality, we feel overall pretty good about the business going forward.
In terms of traffic, Travis, do you want to take the traffic piece?
Travis Marquette:
Yes. Yes, just let me break down comp a little bit. I mentioned comp was 13%. It was driven by larger average basket size. That was partially offset by lower number of transactions. Traffic was down slightly compared to 2019, but it accelerated significantly compared to the fourth quarter. The increase in the average basket was driven by items per transaction as average unit retail was up slightly. And then I think your next question was around just the guidance, the operating margin guidance for Q2?
Matthew Boss:
Yes. Just any puts and takes on the second quarter.
Travis Marquette:
Yes. I mean second quarter, again, we -- the overall guidance reflects a couple of things. One, obviously, the comp store gain is expected to be lower than what we saw in the first quarter, and therefore, we'll get a little bit less leverage on the business.
In addition, on COVID costs, we expect to also be higher, although that will primarily impact SG&A. We also expect to see continued significant pressure on freight. We saw that in the first quarter, both in ocean freight as well as overall freight, and we think that will -- those pressures will continue.
Operator:
Your next question comes from Mark Altschwager from Baird.
Mark Altschwager:
I appreciate all the detailed guidance. I guess, overall, if I have all the numbers down correctly, I think the guide implies EBIT margins down about 250 basis points this year versus 2019. Could you characterize that? I mean how much of the step down is related to the COVID cost, which are hopefully temporary versus some of the more kind of pressures on freight and wages that could persist moving forward? Just trying to think about how that EBIT margin might progress as we move beyond this year.
Michael Hartshorn:
Mark, it's Michael Hartshorn. We're obviously optimistic about our prospects for the balance of the year, and we hope to do better than our sales and margin forecast. We do expect expense headwinds through the balance of the year. And if you break down the COVID cost at some point, those will not continue, but we expect them to be in place. Our guidance assumes that they're in place throughout the year.
Wage cost, we would expect, to persist. And at some point, freight, we would expect to persist throughout the year, and we'll see how that balances out over the coming years. But overall, the recovery to 2019 margin levels, it's highly dependent on strong sales performance. And over time, and again, the persistence of the cost inflation we're seeing today, especially in things like freight.
Operator:
Your next question comes from Adrienne Yih from Barclays.
Adrienne Yih-Tennant:
Let me add my congratulations on the top line improvement. Barbara, my first question is for you on the merchandise margin of up 85 basis points. I just want to make sure that, that is separate and aside. So you don't have inbound freight in that number because obviously, we got a separate number for total freight. So that's number one.
And then can you give us the components of AUR versus AUC on that? I'm imagining your AUR is up meaningfully. Are you getting a relative pricing umbrella from frontline, meaning that if you're 20% to 60% off frontline and frontline's clean, that you're able to maybe clear at a higher price? And lastly, was mix from Home versus apparel, did Home grow faster? And was that an impact on the merchandise margin?
Travis Marquette:
Yes. This is Travis. Let me just take a couple of those that you mentioned. One, just in terms of what's included in merchandise margin, when we say inbound freight, ocean freight is included in that number. And so that's embedded. And we had mentioned previously that we expected meaningful headwinds from ocean freight, and we saw those and expect those to continue as we move through the year.
And then I think you also had a question about apparel versus non-apparel and sort of the mix. We saw broad-based improvements across the store. But non-apparel Home continued to be the strongest category, but we definitely saw an improvement in apparel as well as we move through the quarter.
Michael Hartshorn:
And then, Adrienne, on AUR. AUR was up slightly during the quarter.
Adrienne Yih-Tennant:
Okay. All right. Great. And this is -- go ahead.
Barbara Rentler:
Just relative -- the other part that you're asking about is relative to department stores. because they promoted less than AURs up, the pricing umbrella. Yes. So our AUR is up slightly. But compared -- so that is just -- we just offered a greater value to department store pricing at this point in time. The price value equation is the business that we're in, the relativity to it. But at this moment, our price values are actually stronger than they normally would be to department stores.
Adrienne Yih-Tennant:
Okay. Great. And if I may, just on hourly payroll. I don't really know how to answer it because I know these are sensitive numbers. But if we were to look at freight as a percent of sales, and now I'm talking about the outbound freight because now I know that the inbound freight's inside the merch margin, that line, that deleveraged 75 basis points versus the line item that is wage or hourly payroll, what would be the sort of order of magnitude? Like is the payroll line 3x as much as the freight line or something like that?
Just so mentally, I can understand like if one of them is moving materially higher than the other, which has the bigger impact on the P&L?
Michael Hartshorn:
Adrienne, Michael Hartshorn again. We wouldn't give you specifics other than what we provided in the guidance other than to say both freight and wages, first on freight, given the robust overall economic rebound, there continues to be significant supply chain congestion and costs have increased versus our original expectations. And so our current guidance assumes additional escalation as we move through the year.
On wages, that also remains very dynamic. We've made market-by-market adjustments in our stores as we always have to attract talent. Warehousing labor is very competitive, and we've made additional adjustments in all of our distribution centers, and that's also reflected in our guidance.
Operator:
[Operator Instructions] Your next question comes from Kimberly Greenberger from Morgan Stanley.
Kimberly Greenberger:
Okay. Great. Barbara, obviously, the prudent planning for sales going forward, a very conservative plan compared to the very robust first quarter, that seems very, very prudent to us.
I'm wondering, are you seeing any slowdown so far here in the second quarter that's sort of underscoring your desire to plan more conservatively? Or are you just looking forward and say, okay, there were some really sort of onetime benefit as it were that happened here in the first quarter. So it's just naturally prudent for us to plan more conservatively?
Barbara Rentler:
Kimberly, I think we're thinking more about the first quarter and the lasting impact from some of those factors, the stimulus payments that were out there and what does that really mean as we go forward. So we're comfortable with the number of where we sit today. But that's really some of those pent-up demand, some of those things that we're not sure how that goes forward with completely at this point.
Kimberly Greenberger:
Yes. I know it's a very uncertain path forward. Michael, you talked about -- you've got a plan this year for COVID cost to basically continue through the year. So I'm wondering if you can just sort of isolate the COVID costs and based on what you experienced here in the first quarter and then whatever you've got in your forecast for the second, third and fourth quarter, could you just give us a rough dollar amount of what you're budgeting this year for COVID cost? And would it be fair to assume that those costs would roll off in future years?
Travis Marquette:
Kimberly, this is Travis. Let me just kind of do a little bit of a reset remind folks kind of how we talk about COVID costs. We report COVID costs as net, which is to say that they include pandemic-related increases in cost for things like personal protective equipment, extra cleaning, but there are offsets within that number as well for cost savings that we took for things like travel and when we closed our fitting rooms.
As the pandemic subsides, apparel is becoming more important, we think it's important to take some actions, including reopening our fitting rooms, which is going to eliminate some of the cost savings that we had before, and it drives up the overall COVID cost number. For Q1, as we reported, the COVID costs were about 35 basis points on the quarter. For Q2 and going forward, we're estimating those that they will be around 100 basis points for the balance of the year. Again, that assumes where we are today that we have not removed and we -- not built in to the plan to remove any of the additional cleaning activities and protocols that we put into place. Having said that, we will continue to monitor guidance from the CDC and other health experts. We'll continue to prioritize the health and safety of our associates and our customers. But to the extent that, that guidance changes, then we'll -- we could reevaluate some of those protocols and adjust those plans.
Michael Hartshorn:
And Kimberly, to answer your question on how long they last, those costs are not permanent. So as the pandemic resides, those costs would come back out of the business.
Operator:
Your next question comes from Chuck Grom from Gordon Haskett.
Charles Grom:
Great quarter. My question is just on the first quarter. You originally guided to comps down 1% to 5% and you far exceeded that up 13. Just curious if you guys could just unpack the outperformance, either by category, how much you think was stimulus? I just wanted to ask that question.
Barbara Rentler:
Yes. Probably...
Travis Marquette:
Yes. There's -- no go ahead, Barbara.
Barbara Rentler:
Okay. So if you're talking about by merchandise category? Is that what...
Charles Grom:
Oh, yes. If we could just -- yes.
Barbara Rentler:
So we'll start there. So it was very broad-based. Obviously, Home is accelerated for everyone, and we still feel very good about Home as we go forward. But the additional acceleration really came out of -- really came out of apparel, and that was also very broad-based as the customer kind of came from just wearing activewear, moving into more real, what I would call, real apparel or even those casual, but still broader classifications of products. So -- and that was broad-based. And so that's why we feel good about apparel as we go forward.
Michael Hartshorn:
And then just overall in the quarter, there's -- as Barbara mentioned in her opening comments, there are a number of factors that led to the increase. Obviously, the stimulus, very difficult to put a number on $400 billion of stimulus to the consumer that continues. We'll continue federal stimulus. There's also states that have stimulus, so that will continue through the second quarter, if not throughout the year with some of the child credits.
There is the vaccine ramping up. And so customers are becoming more and more confident returning to brick-and-mortar stores. We expect that to continue as the vaccination rates increase. If you look at our regional performance, as we said in the commentary, Midwest was the top-performing region. Of our biggest states, California performance improved significantly versus the prior quarter as government restrictions eased and its comp was relatively similar to the chain -- same average. So there's a lot of different factors driving the comp in the first quarter.
Operator:
Your next question comes from Lorraine Hutchinson from Bank of America.
Lorraine Maikis:
Barbara, could you discuss the availability of product in the better trending categories? And then do you think there's sufficient availability for you to start rebuilding your packaway balances into the back half?
Barbara Rentler:
Sure. Availability in the better trending businesses, I would say, overall, the availability is there to chase. We have a large merchant team, and so they're out there looking for the goods constantly. I think there's 2 things about it. One is the trends are shifting. in front of us. So things are moving very, very quickly. So I should start with that. And the trends towards just say, like active apparel to other parts of sportswear are shifting quickly. And so far, I would say, yes, we have been able to chase the business, get what we need, get the availability if that's out there. It's more getting the combination of kind of getting ahead of the trend that as it's shifting in the outside world that we're shifting with it and that we get ahead of it.
But yes, I feel comfortable that the availability is there in the businesses that the customer wants at this moment in time. And then say it again, Lorraine, what was the second question?
Lorraine Maikis:
I just wondering how you expected packaway to evolve over the coming quarters if there's sufficient availability for you to be able to rebuild that?
Barbara Rentler:
We think we'll build packaway over time, closer to historical levels. But I do think it will take time as we are very much chasing the business. And if that chase were to continue, I think it would take us a little bit of time because packaway fluctuates also, it's not only that the availability is there. It's that it's the right product, the right value, the right -- it has to have all the right metrics to be going into packaway at the same time.
So I do think it will take a little bit of time, but there is sufficient availability to be driving our business and to buy packaway and the total picture.
Operator:
Your next question comes from Ike Boruchow from Wells Fargo.
Irwin Boruchow:
Just a quick one for Travis. Just on the freight headwind you gave us for Q1. Just curious, should we assume that, that should be run rated through the rest of the year? Or should that cost headwind that you have potentially moderate based on the contracts you guys have?
Michael Hartshorn:
Ike, it's Michael. I'll take that. First, the -- even the contracted rates were significantly higher than 2019 levels. In addition, like other retailers, we're incurring higher cost to move freight really both internationally and domestically, we're spending -- we have higher cost to land freight when expected.
So given the robust overall economic rebound, As I said earlier in the call, we expect freight to -- cost to escalate for the remainder of the year, and that's included in our guidance.
Operator:
Your next question comes from Michael Binetti from Credit Suisse.
Michael Binetti:
I guess 2 quick ones. We see the sales guidance. I appreciate the conservatism. I think it's been the right move through the year here and with the visibility where it is. But if sales trends do remain strong, as strong as they were in 1Q relative to what you thought, a pretty significant upside sales scenario. Can you tell us how to think about sales flow through in the model relative to the framework you've told us about in the past?
And then, Barb, just a comment you made earlier, why not extend the relative value back up to the normal rate relative to the department stores. Why hold it lower if they're moving higher just so we can think alongside you on that?
Barbara Rentler:
Sure. Listen, department stores didn't promote as much for the first time in a very long time. And so I think we'd have to see what that looks like because they're promotional cadence. They've promoted for years and years, and years. So we've had one quarter under their belt where the AUR is probably higher and they haven't promoted. I think we have to see what happens in the future.
And also, I think it's important while we can get great value to the customer, price value is absolutely critical to our customer. And so we're going to value the goods the way we think the customer expects them -- where the customer expects them to be. And so raising the AUR and changing your value equation is a very delicate thing. And so I think having one quarter underneath our belt with lots of money stimulus and lots of things going on in there, driving sales. I think it's a very, very much, remains to be seen, and it is very important in off-price and critical in our business model to offer that price value. The customer is very savvy and shopping all the time. So again, not sustained yet and department stores don't know how that's really going to land. And then with all the money in the stimulus out there, I don't know how to take that as a go-forward strategy to read at this moment in time.
Travis Marquette:
And this is Travis. In terms of the operating margin flow-through on above sales above plan, we continue to expect comp outperformance to drive increased operating margin flow-through compared to the guidance that we've provided. But I don't think we would necessarily expect it to be quite as strong as we saw in Q1, but we do expect operating margin improvements as comp exceeds our plans.
Michael Hartshorn:
And then the flow-through on this guidance would look like it has historically.
Operator:
Your next question comes from Marni Shapiro from Retail Tracker.
Marni Shapiro:
Congrats. And Barbara, the department stores. We all know where they're going. They're going right back to promotions. If you could give me a little bit of guidance around your traffic during the quarter and what you're seeing around things like schools reopened, the Easter holiday. Did you see a pop around when the stimulus checks pop -- came into hand or around Mother's Day? Just trying to get a feeling about the cadence of the traffic, if it's in every day? Or is she also being sparked to come into store by events?
Travis Marquette:
Yes. This is Travis. I can talk a bit about just trends. Again, generally, we don't provide sort of detailed traffic trends by month. But given the timing of tax refunds and stimulus payments, you can imagine that sales were stronger later in the quarter than at the beginning. In terms of traffic trends, again, traffic for us is transactions, it mirrors pretty close to our sales trends.
Operator:
Your next question comes from Laura Champine from Loop Capital.
Laura Champine:
To the previous point, Travis, when you guys set the guidance for Q2 sales, did you just take the trend before the stimulus and extrapolate that there? Or how did you -- what was the basis of that Q2 sales guide?
Travis Marquette:
The comp sales guide? No, again, I think Michael, we've talked about it, there are a number of factors that drove the Q1 performance, be it stimulus, pent-up demand, vaccine rollouts, et cetera. And it's difficult to precisely predict how long some of those will last. And so we took that into account and projected forward what we think is our current plan and best guess for Q2, and we certainly hope to do better.
Laura Champine:
Got it. In the back half related to that, is there anything in your expectations for the benefit from the enhanced child tax credit? And historically, when this sort of stimulus has come through, do you see it in your numbers?
Michael Hartshorn:
Well, I would say it's hard to say at this point. We've not seen this type of stimulus even in the first quarter in a very long time. As Travis said, we set a baseline, and we clearly hope we can do better than these -- the guidance that we put out.
Operator:
Your next question comes from Jay Sole from UBS.
Jay Sole:
Great. My question is about the full year guidance, specifically about the fourth quarter. When we get to the fourth quarter and get to January, we'll be lapping the stimulus that happened in January. How are you thinking about what impact that might have on the business in the fourth quarter? And how might fourth quarter sales and gross margin compared to what we saw this past year?
Michael Hartshorn:
Yes. I think we'll provide guidance as we move through the year. Right now, we typically provide guidance quarter-by-quarter. So we'll have more to say as we move through the year on the fourth quarter.
Jay Sole:
Would you think that January sales will be down year-over-year?
Michael Hartshorn:
We wouldn't comment at this point.
Jay Sole:
Got it. Okay. Well, then maybe if I can ask one more. Are you still seeing right now the impacts of stimulus? Is there any way to measure whether whatever you're seeing in May is sort of still a tailwind from the stimulus that was distributed in March and April? Or is now some other factor become a bigger driver here in May?
Michael Hartshorn:
Yes. We wouldn't -- as Barbara said at the beginning, we don't comment on -- it's our practice not to comment on intra-quarter trends. I can tell you, certainly in the first quarter, we think stimulus had a significant impact among other factors that we called out earlier.
Operator:
Your next question comes from Paul Trussell from Deutsche Bank.
Krisztina Katai:
This is Krisztina Katai on for Paul. I just wanted to add my congrats on a great quarter. I wanted to circle back to merchandise margin and the strength that has been there for the last 3 quarters. How do you see the current environment evolving from just a buying perspective? And can you just speak to the sustainability of these trends to potentially drive pre-COVID gross profit margins if you essentially maintain these strong sales trends?
Travis Marquette:
Yes. In terms of the merchandise margin, again, the buying environment remains very dynamic. Margins will vary significantly based on our overall sales performance. We've talked, over the last several quarters, that the buying environment has been quite strong, and we benefited from that. Obviously, in the first quarter, we also benefited from significant above plan sales, which drove faster turns and fewer markdowns. So those were all positive.
In terms of how long that sustains, we'll see. I mean we have our best guess built into the guidance, and we obviously hope to do better. And the extent we do, we'd expect to see some further benefit.
Krisztina Katai:
Got it. That's helpful. And I was wondering if you could talk a little bit about more what you're seeing as it relates to just general consumer willingness to return to your stores. Do you have any data on this? What portion of your pre-pandemic shoppers have returned to shop with you regularly? And are you seeing any demographic changes, perhaps older consumers are returning to your stores as vaccines are being rolled out here relatively quickly?
Michael Hartshorn:
On the consumer, what we are seeing is the consumer -- we've seen our consumer shop less, but they are buying more during their shopping trips the demographics of our customer base did skew younger during the peak of the pandemic given older customers hesitancy to shop in brick-and-mortar stores. We believe customers of all ages are returning to stores with the increased vaccination rates, and that's especially true with older customers where the vaccination rates are much higher.
Overall, we know that she continues to prioritize value and convenience when deciding where to shop. And with the large number of retail closures, she obviously has fewer places to stop now.
Operator:
Your next question comes from Paul Lejuez from Citi.
Tracy Kogan:
It's Tracy Kogan filling in for Paul. I had 2 questions. I was hoping, first, you could talk about the marketing spend in the quarter and whether you've leveraged that spend and what your expectations are for the year? And then, secondly, can you talk about the rent deals that you saw, I guess, for the deals you signed last year for the openings this year, and how that's trended as you're signing new deals right now?
Michael Hartshorn:
Sure. On the leases, the real estate market is good, both from a supply standpoint and what we're seeing in leases. I wouldn't say specifically on a call like this, but the significance of the rent favorability given the number of leases across the whole chain would not be significant on an overall leverage, for instance on sales. On marketing, for us, marketing continues to be a good reminder to our customers. Overall, our strategic investment here, it has been to move to more digital. I wouldn't provide more specifics on marketing on this call.
Tracy Kogan:
Just going back to the real estate, any changes from what you were seeing last year versus this year, in terms of favorability? Is it getting better or worse?
Michael Hartshorn:
I'd say the story is still developing, Tracy. So we'll see how it develops over the next couple of years. Obviously, the availability is good, and we hope to take advantage of that given all the store closures.
Operator:
Your next question comes from Dana Telsey from Telsey Advisory Group.
Dana Telsey:
Nice to see the progress. It was mentioned about dd's in the release, and I think a little bit at the beginning, what are you seeing in dd's? It sounds like it took an upturn for the better, both in terms of sales and operating profits. And anything to note there on store openings of dd's versus Ross and what you're seeing either in terms of favorability of leases, and also productivity this year to last -- this year to LLY?
Michael Hartshorn:
Dana, I would say that the story is very similar for dd's. We did see strong gains in sales and operating profits for the period versus our expectations. I would also say that dd's has the similar wage, freight and COVID cost expense pressures that we're seeing in Ross. And I would say we feel really good about dd's performance.
Travis Marquette:
In terms of new store productivity, we don't break out dd's specifically, but overall, new store productivity continues to be in the 60% to 65% range that we've talked about historically.
Michael Hartshorn:
On the real estate rollout, we would expect to beyond this year, dd's -- grow dd's at 20 to 25 stores per year.
Operator:
Your next question comes from Priya Ohri-Gupta from Barclays.
Priya Ohri-Gupta:
Great. I was hoping you could update us on your thoughts as to potentially continuing to bring down your debt balance given your -- where the cash balance currently stands? And any further thoughts on improving the balance sheet?
Michael Hartshorn:
Sure. Our expectation is that we're going to pay down our existing debt. So we're not going to refinance it. The timing, if it's economically advantageous to pay off early, we would consider it. But If not, we would expect to pay off our existing debt at maturity.
Operator:
That was our last question. I will turn the call over to Barbara Rentler for closing comments.
Barbara Rentler:
Thank you for joining us today and for your interest in Ross Stores. Have a good day.
Operator:
This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator:
Good afternoon, and welcome to the Ross Stores Fourth Quarter and 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 will contain forward-looking statements regarding expectations about future growth and financial results, including sales and earnings forecasts, new store openings, COVID-related costs 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 2019 Form 10-K and fiscal 2020 Form 10-Qs 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:
Good afternoon. Joining me on our call today are Michael Hartshorn, Group President, 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 fourth quarter and 2020 performance, followed by our outlook for 2021. Afterwards, we'll be happy to respond to any questions you may have.
As noted in today's press release, our fourth quarter sales results exceeded our expectations. That said, the upsurge of COVID-19 resulted in lower traffic, especially in California, our largest state, where we were subject to more stringent occupancy and operating hour restrictions. Earnings per share for the 13 weeks ended January 30, 2021 were $0.67 on net income of $238 million. Total sales for the quarter were $4.2 billion with comparable store sales down 6%. For the 2020 fiscal year, earnings per share were $0.24 on net income of $85 million. These results include a onetime pretax charge of $240 million or $0.54 per share for the year from the refinancing of $775 million in senior notes. Total sales for 2020 declined to $12.5 billion. Let's turn now to additional details on our fourth quarter results. For the holiday selling season, the best-performing major merchandise area was home, while the Southeast and Midwest were the strongest regions. For the quarter, our largest states of California, Texas and Florida significantly underperformed the chain average. Dd's DISCOUNTS business was also impacted by the COVID-19 issues, although to a lesser degree than Ross, given a smaller number of border and tourist locations. As we ended 2020, total consolidated inventories were down 18% versus the prior year with packaway levels at 38% of the total compared to last year's 46%. Average store inventories at year-end were down 16% from 2019 levels. As noted in today's release, our Board recently approved the reinstatement of our quarterly cash dividend at a rate of $0.285 per share. The resumption of our dividend payout in 2021 reflects our strong cash position and our confidence in the company's long-term prospects. Now Travis Marquette will provide further details on our fourth quarter results and additional color on our first quarter guidance and general outlook for fiscal 2021.
Travis Marquette:
Thank you, Barbara. As previously mentioned, comparable store sales declined 6% in the quarter. This decrease was driven by lower traffic, which reflects customers' increased hesitancy to shop during the upsurge of the virus. This was partially offset by an increase in the size of the average basket.
Fourth quarter operating margin was 9.5% compared to 13.3% last year. Cost of goods sold increased 125 basis points in the quarter. Our merchandise margin gain of 70 basis points was more than offset by higher costs, including freight, which increased 100 basis points due to ongoing industry-wide supply chain congestion. Buying costs were higher by 50 basis points. Occupancy delevered 30 basis points on lower sales volume. Lastly, distribution costs grew 15 basis points, primarily due to higher wages, but were mostly offset by the favorable timing of packaway expenses. SG&A for the quarter rose 260 basis points, mainly due to the deleveraging effect from the decline in comparable store sales, higher COVID-related operating expenses and timing of incentive costs. Total net COVID-related expenses for the quarter were approximately $40 million, with a higher impact to SG&A than cost of goods sold. Turning to our balance sheet. We exited 2020 in a strong financial position with over $5.6 billion in liquidity, which includes an unrestricted cash balance of about $4.8 billion and our $800 million revolver that remains fully available. Now let's discuss our outlook for 2021. Our guidance and results throughout fiscal 2021 will be reported versus fiscal 2019. We believe the significant impact from the extended closure of our operations in the spring of 2020, and the ongoing headwinds caused by COVID-19 throughout last year make this a more relevant basis for comparison. As we enter 2021, there remains limited visibility regarding the ongoing pandemic and the pace and magnitude of an economic recovery. As a result, we are providing specific guidance for only the first quarter and a general outlook for the year. Let's move now to our first quarter guidance. As a reminder, our projections for this period are compared to the 13 weeks ended May 4, 2019. While we hoped to do better, total sales are projected to be down 1% to up 4%, with comparable store sales down 1% to down 5%. This sales guidance reflects the potential impacts of lower demand during this year's Easter selling season and ongoing supply chain congestion. Earnings per share are projected to be $0.74 to $0.86.
The operating statement assumptions that support our first quarter guidance include the following:
We project operating margin to be 9.9% to 10.8% versus 14.1% in 2019. This forecast reflects the deleveraging effect from the projected decline in comparable store sales and ongoing expense headwinds from increased supply chain costs and higher wages. In addition, COVID-related expenses will remain elevated and are projected to negatively impact EBIT margins by approximately 50 basis points in the period. While we expect to continue the aggressive expansion of our 2 chains, we planned a more moderate pace of openings this year, especially in the spring.
During the first quarter, we expect to open 4 Ross and 3 dd's DISCOUNTS locations during the period. Net interest expense is estimated to be about $20 million. Our tax rate is expected to be approximately 24% to 25%. And finally, weighted average diluted shares outstanding are projected to be about 356 million. As mentioned earlier, we are only providing a general outlook for the year at this time. From a top line perspective, with the continued rollout of vaccines, potential additional government stimulus and likely pent-up consumer demand, we expect sales trends to strengthen as we move through the year. Similar to the first quarter, though, we are projecting that operating margin relative to 2019 will continue to be affected by increased supply chain costs, higher wages and COVID-related expenses. Therefore, profitability will be well below recent historical high levels. We expect to add about 60 stores, consisting of approximately 40 Ross and 20 dd's DISCOUNTS locations. As usual, these numbers do not reflect our plans to close or relocate about 10 older stores. Net interest expense for the year is estimated to be about $76 million. Our tax rate is projected to be approximately 24% to 25%. We are planning average diluted shares outstanding to be about 356 million. Capital expenditures for 2021 are projected to be approximately $700 million, which includes investments for our next distribution center and the resumption of projects deferred from 2020. And depreciation and amortization expense, inclusive of stock-based amortization, is forecast to be about $495 million. Now I'll turn the call back to Barbara for closing comments.
Barbara Rentler:
Thank you, Travis. To sum up, fiscal 2020 was an extremely difficult and challenging year. Like so many other retailers and businesses, our operations and financial results reflect the major problems caused by the COVID-19 pandemic. That said, the combination of our proven and experienced leadership teams, seasoned associates throughout the company and strong financial foundation and liquidity has enabled us to navigate through this health crisis.
Looking at the balance of 2021, as Travis alluded to, many unknowns remain. However, over the longer term, we believe both Ross and dd's are well positioned in the off-price sector as consumers continue to favor retailers focused on delivering both value and convenience. This is especially true given the number of retail closures and bankruptcies over the past several years. Our mission is to continue delivering the best bargains possible to leverage our favorable market position. We remain confident that our unwavering focus on the successful execution of this core strategy will continue to be the key driver of our success. At this point, we'd like to open up the call and respond to any questions you might have.
Operator:
[Operator Instructions] Your first question comes from Lorraine Hutchinson from Bank of America.
Lorraine Maikis:
I wanted to get your thoughts on the long-term profitability outlook for Ross. It seems like a lot of the cost that you're calling out are transient and COVID-related. So as you think out to a more normalized sales environment in '22 and '23, how do you think about the return -- the trajectory of the return to prior profitability levels?
Michael Hartshorn:
Lorraine, it's Michael Hartshorn. As we mentioned, the cost pressures this year between freight, COVID cost and wage pressures, there are some that we didn't have pre-COVID. And with lower sales productivity, we do lose leverage on fixed costs. So I would say it's hard to say at this point, as it's highly dependent on comp store sales recovery and thus average leverage we get on higher average sales per store. I'd say, with our visibility right now, it's hard to say how long the cost would linger.
Operator:
Your next question comes from Mark Altschwager from Baird.
Mark Altschwager:
I was hoping you could give us a bit more color on the real estate front. Just given the significant market share opportunities that are out there, just maybe walk us through the thought process on the more conservative pace of store openings this year. And how should we think about the potential to reaccelerate back to that prior run rate of around 100 per year?
Michael Hartshorn:
On the real estate, we made the decision last year during the peak of the pandemic, when all stores were temporarily closed, to take a more conservative approach for our 2021 openings, especially in the spring. I'd say at this point, we're committed to expanding our 2 chains, both in existing and new markets. And our plan would be to return to more normal opening cadence next year, again, assuming no extraordinary issues similar to the ones we experienced in 2020.
Operator:
Your next question comes from Paul Lejuez from Citigroup.
Paul Lejuez:
Curious if you could provide any color on monthly performance during the quarter. And if you could share any more specifics about California versus Texas versus Florida? And then second, as you've been dealing with wage pressures in the past several years in some key states, I'm curious if you would also say that you tend to see an improvement in sales results in those states as well as the consumer gets the benefit from those higher wages.
Travis Marquette:
So let me take the first couple. In terms of month-to-month progression, again, generally, we don't talk about intra-quarter trends. That said, it's -- we discussed in November, we did mention at the time that comps were down mid-single digits to start the quarter. Beyond that, we did see a benefit to sales later in the quarter as shelter-in-place orders were lifted in California and as new stimulus payments were issued.
Relative to sort of Texas, California, Florida, we wouldn't get into the details of each of them specifically. But as we mentioned, collectively, they significantly underperformed the chain. And in particular, during the quarter, California was impacted by increased occupancy restrictions and curfews as well as the shelter-in-place order.
Michael Hartshorn:
On the wage front, Paul, it's really hard to tease out any impact from higher wages and correlate that to sales with all the different factors that we're seeing in the business today.
Operator:
Your next question comes from Kimberly Greenberger from Morgan Stanley.
Kimberly Greenberger:
I wanted to just check if your stores are currently all open and less encumbered or less hindered by some of the capacity restrictions you were facing in the fourth quarter. The guidance -- the better revenue guidance here for Q1 would seem to suggest that, but I just wanted to confirm that. And then on the supply chain cost, I'm wondering if you can talk about the various pieces in there that are currently pressuring supply chain costs? And it's hard to guess when the world might be normal again. But if there are any supply chain costs in there that you feel like are more temporary in nature, it would be interesting to hear about those as well.
Michael Hartshorn:
Kimberly, on the occupancy restrictions, during the fourth quarter, about 70% of our stores were under some level of capacity restrictions, including states like Nevada, Weston and of course, as we mentioned, California. Also during the quarter, we had about 35 stores that were closed for some period of time. As of today, all stores are open, although we still have occupancy restrictions in a number of states, although I would say the impact during this time of year versus peak holiday selling season is less.
Travis Marquette:
And on your question on the supply chain cost, there's a couple of components to that. First, I'd speak to freight, which really, there's 2 parts to that. There's domestic freight as well as ocean freight costs, which are significantly higher. There's also ongoing wage pressure, which we spoke to. Some of the actions that we took last year will clearly carry over. And then beyond that, COVID is also driving higher costs in the supply chain.
In terms of how long those will last, again, it's hard to say. From where we sit today, it feels like the freight costs will continue through the year. It's one of the reasons why we called that out in our commentary. And obviously, the wage pressures, we made those increases in wages in the third quarter. And so those would carry through until then.
Operator:
Your next question comes from Chuck Grom from Gordon Haskett.
Charles Grom:
Just I was wondering if you guys could speak to the mix of Home as a percentage of sales in the fourth quarter and also all of 2020? And I guess, how you're thinking about the Home category for this upcoming year. And then also if you could speak to the contribution margins within the Home category itself relative to apparel. Just wondering how big of the difference there is?
Travis Marquette:
In terms of the product mix, we wouldn't give specific details by quarter. Our total for the year, Home was about 28% compared to about 25% last year. In terms of contribution margins, again, I think the contribution margins for that are relatively similar. There's some puts and takes in terms of markup and costs, but in general, the contribution margin is similar.
Operator:
Your next question comes from Kate Fitzsimons from RBC Capital Markets.
Kate Fitzsimons:
I guess, just on inventory, packaway as a percent of total inventory was down year-on-year, but it does seem like it is building sequentially relative to the third quarter. I guess, just how we should evaluate the rebuild on packaway go forward? And then just looking out, your ability to generate, I guess, merchandise margin improvement relative to 2019 looking out the next few quarters, that would be helpful.
Barbara Rentler:
Sure. In terms of the builds of packaway, we used part of packaway to support our planned sales in the fourth quarter. So yes, the rebuild -- it has rebuilt since the third quarter, and our intention is that it will continue to build to more historical levels. But we did use that to chase part of the sales increase.
Travis Marquette:
And then in terms of merchandise margins, again, we're not providing specific guidance beyond the first quarter. What I'd say, in Q4, merchandise margins were impacted by a couple of things. One, the favorable buying environment that we spoke about in Q3 carried forward to some extent. But then we had a significant negative impact from the higher ocean freight costs, which for us are included in merch margin.
Operator:
Your next question comes from Adrienne Yih from Barclays.
Adrienne Yih-Tennant:
Barbara, I was wondering if you can talk about the availability of inventory, both in quality and quantity? And whether the West Coast port congestion is impacting that availability? And then for Michael, can you talk about sort of this COVID pressure, the 50 basis points during -- in the period? How should that diminish over time? Do you expect that to kind of go forward into the second quarter and then kind of diminish in the back half of the year?
Barbara Rentler:
So Adrienne, in terms of availability in quality and quantity, we're still seeing pretty great supply opportunities in the marketplace. What I would say is the West Coast port congestion, obviously, has slowed down some of receipts coming into the country. So the merchants are constantly moving and shaking based off of what's coming in.
In terms of the end state of availability from the disruption of the port, I think at some point, there'll be a bubble. I don't think we've seen that bubble yet. But at some point, historically, when things start to self correct, there'll be a bubble of inventory, so that would be an indication.
Adrienne Yih-Tennant:
Opportunity.
Travis Marquette:
And then in terms of -- this is Travis. In terms of COVID costs, we're not providing specific guidance beyond the first quarter. However, we currently expect COVID costs to be somewhat similar to Q1 throughout the year, given our expectation for continued investments to keep associates and customers safe.
Operator:
Your next question comes from Ike Boruchow from Wells Fargo.
Irwin Boruchow:
Travis, just a quick question. I know you're not giving explicit guidance, but we know the margin guide for 1Q relative to '19, understanding that you don't expect margins to get back to '19 levels based on your commentary, is it fair to say that there should be a -- basically a glide path upward as we move throughout the year? Or is there reason to believe that there could be some lumpiness quarter-to-quarter just in that regard? Any help there would be great.
Travis Marquette:
Yes. You're right. As we mentioned, we're not providing specific guidance. I think I would sort of come back to the comments that Michael made. Our profitability is going to be significantly connected to, as you would expect, our sales. And as we're able to drive higher same-store sales, that should -- we should see improvements in profitability.
Operator:
Your next question comes from Jay Sole from UBS.
Jay Sole:
I just want to ask you about the down 5% to down 1% comp guidance for Q1 versus Q1 of '19. Is the current trend that you've seen quarter-to-date in line with that? Or are you performing better or worse? And then would you say that like things like delayed tax refunds or bad weather in Texas has impacted your February comp?
Michael Hartshorn:
We wouldn't talk specifically about quarter-to-date trends. That was our process prior to last year when we needed to report related to COVID. But I would tell you that the guidance reflects both the tax refund delays and also what we saw in Texas in February in weather throughout the country.
Operator:
Your next question comes from Marni Shapiro from Retail Tracker.
Marni Shapiro:
Barbara, I just want to clarify, because I had in my questions, typically, things like port disruptions, while bad, ends up being good for you guys with opportunity. And did you -- that's what you were referring to when you talk about the bubble that once this all settles out, there will be probably outsized opportunity additional on top of what's already out there.
Barbara Rentler:
Correct, Marni, that's what you would expect. Although we're still seeing great supply opportunities out there, because of things, the supplies and the moves that are going on, we would expect that at some point, that would back up and that there would be an opportunity. That's what history would tell us. So that's what I would think would happen.
Marni Shapiro:
Makes a lot of sense. And then just following up on the packaway comment for holiday. I know Mother's Day, Father's Day, events like that, even Easter, you guys have had a long history of packing away, let's use the example of polo shirts for Father's Day. Given the disruptions, do you feel like you're well set up for these holidays? I know you're planning Easter is going to be a little more muted potentially, but are you set up for gifting for Mother's Day and Father's Day with what you have on order and with packaways?
Barbara Rentler:
Yes. I feel comfortable with that. Yes.
Operator:
Your next question comes from Jamie Merriman from Bernstein.
Jamie Merriman:
Can you talk a little bit about how you're thinking about use of cash? Good to see the dividend get reinstated. And I'm just wondering if there's any markers that you're looking for from a revenue perspective or profitability before you might think about resuming buybacks?
Michael Hartshorn:
On the -- on shareholder returns, our preference has long been a consistent and measured approach to returning excess cash to shareholders. The dividend decision, it made sense for us to restart the dividend first, as it requires a lower cash outlay, especially given the uncertain environment. I'd say we remain very committed to returning excess cash to shareholders. And we'll continue to assess additional shareholder payout actions once we have more sustained visibility on the business.
Operator:
Your next question comes from Janine Stichter from Jefferies.
Janine Stichter:
I wanted to ask a bit about the category performance. Obviously, you called out the strength in Home. Wondering if you're seeing any green shoots in apparel? And if so, how you're feeling about your ability to chase into that category, if and when we get the customer having some more appetite for the category?
Barbara Rentler:
Sure. The performance in Home has been very broad-based. I mean, Home is just taking -- in total, has taken a lift. And Home in the fourth quarter, in particular, has a lot of gift-giving businesses. So that was a big part of the performance also.
In terms of seeing life in some parts of apparel, I mean, I think what we saw in the fourth quarter is the continuation of casual being very strong, whether it's activewear or casual just type products, whether it's denim or shirts. And I think the other businesses, we're watching them closely to see if they start to come to life. When I'd say that Q2 was traditionally a better -- Q2 is traditionally a better apparel quarter than Q1, and we're watching it. And then the merchants will make the shift, and we'll chase it. A lot of those classifications of business have availability. And so we're watching every week to see where the customer is going, and we'll make the shift just the way we made the shift the last time into more money into Home and casual and all the businesses on the way into the fourth quarter.
Operator:
Your next question comes from Dana Telsey from Telsey Advisory Group.
Dana Telsey:
Can you elaborate a little bit on the SG&A puts and takes of how you're thinking of it for 2021? Anything on expenses, particularly in occupancy, that would be a benefit? And lastly, on dd's, do they get more of a benefit from stimulus than you're seeing in Ross? And if so, how are you seeing the difference when you have seen stimulus?
Travis Marquette:
Dana, in terms of specific details for 2021, I really wouldn't get into the specifics beyond the level of detail that we've provided, other than to say, again, we think the significant cost pressures that we're seeing in Q1 around lower average sales per store, higher supply chain costs, higher wages, which, to some extent, will impact stores, particularly compared to 2019, and in COVID-related expenses, which impacts both SG&A and cost of sales, those will continue.
Michael Hartshorn:
And Dana, on the dd's customer, I think history would say, whether it's tax refunds or stimulus, we -- the dd's customer is more sensitive to stimulus payments than, frankly, tax refunds. So we would expect to see a more immediate impact in the dd's business.
Operator:
Your next question comes from John Kernan from Cowen.
John Kernan:
Just curious on your confidence in the ability to rebuild inventory as we go into the back half of the year. Are your key vendors, particularly in apparel, going to have enough inventory to service you to comp off of 2019 levels?
Barbara Rentler:
Well, we feel confident based off our plan that we would be able to rebuild our inventory in apparel. Part of that will come from chase, part of it will come from packaway, part of it will come from goods that we might buy in advance of the season. So it will be a combination of all 3 things. And in terms of the market having supply, I think most vendors will have some supply. I think some vendors are bringing in supply earlier. So I think it will be a mix based on who the vendor structure is. But I feel confident that we can get back into the inventory position we need to get into.
Operator:
Your next question comes from Laura Champine from Loop Capital.
Laura Champine:
It's on COVID-related costs, which my understanding, Michael, is that you expect Q1's level to continue throughout the year. How would that compare to your total COVID-related spend in 2020?
Travis Marquette:
Yes, this is Travis. If it plays out exactly that way, and again, we don't know if it exactly will, that would be a bit lower than what we incurred in 2020.
Laura Champine:
And then just housekeeping. You mentioned timing and incentive comp, which pushed your Q4 SG&A expense higher. Can you be more specific on how much pressure that was?
Travis Marquette:
Yes, I wouldn't specifically quantify it, but just a little bit more color on that. Again, the timing of incentives related to management incentive costs, overall, management incentive costs for the year were down, which you'd expect given our performance. But they were more heavily weighted to the back half, given the timing of when we finalized our incentive comp plans for the year.
Operator:
Your next question comes from Bob Drbul from Guggenheim.
Robert Drbul:
Just 2 questions for me. The first one is when you look at average inventories in the stores down 16%, is there a wide variation? I mean, in terms of when you think about the stores in California, Texas, Florida, how you're inventorying those stores versus the other stores. And the second question is, just wondering if you had any change in your long-term store potential, either the Ross Stores or dd's, given continued bankruptcies and store closures throughout the industry?
Michael Hartshorn:
Bob, on inventory, given the ongoing uncertainty, we had planned inventory down, fairly broad-based across the chain. Of course, we pay attention to churns by region. And regions that were underperforming, we would have less inventory there to maximize profitability.
And then on store potential, it's -- the real estate availability is very good, and it's possible that the number could grow given that availability. However, at this time, we continue to believe 3,000 stores is the appropriate long-term growth potential for the company, and that includes 2,400 Ross and 600 dd's.
Operator:
Your next question comes from Roxanne Meyer from MKM Partners.
Roxanne Meyer:
I wanted to dig into CapEx a bit. I know, in part, you said you're investing in the distribution center. I'm just wondering if, costs related to that, the expenses are expected to hit in 2021 and are included in your outlook? And secondly, I'm wondering if you could talk about some of the projects, the key projects that you've got that were deferred in 2020 that you're focusing on now.
Travis Marquette:
Yes. I wouldn't go into specific details on the project, but I can give you a little bit more color on capital expenditure plans. As I mentioned, we expect to spend around $700 million this year. Around half of that we would expect to spend on our distribution centers and supply chain projects in general. About 20% of that would be for maintenance and remodels of existing stores, about 15% for new stores and then the balance in IT and other.
In regards to DC cost impact on the P&L this year, at this point, we're expecting the new distribution center to open sometime in early 2022. And so those costs would hit the P&L once the DC opens, so they wouldn't impact this year.
Michael Hartshorn:
Roxanne, on the deferral of capital, given our goal of improving liquidity last year, we had a lot of maintenance-type projects that we deferred into this year. So that capital forecast for this year, whether it's store maintenance projects, things of that nature, we're catching up in this year's plan.
Operator:
Your next question comes from Matt Boss from JPMorgan.
Matthew Boss:
Barbara, maybe to think about this a slightly different way or more on the positive side. So your brick-and-mortar-only retailer, you're guiding to negative low to mid-single-digit comp in the middle of the pandemic. I guess, how do you view the off-price opportunity to take market share in apparel exiting the pandemic? And anything that you've seen that makes you question either the value or the convenience component of Ross going forward.
Barbara Rentler:
Sure. Off-price taking market share in apparel as we move forward, yes, when you think about all the store closures that have happened out there and our continued growth, I think that we have the ability to gain share. Let me start with that.
That will build and grow over time. Based off of our large vendor base and our large merchant team, we should be able to drive sales and go forward and offer assortments that are perhaps broader than other businesses and other types of models. So I do feel comfortable that when apparel gets back on track, that we will move in that direction, and that off-price has an opportunity in grand total to gain share, whether it's -- quite frankly, whether it's in apparel or whether it's in Home or other products. In terms of value and -- our value and convenience and how we rank on value and convenience, we know from customer surveys that value is one of the things that our customer really gives us high marks on. It's a very competitive market, as you know. And the merchants are constantly out there shopping and trying to get the best deal and really understanding what's going on around them. But most importantly, that's what the customer tells us, that she gives us, I would say, good grades on. And that is a focus, and that is the main focus of us every day. That is our mission is to deliver the best branded bargains possible. So in value, I would say that I would give us high scores in convenience, again, getting data back from the customers based off of where our stores are located and how easy it is for the customer to shop and certainly in our key markets where we have a lot of stores, it could be on one side of a road and go to a Ross and look across the highway and see another Ross on the way on the other way. So whether I'm going to or from work, I can go to a Ross store. So I think those are 2 things we know the customer values. Those are 2 things that, as a company, we get behind and really protect because that is an important part of us being able to pick up market share as we go forward. And as we know with all the store closures, there's a lot of potential market share to be had. So that is a company focus.
Operator:
Your last question comes from Michael Binetti from Crédit Suisse.
Michael Binetti:
I guess I'm trying to think of -- I guess, 2 quick ones, if you could. I'm trying to think a little bit about how you built the range of same-store sales that you looked at for the first quarter from the negative 5% to negative 1%. And just maybe the different scenarios, what you think it takes to get to the negative 1%. And I guess it's reasonable -- it seems to me like it's reasonable to assume, based on your comment for sequential progress, that, that scenario turns positive in the second quarter. It might be a little earlier for you to endorse that, but just how you thought about it.
And then on SG&A, I was trying to look at it a little bit of a different way that on a per-foot basis, it looks like it grew about 11% in the fourth quarter. I know there was some timing that you guys ran over on the incentive comp. But Michael, it sounds like the sales deleverage is the biggest input for that. And I know you won't know that until you know it, but maybe you could just help us think about how much we should back up on a per-foot basis as far as we think about what kind of cost inflation rolls forward, at least the first half of the year, if you have any visibility there.
Michael Hartshorn:
On the comp trend, I would just say, we did a minus 6% in the fourth quarter, and that included, as we mentioned a number of times here that California had stay-at-home orders and restrictions. And with the cases improving the potential for increase in vaccinations, the first quarter really just represents a sequential improvement over the fourth quarter.
Travis Marquette:
And on G&A cost, again, it's really hard to sort of quantify, I think, an answer your question in an easy, concise way. But of the pressures that we talked about for the year, obviously, higher wages relative to 2019 will certainly impact G&A cost. COVID will certainly impact G&A costs. That will probably -- I would expect more likely to be continually -- continue to be a little bit more weighted towards G&A going forward. And so those are some of the pressures, but I couldn't give you a specific inflation factor for your model.
Operator:
I will now turn the call over to Barbara Rentler for closing remarks.
Barbara Rentler:
Thank you for joining us today and for your interest in Ross Stores.
Operator:
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
Operator:
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:
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 onetime 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 onetime 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 onetime 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 Marquette:
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 onetime 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 details or earnings per share guidance for the fourth quarter. Now I'll turn the call back to Barbara for closing comments.
Barbara Rentler:
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' focus 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.
Operator:
[Operator Instructions] Your first question comes from the line of Matthew Boss from JPMorgan.
Matthew Boss:
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:
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 to what the Ross model does.
Michael Hartshorn:
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 Boss:
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 Marquette:
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:
Your next question comes from the line of Mark Altschwager from Baird.
Mark Altschwager:
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 Hartshorn:
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:
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:
Our next question comes from the line of Kate Fitzsimons from RBC.
Kate Fitzsimons:
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 Hartshorn:
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 inter-quarter trends other than to say, the current trend is down mid-single digits.
Operator:
Your next question comes from the line of Paul Lejuez from Citi.
Paul Lejuez:
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 Hartshorn:
Well, 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 Lejuez:
And just 1 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:
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 Hartshorn:
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:
Your next question comes from the line of Kimberly Greenberger from Morgan Stanley.
Kimberly Greenberger:
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 Hartshorn:
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:
And in terms of spring, 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 Greenberger:
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 Hartshorn:
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:
[Operator Instructions] Your next question comes from the line of Ike Boruchow from Wells Fargo.
Irwin Boruchow:
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 onetime, assuming if there is a vaccine and life goes back to normal by the time you start lapping these results come next year?
Travis Marquette:
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 onetime? Generally speaking, yes, we would expect that as the pandemic ends that these costs would start to fade out of the business.
Operator:
Your next question comes from the line of Michael Binetti from Crédit Suisse.
Michael Binetti:
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 Hartshorn:
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 Binetti:
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 Hartshorn:
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 Binetti:
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. They seem 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 that 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:
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 slowing 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:
Your next question comes from the line of Janine Stichter from Jefferies.
Janine Stichter:
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 Marquette:
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 Hartshorn:
So not a significant change in that.
Travis Marquette:
Yes.
Janine Stichter:
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:
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:
Your next question comes from the line of Paul Trussell from Deutsche Bank.
Paul Trussell:
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 Marquette:
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 whatnot, 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 Hartshorn:
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:
Your next question comes from the line of Lorraine Hutchinson from Bank of America.
Lorraine Maikis:
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:
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:
Your next question comes from the line of Marni Shapiro from Retail Tracker.
Marni Shapiro:
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 Marquette:
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 the 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:
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:
Your next question comes from the line of Jay Sole from UBS.
Jay Sole:
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 Hartshorn:
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:
I think the way we should think about it is -- the way we think about it is because we chase 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:
Your next question comes from the line of Simeon Siegel from BMO Capital Markets.
Simeon Siegel:
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 Marquette:
Yes. Sure. AUR was down. It was down during the quarter.
Simeon Siegel:
Any thoughts on just -- yes, I'm sorry.
Barbara Rentler:
Go ahead. Go ahead.
Simeon Siegel:
No, no. I was just going to ask about the holiday, just how you're viewing the broad promotion.
Barbara Rentler:
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:
Your next question comes from the line of Laura Champine from Loop Capital.
Laura Champine:
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 Hartshorn:
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:
Your next question comes from the line of Bob Drbul from Guggenheim.
Robert Drbul:
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:
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 Hartshorn:
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:
Your next question comes from the line of Alexandra Walvis from Goldman Sachs.
Alexandra Walvis:
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:
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 help to drive the comp forward.
Michael Hartshorn:
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:
Your next question comes from the line of Jamie Merriman from Bernstein.
Jamie Merriman:
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:
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 Hartshorn:
Could you repeat your question on the store growth?
Jamie Merriman:
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 Hartshorn:
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:
Your next question comes from the line of Dana Telsey from Telsey Advisory Group.
Dana Telsey:
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?
Travis Marquette:
Sure, Dana. I think it's too early to predict what's going to happen in the -- in terms of occupancy costs. Just 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 Telsey:
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:
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:
Your next question comes from the line of Chuck Grom from Gordon Haskett.
Charles Grom:
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 Hartshorn:
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. We're allowed to do so.
Operator:
Your last question comes from the line of Roxanne Meyer from MKM Partners.
Roxanne Meyer:
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 Hartshorn:
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 cash hearing 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:
I will turn the call back over to Barbara Rentler for closing remarks.
Barbara Rentler:
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:
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
Operator:
Good afternoon, and welcome to the Ross Stores Second 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, 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 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:
Good afternoon. Joining me on our call today are Michael Hartshorn, Group President, Chief Operating Officer; Travis Marquette, Group Senior Vice President and Chief Financial Officer; and Connie Kao, Vice President, Investor Relations. We will begin our call today with an update on the status of the company's operations, including some color on our store reopenings, followed by a review of our second quarter performance. 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 May 14, when we began a phased process of resuming operations. On average, our stores were open for about 75% of the quarter, though operating on shorter hours compared to the prior year. All our distribution centers were reopened by the end of May. The ongoing COVID-19 health crisis remains very fluid, and we continue to closely monitor local developments to assess any potential changes to our operations as mandated by local, state or other government directives. We remain committed to prioritizing the health and well-being of our associates and customers as we navigate through this pandemic. Turning now to our financials. Total sales for the second quarter were $2.7 billion compared to $4 billion in the prior year, reflecting the negative impact from store closures during the period. Comparable store sales were down 12% for reopened stores from the date of the reopening to the end of the fiscal quarter. Sales during the quarter were significantly impacted by several factors including COVID-19's negative effect on consumer demand, particularly in California, Florida, and Arizona, which represents about 50% of our store base. Further, during the initial reopenings, overall sales were ahead of our conservative plans as we benefited from pent-up demand and aggressive markdowns to clear aged inventory. In the weeks thereafter, trends were negatively impacted from depleted store inventory levels, while we were ramping up our buying and distribution capabilities. For the 13 weeks ended August 1, 2020, earnings per share were $0.06 on net income of $22 million. This compares to net income of $413 million or earnings per share of $1.14 for the same period last year. Year-to-date, the loss per share was $0.81 versus earnings per share of $2.29 last year. Our net loss of $284 million is compared to net income of $834 million in the first half of 2019. Sales for the first 6 months of 2020 declined 42% to $4.5 billion. At quarter end, total consolidated inventories were down 39% from the prior year, with average store inventories down 10% versus the same period last year. Packaway levels at quarter end were 25% of the total compared to last year's 43% as we use packaway to replenish store inventory throughout the quarter. As planned, we did not open any new stores in the second quarter. We continue to expect to add about 39 locations this fall for a total of 66 new stores for the full year. Now Travis Marquette will provide further color on our second quarter results.
Travis Marquette:
Thank you, Barbara. As Barbara noted, stores operated on average for 75% of the period with comparable store sales down 12% versus last year from the date of their reopenings to the end of the fiscal quarter. The decline was driven by a lower number of transactions that was partially offset by a larger average basket size. Average unit retail was down during the period, reflecting the strong sell-through of deeply discounted aged inventory.
Operating margin for the quarter was 3.2% compared to 13.7% last year. Both cost of goods sold and selling, general and administrative expenses reflect the deleveraging effect from lower sales versus last year and expenditures for COVID-19-related measures. In addition, cost of goods sold was impacted by the unfavorable timing of packaway-related expenses. These higher costs were somewhat offset by the partial reversal of the inventory valuation reserve we took in the first quarter resulting from the faster-than-expected sell-through of aged inventory. This reversal benefited the second quarter by $174 million or $0.19 per share. Total net COVID-related expenses for the quarter in cost of goods sold and SG&A combined were approximately $65 million, primarily for costs associated with restarting the business, supplies, cleaning and payroll related to additional safety protocols. We ended the quarter in a healthy financial position with over $4.3 billion in liquidity, which includes an ending unrestricted cash balance of about $3.8 billion and an undrawn $500 million revolver. As we move into the third quarter, trends have not materially changed from the second quarter, with comparable store sales for the first 2.5 weeks trending down mid-teens versus last year. Given the lack of visibility on the potential impact from this ongoing health crisis, we are not providing sales or earnings guidance. Now I'll turn the call back to Barbara for closing comments.
Barbara Rentler:
Thank you, Travis. Aside from the pandemic impact on consumer demand, as initial reopening sales significantly exceeded our conservative forecast, we were unable to ramp up our buying and distribution capabilities quickly enough to adequately replenish stores. As Travis mentioned earlier, the ongoing COVID-19 health crisis remains extremely uncertain, and we have limited insight into how this pandemic could further impact consumer demand and the retail and economic landscape. There is additional risk if COVID-19 cases remain elevated or increased, potentially prompting larger scale shutdowns of our operations. Given these uncertainties, we believe the most prudent approach is to plan and manage the business very cautiously, while continuing to prioritize the health and safety of our customers and associates.
As we move forward during this challenging period, we remain confident that our strong financial foundation and outstanding team of experienced off-price executives will help see us through these uncertain times. Over the longer term, we remain well positioned as an off-price retailer to continue to gain market share given the large number of retail store closures and consumers' continued focus on value and convenience. We've proven in the past that we have successfully competed in this type of retail environment and believe we will do so again. At this point, we'd like to open up the call and respond to any questions you might have.
Operator:
[Operator Instructions] Your first question comes from Matthew Boss from JPMorgan.
Matthew Boss:
Great. Barbara, on the cadence of customer traffic that you've seen since reopening, how much of the recent moderation do you attribute to health concerns versus the lighter inventory that you cited? And larger picture, do you believe anything in the competitive landscape has changed as we think about market share beyond the pandemic?
Michael Hartshorn:
Matt, it's Michael Hartshorn. On the recent trends, I think there's a number of factors that are impacting what we're seeing currently. I certainly think there are things internally that we can focus on in terms of execution. We're still not where we want to be on ramping up the DCs and continue to have lower receipts than planned. I do think there are external factors that include things like the expiration of unemployment that happened at the end of July, obviously, with no back-to-school as the country has moved to distance learning. I think those are the primary factors.
And looking on long-term growth, obviously, the pre-COVID trend had customers migrating to value and convenience. And this disruption just accelerated those trends with a number of store closures, our value proposition and 1,800 and growing conveniently located store locations, I think we have a significant opportunity to gain market share over the longer term.
Matthew Boss:
Great. And then just a follow-up on gross margin. How best to think about the puts and takes on merchandise margins in the back half of the year? Any help would be really greatly appreciated.
Travis Marquette:
Yes. Sure, Matthew. This is Travis. In terms of the margin components for this quarter, similar to last quarter, given the significant deleveraging effect of having our stores closed for a portion of the quarter, we're not providing specific margin components. The puts and takes this quarter, I covered in my remarks. And then in terms of the go-forward look, again, given the ongoing uncertainty, we're not providing any forward guidance or commentary on future margins right now.
Operator:
Your next question comes from Mark Altschwager from Baird.
Mark Altschwager:
I was hoping you could touch on some of the current inventory dynamics. What does availability look like in the marketplace, just both in general and in some of the stronger trending categories? And how do you feel about your ability to really chase back into some of these key categories should the demand backdrop recover faster than you're seeing right now?
Barbara Rentler:
Sure. Overall, we continue to see a lot of supply out there, but it's not as consistent across the merchandise areas. We believe that these creates opportunities in some products in some areas and gaps in other areas. In terms of stronger trendier categories, that's kind of a broad question. But I would say in most businesses, there has been supply in that -- without having what that trendy category is, kind of hard to comment on it. But what I would say is that in key categories, the merchants are out there chasing every day, and we have very conservative plans that they're working towards. And I think over time, in the categories that have, I'll say, gaps in the assortment today, I think eventually, that will catch up.
Operator:
Your next question comes from Lorraine Hutchinson from Bank of America.
Lorraine Maikis:
Just following up on that question, when do you think you'll be appropriately stocked? And then as you look at your packaway volumes, do you feel comfortable with the mix and content of that inventory that it's appropriate for the current environment?
Michael Hartshorn:
Lorraine, on the stocking, I'm going to go through the sequence of the quarter, and that will help explain the actions that we're taking to get inventory levels that are appropriate for the plan. When we first began our phased opening of stores, that's the first thing we did, and then we opened our DCs. And we did it in that order because of government restrictions in California and actually Pennsylvania at that point in time. Because sales exceeded our conservative expectations when we reopened, at the same time, we were ramping and initially opening and initially ramping our DCs, the result was the depleted store inventory. The initial ramp-up of our distribution centers took longer than we had hoped. And we've had further difficulty ramping up our DCs to full capacity due to staffing challenges.
We've taken aggressive steps to improve our production levels that include higher wages and incentives. And believe those actions will allow us to quickly -- more quickly ramp up to peak capacity over the next few months. So I think we would expect to see improvement as we progress through the quarter.
Barbara Rentler:
And in terms of the content of packaway, I mean, we're pleased with the content the pathway we have now. We don't feel like we have any residual issues or anything from spring. As to Michael's point, we used packaway to drive our business in Q2 and got through everything. So of the levels that we own, we feel fine about the content. And in terms of just packaway in general, the merchants, as you know, packaway fluctuates normally. And the merchants are out there chasing packaway now looking for spring product, current product, whatever the great deals are, because the most important thing about packaway is that what you own is really great content.
Operator:
Your next question comes from Kimberly Greenberger from Morgan Stanley.
Kimberly Greenberger:
Great. Barbara, I was very interested in what you said about the state that are seeing particular impacts from COVID, California, Arizona, Texas and Florida. You talked about in the second quarter that your store openings were in that -- the store opening days, you were comping down 12%. Did you see a worse result in those 4 markets than the company average at minus 12%? And then I just wanted to reflect on what's happening currently here in August. And I wonder if there's any way for you to figure out if the current month-to-date mid-teens decline in sales trends is indicative of underlying consumer demand right now? Or are you seeing headwinds from either insufficient inventory levels that might be impacting your sales here in August, given that you're still ramping? Or another potential explanation could be that with this abnormal back-to-school that you referenced, maybe the kids business, juniors, young men's are underperforming, and other categories are doing better, and it's just a function of slow demand there. I'm just trying to break apart the pieces to understand a little bit more of the underlying drivers of the business, if you can provide any insight there?
Michael Hartshorn:
Kimberly, it's Michael. On the regional trends, Texas, Florida, California and Arizona underperformed the rest of the chain by significant margins. Now part of that is driven by the resurgence in those areas during the quarter. So they had a significant impact on the overall performance. Trends in certain areas have improved as the cases improved. And then on the current trend, we do believe that part of the current trend is driven by lower-than-planned receipts with the DCs continuing to ramp up. So we do think that, that is a factor in the current trend.
Barbara Rentler:
Okay. And then as it pertains to the assortment and back-to-school, we plan those businesses very conservatively. We made the adjustments in the assortments that we thought were appropriate based on what was going on in the outside world with children going back-to-school or not. And obviously, we're still in back-to-school. So it's kind of hard to rate the total experience. But we went in with pretty conservative plans for back-to-school.
Kimberly Greenberger:
Okay. Great, Barbara. And Michael, I just wanted to ask, to the extent that you think inventory levels or depressed inventory levels could be hurting current sales trends, is there a way for us to think about when over the next 1 or maybe 2 months, you would expect to be in a more -- in a better in-store inventory position that would be maybe reflective of where you'd like to have seen them today?
Michael Hartshorn:
Sure, Kimberly. I think I would repeat my comment with Lorraine. We've taken aggressive actions in the DCs. We probably took them later than we should, but we do expect to -- we do expect those actions to improve our throughput and bring the levels up to peak capacity over the next couple months.
Operator:
[Operator Instructions] Our next question comes from Janine Stichter from Jefferies.
Janine Stichter:
I wanted to ask a little bit about the complexion of the comp. I think you mentioned higher average basket and lower AUR. The average basket makes sense since we're hearing about shoppers consolidating their trips. Wondering if you're still seeing that towards the tail end of 2Q into 3Q? Or if the inventory shortages are having a role in maybe offsetting some of that? And then also AUR sounds like it was driven lower by some of the clearance activity earlier in the quarter. Wonder if the AUR should still be expected to be down in 3Q or if we could start to see that stabilize now that you're so clean on inventory?
Travis Marquette:
This is Travis. In terms of the average basket, we do continue to see customers coming in a little bit less frequently but buying more when they do, so the average basket size continues to be up. That's sort of just generally towards the end of Q2. In terms of Q3, again, it's really early in the quarter. And I think it's really too early to draw trends, and we don't think we -- we're not providing further details on the breakdown of the sales, not at this time.
Operator:
Your next question comes from Kate Fitzsimons from RBC Capital Markets.
Kate Fitzsimons:
Travis, I believe you called out $65 million in COVID-related expenses in the quarter. Just directionally, as we move into the back half, is there any way to piecemeal how we should think about some of these enhanced cleaning, PPE, et cetera, as well as the labor piece. It sounds like in order to get the distribution centers more fully up and running, you're having to make some investments there. So just directionally, how should we think about some of these puts and takes, I guess, on the SG&A line as we move through the back half?
Travis Marquette:
Yes. Sure. A couple of comments. The $65 million was both, as a remainder, in SG&A as well as COGS. As you might have guessed, the majority of those were in SG&A as it related to personal protection equipment, sanitation supplies, payroll, et cetera. As I mentioned, a portion of those did relate to costs related to restarting the business. And so that portion, we wouldn't expect to repeat. Having said that, we do expect elevated levels of COVID expenses as we continue to move through the year. Your question, specifically on the DC investments, those were not part of the $65 million in Q2.
Operator:
And your next question comes from Paul Lejuez from Citigroup.
Paul Lejuez:
Curious about the packaway opportunities that you're seeing today compared to a normal period. Maybe talk in terms of good, better, best, maybe you talk home versus apparel. And I'm also curious about the initial margins that you expect on packaway based on the deals that you're seeing?
And then second, just curious if you could talk about the number of new vendor opportunities you're seeing. Is there any way to quantify what you're seeing out there?
Barbara Rentler:
Sure. In terms of packaway opportunities, I don't know if I really can tell you by a good, better, best. Home versus apparels, apparel tends to be more packaway than home on -- normally on a normal basis. I think there are opportunities that are not perhaps as balanced as they've been in the past. The supply out there isn't as consistent across merchandise areas as the way it normally is.
So the opportunities that are out there are perhaps not quite as balanced. What I would say is there are more opportunities in the last couple of weeks that seems to be emerging. And so we're feeling like packaway is moving in the right direction. But again, it's not necessarily as broad based as it normally is because of the gaps of supply that are out there, created by all the issues from COVID and the market and all the things that have gone on there. In terms of the margin, we don't really look at packaway as a margin driver. We look at packaway as a sales driver. So in terms of -- if you're asking about pricing as it pertains to packaway, the merchants are out always looking for great deals on packaway. So packaway tends to be prices that are very sharp normally and is also something that we use to drive value into the stores. So in terms of a margin scenario, if we bought something that was a great deal, we would probably pass it along to the customer. Again, we use it as a sales driver. In terms of new vendors, obviously, we have a large merchant team, 900 merchants out there looking to open new resources, open new vendors. Situations like this, obviously, create opportunities, and sometimes people are a little bit more open to listen. And so we're out there now looking for new vendors and to see if we can expand the vendor base. And so that's kind of ongoing. And I think we'll continue to be ongoing. But that is a focus for merchants every day of the week is to try to expand the vendor base.
Paul Lejuez:
Got it. And then just 1 follow-up. When we hear you talk about some gaps out there? Are the goods you want not available to you? Or were you just slower to bring demand than you should have been?
Barbara Rentler:
Two things. Well, the goods that are available as all closeouts are, closeouts are never consistent amongst every business any season, any year. I think this year, there's just been -- with everything that's gone on, which I know you're versed on in the market, in factories overseas. And there seems to be, I'll say, some bigger pockets. In terms of the pace at which we're buying it, I would say that when the -- when we reopen the stores, in retrospect, in hindsight, we probably could have gone out and started to buy a little bit sooner than we did as we started to ramp the stores back up.
We didn't anticipate the consumer demand the way it turned out to be. So I feel like there was probably an opportunity that we could have done that a little bit better. But I'm not necessarily sure that, that would have impacted the assortment because I think the -- some of the gaps are just some -- they're just some big gaps. This classification is a business where they're there, and some where there's not. And our expectation is that over time, it will be a little bit more reasonable as vendors -- many vendors didn't commit and bring in some goods. And so it puts us in a chase. And the merchants are out there chasing and have been chasing since we opened, both for packaway or to flow-in stores.
Operator:
Your next question comes from Simeon Siegel from BMO Capital Markets.
Simeon Siegel:
Understanding all that there's obviously uncertainty today and quite along in the future. But on the back of these inventory conversations, do you have a view on what the broader pricing or promotional environment should look like going forward as thinking of holiday, which I know feels like it's so far ahead? And then just -- sorry for the dumb question. As you -- it's great that you had that packaway products to replenish the stores during the depletion. Any reason you wouldn't have gotten further into the packaway. Is that just seasonality? Or is there something other reason on this?
Barbara Rentler:
I couldn't hear the last part of your question on packaway you kind of faded out. I just need you to say the same thing over again, that would be great, the packaway piece.
Simeon Siegel:
Yes. Sorry. Just wondering, it's great that you were able to use the packaway to fill the stores. Is there any reason you didn't go deeper? And if the answer is seasonality then that
your answer -- easy answer or something else on?
Barbara Rentler:
Meaning go deeper, meaning release work.
Simeon Siegel:
Yes. Bring more into the stores.
Barbara Rentler:
I think the packaway releases were what we thought was appropriate to flow to the stores at the time. So packaway is not it's a broad assortment of products that we put into the hotel. And so you flow them based off of what's the right timing, right product to the floor. So depending upon what the products were, that's how we flow it. Is not -- every business doesn't have packaway to it. Some of that packaway in the hotel could have been for fall.
So we flowed what we thought was appropriate, and we flowed what we thought we needed to get through to make sure that we came in clean into the fall season. And that we weren't carrying residual products that we didn't want to have. So that's what determined what we released and how we released it. In terms of the promotional environment, I would expect that promotions will continue. It's a highly competitive environment. Retailers are trying to clear through all their excess inventory. And there'll be a long liquidation activity also coming from store closures, bankruptcy announcements. So our expectation is that it will be a promotional environment as we go forward.
Operator:
Your next question comes from Marni Shapiro from Retail Tracker.
Marni Shapiro:
Best of luck getting through the next couple of weeks of back-to-school. But can I ask you a question with -- I think you mentioned that transactions were down, and I'm assuming that's due to foot traffic, not conversion, but if you would confirm that? And then if you could talk a little bit about operationally, what your thoughts are on opening up the stores for longer hours, raising capacity levels as you get in closer to the peak season? And what are your thoughts around that, even if it's specific to just we'll extend it on the weekends, maybe not during the week. I'm just curious what your thinking is.
Michael Hartshorn:
Sure, Marni. On transactions and conversions, we don't measure conversion. We use transactions as our proxy for traffic. So we don't measure that. On -- in terms of hours, so we did when we opened significantly reduced the hours we operate. We operated from 10 to 7. So we think that had some impact on the performance. As we move through the quarter, we have extended hours to 9 o'clock across the chain currently. And we haven't yet developed our hours for the holiday season.
Operator:
Our next question comes from Alexandra Walvis from Goldman Sachs.
Alexandra Walvis:
Barbara, you mentioned in the prepared remarks there was a lot of uncertainty. Of course, heading into back-to-school and then to holiday. Can you talk a little bit about how you're planning the business into the second half, perhaps you referenced to the mid-teen to down mid-teens trend that you're seeing at the moment?
And then my second question is on logistics costs. How are you expecting those to trend going forward?
Travis Marquette:
On logistics cost, given the wage increases, certainly in the back half of the year, we would expect to grow. But we also have cost savings throughout the business, including the distribution centers because as we staff up, we'll be able to improve our productivity as well.
Barbara Rentler:
Okay. Could you do me a favor? Just repeat the back-to-school question because I didn't capture the first part of it. Could you say that again, please?
Operator:
It will be one moment while I locate the line.
Alexandra Walvis:
Now I was just wondering how conservatively you're planning the business into the back half, given all of the uncertainty about consumer behavior as we head into that important holiday season?
Barbara Rentler:
Sure. We plan to continue to manage the business conservatively. I mean given all the ongoing COVID-19-related risks, including potential for additional rounds of store closures and distribution center closures. So our plan is to plan it conservatively and to chase our way back.
Operator:
Our next question comes from Bob Drbul from Guggenheim.
Robert Drbul:
Two quick questions, if I could. The first 1 is, can you just give us an updated thought process around the resumption of a dividend or share repurchase? And the second question, I think, follows Alex's a bit. But when you think about the uncertainty that you have, can you just maybe talk about how you're planning sort of fall, winter, colder weather-type products in the back half with everything else that's going on?
Travis Marquette:
Yes. Sure. This is Travis. Just with regard to the dividend and the share repurchase program, again, there's still, as we've mentioned several times, significant uncertainty in the market. We don't know what's going to happen with COVID, with consumer demand. And we really would need greater visibility on sales and the sustainability of those sales before we would start to consider or evaluate reinstituting either of those.
Barbara Rentler:
And in terms of how we're planning fall or winter products in the back half, we're planning the entire business conservatively. And so we would look at each 1 of those businesses, I'm assuming outerwear, sweaters, those type of businesses and plan them relative to the conservative plan. So we would have an assortment on the floor. And then if business took off at a greater rate than we expected, we would come back and chase some of those products.
Operator:
Your next question comes from Michael Binetti from Crédit Suisse.
Michael Binetti:
Okay. Michael, are you seeing any difference in the trend line in the markets where the schools have announced virtual versus in-person? It sounds like that could have been a driver. Any evidence as the school systems are communicating in the local markets that back-to-school is showing up or it's a little late? And then I don't know if some of the schools are already passed back to school. Have you seen any improvement as you kind of move pass the back-to-school season in some of the southern markets at all?
Michael Hartshorn:
Yes. Michael, we wouldn't talk about current trends going into the quarter. We obviously gave the top line trend to give you an indication of what's going on overall. I'd say there's so many factors that we're seeing in the sales between the virus resurgence and unemployment trends and other things, I think it's really hard to see right now.
Operator:
Your next question comes from John Kernan from Cowen.
John Kernan:
Can you comment on your ability to get back into product and inventory if the environment, as we go through the back half of the year does improve from a traffic perspective? Obviously, see the inventory position now being pretty lean. So I'm just curious, the speed at which you can ramp back up and get goods into stores throughout the back half of the year?
Travis Marquette:
Yes. It's a good question. Obviously, we plan the business very conservatively. We think we've done that strategically. And we think that an appropriate approach to managing our business risk given these uncertain times. We've always -- as we always do, we'll chase the business with closeouts and supplement with packaway, and that is ordinary course of business for us.
Operator:
Our next question comes from Laura Champine from Loop Capital.
Laura Champine:
I mean obviously, we hope that this is a once in a lifetime event. But does the problem with getting inventory in stores quickly enough highlight a potential to build in more direct ship from vendors to stores so that you can be more flexible going forward if demand doesn't line up with your prior expectations? Or is this something that once DCs are running at full tilt shouldn't be a long-term problem?
Michael Hartshorn:
I think it's the latter. Once we have the DCs running at full tilt, we do not think it's a longer-term issue.
Operator:
Your next question comes from Roxanne Meyer from MKM Partners.
Roxanne Meyer:
Great. I wanted to ask about any color you can provide on trends by category. Several of your peers have talked about the strength of home. And then related to that as a follow-up, you mentioned that you planned back-to-school business accordingly. So I was just wondering how comfortable you feel about your mix of goods in the store and your need to perhaps pivot categories to get to an ideal mix? And when you think that could be, if you're not there?
Travis Marquette:
Yes. Let me start with the trends by merchandise, et cetera. Again, given the phased reopening of the stores and, in particular, the significant impact of clearance sales on results for the quarter, it's really hard to get a clear sense of product trends. So one thing that's clear is that the consumer during the quarter was very much more focused on home as opposed to apparel.
Barbara Rentler:
What I think you're at, Roxanne, also is just where are we seeing the shifts in product, where is the consumer heading versus where she's been. So yes, I would say, to Travis' point, home is certainly a place that the consumer has flocked to and is a business that we believe in. And actually, home gets bigger, as you know, as you enter into the fourth quarter. I would think also in apparel, the shift that we're starting to see, which I think everyone is starting to see, is the consumer moving more towards casual products, activewear, athletic wear, as perhaps she's working remotely now.
And so making that pivot in that shift is where we're going. We normally have a large casual business. Our carrier businesses have never been the biggest part of our apparel at Ross ever. And so for us, it's really about shifting even more dollars over there as the consumer has moved in that direction. And that's what we would see in the back-to-school businesses like the juniors or young men, you would see that same shift on the floor now and a continued shift because that is the bulk of where those businesses are for us normally.
Operator:
Your next question comes from Dana Telsey from Telsey Advisory Group.
Dana Telsey:
As you think about the dd's business, are you seeing the same trends at dd's as you are -- as compared to Ross? And then as you think about your vendor base, Barbara, is this an opportunity to also expand the vendor base? And are terms of payments at all being adjusted permanently in the industry from what happened in the short term?
Michael Hartshorn:
Dana, on dd's, I'd say that dd's experienced somewhat similar performance as Ross, the supply chain and buying ramp-up issues impacted the entire company and that included both Ross and dd's.
Barbara Rentler:
And from a vendor based perspective, obviously, we're always trying to expand the vendor base. And usually, when business is difficult is when there are often more potential opportunities to expand that base, so the merchants are focused on trying to do that every day and particularly now.
In terms of terms and adjustments permanently in the industry, I think I really couldn't comment on what globally that looks like for the entire industry. I think there's been a lot going on in the last few months. And so I think everyone is reacting to what they need to do for the business, but I really can talk about a permanent shift in the industry.
Operator:
Your next question comes from Jamie Merriman from Bernstein.
Jamie Merriman:
Barbara, when you're talking about sort of pivoting to categories that are strong. Just can you just talk a little bit about how that works and the timing in terms of how often buying budgets are allocated? I'm just really wondering like how quickly you could really pivot assortments, if necessary? And then you talked in your prepared remarks about thinking through and sort of weighing the risk of future shutdowns. So -- and given your comments around the DC locations of California and Pennsylvania, can you just remind us of where your big DCs are located? And if there are sort of risk mitigation strategies you can put in place if there were say shutdowns that impacted the California DCs?
Michael Hartshorn:
On the DCs about a little -- over half of our capacity is on the West Coast. We have DCs in the Bakersfield Central Valley area, 1 DC there, several in Riverside. We also have a DC in Pennsylvania and 2 in South Carolina. If we had to shut down the California DCs, it would have a significant impact on the chain.
As far as mitigation strategies, obviously, it's going to be important for us in our future growth. Our next DC opens in Houston. We'll have another DC somewhat after that, that we would expect to be non-California.
Barbara Rentler:
Sure. And in terms of pivoting to categories that are strong, how quick you can do it? I mean it literally depends on each category in each size range and gender. So I couldn't give you a specific time. But what I would tell you is that we would be more aggressively pursuing those categories base -- and then based off of supply in the shorter term, we would drive it as much as we can. And in the longer term, what will usually happens is when there is a trend shift, the market follows that trend shift and then the supply all naturally kind of goes there. And so then you can take a bigger lift than perhaps you can initially as the market recognizes what's working and what's not working themselves.
Operator:
your next question comes from Jay Sole from UBS.
Jay Sole:
Barbara, my question is you mentioned there's a lot of near-term factors impacting the trend in the third quarter so far, back-to-school, like a stimulus, the inventory issue, the rising COVID cases. But to what extent do you think traffic is being impacted by perhaps customers going online and finding bargains there because they're just not comfortable coming to the stores right now?
And then Michael, just want to follow-up on the question about the DC staffing. Can you just explain a little bit more about what the challenges have been about? Is it people not coming back? Were they furloughed? And then when you tried to bring them back they just -- they weren't -- they found other jobs, or they just didn't want to come back, so you've had to raise wages? If you could just explain that a little bit more, that would be appreciated.
Michael Hartshorn:
Sure. On the DCs, we did furlough our associates, and we operate the DCs with both temp labor and perm labor -- permanent labor for surge capacity. We did see our permanent workforce good retention in returning from furlough. But I suspect with the surge of e-commerce and the impact of commerce coming back post closure. The warehousing competitive labor market has increased quickly and significantly. So I think those are the main factors on what's driving the DC staffing shortfall. I would also add that in a COVID environment, we want to make sure that people are safe, and we don't want them coming to work if sick. So there's also things like attendance that we're addressing as well.
Barbara Rentler:
And in terms of the impact of online in our business, I think that's hard for us to measure the exact relationship of that. Obviously, online business has been very good, especially in essential businesses and core basics and things like that. But I think it's hard for me to put a number to what that impact could be to our current business trend.
Operator:
Your next question comes from Ike Boruchow from Wells Fargo.
Irwin Boruchow:
I'll follow-up on Jay's question, but I'll ask it differently. Not necessarily e-commerce, but I know you guys, I'm sure you have good communication with your customers. When you talk to them about why they're not coming back as much as they did last year, is it between the COVID concerns, the economy and maybe the customer lost their job or income of the family has gone down? And then thirdly, your own inventory shortage, not having the right stuff in store. Do you know which is the main factor? Like is there a rank order of those? Is there any way you kind of talk to that?
Michael Hartshorn:
Ike, I would say, it's hard to break out between those components. I think it's very clear that the #1 factor is the impact of the virus. As we said in our comments, that the markets that were impacted the most were also the markets that had the largest outbreak. So I think that's clear that, that's the #1 factor. But I don't want to minimize. We think we could have done things better during the quarter. So there are factors that we talked about with inventory that we think we can impact. So the bottom line is we're going to work on our own execution and do the things that we can do to impact the business.
Operator:
Your next question comes from Chuck Grom from Gordon Haskett.
Charles Grom:
Just one quick one for me. Just I'm curious, just in those FCAT states, if you're still seeing subdued sales here in August or if they were -- hope they have recovered back to sort of the national average?
Travis Marquette:
I didn't hear the first part of the question.
Charles Grom:
Just on the sales in those FCAT states. I'm just wondering if the sales are covered, Florida, California, Texas, Arizona.
Travis Marquette:
In those states, they continue to trail the chain. We have seen some small improvement.
Operator:
And your last question comes from Adrienne Yih from Barclays.
Adrienne Yih-Tennant:
Barbara, I was wondering if you can talk about if we are in a reduced traffic environment as we go into the holiday season, changes to the store operating procedures for Black Friday and then into the critical pre-holiday weeks, any changes to hours or traffic-driving events or something of that sort? And then for Michael or Travis, if you can talk about what portion is distribution center payroll versus total payroll, like employee payroll, not including corporate headquarters? I imagine you're not seeing as much of that wage pressure at the store payroll line, but if you can talk about anything, did people come back or didn't come back similar to the DCs? Or is that normalized?
Michael Hartshorn:
I'll try to hit through those. I'm going to go in reverse order. We're not seeing the same issues in the stores, and that's likely -- again, the DCs were impacted by the surge in e-commerce with the closures of a number of bricks-and-mortar retailers. We're not having that same issue in the stores. And then in terms of holiday plans, we wouldn't discuss those at this point as we're still working through those plans.
Barbara Rentler:
And in terms of events, Black Friday, we don't really run events. Our thing is that we want to make sure that we have great branded values on the floor. And obviously, our inventories levels go up in that time period. And that's what the customer values, and that's what we look to do to drive traffic is just having great branded bargains on the floor.
Operator:
And I will turn the call back over to Barbara Rentler for closing remarks.
Barbara Rentler:
Thank you for joining us today and for your interest in Ross Stores. We wish you and your families continued health and safety. Thank you.
Operator:
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
Operator:
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.
Barbara Rentler:
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 advisers 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 dd's 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.
Travis Marquette:
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.
Barbara Rentler:
Thank you, Travis. We want to reiterate that given the extraordinary global health crisis created by COVID-19, the safety and wellbeing 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 confidence 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.
Operator:
[Operator Instructions] Your first question comes from Lorraine Hutchinson from Bank of America.
Lorraine Maikis:
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?
Michael Hartshorn:
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.
Operator:
Your next question comes from Mark Altschwager from Baird.
Mark Altschwager:
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?
Travis Marquette:
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.
Barbara Rentler:
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.
Operator:
Your next question comes from the line of Kate Fitzsimons from RBC Capital Markets.
Kate Fitzsimons:
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?
Barbara Rentler:
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.
Operator:
Your next question comes from Paul Lejuez from Citigroup.
Tracy Kogan:
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?
Michael Hartshorn:
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.
Barbara Rentler:
And just in terms of just the thought process around buying packaway, I'm assuming you may pack away that I could release earlier than packaway that it might not release till March of next year. Is that really your question?
Tracy Kogan:
Exactly.
Barbara Rentler:
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.
Operator:
Your next question comes from Kimberly Greenberger from Morgan Stanley.
Kimberly Greenberger:
I wanted to understand if you have 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?
Michael Hartshorn:
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.
Travis Marquette:
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.
Kimberly Greenberger:
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.
Travis Marquette:
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.
Kimberly Greenberger:
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?
Michael Hartshorn:
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.
Operator:
[Operator Instructions] Your next question comes from Adrienne Yih from Barclays.
Adrienne Yih-Tennant:
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?
Michael Hartshorn:
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.
Barbara Rentler:
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.
Operator:
Your next question comes from Mike Baker from Nomura.
Michael Baker:
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?
Travis Marquette:
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.
Michael Hartshorn:
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.
Operator:
Our next question comes from Matthew Boss from JP Morgan.
Matthew Boss:
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?
Michael Hartshorn:
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.
Operator:
Your next question comes from Charles Grom from Gordon Haskett.
Charles Grom:
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?
Barbara Rentler:
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.
Operator:
Your next question comes from Jay Sole from UBS.
Jay Sole:
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?
Barbara Rentler:
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.
Operator:
Your next question comes from Bob Drbul from Guggenheim.
Robert Drbul:
Just a couple of questions for 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?
Michael Hartshorn:
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.
Robert Drbul:
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.
Barbara Rentler:
On when the vendor is packing away their own goods?
Robert Drbul:
Yes. Yes.
Barbara Rentler:
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's -- 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 there if you sell it or us 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.
Operator:
Your next question comes from Ike Boruchow from Wells Fargo.
Irwin Boruchow:
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.
Travis Marquette:
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?
Irwin Boruchow:
Just, I guess, merchandise margin trajectory, Q2 relative to Q1.
Travis Marquette:
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.
Michael Hartshorn:
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.
Operator:
Your next question comes from Laura Champine from Loop Capital.
Laura Champine:
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?
Barbara Rentler:
How big the buy will be or just how...
Laura Champine:
Exactly, exactly.
Barbara Rentler:
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 full 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.
Laura Champine:
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?
Barbara Rentler:
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.
Operator:
Your next question comes from Alexandra Walvis from Goldman Sachs.
Alexandra Walvis:
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.
Michael Hartshorn:
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.
Operator:
Your next question comes from Michael Binetti from Crédit Suisse.
Michael Binetti:
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?
Travis Marquette:
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.
Michael Hartshorn:
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.
Travis Marquette:
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.
Michael Hartshorn:
But to answer -- a short answer to your question, yes, it could be more than that in the second quarter.
Michael Binetti:
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?
Travis Marquette:
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.
Operator:
Your next question comes from Marni Shapiro from Retail Tracker.
Marni Shapiro:
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?
Michael Hartshorn:
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 pause 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.
Marni Shapiro:
That makes sense. And then just 1 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?
Barbara Rentler:
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...
Marni Shapiro:
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.
Operator:
Your next question comes from Dana Telsey from Telsey Advisory Group.
Dana Telsey:
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?
Travis Marquette:
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.
Dana Telsey:
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?
Michael Hartshorn:
Yes. Dana, it's very similar across both chains. I wouldn't say there were significant differences.
Operator:
Your next question comes from John Kernan from Cowen.
John Kernan:
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?
Michael Hartshorn:
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.
Operator:
And our last question comes from the line of Jamie Merriman from Bernstein.
Jamie Merriman:
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?
Barbara Rentler:
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?
Jamie Merriman:
Whether you had to cancel orders and extend payment terms during the quarter just from a liquidity perspective?
Barbara Rentler:
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.
Operator:
And I will now turn the call back over to Barbara Rentler for closing remarks.
Barbara Rentler:
Thank you for joining us today. Our thoughts go out to all of you and your families for your continued health and safety.
Operator:
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
Operator:
Good afternoon, and welcome to the Ross Stores' Fourth Quarter and Fiscal Year 2019 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 2018 Form 10-K and fiscal 2019 Form 10-Qs 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:
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 of Investor Relations.
We'll begin our call today with a review of our fourth quarter and 2019 performance, followed by our outlook for 2020. Afterwards, we'll be happy to respond to any questions you may have. As noted in today's press release, we delivered strong sales and earnings gains for both the fourth quarter and fiscal year. Our ongoing ability to offer compelling bargains to our customers enabled us to achieve these results despite our own challenging multiyear comparisons and a fiercely competitive holiday season. Earnings per share for the 13 weeks ended February 1, 2020, grew 7% to $1.28 on net income of $456 million. For the 2019 fiscal year, earnings per share grew 8% to $4.60 compared to $4.26 in 2018. Net income was $1.7 billion, up from $1.6 billion last year. Now let's turn to our recent sales results. For the 13 weeks ended February 1, 2020, total sales were $4.4 billion. Comparable store sales for the period rose 4% on top of a 4% gain in last year's fourth quarter. For the fiscal year, sales increased 7% to $16 billion, with same-store sales up 3% on top of a 4% gain last year. For the fourth quarter, the best-performing major merchandise area was Children's, while the Midwest was the strongest region. dd's DISCOUNTS customers continued to respond positively to its merchandise assortment, leading to another quarter and year of robust gains in both sales and operating profit. As we ended 2019, total consolidated inventories were up 5% over the prior year with packaway levels at 46% of the total, similar to last year. Average in-store inventories at year-end were flat versus 2018. As noted in today's release, our Board recently approved an increase in the quarterly cash dividend to $0.285 per share, up 12% over the prior year. The increases to our shareholder payouts for 2020 reflect our ongoing confidence in the company's ability to generate significant amounts of cash after funding our growth and the other capital needs of our business. We have repurchased stock as planned every year since 1993 and raised our cash dividend annually since its inception in 1994. This consistent record also reflects our continued commitment to enhancing stockholder value and returns. Now Travis Marquette will provide further color on our 2019 results and details on our 2020 full year and first quarter guidance.
Travis Marquette:
Thank you, Barbara. As Barbara mentioned earlier, earnings per share for the fourth quarter and fiscal 2019 year were $1.28 and $4.60, respectively. These results compare to the fourth quarter 2018 earnings per share of $1.20 and $4.26 for the year. As a reminder, our results for both the 2019 and 2018 fourth quarters and fiscal years reflect onetime noncash gains of $0.02 and $0.07 per share, respectively, primarily related to the favorable resolution of tax matters.
Now I'll discuss further details on our fourth quarter results. Our fourth quarter comparable store sales gain in the quarter was driven by a combination of higher traffic and an increase in the size of the average basket. Fourth quarter operating margin was 13.3% compared to 13.2% last year. Cost of goods sold increased 30 basis points in the quarter, mainly from higher distribution costs of 45 basis points due to unfavorable timing of packaway-related expenses and higher wages. Merchandise margin declined 5 basis points, reflecting some pressure from tariffs. These higher expenses were partially offset by 10 basis points of lower buying costs, while freight and occupancy levered by 5 basis points each. SG&A for the quarter levered by 40 basis points, primarily due to lower incentive bonus and lower other miscellaneous costs. During the quarter, we repurchased 2.7 million shares of common stock for a total purchase price of $309 million. For the full year, we repurchased 12.3 million shares for an aggregate price of $1.275 billion. Now let's discuss our outlook for 2020. As noted in our press release, our guidance does not reflect the potential unknown impact from the evolving coronavirus outbreak. While we're closely monitoring the situation, there remains a high level of uncertainty over supply chain disruptions in China. In addition, it is unclear how a further possible spread of the coronavirus could negatively impact U.S. consumer demand.
For the 52 weeks ending January 30, 2021, we are forecasting earnings per share to be $4.67 to $4.88, which includes ongoing pressure from tariffs. The operating statement assumptions for fiscal 2020 include the following:
Total sales are projected to grow 4% to 5%. Comparable store sales are expected to increase 1% to 2% on top of multiple years of strong gains. We plan to add about 100 stores this year, consisting of approximately 75 Ross and 25 dd's DISCOUNTS locations. As usual, these numbers do not reflect our plans to close or relocate about 10 older stores.
We project that operating margin for 2020 will be in the range of 13.0% to 13.2% compared to 13.4% in 2019. The forecasted decline reflects our plans for merchandise gross margin pressure from ongoing tariffs and some deleveraging of expenses if same-store sales only increase 1% to 2%. Net interest income is estimated to be about $8 million. Our tax rate is projected to be approximately 24%. We expect average diluted shares outstanding to be about $351 million. Capital expenditures for 2020 are projected to be approximately $730 million, which includes investments for our next distribution center. And depreciation and amortization expense, inclusive of stock-based amortization, is forecasted to be about $490 million. Let's now move to our first quarter guidance. We are forecasting comparable store sales to be up 1% to 2%. Earnings per share are projected to be $1.16 to $1.21 versus $1.15 for the first quarter ended May 4, 2019.
Other assumptions that support our first quarter guidance include the following:
total sales are planned to increase 4% to 5%. We expect to open 21 Ross and 7 dd's DISCOUNTS locations during the period.
First quarter operating margin is projected to be 13.6% to 13.8% versus last year's 14.1%. This forecast reflects our expectation for some pressure on merchandise gross margin from the previously mentioned tariffs, along with deleveraging on occupancy and other expenses on a comparable sales increase of 1% to 2%. Net interest income is estimated to be about $2 million. Our tax rate is expected to be approximately 23%. And finally, weighted average diluted shares outstanding are projected to be around 355 million. Now I'll turn the call back to Barbara for closing comments.
Barbara Rentler:
Thank you, Travis. Again, we delivered solid sales and earnings gains for both the fourth quarter and fiscal year. Looking ahead, while we hope to do better, we continue to take a prudent approach to forecasting our business for 2020. Although we remain favorably positioned as an off-price retailer, we are facing our own strong long-term sales and earnings results, a very competitive retail landscape, unknown impacts from the corona outbreak and an uncertain macroeconomic and political environment.
Longer term though, we remain confident in our ability to achieve ongoing profitable market share gains by consistently offering customers outstanding value throughout our stores. As long as we remain focused on the careful execution of our strategy, we believe we can continue to deliver solid sales and earnings growth over time. At this point, we'd like to open up the call and respond to any questions you might have.
Operator:
[Operator Instructions] Your first question comes from Matthew Boss from JPMorgan.
Matthew Boss:
Great. Congrats on a nice quarter.
Travis Marquette:
Thanks, Matt.
Matthew Boss:
I guess, maybe larger picture, so other than same-store sales at 1% to 2% and the associated revenue flow-through, are there any material differences in your 2020 bottom line guide versus historically 3% to 4% comps equating to double-digit earnings growth?
Michael Hartshorn:
Matt, it's Michael Hartshorn. As we have over a number of years and as we said in the remarks, there's a number of reasons to run the business with a cautious eye, including our own sales and earnings comparisons at the competitive retail landscape and certainly the uncertain macro and political environment.
The bottom line though is if we can put ourselves in a position to chase the business, we heighten our ability to optimize both sales and earnings results. Over the long term, our long-term algorithm has not changed, which is the combination of comp store growth, new store growth, EBIT margin expansion at the high end of 3% to 4% and our share buyback program gets you to double-digit comp growth -- double-digit EPS growth.
Travis Marquette:
And the only other thing I'd call out is just as a reminder, we did have a $0.02 per share benefit in the fourth quarter of 2019 that we're lapping. That was a onetime item.
Matthew Boss:
Great. And then maybe Barbara, just to follow up, how would you describe the larger picture product availability in the marketplace today maybe versus a year ago? And have you seen any changes as it relates to current supply chain disruption so far to date related to all of the larger picture changes that are happening?
Barbara Rentler:
Sure. Versus a year ago, there's still currently a lot of supply in the market as there was last year. As it relates to the whole China supply chain, there still remains a high level of uncertainty with the disruption from China. So it's really kind of hard to predict where that is going to go. But at this particular moment in time, there have been good. So whether later on there's an influx of goods or not, I just think it's too hard to predict at this point in time.
Operator:
Your next question comes from Lorraine Hutchinson from Bank of America.
Lorraine Maikis:
Just wanted to ask a question about the tariff pressure you're seeing. Is that pressure coming all from direct imports? Or are you taking on some pricing pressure from some of your vendors? And are there any plans to try to raise price to offset these pressures?
Michael Hartshorn:
Sure. Lorraine, on the tariffs, the largest impact is for goods that we directly import for us. That's areas like Home. The Home area has the 25% tariff. How they played out last year was very similar to how we guided. And the way we guided into 2020 is mainly the front half of the year as we lap the 25% tariff for Tranche 3 and 7.5% tariff on Tranche 4A.
For us, on pricing, our focus is to maintain a value proposition through a pricing umbrella relative to full price department stores and specialty stores. And to be honest, we have not seen a material change in pricing.
Operator:
Your next question comes from Mark Altschwager with Baird.
Mark Altschwager:
I was hoping you could dig in a little bit more on the merchandise margin performance in the fourth quarter, how that compared to your internal plans and expectations. And then in terms of your margin outlook for 2020, specifically on the merch margin front, I know you just gave us some added color on how the tariffs are going to play out. But are there other factors embedded in that outlook? I know you'd mentioned the competitive environment. Just curious how you're looking at that relative to what you've been experiencing in recent quarters?
Michael Hartshorn:
I'll answer. In terms of our outlook for 2020, with the tariffs, our guidance includes a slight decline in merchandise margins for the year. But again, that's all driven by the tariff impact mainly in the front half of the year.
Travis Marquette:
And in terms of Q4 for merchandise margin is -- it was down a little bit year-over-year. And again, that did reflect some pressure from tariffs, but it was a little bit better than we expected.
Operator:
Your next question comes from Paul Trussell from Deutsche Bank.
Paul Trussell:
I know you mentioned that, I believe, Children's was the best-performing category. Just curious if you can give a little bit more color on the rest of the areas, in particular, your Ladies business and how you feel about the trajectory of that business today going into the new year?
Barbara Rentler:
Sure. Our overall performance was pretty broad-based. I know we called out Children's, but the overall performance is broad-based across all the areas. Ladies performed above plan. We feel pretty good about our current offering, and we believe that we have the right initiatives underway to drive sales growth in Ladies in Q1 and for the year. So we feel like we're moving forward in there.
Operator:
Your next question comes from Kate Fitzsimons from RBC Capital Markets.
Kate Fitzsimons:
I guess, looking to 2020, when we're thinking about some of these non-merchandise items and COGS between distribution and freight, is it -- can you give us any guidance in terms of how we should think about that? Distribution, seems like it was a drag here again in 4Q after being an item -- a drag in the third quarter. So how should we look at that looking out to 2020 between the first half and the back half? And again, freight had been a pressure point more recently, but it seems it turned to a leverage item in the fourth quarter. So just how should we think about that into 2020?
Travis Marquette:
Yes. Sure. In terms of DC costs, again, as I mentioned, the higher DC costs in the quarter were driven primarily by unfavorable packaway-related timing but to a lesser extent, as I mentioned, by ongoing wage pressures. In terms of the outlook for that, again, we have built into our forecast -- or into our guidance, some continuing pressure in the DCs, primarily from ongoing statutory wage increases. And again, as I said, that's built into the guidance.
In terms of freight, overall, during the year, freight played out kind of as we expected it would during the year. I think, at the beginning we talked about that we'd expect higher costs at the start of the year. Those costs would abate towards the back half of the year, which is how it played out to a slight tailwind. In terms of freight, as a reminder, sort of the majority of our shipments are completed under contract. So we're not regularly exposed to the spot market. Those contracts typically renew towards the middle of the year. So we feel pretty good about the outlook and believe it should be a relatively stable perspective at least for the first part of the year.
Operator:
Your next question comes from Kimberly Greenberger from Morgan Stanley.
Kimberly Greenberger:
Great. A nice way to finish the year. My question, Barbara, is for you. Reflecting back on the first quarter last year, with the 2% comp for the quarter, I know that I think you were hoping to do better. At least, that's what you had articulated at the time and there were some execution issues that you were addressing. I'm wondering, looking out to the first quarter 2020 guidance for 1% to 2% comp, it doesn't look like contemplated in that estimate is any expectation of recovery relative to a softer comparison in Q1? But I'm wondering if you can just reflect on what happened last year. It seemed like the issues were certainly corrected throughout the year. And do you think there's an opportunity perhaps in Q1 to do better?
Barbara Rentler:
Sure. So you're correct. Last year in Q1, with the 2% comp, our Ladies business was very difficult. And actually, quite frankly, Q1 for us, over the last 2 or 3 years has been a difficult quarter for us as Ladies is a big piece of the business, you have more weather issues, you have tax refund. There's a lot of noise in the first quarter. So we feel it's prudent to plan the first quarter with a 1% to 2% and just chase our way back into the business.
The difference a year ago versus today is that, to your point, as the year progressed, that Ladies slightly improved each quarter as we went along. And again, in the fourth quarter, the business performed slightly above our expectations. And so as we go forward, Ladies perhaps will not be the drag that it was on the first quarter. But in the first quarter last year, that was really our main driver. Does that answer your question, Kimberly?
Kimberly Greenberger:
Yes. So would you say you're sort of planning Q1 cautiously just because there have been so many moving pieces in Q1 for the last few years that it just hasn't all necessarily panned out to be a more robust quarter. But stepping back, do you think there might be an opportunity -- or I guess, you sort of said it earlier. Your goal is to beat the performance that you've laid out and you think it's best to sort of plan conservatively and chase, is that the best way to think about it?
Barbara Rentler:
Exactly. That you really want -- it's been difficult for 2 to 3 years. We want to put ourself in a position to chase our way back, keep the goods turning and take us into Q2 in a healthy position.
Michael Hartshorn:
Kimberly, I'd also add that across retail, if you look at sequential performance in Q1 versus the rest of the year, performance has been down from a comp perspective. And it's unclear whether that's weather driven or, as Barbara mentioned, tax refund timing, but there are a number of factors that retail has been soft in Q1, including us, obviously. So it makes the most sense for us to be cautious and chase our way back into the business if sales outperform.
Operator:
Your next question comes from Alex Walvis from Goldman Sachs.
Brooke Roach:
This is Brooke Roach on for Alex. We just had a quick question regarding some of the category comments that you've shared earlier. Gifting was a key part of the holiday strategy this year. Can you share how that performed during the quarter? And then can you share a little bit of commentary regarding the performance of apparel versus home?
Barbara Rentler:
Sure. In terms of gifting, we were pleased with our gifting performance throughout the store. It was one of our initiatives for the fourth quarter, and the customer definitely responded to the assortments. So we felt very good about gifting. And as we go forward in 2020, we would continue to expand on our gifting assortment.
Travis Marquette:
In terms of your question on apparel versus nonapparel, they performed relatively similarly in the quarter.
Operator:
Your next question comes from Adrienne Yih from Barclays.
Adrienne Yih-Tennant:
Let me add my congratulations for a solid holiday. I guess, my first question is, Barbara, if you think back to the SARS, and I know it's completely different time period, sourcing, et cetera, do you recall any impact on inventory that might be something to think about as we go through the coronavirus?
And then, Michael, can you talk about your average hourly rate assumptions on wage for fiscal '20?
Barbara Rentler:
Well, in terms of SARS, which was a lot of years ago -- I'm not even sure what job I had; it was years ago. Look, I think the way to think about inventory and managing inventory whether it's 18 years ago or today, it's the same thing. When there is a lot of volatility in the outside world, you want to manage your plan and you want to manage your inventory as tightly as possible and you want to keep yourself flexible, nimble and have liquidity. And I think, although I might not have lived through the SARS experience myself at that point in time, it's the same metrics that you would -- in an off-price model that you would use to manage and control your business as you're kind of going through the issue at hand.
Michael Hartshorn:
In terms of wages, as you probably know, we raised the minimum wage in 2018 to $11 an hour. There are many states, some of which were heavily concentrated, whether it's the DCs or stores like California. California is at a $13 average minimum wage and will be marching to $15 over the next couple of years. But there's other municipalities that are built into our guidance.
In terms of market rates, we continue to make adjustments to compete for talent in many of our markets. So what we have built into our guidance is market-based adjustments, where we know we'll need to increase, plus the statutory increases. Yes, that's what's built into the existing guidance.
Operator:
Your next question comes from Michael Binetti from Crédit Suisse.
Michael Binetti:
Let me start with just a quick modeling question. I think in the revenue build, at this time last year, you started guiding the year to same 1% to 2% comps, translating to 5% to 6% on revenue growth, if I'm not mistaken. This year translates to 4% to 5%, did you say? Is there anything to call out on the non-comp component there that we should know about that causes that difference?
Michael Hartshorn:
No. I don't think there's anything different. Obviously, we're opening about 100 stores, which is similar to last year. So you're on a larger base. I think that's the only difference year-over-year, Mike.
Michael Binetti:
Okay. And then on -- I guess on -- Michael, you offered comments that if you can get to a 3% to 4% comp, you still have line of sight to double-digit type EPS growth, an algorithm that you've spoken for many years. But now we're past things like the self-inflicted $11 wage inflation, and it seemed like we were back to the kind of longer-range "We see it coming" type minimum wage increases that you had before, but you're still speaking to wage inflation this year. Are there other good guys that we add back to the way we think about your margins on a multiyear basis that should offset -- if you're going to have things like wage inflation higher on a go-forward basis than you had when you started giving that kind of an algorithm in the past?
Michael Hartshorn:
Sure. Well, I'd start with 2019. We ended the year with a 3% comp. And if you take out the onetime tax adjustments, we were very close to the double-digit growth and would have been double digits with a 4% comp, so in line with our algorithm.
As we think about it going forward, certainly, we've guided the year -- this year at 1% to 2%. If we exceed, we'll see what flow-through happens on that. But it's up to us to figure out how to be more efficient in the business as we see those wages come through. A lot of the wage increases have been statutory increases that we have some foresight on, and we'll work to find costs throughout the business to be more efficient as we go forward.
Michael Binetti:
Okay. Can I just ask one last one at a higher level. It seems to me that any kind of meaningful product coming out of China delays, given how fast your inventories turn, it just seems like off-price could be in a position where availability of inventory in the short term could be impacted. It didn't sound like you said anything today that you're seeing that today. How much visibility do you think you have to that, if there is an issue? And then, I guess, just theoretically, why would off-price be well positioned if -- given what we know about how fast the inventory turns are and that there were factories closed for a good amount of time here recently?
Barbara Rentler:
Sure. First, let me say that we're seeing a very active marketplace. There's a lot of competition in the market. There are absolutely goods in the market, and there's a lot of competition for those goods. And you're right, it's early and it's unclear what the impact could be on the supply chain because I'm sure it's hard to get clarity around what that looks like. But sometimes, people are bringing in goods. And we also have packaway that we will use in this time frame to support our sales trends. And at some point, you're at a point we don't know -- at some point, it will catch up. And so our strategy is to keep ourselves flexible and nimble and in a position to take advantage of goods when they come in. And so that's kind of how we have ourselves set up, but there has been a lot of activity in the marketplace buying goods immediately.
Operator:
[Operator Instructions] Your next question comes from Ike Boruchow from Wells Fargo.
Irwin Boruchow:
Let me add my congrats on a nice quarter, good end of the year. Just -- to dig into the gross margin a little bit. I know this is a bit nitpicky, but you called out tariff pressure to impact your Q3 as well as your Q4. I believe your merch margin was up 20 basis points in Q3 and down a little in Q4. Is that just a function of more tariff inventory flowing through? Or is there something else on the merchandise margin line in the fourth quarter relative to the third quarter that's worth calling out?
Travis Marquette:
Yes. I think as the year went on, the impact from tariffs got larger, right? So -- in particular, the tariffs that were put into place in September had a larger impact and the tariffs that were in place even earlier in the year, as the year went on, those started to actually arrive and flow through. So that's why the impact grew as we went through the year.
Irwin Boruchow:
And so Travis, does that mean we should assume that until we lap this fourth quarter that we should assume potential slightly negative merch margins for the year? Is that what's embedded in your guidance?
Travis Marquette:
Yes. Our guidance is merch margins down a bit for next year, and it's more heavily weighted towards the front half of the year than the back half of the year.
Michael Hartshorn:
Ike, if you think about the timing of when the increases went in, so Tranche 3 went in, in the June time frame from 15% to 25%. And Tranche 4 went in place in September. So even though they went in place, they start hitting a little bit later. So those are the 2 kind of key points that we'll anniversary as we move into 2020.
Operator:
Your next question comes from Marni Shapiro from Retail Tracker.
Marni Shapiro:
Congratulations on a great end of the year. Could we just talk a little bit about real estate. You guys have been pretty consistent in opening up the same -- close to the same number of stores every year. Can you just talk about how many stores you renovate in a given year? Will you close about the same 10-ish stores this year as you usually do? And have there been any changes to the size of the stores or the kind of leases that you're getting, given how many retailers have exited the space, particularly in these stand-alone places?
Michael Hartshorn:
Marni, on the real estate front, nothing has changed dramatically for us. We expect to open about 100 stores. The closures are in the 1 to 2 handfuls of stores that we'll consider closing every year. But our view on the real estate market hasn't changed. There's good availability, and we'll look at every site that fits our specific requirements. Obviously, with store closures, that gives us sites -- plenty of sites to choose from.
In terms of the overall real estate market, we're not seeing -- the cost front has been fairly stable. But our plan, 100 stores a year, we're very comfortable with from both the store operations, opening stores and also getting the right sites for us.
Travis Marquette:
And on your question of existing stores, we do touch or refresh a number of stores every year. For our capital spending for 2020, we'll probably spend about 20% of that total on existing stores between refreshes, remodels and things like that. So we do work to keep the stores current for our customers.
Operator:
Your next question comes from Laura Champine from Loop Capital.
Laura Champine:
As you discussed the risks and try to plan for the risks around coronavirus, are you more worried about a slowdown in consumer traffic? Or are you concerned about supply chain issues that you might not be able to offset with packaway? And to that end, have you seen any shift in traffic trends over the last week or 2 as the headlines have gotten worse?
Michael Hartshorn:
Yes. Look, I think there's a couple of different aspects. Obviously, we're concerned about our associates' safety. We're concerned about supply. We're concerned about what would happen with consumer demand if it's spread further throughout the U.S. I think it's too early to weigh one or the other, other than we're obviously watching it very closely and making decisions daily based on how it's evolving.
Operator:
Your next question comes from Bob Drbul from Guggenheim.
Robert Drbul:
Just a couple of quick questions. On the quarterly cadence, was there any variation in the monthly -- November, December, January that you would call out? And just wondering, on a geographic basis, you called out the Midwest, but if you could maybe comment on California or any other big markets and how they performed, that would be great.
Travis Marquette:
Yes. Sure. Generally, we don't provide specific trends within the quarter, but I would say that our strongest performance was during that December holiday selling period. In terms of geographic performance, as you mentioned that the Midwest was our strongest region. Other strong regions were the Mid-Atlantic and the Southeast. Texas also performed, one of our larger regions performed a bit above the chain. California was roughly in line with the chain.
Operator:
Your next question comes from Jamie Merriman from Bernstein.
Jamie Merriman:
Just to pick up on your comments earlier, Barbara, about your ability to use packaway if supply chains do become more tight. Can you just talk philosophically about how you would think about that now? And sort of what level of packaway you'd be comfortable with?
And then just given the sort of range of categories and brands, I guess, would you expect that you could shift across different categories to the extent that one area becomes more constrained from a supply chain perspective?
Barbara Rentler:
Sure. So let's start with -- let me start from the bottom and go back to the top. In terms of shifting money through categories, if we have the appropriate inventory and we could deliver the appropriate assortment and we needed to shift from one business to the other, we absolutely could because that's what our model is about.
In terms of packaway level, our packaway level, I think, at the peak, Michael, was 50%?
Michael Hartshorn:
Right.
Barbara Rentler:
It was about 50%. And we certainly have the ability to increase that and to increase our capacity in our DCs if we needed to. So packaway, based on, would really be driven on the merchants coming back and saying, what the deals are, what the product is and is it really worthy of packing it away and is it good value? Because the danger in all of this is that all merchants across America just go out and buy goods for the sake of buying goods. So you really have to have size around that and what that looks like.
In terms of categories and brands and things that go in packaway, that very much depends on what we see and the value we can offer to the customers. So packaway is not consistent through every single business in the company. It's based off of opportunities that the merchants found in the market they think have great value that the customer will appreciate and satisfy her needs.
Operator:
Your next question comes from John Kernan from Cowen.
John Kernan:
Just on the packaway point, there was a fairly sizable impact on the gross margin, I think, on timing of packaway expenses. Is there any way for us to think about that in 2020 and anything in the first quarter in terms of how that would flow through now that packaway has ticked back up year-over-year and sequentially as a percentage of the inventory?
Michael Hartshorn:
For 2020 -- first of all, packaway is one of the hardest things for us to predict in the business. It's really based on market dynamics. But typically, for the full year, there's really a nominal impact. Where we see the timing differences are usually quarter-to-quarter timing differences and not for the full year.
Operator:
Your next question comes from Mike Baker from Nomura.
Michael Baker:
I just wanted to clarify, did you say at one point when we were talking about some of the issues that are impacting overall retail, and I thought you said there are a number of factors that have been soft in retail, including you guys. So are you saying that your 1 quarter -- your first quarter has been softer than you would otherwise expect because of things like tax refunds and the weather?
Michael Hartshorn:
Mike, no. What I was really referring to is if you look at comp growth throughout retail in the first quarter versus the rest of the year, the first quarter has been softer than the rest of the year across retail and that's been true year-over-year for a number of years. So that's what we're referring to.
Operator:
Your next question comes from Simeon Siegel from BMO Capital.
Simeon Siegel:
Sorry if I missed it, but did you say what you're expecting for expense dollar growth next year? And then can you just remind us the difference in sales per store at Ross versus dd's?
Michael Hartshorn:
Sure. On sales per store, we wouldn't break out dd's separately. We're in the $9 million range per store across the chain.
Travis Marquette:
And can you clarify your first question?
Simeon Siegel:
If I missed it. Hello?
Travis Marquette:
Yes. I didn't -- I was asking for clarification on the first question.
Simeon Siegel:
Sorry, just the SG&A -- the expected SG&A dollar growth for next year, if you had given that.
Travis Marquette:
Yes. We haven't provided the specifics in terms of that below operating margin.
Operator:
Your next question comes from Dana Telsey from Telsey Advisory Group.
Dana Telsey:
As you think about the buckets of gross margin and the enhancements that you're looking to make in different categories like women's apparel, where do you see the opportunity for merchandise margin going forward. And with that, what -- any updates on shrink?
Michael Hartshorn:
On the shrink front, Dana, no real updates. We take our physical inventory in the third quarter. And what we saw last year was continued improvement over many years of improvement. So at this point, we wouldn't provide any other update versus what we saw in September last year.
Travis Marquette:
And in terms of merch margin, as we've said for a while now, we continue to believe that the biggest opportunity for further improvements in merchandise margin is above-plan sales.
Operator:
And that was our last question. At this time, I will turn the call back over to Barbara Rentler for closing remarks.
Barbara Rentler:
Thank you for joining us today and for your interest in Ross Stores. Have a great day.
Operator:
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
Operator:
Good afternoon, and welcome to the Ross Stores' Third Quarter 2019 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 2018 Form 10-K and fiscal 2019 Form 10-Q and 8-Ks on file with the SEC. Now I would 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; Travis Marquette, Group Senior Vice President and Chief Financial Officer; and Connie Kao, Vice President, Investor Relations.
We'll begin our call today with a review of our third quarter performance, followed by our outlook for the remainder of the year. Afterwards, we'll be happy to respond to any questions you may have. As noted in today's press release, we are pleased that our third quarter results were ahead of our expectations. Earnings per share for the period were $1.03, up from $0.91 last year. Net earnings grew to $371 million from $338 million in the prior year. Total sales for the third quarter increased 8% to $3.8 billion, with comparable store sales up a strong 5% on top of last year's 3% gain. For the third quarter, we saw broad-based strength across both merchandise departments and geographic regions with Children's and the Midwest performing the best. We also continue to see improving sales trends in our Ladies Apparel business. While this area becomes less important as we move into the fourth quarter, we believe the actions we are taking here will lead to ongoing improvement during the holiday selling season and into 2020. Operating margin of 12.4% was above plan, mainly due to better-than-expected sales and merchandise margins. For the first 9 months of fiscal 2019, earnings per share were $3.32, up from $3.06 last year. Net earnings were $1.2 billion versus $1.1 billion in the first 9 months of 2018. Sales year-to-date rose 7% to $11.6 billion, with comparable stores up 3% on top of a 3% gain last year. As we ended the third quarter, total consolidated inventories were up 10% over the prior year, while packaway was 39% of the total compared to 41% last year. Average in-store inventories at the end of the period were up 3%. Dd's DISCOUNTS continue to perform well, with robust above-plan growth in both sales and operating profit. Turning to our store expansion program. We opened 30 new Ross and 12 dd's DISCOUNTS locations in the third quarter, completing our 2019 store opening program. We expect to end the year with 1,546 Ross and 259 dd's locations for a net increase of 89 for fiscal 2019. Now Travis Marquette will provide further color on our third quarter results and details on our guidance for the remainder of the year.
Travis Marquette:
Thank you, Barbara. Let's start with our third quarter results. Our 5% comparable store sales gain was driven by higher traffic and an increase in the size of the average basket. Third quarter operating margin of 12.4% was above plan and similar to last year. Cost of goods sold increased 10 basis points in the period. Merchandise margin grew by 20 basis points, while occupancy and buying levered by 10 and 5, respectively. These favorable items were more than offset by distribution expenses that increased 45 basis points, mainly due to the unfavorable timing of packaway-related costs and higher wages. Freight was flat for the quarter.
Selling and general and administrative expenses for the period decreased 10 basis points. During the third quarter and first 9 months of fiscal 2019, we repurchased 3.0 million and 9.6 million shares, respectively, of common stock for a total purchase price of $326 million and $966 million, respectively. We remain on track to buy back a total of $1.275 billion in stock for the year. Let's turn now to our fourth quarter outlook. As noted in today's press release, we continue to project fourth quarter comparable store sales to increase 1% to 2% versus a 4% gain last year. In addition, our guidance for fourth quarter earnings per share remains unchanged at $1.20 to $1.25, which now includes a onetime noncash benefit of $0.02 per share, primarily due to the favorable resolution of a tax matter, offset by slightly higher pretax expenses. This forecasted guidance compares to $1.20 per share in the prior period, which also included a onetime per share benefit of $0.07 related to the favorable resolution of a tax matter. Excluding both of these onetime items and if comparable sales only perform in line with our guidance, earnings per share are forecasted to grow 4% to 9% over last year.
The operating statement assumptions for the fourth quarter include the following:
total sales are projected to grow 5% to 6%. Operating margin is projected to be in the range of 13.0% to 13.2% compared to last year's 13.2%. We expect net interest income of about $2.3 million. Our tax rate is expected to be approximately 22% to 23%, which includes the aforementioned onetime tax benefit. And weighted average diluted shares outstanding are projected to be about $357 million. Based on our year-to-date results and updated fourth quarter guidance, we now project earnings per share for the full year to be in the range of $4.52 to $4.57 compared to $4.26 in fiscal 2018, which included the previously mentioned onetime per share benefit of $0.07.
Now I'll turn the call back to Barbara for closing comments.
Barbara Rentler:
Thank you, Travis. As we mentioned earlier, we are pleased with our solid sales and earnings performance in the third quarter. We believe these above-plan results demonstrate that we are well positioned to compete effectively in today's volatile retail environment, given consumers' continued focus on value and convenience. However, as we look ahead, we expect another highly competitive fourth quarter. In addition, we are up against strong multiyear sales and earnings comparison, a shortened calendar between Thanksgiving and Christmas, and ongoing uncertainty in the macroeconomic and political landscape. Therefore, although we hope to do better, we believe it best to maintain a cautious posture heading into the holiday selling season.
At this point, we'd like to open up the call and respond to any questions you might have.
Operator:
[Operator Instructions] And our first question is from Matthew Boss with JPMorgan.
Matthew Boss:
Great. Congrats on a really nice quarter. Barbara, maybe on the top line, any areas of sequential improvement that you'd like to highlight by category? Maybe how best to think about Ladies apparel relative to the total comp going forward? And any particular areas of assortment opportunity that you think is worth noting into this year's holiday?
Barbara Rentler:
Well, as we've said in the comments, basically, all merchandise areas, it was very broad based, the performance. So overall, the company took a lift. As we look at Ladies, we really saw improved sales in the quarter, and it performed slightly above our expectations, and we are expecting to see ongoing progress in the quarter. So we are pleased with the pace of improvement, but at this point, we wouldn't provide more detail in terms of that. And I'm sorry, Matt, can you just state the second question again?
Matthew Boss:
Just more into the holiday, any particular areas of assortment opportunity that you're excited about?
Barbara Rentler:
Sure. Our main focus will be to build upon the success of our gift-giving assortment. I mean we've built that gifts throughout the entire store. And we feel good about that. And we feel that we're offering gift items at really compelling values because we really feel that value remains the most critical factor for her, where she makes her shopping decisions. And we believe that we're really positioned to deliver on this.
Matthew Boss:
Great. And then just to follow up more on the margin side. So it sounds like freight has now moderated and it's not that -- not the headwind for pretty much everybody out there. So I guess my question is, if same-store sales are consistently in the 3% to 4% range and as we're thinking now going forward, is there any reason to think that the algorithm is any different historically than it was on the bottom line? If -- again, if you're at that 3% to 4% comp range, just any margin headwinds or things to highlight that would be different than that historical 3% to 4% same-store sales double-digit earnings growth algorithm going forward?
Michael Hartshorn:
Matt, it's Michael Hartshorn. So our long-term earnings algorithm has not changed. A combination of new store growth, comp growth, EBIT margin expansion at the high end and then the buyback program. The one thing that I would throw in the mix with a lot of uncertainty around it is tariffs. So net of tariffs, we haven't changed our long-term algorithm.
Operator:
Your next question comes from Mark Altschwager with Baird.
Mark Altschwager:
I was hoping you could give a bit more color just on the distribution expenses in the quarter. Know that was a bit of a headwind. Do you expect that to normalize in Q4? And then just more broadly, hoping you could touch on the buying environment and how you characterize what you're seeing out there versus the earlier part of the year?
Travis Marquette:
Yes, sure, this is Travis. In terms of the distribution cost expenses, as we said, they were related to a couple of things
Barbara Rentler:
And as it pertains to the buying environment now versus the earlier part of the year, there's been plenty of availability in the marketplace pretty much all year. I'd say it's been consistent, whether it's vendors bringing goods in for tariff or just supply coming from sales falling off in the department store sector. There's been a lot of goods all along. And what we're really seeing is that the availability is broad based across brands and categories. So it's really a good buying time.
Operator:
Your next question is from Lorraine Hutchinson with Bank of America Merrill Lynch.
Lorraine Maikis:
The packaway percentage is lower than it's been in quite a few years. And I was just hoping you could give us a little bit of insight into how the in-season buying is looking and how you'll manage through holiday with a lower level of goods available in the packaway.
Michael Hartshorn:
Sure, Lorraine. As we mentioned in our commentary, total inventory was actually up 10%. Packaway was 39% versus 41% last year. But on an absolute basis, packaway was actually up year-over-year. The percentage was a function of higher inbound in transit, so that was higher for us. And we brought in product earlier to support the holiday selling season. I'd say, overall, as Barbara mentioned, we continue to see plenty of availability, but our buyers are very strategic to ensure we have the best values. And then I'd also add that we did flow packaway to chase the ahead-of-plan sales from the quarter.
Operator:
Your next question is from Paul Lejuez with Citigroup.
Paul Lejuez:
I'm wondering if you could give any more color on dd's comps versus Ross. Maybe talk about the magnitude of the traffic and ticket increases that you saw, maybe for each one.
And then second, just to continue on availability of product question. Are you seeing, Barbara, any particular price strata more available just like the good, better, best, as you think along those lines? Are you seeing outsized availability in any particular price point?
Michael Hartshorn:
Paul, on dd's, we don't break that out separately. I'd just repeat what we said in the commentary. We're very happy with the results. They're performing well, and robust above-plan growth in both sales and operating profits.
Travis Marquette:
In terms of the components of sales, as we mentioned, the comp was driven by both higher traffic and an increase in the size of the average basket. The average basket was driven more by items per basket, that was up, while AURs were down a little bit. In terms of traffic versus basket, it was pretty evenly split.
Barbara Rentler:
And then in terms of availability of product from a good, better, best point of view, the availability is truly broad based in all 3, across all brands and categories. I mean there's really a large assortment of products to choose from. So I wouldn't say, just focus on one, I'd say, available in all.
Paul Lejuez:
Got you. And then just one follow-up. Home versus apparel, any color you can provide there? And also, can you just remind us the percent of the business that home represents in 4Q versus the rest of the year?
Travis Marquette:
Yes. Overall, apparel versus non-apparel results were pretty similar. And...
Michael Hartshorn:
Home is a little bit more than 1/4 of the business, and it's slightly higher in Q4.
Operator:
Your next question is from Kimberly Greenberger from Morgan Stanley.
Kimberly Greenberger:
Barbara, I wanted to just hear your sort of state of the union on the Ladies Apparel business. Are you happy? It sounded like you like the trend, but are you satisfied with the performance across Ladies at this point?
Travis, I just wanted to ask you a follow-up on the 45 basis points of distribution center headwinds. Was it unfavorable packaway and freight or unfavorable packaway and wages? I just wanted to get a clarification there. And then on the unfavorable packaway, could you just clarify, does that mean that sequentially from Q2 to Q3, packaway dollars would have declined sequentially and so you would have more expenses flowing through the DC in the current period. Is that right?
Travis Marquette:
Yes. I guess, let me answer that question first. Packaway dollars were actually higher year-over-year and quarter-to-quarter. The unfavorability relates to sort of the magnitude of the increase compared to last year, so they were up less than last year, but we typically see a benefit on the P&L from packaway this quarter. Your question on the 45 basis points, yes, it was packaway timing and wages was the answer.
Kimberly Greenberger:
Okay. Great. And that just relates -- yes, sorry, Barbara, go ahead. Sorry.
Barbara Rentler:
No, no. Go ahead. Go ahead.
Kimberly Greenberger:
I just wanted to make sure I understood the connection and that was related to the wage rate increases in the state of California? Or have you not yet lapped wage increases in your distribution centers that were maybe implemented later?
Travis Marquette:
We lapped the $11 increase that we did sort of as a minimum across the company that was lapped after Q2. And so these are primarily related to sort of state minimum increases. There's state and local minimum wage increase.
Barbara Rentler:
And as it pertains to Ladies, yes, as I said, the business performed slightly above our expectations. And we expect to see more ongoing progress. We were pleased with the pace of the improvement in the Ladies business during the quarter. Obviously, I'm not going to go into more detail than that, but we expect to see ongoing progress in Q4 and beyond.
Kimberly Greenberger:
Okay. Great, Barbara. And just a quick follow-up question on tariffs, if I could. I'm wondering if you have -- would the tariff impact would potentially be incorporated into your Q4 guidance. Is there a way to quantify that? And do you have any visibility for the impact of tariffs or potential impact of tariffs beyond the fourth quarter at this point?
Michael Hartshorn:
Sure, Kimberly. For Q4, right now, we have $0.01 to $0.02 built into the impact. Obviously, they just went in place, especially in apparel and shoes, in the third quarter. It's too early to speak about the impact longer term. Obviously, the longer the tariffs remain in place, the more pressure it'll put on the retail marketplace. So the situation remains very fluid at this point, so we wouldn't comment at this point beyond that.
Operator:
Your next question is from Alex Walvis with Goldman Sachs.
Alexandra Walvis:
I might have a few questions on the category dynamics, if I may. You mentioned Children's being a particularly strong category for you. Can you talk about what's really working there?
And then second question is on Men's that's been mentioned as a strong category for the last few quarters. Can you talk about the progression of that business as well?
Barbara Rentler:
Sure. The Kids business really, really benefited from strong execution of the merchandise strategy. We have a very strong team. They've put a strategy in place, and they really stick to their mantra and then have done a really fine job. The business itself is pretty broad based in terms of performance across total Kids. Our Men's performance has been strong, it's been strong for a number of years. Continues to be strong. It's performed pretty much in line with chain average. And we also feel like we have a solid strategy in there and the business continues to move forward. I mean there's supply, there's been some good opportunities in Men's also.
Alexandra Walvis:
Fantastic. And then maybe, if I may, a question on pricing trends in the market, recognizing, of course, that you guys are price followers. Any comments on what you're seeing out there? Any thoughts on what pricing could look like across the categories in which you operate as you move into next year and how you're likely to respond there?
Barbara Rentler:
Sure. So far, we really haven't seen any material changes in pricing so far. I mean the merchants are constantly competitive shopping and trying to stay on top of that. But to your point, we're not the lead, we're following pricing. So we'll have to wait and see how different retailers ultimately react to the higher cost and how they approach pricing, and then we'll go from there. But we're not the lead, we definitely follow. And again, to date, we really haven't seen any material changes.
Operator:
[Operator Instructions] Your next question comes from Michael Binetti with Crédit Suisse.
Michael Binetti:
Congrats on a great quarter. Would -- Barbara, would you -- I think it was the second time you've been very, very direct with your expectation for an ultra-competitive promotional marketplace in the fourth quarter. I think excluding the onetime benefit, you moved the midpoint down $0.01 or $0.02 in the fourth quarter as far as what you expect now. Could you just tell us what changed since 90 days ago, particularly since you're delivering really well on the top line in the quarter? And I think, I guess, on the back of that you did mention some higher pretax expenses that moved in. Maybe you could just tell us a little bit about what some of those expenses were so we can think about it for a model, please?
Travis Marquette:
Yes, this is Travis. Just in terms of the expenses, we did have a couple of extra pennies of expenses in Q4 and those are really split across cost of goods and SG&A. We wouldn't be more specific really beyond that.
Michael Hartshorn:
And Michael, on the guidance, we didn't change the guidance coming out of Q3 into Q4. As we said, we guided with comp at 1% to 2%. And just to reiterate what we said in the commentary, we expect it to be highly competitive and especially with the recent department store performance in Q3. And we're obviously up against a strong multiyear comparison. We have a shortened calendar between Thanksgiving and Christmas. And there continues to be uncertainty in both the macroeconomic and certainly the political landscape. I'd add, historically, the shorter calendar compresses sales with minimum impact to the overall quarter. That said, the shorter calendar can add some uncertainty if there's a weather disruption, for instance, especially near the Christmas holidays, it's more difficult to overcome. But we believe it's the best way to manage our business with a cautious posture during the holiday season.
Michael Binetti:
All right. That makes sense to me. And I guess one follow-up, a little longer-term question as we look at some of the components. One thing that's fairly noticeable and impressive is that you've kept the merch margin expanding slightly, call it in around 20 basis points pretty consistently on a run rate basis for a while, talking years, not quarters. But you have been able to do that on a pretty consistently lower AUR as well. I think it's been a few years since we heard the AUR up. Is that a dynamic that's sustainable going forward on a multiyear basis? Is your thinking that you continue to prioritize value and plan the AUR to be down slightly but that the merch margins can continue to be up? Is that -- or is there any reason that, that dynamic would change as we look -- we lift our eyes to next year and beyond?
Michael Hartshorn:
You know what, the key for us is to plan the business cautiously. And if we can beat the sales plan, one, we can turn faster, which helps on the markdown line. And then two, we chase the business with closeouts, which typically have better margins. So that's the secret sauce. If we can beat our sales plan, that's our opportunity.
Travis Marquette:
And AUR is not something that we plan, we don't. We don't target a specific AUR. It's really an output of the process, not an input.
Operator:
Your next question comes from Paul Trussell with Deutsche Bank.
Paul Trussell:
Just wanted to have you talk a bit more about new store performance. Maybe discuss what you're seeing in terms of some of the existing markets as you backfill and what you're seeing in new markets as well? And is there any reason why we shouldn't think that 100 doors a year is a good go-forward number?
Travis Marquette:
Sure. Yes. Our new store performance has been pretty consistent for the last couple of years. As you might imagine, performance in our established existing markets tend to be a little bit higher. It's a little bit lower in our new markets, but the average has worked out to around 60% to 65% over the last couple of years, and we're still seeing that. If we talk about sort of the opportunity for future growth, we're pretty comfortable with the 100 stores per year. We've been doing that -- 100 gross stores per year, we've been doing that for a little while now, and we think it sort of aligns with our ability to make sure we find the right sites. We're not sort of forced to make decisions that we wouldn't -- sort of wouldn't be as beneficial to us. And we can open them in a way that sort of drives their success.
Michael Hartshorn:
And I would just add that on the new store openings, our line of sight is really just a couple of years out. That's what we can see in the hopper from a real estate standpoint, so we're comfortable with that number.
Operator:
Your next question is from Kate Fitzsimons with RBC Capital Markets.
Kate Fitzsimons:
I'll add my congratulations as well. My question is on inventory receipts. You had slowed them earlier ahead of back-to-school, and it looks like that decision obviously really reaped rewards in the third quarter. Maybe just how is it adjusting your views on inventory flows headed into holiday? Heard in-store inventory is up 3%, I believe, so maybe just curious about the decision behind maybe adjusting some of those receipt timings headed into the fourth quarter?
Michael Hartshorn:
Yes. I mean, for us, it was really about the compressed calendar. And we thought we had some opportunities that we may have missed going into the quarter last year. So that was -- it was in our plan at the beginning of the year, and we executed to it.
Operator:
Your next question is from Daniel Hofkin with William Blair.
Daniel Hofkin:
Just a quick question. I think you talked a little bit about home and I believe it was Kids. Any other category commentary or kind of regional variances that you would care to comment on? That's my first question. Then I just had a quick follow-up.
Travis Marquette:
Yes, sure. As we've discussed, Kids was the top-performing category. Performance was pretty broad based to both -- across both categories and geographic regions. Aside from Kids, some of the -- shoes was also a strong category. Geographically, the Southeast and Southwest were also strong performers. But again, performance was pretty broad based.
Daniel Hofkin:
Okay. And anything you can kind of, as you're getting further into the kind of the improvement within Ladies Apparel, any more color you can share on kind of what the issues were or have been that you're now correcting? And then, I guess, lastly, on just online resellers, curious if there's any updated thinking about what you're seeing out there on a competitive landscape?
Barbara Rentler:
Sure. So listen, back to the Ladies scenario, what I would say about Ladies, rather than rehashing, is that we believe that we have the right initiatives underway to drive sales growth through the fourth quarter and then into 2020. We continually see improvement. And although we're never fully satisfied with any part of our business, we're happy that at least it's moved in the right direction, and we feel like we have a strategy in place as we go throughout 2020.
Michael Hartshorn:
On the resell competition, relative to the resell business model, we believe we have a differentiated value offering. We've obviously competed with many different retailers over the years and our focus is making sure we continue to offer our customers the best branded value as possible.
Operator:
Your next question is from Adrienne Yih with Barclays.
Adrienne Yih-Tennant:
Let me add my congratulations. Barbara, 2 longer-term questions and a quick one for Mike. What, if anything, would you -- would have to happen for you to contemplate the launch of a potential e-commerce business? And then as you think about the expansion plans in the U.S., what -- at what point in time would you accelerate sort of a Northeast regional expansion?
And for Michael, you talked about some rent trends. What's happening with off-mall rents? And is it impacting at all sort of where your breakeven comp is on fixed expenses?
Michael Hartshorn:
Adrienne, I'll jump in there and take all 3 of those. So on e-commerce, our view has not changed. We think that the moderate off-price business, which is what we're in, would not work in an online environment with a $10 to $11 AUR. The economics with free shipping and returns are just not financially sustainable, and we don't see any way that, that business would be accretive to our profit. In terms of real estate growth over the next several years, our focus will continue to be building in the Midwest about, call it, 10% to 15% of those stores and continue to grow in existing markets, and we'll continue to do that over the next couple of years before we would enter into the rest of the country, including the Northeast. And then, real estate trends, really not significant changes. We've not seen any significant changes in terms of rent or lease terms recently.
Operator:
Your next question is from Michael Baker with Nomura.
Michael Baker:
Two follow-ups. One, tariffs were supposed to be $0.03 in the back half. You said $0.01 to $0.02 in the fourth quarter. Does that mean that they impacted by $0.01 to $0.02 in the third quarter? In other words, are we still looking for $0.03 in the back half? And then a follow-up on the fourth quarter guidance in the slightly higher pretax expenses. Should we consider those to be onetime as that $0.02 benefit that you mentioned -- you specifically called out as onetime? Or these slightly higher pretax expenses more are just ongoing business expenses?
Michael Hartshorn:
Mike, on the tariffs, our original guidance assumed $0.01 impact in Q3 and then the $0.01 to $0.02 in the fourth quarter. As I mentioned earlier, the tariffs just went into effect for the latest tranche, Tranche 4A, in September, so mid-quarter. I would also say that we had pre-tariff packaway inventory and pre-tariff purchase orders that enabled us to mitigate the impact in Q3, where you saw we had a 20 basis point improvement in merchandise margin.
Travis Marquette:
And on that $0.02 of additional expenses, those are just for -- we expect those just to be for Q4 only.
Operator:
Your next question is from John Kernan with Cowen.
John Kernan:
Congrats on another nice quarter. I just want to go back to the inventory question. Your inventory turn has improved consistently the last several years. It's obviously had great effects on free -- on the growth of free cash flow. Just wondering how much faster you think you can turn, how much more productive you think you can be with inventory and working capital?
Michael Hartshorn:
I think going forward, it's been down -- if you go back a decade, I mean we brought down inventories over 40% in front of the customer. Given the way we plan the business, if we posture the plans at a lower level and we can beat those plans, that's really -- like margin, that's our opportunity to turn faster.
Operator:
Your next question is from Dana Telsey with Telsey Advisory Group.
Dana Telsey:
Congratulations on the very nice results. Can you please talk a little bit about beauty and women's apparel? Are you still seeing the progressive improvement from Q1 and Q2 that was in the plan? And on the beauty side, how is that growing and as that becomes a larger piece of sales?
Barbara Rentler:
So the beauty business has been one of our growth areas and continues to expand as we add additional classifications of products and broaden the assortments. And so we feel good about beauty as a growth business and it continues to grow sequentially quarter-to-quarter. The Ladies Apparel business, as we've gone through the year, has progressively improved. And as I've said, as we're looking forward, we expect to see ongoing progress.
Operator:
Your next question is from Ike Boruchow with Wells Fargo.
Irwin Boruchow:
A question for the team. Just a high-level question, nothing specific, but the company had a decade-plus of margin expansion behind them and this will be the second year in a row of operating margins declining. I just -- I guess my question is, the outlook for freight seems to be a little bit better. The outlook for wages, it doesn't seem like there's any broad-based wage inflation to bake in next year. Can this -- can the business get back to potentially a period of margin growth? Just kind of curious, the puts and takes, again, just big picture looking out.
Michael Hartshorn:
Yes, I think if we look ahead, certainly, we'll start a year with a cautious outlook on sales. And if we can drive ahead of the sales plan, that's where our margin opportunity is going to be. This year, I would point out, even though we've been able to mitigate the tariff impact, the home, accessories and cosmetics, Tranches 1 through 3 have been in place all year, and we've spent a lot of time trying to mitigate those, and then here with Tranche 4. So again, what's different going into next year is tariffs, which are very uncertain at this point.
Operator:
Your next question is from Marni Shapiro with Retail Tracker.
Marni Shapiro:
Congratulations. Barbara, I have a big picture Ladies question for you. There's been a lot of talk about the Ladies business. When the business got tough in the stores, did you see the shopper not buying? Or was she shifting to other departments, whether that's anecdotal or you can tell by her receipts and credit card data? And if she was shifting to other departments, are you seeing that shift back? Or is she just buying more? I'm curious just how the dynamic is working in the store.
Barbara Rentler:
I think -- look, I think your Ladies -- Ladies Apparel business is tough. Our core customer is a woman. So obviously, it makes the entire business more difficult. But when we think about the Ladies customer, we don't think of her as just apparel. So we think of her more holistically. So we think of her as apparel and shoes and cosmetics, all these handbags, all the things that satisfy her. So when -- this is all anecdotal. So this isn't going to be anything from any fact other than -- the other businesses that were healthy, like beauty, were healthy. They're healthy and continued to grow, while Ladies was difficult. And so I don't necessarily -- I think she bought other products in the store. However, I think she probably would have bought those products even if Ladies apparel had been good or better, I should say, than what it was because those businesses are growing exponentially and there's lots of products and things for her to choose from. So I think in the end, it all just becomes about the assortments that we deliver. If we deliver compelling bargains and compelling assortments and we do that in Ladies Apparel and we do it in all the other things that satisfy her personally, all businesses and all ships will arrive. But I think also when we don't do that in an area as big as Ladies, there's potentially some total impact, I think, to the total store, but I think that's very difficult to quantify. But if you think that she is our core customer, it would be logical.
Operator:
Your next question is from Bob Drbul with Guggenheim Securities.
Robert Drbul:
Just I was wondering if you could talk, did weather impact your business at all throughout the quarter. And if -- was there any variation sort of month-to-month? And I guess the last piece, you mentioned handbags, but can you maybe just talk about handbags and accessories and how that as a category, you're seeing, play out at this point?
Travis Marquette:
Yes, sure. This is Travis. We don't specifically comment on results month-to-month. Generally speaking, there wasn't a lot of variation in terms of weather. Again, it wasn't a significant impact at all for the quarter. In terms of accessories and performance, again, it performed pretty close in line with the chain.
Operator:
And our last question comes from Laura Champine with Loop Capital.
Laura Champine:
Should be a quick one. On the Ladies business, was AUR down more in that category than it was for the company overall?
Travis Marquette:
We don't generally talk about sort of AURs by specific line of business.
Laura Champine:
I've got a plan B. The Midwest region comped better than average. Can you give us a reason why you think it was the strongest region in the quarter?
Travis Marquette:
Yes, the Midwest has been one of our best-performing regions ever since we entered the market many years ago. We -- I think the customer has responded well to sort of the values and the product that we offer them. And so we've been very pleased with the performance ever since we entered.
Operator:
Ladies and gentlemen, this does conclude the Q&A portion of the call. I'll now turn things back over to management for any closing remarks.
Barbara Rentler:
Thank you for joining us today for your interest in Ross Stores. Have a great day.
Operator:
Ladies and gentlemen, this does conclude today's call. Thank you for your participation, and you may now disconnect.
Operator:
Good afternoon, and welcome to the Ross Stores' Second Quarter 2019 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 2018 Form 10-K and fiscal 2019 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:
Good afternoon. Joining me on our call today are Michael Hartshorn, Group's President and Chief Operating Officer; Travis Marquette, Group's Senior Vice President and Chief Financial Officer; and Connie Kao, Vice President, Investor Relations.
We'll begin our call today with a review of our second quarter performance, followed by our outlook to the second half and fiscal year. Afterwards, we'll be happy to respond to any questions you may have. As noted in today's press release, we delivered respectable gains in both sales and earnings for the second quarter. Earnings per share for the period $1.14, up from $1.04 last year. Net earnings were $413 million, up from $389 million in the prior year. Total sales for the second quarter increased 6% to $4 billion. Comparable store sales rose 3% on top of last year's strongest quarterly comparison of 5%. For the second quarter, the best performing merchandise department at Ross was men, while the Midwest and Southeast were the top performing markets. While the Ladies business continued to trail the chain, trends in this important area showed some improvement during the quarter. We continue to believe that the actions we are taking here will lead to additional improvements as we move through the balance of the year. Operating margin of 13.7% was better than expected mainly due to favorable timing of expenses that are expected to reverse in the second half. For the first 6 months of fiscal 2019, earnings per share were $2.29, up from $2.15 last year. Net earnings were $834 million, up from $808 million in the first half of 2018. Sales year-to-date rose 6% to $7.8 billion, with comparable store sales up 2% versus a 4% gain for the first half of last year. As we enter the second quarter, total consolidated inventories were up 8% over the prior year. Packaway was 43% of total inventory compared to last year's 44%. Average in-store inventories at the end of the period were up 4% as we flowed receipts a little earlier to support the back-to-school selling period. Dd’s DISCOUNTS had another quarter of strong growth in both sales and operating profits. Turning to our store expansion program. We remained on schedule with the opening of 22 new Ross and 6 dd's DISCOUNT locations in the second quarter. We continue to project adding a total of approximately 100 locations in 2019 comprised of 75 Ross and 25 dd's. As usual, these numbers do not reflect our plans to close or relocate about 10 older stores. Now Travis Marquette will provide further color on our second quarter results and details on our second half guidance.
Travis Marquette:
Thank you, Barbara. As previously mentioned, our second quarter earnings results benefited from the favorable timing of expenses that are expected to reverse in the second half. This benefit was worth approximately $0.02 to earnings per share.
Now turning to the details of our Q2 results. As noted in today's press release, we have updated our earnings guidance for the second half given the recent announcement of 10% tariffs on goods sourced from China, including apparel and footwear. Our projected impact is based on our present understanding of the timing of and the merchandise categories included in these additional tariffs. Our sales forecast for the second half remains unchanged. We continue to forecast same-store sales for the balance of the year to grow by 1% to 2%. Sales performed in line with this projection, earnings per share for the third quarter were forecasted to be in the range of $0.92 to $0.96 compared to $0.91 a year ago. For the fourth quarter, earnings per share are projected to be $1.20 to $1.25 versus $1.20 in the prior year, which included a onetime per share benefit of $0.07 from the favorable resolution of a tax matter. Now I will provide some operating statement assumptions for our third quarter EPS. Projected sales -- total sales are projected to grow 5% to 6%. We expect to open 42 new stores during the period, including 30 Ross and 12 dd’s locations. Operating margin is projected to be in the range of 11.8% to 12.0% compared to last year's 12.4%. This forecast reflects our expectations for some pressure on merchandise gross margin from tariffs along with deleveraging on occupancy and other expenses if comparable sales perform in line with our guidance. We expect net interest income of about $3.3 million. Our tax rate is expected to be approximately 24%, and weighted average diluted shares outstanding are projected to be about 360 million. Based on our first half results and second half guidance, we now project earnings per share for the full year to be in the range of $4.41 to $4.50 compared to $4.26 in fiscal 2018, which included the previously mentioned onetime per share benefit of $0.07. Now I'll turn the call back to Barbara for closing comments.
Barbara Rentler:
Thank you, Travis. To sum up, as I mentioned earlier, we delivered respectable sales and earnings growth for the second quarter on top of our strongest quarterly comparable sales comparison from last year. While we've made progress in strengthening the Ladies apparel business, we still have a way to go until we're satisfied with our assortments in this important area.
As we move into the fall season, we'll work on our merchandising initiatives in Ladies and also throughout the entire store, so that we are delivering the right products and brands, priced as sharply as our customers have come to expect. We believe the additional tariffs may result in increased uncertainty in the apparel and footwear markets. Historically, disruptions like this have benefited off-price. As always, our focus will continue to be offering our customers the most compelling value as possible throughout our stores. At this point, we'd like to open up the call and respond to any questions you might have.
Operator:
[Operator Instructions] Your first question comes from the line of Matthew Boss from JPMorgan.
Matthew Boss:
Congrats on a nice quarter. So with same-store sales comparison easing in the back half of the year relative to the front half, and given the sequential improvement that you spoke to in the Ladies business, anything you see constraining your ability to exceed the 1% to 2% comp guidance for the back half of the year? Or maybe where do you see top opportunities to potentially outperform?
Michael Hartshorn:
Matt, it's Michael Hartshorn. The way we thought about the back half, first, we're up against strong multiyear comparisons in both Q3 and Q4. With Ladies strengthening, it is a smaller part of the business in the back half. On top of that, we think there is going to be continued uncertainty given the department store performance in Q2 we expected are -- could be more promotional. And on top of that, we think the tariffs are going to cause a bit of uncertainty in the back half. So our point of view is, we always like to be conservative and hope to beat it.
Matthew Boss:
Great. And then maybe just to follow up in larger picture. Barbara, I guess how best to think about the near-term versus intermediate term, the potential impact of tariffs maybe to the customer and the off-price sector, in your view?
Barbara Rentler:
Well, in the near term, I think what we have to do is recognize that we're not the leader in all of this, we're the follower. So we're not going to be the leader in terms of raising prices. So as the tariff comes on, it's early for us to know how retailers plan to manage through the cost, and ultimately, what the customer's going to see in terms of pricing from them. So we're studying that business. So we're going to have to wait and see how retailers react to the higher cost, their approach on pricing, and then really the customers' reaction to potential price inflation. So in the near term, it's a wait and see. We have to kind of watch what they are doing and then see where that puts us because we're clearly not the leader on pricing.
In the intermediary -- intermediate, get that word out, I think it will -- it historically would have given us an opportunity for supply in some changing markets. But I think until we understand, near term and intermediate being defined as, I guess, part of '20, until we understand what the price -- what the pricing is going to mean to the customer, I think there's going to be some challenges ahead, particularly as department store business is difficult. And so with that, we're willing to wait and see. And again, as I said, we're going to hold on our pricing. And see where we sit in the order because the most important thing while all of this is going on is that we offer our customers the best value as possible. And so there is going to be a lot of moving targets, I think, here. And so I think we need to study it.
Operator:
Your next question comes from Lorraine Hutchinson from Bank of America.
Lorraine Maikis:
Just to follow up on the tariffs. Can you talk about what proportion of your product is affected? And then are there any opportunities for mitigation as you look into 2020?
Michael Hartshorn:
Sure, Lorraine. We don't disclose the specific percentage for competitive reasons. That said, as with most retailers, a good portion of our apparel and footwear comes from China. So with that said, in terms of the mitigation, so as we mentioned in the commentary, we think it was a prudent approach to make our best estimate of a potential impact, separating out what goes into effect in September and December. And for us, our best estimate at this point is we added $0.03 -- or took $0.03 from EPS in the back half. But certainly, I hope it plays out more favorably, but that's our best shot at this point in time. I mean, we'll have to wait to see, as Barbara mentioned, how different retailers react to the higher cost, their approach on pricing as well as how the consumer would react to increase in prices. That said, historically, disruptions like this had been beneficial for off-price.
Operator:
Your next question comes from Mark Altschwager from Baird.
Mark Altschwager:
I was hoping you could give a bit more color on some of the gross margin drivers in Q2 just in terms of merch margin, freight, distribution. And then if you're able to quantify perhaps just the level of merch margin pressure you expect from tariffs over the back half, that'd be helpful.
Michael Hartshorn:
On merch margin piece, we wouldn't disclose the margin impact, but the $0.03 that we included in the guidance is largely merchandise margin.
Travis Marquette:
And then let me just provide a little bit more detail. So during the period, cost of goods sold increased 10 basis points. Higher merchandise margin and lower distribution cost of 10 basis points each were offset by freight cost that rose 20 basis points, and occupancy deleverage of 10 basis points. Buying expenses were flat versus last year. Selling and general administrative expenses for the quarter increased 5 basis points, largely due to higher wage cost.
Operator:
Your next question comes from Kimberly Greenberger from Morgan Stanley.
Kimberly Greenberger:
I wanted to explore SG&A a little bit more. Wage is obviously still growing here in the second quarter. If you could give us any sort of order of magnitude on the wage growth headwind to SG&A here in Q2 that will be helpful. And will that change as we look out to the back half of the year? And on the cost -- the SG&A cost shift out of Q2, do you have -- I think you said that was $0.02 benefit to the second quarter. If you could give us the SG&A dollars benefiting Q2, and if that's expected to come in Q3 or Q4? Just any color on that would be helpful.
Michael Hartshorn:
Kimberly, as you may recall, we increased wages across the board last year to $11. So we are just now anniversarying that in the second quarter. When we entered the year, despite wage growth, our own $11 increase and the minimum wage increases in states like California, we guided the year for SG&A to leverage at the normal 3%. So we've been able to offset those costs.
In terms of the $0.02 timing, that wasn't all in SG&A. Some of that's gross margin, and we wouldn't break out that specific. And as a reminder, the $0.02 timing benefit was versus our original guidance not versus last year.
Operator:
Your next question comes from Omar Saad from Evercore ISI.
Omar Saad:
Could you talk about some of the women's apparel trends? I know it's improved a little bit but still kind of lingering issues there. Is that more external fashion trends or external factors related to the category and environment or internal execution issues that you think you can address? And I also would love to get your thoughts on some of the lower freight rates we're hearing about this year and into next year if that's material to you guys.
Michael Hartshorn:
I'll start with the freight. So generally for us, freight has played out much as we expected at the beginning of the year. What we saw was 35 basis point deleverage in Q1, 20 basis points deleverage in Q2. And our guidance assumes that it will abate further in the back half.
Barbara Rentler:
And as it pertains to the women's apparel trends, externally, there isn't any one major big trend driving Ladies apparel. I mean I think that's the first thing. But -- so with that, our issues in Ladies apparel really related to our own execution issues, brought our assortments below our normal standard. So we feel like we've been working through those issues, we feel like we've made some progress, still trailing the chain. And as I said before, in my comments, we feel like as the year goes on, that the business will continue to improve.
Operator:
Your next question comes from Michael Binetti from Crédit Suisse.
Michael Binetti:
Congrats on a nice quarter. Just, Michael, a question on your comments on the near term. I think you mentioned that you flowed some inventory for back-to-school earlier to -- maybe some color on whether you think that strategy seems successful in the early days.
And then you did make a comment on observing department store trend lately, and your hunch that we could see promotions stepping up. Maybe just a little more color about how you're looking at the landscape. And what you're planning your business for given the competitive set that you expect in the back half. And I have a follow up.
Michael Hartshorn:
Sure, Michael. We wouldn't comment on kind of inter-quarter trends at this point. We would do that in -- at the end of Q3. And my comments really on the department store is just based on their earnings performance. So they obviously -- the comps were certainly below the off-price and value performers, plus on top of that, their gross margins, which would suggest they were more promotional, and that could continue into Q3.
Michael Binetti:
Okay. And I hate to ask the most basic question, but maybe a little color on inventories you're seeing available. Are you seeing things that excite you? And more importantly, maybe why? Is it better brands? New categories opening up? I'm a little surprised packaway was lower year-over-year given what we're seeing in the market and the rush to get product in before the tariffs this year. So I'm wondering if we're going to -- if your plan includes -- are we going to see that total inventory number built into 3Q? Any thoughts on that?
Barbara Rentler:
So in terms of supply, supply is very plentiful. It is broad across most classifications of business. In terms of the level of packaway, packaway fluctuates in the merchant side as the way they see it in terms of the products, the timing, the pricing of those goods. And so it is still in the 40s range, which is pretty average for us. But the merchants have to make that decision. So as the season goes on, they'll continue to see additional department store business. If it continues to be difficult, you would expect that there would be more supply in the shorter term, and we're liquid and ready to take advantage of those opportunities once the merchants feel that it's at the right price and the right value as we're anticipating it being a very promotional fourth quarter. So...
Operator:
Your next question comes from Alex Walvis from Goldman Sachs.
Alexandra Walvis:
The first question that I had is whether you can help us out with the breakdown of the comp between traffic, where you are, and basket. Second question was a follow-up on the inventory, in-store inventory growth. Can you talk about the drivers of the decision to flow receipts earlier, is that all of the reason for the slightly higher in-store inventory? Or is there anything else going on there?
Travis Marquette:
Yes, this is Travis. In terms of the components of sales, the 3% comp was driven by slightly higher traffic, and an increase in the size of the average basket. A higher basket was driven by higher units per transaction. AUR was down just a bit for the quarter.
Michael Hartshorn:
And on inventory, it was a function of flowing receipts early. It was in our plan at the beginning of the year. And so that was strategic.
Alexandra Walvis:
Great. And one follow-up, if I may. The men's business has been strong for some time. Can you talk about what's working there? And where the continued strength is coming from?
Barbara Rentler:
Sure. I would tell you. So the reason the men's business is good is because we have a solid strategy that the merchants have done a very good job of executing on. So our level of execution there has been very consistent, and again, as has the strategy. So there's not one particular thing that's really driving it.
Operator:
Your next question comes from Daniel Hofkin from William Blair.
Daniel Hofkin:
Just a couple of quick questions. And I apologize I missed a little bit, so if you've already answered that, no worries. But as it relates to the -- you talked a little bit about, it was SG&A and gross margin both had a little bit of timing of expenses. I was just curious, did inventory flow timing affect the gross margin? And if so, was that -- how much roughly was that? And then just if you haven't already given it, some additional color by region and category beyond just sort of the main ones, if you have that.
Michael Hartshorn:
Dan, on the inventory flow, it just happened at the end of the quarter. So no, it did not have an impact on margins. Margin for the quarter was up 10 basis points, that was a little lower than the benefit that we saw in Q3. That was somewhat impacted by the tariffs that went into effect in June, but we were able to offset that with strong expense control. And then...
Travis Marquette:
And then by -- in terms of color or geographic region, as we mentioned in our commentary, the Midwest and Southeast were the strongest regions. Of our other major markets, California and Florida were slightly below the chain while Texas and the Southwest were a bit better than the chain average. In terms of merchandise categories, we mentioned men's was the strongest category. Children's was also pretty strong.
Operator:
Your next question comes from John Morris from D.A. Davidson.
John Morris:
Congratulations on a nice quarter as well. Barbara, maybe can you give us a little bit more color on dd's, and the progress that you're making there, and what you're particularly pleased with? And sort of how you're benchmarking it?
And then 2 other kind of quick housekeeping questions. One is, we talked a little bit about inventory in the plan but can you give us a sense of where inventory at the end of Q3 might be related to sales? I mean same kind of growth about in line, I'm assuming. And I don't know if you would answer this or not, I'm just kind of curious, we've talked a lot about freight, but just a kind of quick one. Does freight contracts -- when you're negotiating terms, is that an annual event with somebody or is it kind of a continuous thing? It just kind of helps us understand how it should flow through.
Michael Hartshorn:
Sure. So to go through those, we don't give forward-looking guidance on inventory levels. And on freight, for us, we have already gone through our annual renewals, we did that earlier this year. So we have some pretty good visibility at this point.
Barbara Rentler:
And as it pertains to dd’s, as I said before, we've had strong growth both in sales and profit. But for competitive reasons, we don't really get more specific than that other than to say that dd’s has a similar four-wall profit margin to Ross.
Operator:
Your next question comes from Paul Trussell from Deutsche Bank.
Paul Trussell:
I'm curious to hear what you are seeing in terms of new store performance both on the Ross and dd’s side.
Travis Marquette:
Yes, this is Travis. Our new store performance is pretty consistent with our historical averages of between 60% and 65% of an average comp. It fluctuates a little bit quarter-to-quarter, depending on where the new stores are located, but overall, the performance is pretty consistent.
Paul Trussell:
And just sort of -- just a bigger picture, just curious if there is any thoughts around e-commerce as you look in the years ahead?
Michael Hartshorn:
On e-commerce, our view on e-commerce has not changed. We think in the moderate off-price business, the economics are just not sustainable. Over many years now, we've posted comp sales that are at the high end of retail benchmarks, and we've done this without e-commerce. So rather than being distracted by what we view as unsustainable business, we'd rather focused ourselves on what's proven and -- proven to be very profitable opportunity in front of us.
Paul Trussell:
Congratulations on recent promotions.
Michael Hartshorn:
Thank you, Paul.
Operator:
Your next question comes from Ike Boruchow from Wells Fargo.
Irwin Boruchow:
Just on the cap -- on the CapEx spend. I think you guys guided it to $600 million this year. I'm just curious, is that still the right number? And then I think there is a new DC build-out embedded in there. I'm just trying to understand what maybe the run rate of CapEx should be into next year. And then to whoever wants to answer it, should there be some kind of supply chain pressure on margin at some point? I'm not sure if you're already seeing that or maybe something we should keep in mind for our models next year. Just any color on that.
Michael Hartshorn:
So the DC. I'll let Travis cover the capital, but on the DC, next couple of years. So we would expect to open, so we would not expect any impact of that new DC as we move into 2020.
Travis Marquette:
In terms of total capital spend, it hasn't changed. We're still expecting to spend around $600 million this year, about 1/3 of that is related to distribution center buildouts and -- et cetera. In terms of going forward, again, I think we've said in the past, we expect total capital spending to be elevated for a couple of years.
Operator:
Your next question comes from Jay Sole from UBS.
Jay Sole:
I have a question about the $0.03 impact on tariffs. Is that a net number, meaning is there sort of like a $0.06 headwind that's being offset with $0.03 of cost cutting or other mitigation factors? Or is it just $0.03 would be actual impact of the tariff is?
Michael Hartshorn:
Yes. On that question. So obviously, we had the tariffs -- we started the year with 10% tariffs on Tranche 3, which was mainly in categories like home, cosmetics and accessories. That expanded to 25% in June. We were able to mitigate those tariff impacts with tightening our belts on cost. With this, this $0.03 is our best estimate on what the margin could impact -- margin impact could be. And at this point, don't think we can offset that with cost reduction. And again, hope it plays out more favorably than this.
Jay Sole:
Right. And then Barbara, I wanted to ask you is, if apparel is a category that's a little bit slower and there's some opportunities to do more business in categories like pet supplies or auto parts or food or some of the newer categories in the store. How do those -- what's the interplay like between those categories and some of your more traditional categories like apparel and footwear? How does the customer experience change if they're coming in to buy apparel, if they're also kind of looking at auto parts and pet supplies and toys and food and other things that maybe they're not used to seeing in the store?
Barbara Rentler:
Well, I actually think the customer likes it because it enhances the treasure hunt, right? So I come in, thinking I'm going to buy something in Ladies, say, and I go to Ladies, and I looked at Ladies. And this customer likes to touch and feel. Likes to see new things and something that they didn't see the last time they were in the store. Average customer shops at store more than 3 times a month. So we think it's exciting, and the customer enjoys having something new. The challenge is to keep continually adding new things to make the treasure hunt -- make her come back again and again with exciting and new products.
Operator:
Your next question comes from John Kernan from Cowen.
John Kernan:
Can you talk about any emerging competitive threat from the growth of resale? There has been some industry chatter about it recently, there has been some executives within that channel talking about the share that they're stealing from off-price. Have you seen any effects of that? Do you think that this is any type of a long-term competitive threat? And then I have one quick follow up.
Michael Hartshorn:
I would say, over the long term, we've competed with -- against many different types of retail concepts, brands, department stores, specialty stores and have done extremely well. So we don't see it as a long-term competitive threat.
John Kernan:
Got it. Then maybe can you just talk about the performance of Home? It feels like as if the category in general has become a little bit more competitive recently. Can you talk about your specific performance?
Barbara Rentler:
Sure. Home, for the quarter, performed in line with the chain. We still continue to see it as a long-term growth opportunity because it's obviously a wide assortment of products. But performance in line with the chain, we're never fully satisfied with any part of our business. So we would like to continue to expand and to grow that business. But for competitive reasons, I wouldn't talk more about the specifics of that. I mean what actually...
Operator:
Your next question comes from Janine Stichter from Jefferies.
Janine Stichter:
Just had a quick follow-up on the tariffs just for modeling purposes. Is there any major variation we should think about in terms of how the tariffs flow through? Which comes through in September versus what flows through in December?
Michael Hartshorn:
We -- because we haven't given fourth quarter guidance at this point, it's hard to say other than we have embedded the $0.03 into the back half guidance. I think if you've looked at the -- it doesn't start till September. And I think if you look at the industry, I would say that there's more of the apparel and shoes in the September tranche than in the December tranche. So that's the color I'd add to that.
Operator:
Your next question comes from Laura Champine from Loop Capital.
Laura Champine:
It's about the mechanics of getting to the $0.03 impact from tariffs. Since you've got such an open -- significant open to buy, I'm wondering whether you just calculated that by looking at what you bought year ago period from China.
Michael Hartshorn:
Well, remember our business -- so there is a small portion of our business where we directly import [indiscernible]. Our thought is that over the majority of the goods that we procure in apparel and shoes is -- was originally sourced from China. That said, it's hard to know what's going to happen at this point. I mean it just was announced several weeks ago in the markets. What I would say is, the majority of our business is closeout. So if you look at what we have left to buy year-over-year, we would normally have a lot of closeout in our receipt plan for the remainder of the year.
Laura Champine:
And because you used packaway inventory so extensively, would that potentially delay any impact of tariff-related inflation beyond the time horizon when it would've hit some of your competitors?
Michael Hartshorn:
Certainly a benefit for us.
Operator:
Your next question comes from Dana Telsey from Telsey Advisory Group.
Dana Telsey:
As you think about the expense timing shift that went on, how much should go in each quarter as you think about in the third and the fourth quarter? And is there anything in particular that shifted from the second quarter to the back half?
And just lastly, how you're thinking of marketing for the back half of the year? Any changes in what you're spending or what you're doing?
Michael Hartshorn:
In terms of the timing, I just want to reiterate that the timing difference is versus our original guidance. So that $0.02 flows into our back half guidance. And so we wouldn't break that out between Q3 and Q4.
On marketing, our marketing strategy and message has been very consistent over the years and hasn't changed for us. The message is we offer the best values in apparel and home fashions. We think, frankly that marketing can help support our business, but what really drives our business is great bargains in the store. If we have great assortments then marketing can help support that trend.
Operator:
Your next question comes from Roxanne Meyer from MKM Partners.
Roxanne Meyer:
I wanted to ask 2 things, one about AUR, wondering if it was down slightly on mix or pricing. And then secondly, I'm wondering just in the context of the plentiful inventory availability. So far this year and going forward, if you are looking to change your mix or have the opportunity to change your mix, if you so desire, between good, better and best product.
Travis Marquette:
Yes. In terms of AUR, the decline was primarily driven by the change in mix of sell-through within categories.
Barbara Rentler:
And in terms of the availability and the changing of our mix, we're going to take advantage of whatever we think the best deals are out there. We don't go in there and say, I want x amount of our purchases to be good, to be better and to be best. We go to see what the best possible deals and values are for the customer, and that's how we purchase it. So the merchants are out buying it the way they see it. It's not as much top-down as you might think, it's really more of bottom-up, based on the deals, based on the values that they can deliver.
Operator:
Your last question comes from Paul Lejuez from Citi.
Paul Lejuez:
Just going back to the Ladies apparel. I think you said, it's still performing below the chain. I guess something always has to be below average. So is there any color you can give on the comp ex that Ladies business? And how that has changed? Just trying to get a sense of the drag from that piece over the last couple of quarters that it has underperformed.
And then second. In the first quarter, you talked about SG&A timing as well. And I'm just curious if this is the -- that the timing shifts that we're talking about out of 2Q, are we talking about the same expenses that keep getting pushed out? Or are we talking different expense buckets? So if you could be maybe a little bit more specific about what's moved around?
Michael Hartshorn:
Yes, Paul. So we always like to start the year with guidance. And then as we move through the year, make sure we update you on how that impacts. So for the second quarter, for instance, we were $0.03 above the high end of the range but we only flowed $0.01 of that through to the full year. And no, those weren't the same types of expenses, we have things -- quarterly timing differences on projects that may be delayed or we may make decisions to delay projects until later in the year. So that's all we're calling out in the guidance.
Travis Marquette:
In terms of Ladies comp, we wouldn't get into the specifics of that in terms of providing specifics.
Michael Hartshorn:
What I would say on the comp though, obviously, we were up against -- we went from a $0.02 to $0.03, but we're up against the $0.05. So on a multiyear basis, there was acceleration across the division.
Paul Lejuez:
Got you. And then can you just remind us, is the -- the issue in Ladies, is that a dd's issue as well or just Ross?
Barbara Rentler:
Just Ross.
Operator:
I will now turn the call back over to Barbara Rentler for closing remarks.
Barbara Rentler:
Thank you for joining us today and for your interest in Ross Stores. Have a great day.
Operator:
This concludes today's conference call. You may now disconnect.
Operator:
Good afternoon, and welcome to the Ross Stores' First Quarter 2019 Earnings Release Conference Call. This call will begin with prepared comments by management followed by a question-and-answer session.
[Operator Instructions] Before we get started, on behalf of Ross Stores, I would like to note that the comments made on this call will contain forward-looking statements regarding expectations about future growth and financial results including sales and earnings forecasts, new store openings and other matters that are based on the company's current forecast of aspects of its future business. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from historical performance or current expectations. Risks factors are included in today's press release and the company's fiscal 2018 Form 10-K and fiscal 2019 8-Ks on file with the SEC. Now I'd like to turn the call over to Barbara Rentler, Chief Executive Officer.
Barbara Rentler:
Good afternoon. Joining me on our call today are Gary Cribb, Group Executive Vice President, Stores and Loss Prevention; Michael Hartshorn, Group Executive Vice President and Chief Financial Officer; Travis Marquette, Group Senior Vice President and Deputy Chief Financial Officer; and Connie Kao, Vice President, Investor Relations.
We'll begin our call today with a review of our first quarter performance followed by our outlook for the second quarter and fiscal year. Afterwards, we'll be happy to respond to any questions you may have. As noted in today's press release, for the first quarter, we delivered sales gains at the high end of our guidance as well as better-than-expected earnings per share growth despite continued underperformance in Ladies apparel. Earnings per share for the 13 weeks ended May 4, 2019 was $1.15, up from $1.11 for the same period last year. Net earnings for the 2019 first quarter were $421 million compared to $418 million in the prior year. These results include an approximate $0.02 per share benefit from favorable timing of expenses that are expected to reverse over the balance of the year. Total sales for the period increased 6% to $3.8 billion with comparable store sales up 2%. For the first quarter, the strongest merchandise category at Ross was men's while the Midwest was the best performing geographic region. As I just mentioned, Ladies apparel trails a chain. Our execution in this important business remains below our standard and consequently, we did not offer our customers the compelling values they have come to expect from us. While we are working diligently to improve our merchandise assortments, which were out of balance in a number of areas in Ladies, plus strengthen our value propositions, it can take some time to correct issues like this in a chain of our size. That said, we do believe that the actions we are taking will lead to improved results as we move through the year. As we ended the period, total consolidated inventories were down 4% over the prior year. Average in-store inventories were up 1% as planned while packaway, as a percentage of total inventories, was 44% compared to 49% last year. As it has for time now, dd’s DISCOUNTS posted better-than-expected gains in both sales and operating profits for the quarter. Turning to store growth. Our 2019 expansion program is on schedule with the addition of 22 new Ross and 6 dd’s DISCOUNTS locations in the first quarter. We remain on track to open a total of approximately 100 locations in 2019 comprised of 75 Ross and 25 dd’s DISCOUNTS. As usual, these numbers do not reflect our plans to close or relocate about 10 stores. Now Michael Hartshorn will provide further color on our first quarter results and details on our second quarter guidance.
Michael Hartshorn:
Thank you, Barbara. Let's start with our first quarter results. Our 2% comparable store sales gain was primarily driven by an increase in the size of the average basket. While operating margin of 14.1% was down 95 basis points from last year, it was better-than-expected mainly due to above planned merchandise margin and favorable timing of expenses. Cost of goods sold rose by 85 basis points in the quarter, a 30 basis point improvement in merchandise margin was more than offset by a 60 basis point increase in distribution cost as we were up against last year's benefit from packaway-related expense. In addition, freight costs grew by 35 basis points and occupancy and buying expenses increased by 10 basis points each.
Selling, general and administrative expenses for the period increased 10 basis points as higher wage-related costs were partially offset by favorable timing of expenses. During the first quarter, we repurchased 3.4 million shares of common stock for a total purchase price of $320 million. We remain on track to buy back a total of $1.275 billion in stock for the year. Let's turn now to our second quarter guidance. For the 13 weeks ending August 3, 2019, we're forecasting same-store sales to increase 1% to 2% on a top of a 5% gain last year. Earnings per share for the second quarter are projected to be in a range of $1.06 to $1.11, up from $1.04 in the prior year period.
The operating statement assumptions for our second quarter guidance include the following:
total sales are projected to grow 5% to 6%. We expect to open 28 new stores during the period including the 22 Ross and 6 dd’s DISCOUNTS locations. If same-store sales are in line with our guidance then we project operating margin to be in the range of 13.2% to 13.4%. The forecasted decline from last year's 13.8% mainly reflects headwinds from higher wage and freight cost, partially offset by the anniversarying of last year's negative impact from packaway timing.
In addition, we would expect some deleveraging on occupancy if comparable sales performed in line with our guidance. We expect net interest income of about $4 million, our tax rate is expected to be approximately 24% to 25% and weighted average diluted shares outstanding are projected to be about $363 million. Based on our first quarter results and second quarter guidance, we now project earnings per share for fiscal 2019 to be in the range of $4.38 to $4.52. This compares to EPS of $4.26 last year, which included a $0.07 per share benefit from the favorable resolution of a tax matter in the fourth quarter. Now I'll turn the call back to Barbara, for closing comments.
Barbara Rentler:
Thank you, Michael. To sum up, we delivered respectful results in the first quarter despite difficulties in our Ladies apparel business. As I said earlier, we're working hard to improve our merchandise assortments and strengthen the values we offer in this important business. We do believe the steps we're taking in Ladies will lead to improved performance over time. At this point, we'd like to open up the call and respond to any questions you might have.
Operator:
[Operator Instructions] Your first question comes from the line of Matt Boss from JPMorgan.
Matthew Boss:
Congrats on a nice quarter. I guess on the top line, can you speak to Ladies apparel performance, maybe, versus plan in the first quarter? And just how much do you attribute to company's specific execution versus relative category weakness as we've heard this trend from a number of retailers in the last couple of quarters?
Barbara Rentler:
Sure. Well, obviously, I wouldn't talk versus plan, all I'll say is that Ladies on the top line trailed the chain. In terms of company execution versus relative performance in the outside world, we really feel that our execution was below our standards. And obviously, there are other outside factors, there's weather and there was whatever, but in terms of execution, we felt that our assortments were out of balance, that our value offerings were not as compelling as they should have been and obviously, the price value equation is critical. And so we really feel like it's an execution issue and not necessarily based off of other factors in the outside world.
Matthew Boss:
Got it. And then maybe just a follow-up on the margin front. On gross margins, what's your expectation for merchandise margin in the second quarter and then the balance of the year in the back half?
Michael Hartshorn:
Sure, Matt. We don't give specific guidance by quarter. I will tell you when we started the year, we planned merchandise margin relatively flat for the year and at this point, that's what's embedded into our guidance for the remainder of the year.
Operator:
Your next question comes from Lorraine Hutchinson from Bank of America.
Lorraine Maikis:
You've had a couple of your senior leaders leave over the past few months. I'm just hoping you could talk about the bench under them if you're planning external searches? Or how you are thinking about the leadership team going forward?
Barbara Rentler:
Sure. What I would say, overall, our ability to -- we have a very deep bench of talented and long-tenured executives on the operational side and on the merchandising side. And so we have a strong succession plan in all of those worlds underneath. So we feel strongly that our bench at the senior level and the level below that is very solid. And as we know that certain executives where we knew that they were leaving, we had transition plans put in place for them, so that we could have a smooth transition and not have disruption to the business.
Operator:
Your next question comes from Mark Altschwager from Baird.
Mark Altschwager:
With respect to the comp guidance of 1% to 2%, I think last quarter you guided 0% to 2% given some of the headwinds you identified in Women's apparel. So I mean, is the fact that you're returning to that 1% to 2% range, even with the tougher Q2 comparison or reflection that you think the Women's apparel issue is improving as you move forward? Or are there other categories that are perhaps making up big difference in giving you some more broad-based confidence in the trajectory of the comp?
Michael Hartshorn:
Yes. I'd say on the guidance, I mean, we did it too in the first quarter, so the 1% to 2% is kind in line on how we usually guide the business and that's all I'd read into it and that's the way I think about it.
Operator:
Your next question comes from Kimberly Greenberger from Morgan Stanley.
Kimberly Greenberger:
I wanted to know if there's any color you can provide on just the monthly cadence in the first quarter? And whether you saw the same sort of headwinds in February this year from delays in tax refunds that you had seen perhaps 2 years ago? And then secondarily, Barbara, I'm wondering if there is a good basic way to help us understand the out of balance in Women's, we're all -- many of us are finance people not merchants. So just maybe in simple terms, how would you explain to a non-merchant person what is the out-of-balance issue? And then is the lack of the value proposition you talked about or lack of compelling value, is that a function of the availability of goods in the market, the price that those goods are available for or perhaps maybe just some mistakes in the buying process? Any insight would be really appreciated.
Michael Hartshorn:
Kimberly, on the trends during the quarter, sales strengthened as the quarter progressed and as frankly as weather improved and obviously, also with the later Easter that was 3 weeks later last year. Like others, we -- the delay in tax refunds did have a short-term impact until they got caught up pretty quickly. I think overall, the tax refunds were slightly down for the kind of tax filing year. But hard to understand that's any impact to us for the entire quarter.
Barbara Rentler:
And then Kimberly, in terms of out of balance, I mean that some of the simplest examples would be I own not enough shorts, too much denim, it could be out of balance by classifications, it could be out of balance by price points. I mean those are the kinds of things I've been talking about out of balance to give you a couple of examples to put sides around it. In terms of offering the compelling value, it has nothing to do with the availability of goods, if there's a lot of merchandise in the market, there continues to be merchandise in the market. I would say that the overall merchandise offerings just weren't where they needed to be and really it was execution issues that were really below our standards.
Operator:
Your next question comes from Michael Binetti from Crédit Suisse.
Michael Binetti:
I wanted to maybe, Barbara, ask a similar question what Matt asked before. But when you think about how to isolate your comments to your business versus what's going on more broadly in a marketplace, obviously there's a quite a bit going on out there right now. But how much do you -- how do you assess your comment that Midwest was the strongest market relative to your own company's performance versus externals like the big Bon-Ton bankruptcy a year ago? Have you guys tried to measure how much that's helping add to the Midwest?
Michael Hartshorn:
Sure. On the Midwest -- Michael, on the Midwest, Midwest has been comping well for us for -- frankly, since we entered the market in 2011. And it's been one of our strongest performing comp. And it continues to be a place that we're adding stores. So it's a newer store base and have been -- continued to be successful there in gaining market share.
Barbara Rentler:
And then in terms of -- I'm sorry, there was an echo there. In terms of our business [indiscernible] to comments people have made on the outside, we look at a number of metrics, Ladies to plan, other apparel businesses to plan and key classifications, churn, I mean, there's a variety of metrics that we look at to make that assessment overall. I mean it isn't just 1 metric, it's a series of metrics.
Michael Binetti:
Got it. And then if I could follow-up quickly. I think you said the merch margin was up 30 basis points in the quarter, but you think flat for the year. Michael, is there a point on the horizon where we see a minus sign in front of that? And then if so, any reason why? That's a planning or just erring on the side of conservatism?
Michael Hartshorn:
Well, when we entered the quarter, we were actually able to take -- be able to remain very flexible and so our margins were able to take advantage of closeouts during the quarter, which helped the margin. I would also say that we entered and exited the quarter with healthy inventory positions and therefore there wasn't markdown exposures.
Operator:
Your next question comes from Paul Trussell from Deutsche Bank.
Krisztina Katai:
This is actually Krisztina Katai, on for Paul. I was just wondering if you could just maybe talk a little bit more about the weakness that you continue to see in Ladies apparel. I know you've discussed it earlier, but I'm just wondering what are some of the steps that you have taken to improve these results. And maybe the timeline to remedy it? And then just if you could just discuss some of the categories, what you saw there? I mean you called out men's outperforming, but what about some of the other categories such as home and beauty? If you could just share anything there?
Barbara Rentler:
Sure. First, as it pertains to Ladies issues, as I've said before, we're working diligently to improve the assortments in this important area. But it's going to take time to complete -- address all of the issues for a chain of our size. That said, we believe that we will see improved performance as we move through the year. In terms of other categories, home and beauty, home was relatively in line with the chain and beauty outperformed the chain.
Operator:
Your next question comes from Simeon Siegel from Nomura Instinet.
Simeon Siegel:
Just given your comments on the inventory and the supply in the market, just any help on understanding why the inventory decline? And I guess, specifically packaway would've -- I thought, you would have had a nice opportunity there. So just any thoughts on that and the comfort in the ability to comp with the down inventory.
Michael Hartshorn:
So inventory was down just slightly at the end of the quarter. So we think we can continue to operate at that level of inventory and turn faster. On packaway, we're actually up against the very large number of last year. Packaway tends to be between 40% and 49% of the total inventory and that can vary over time. But I think we're happy with the level and the content of our packaway inventory as we ended the quarter.
Barbara Rentler:
Right. And in terms of supply in the market, there's an abundance of supply in the market just based off of Q1 performance and just -- even in just traditional department stores. So supply is not the issue, buying it at the right price and the right time is really a merchant's judgment call.
Operator:
Your next question comes from John Morris from D.A. Davidson.
John Morris:
Congratulations on a good quarter. Very brief, I'm just curious why this shifting of the timing of the expense? Why that was particularly or generally happening in the current quarter? And then on the merch margin, merch margin was up, Women's -- however, Women's underperformed. So maybe if you can dive a little bit deeper to help us understand the differences there. Was it all men's or should we look at it from a different -- with a different filter in terms of why you were able to have that merch margin up despite the Women's underperformance?
Michael Hartshorn:
Sure. On the timing, it was really broken into 2 pieces. It's -- part of it's just the packaway timing. And all of these timing, by the way, is not versus last year's versus our original guidance. And so what you've noticed we did is, we beat the first quarter by $0.04 and then up the full year by $0.02 on the top end of the range. So we're just trying to call that out. But part of it was packaway-related and part of it was SG&A cost that we expected to happen in the first quarter that will happen later in the year. And then just kind of on the merchandise margins, the reason we didn't have -- we're able to operate with higher merch margin and -- what's very important when you have a business that underperforms is that you manage the inventory. And with Ladies and overall inventories, we entered -- both entered and exited the quarter with healthy inventory positions. So I think that's an important part of the margin improvement.
Operator:
The next question comes from Ike Boruchow with Wells Fargo.
Sharon Lui:
This is Lui, on for Ike. I wanted to ask about the margin dynamics in the quarter just around freight since I know that it's been such an outsized drag on your costs. How are you thinking about that dynamic for the balance of the year and in Q2?
Michael Hartshorn:
Sure. So -- and maybe it's best to go through last year. Last year, the freight cost escalated as we moved through the year. So in our initial call this year, we said that we thought freight would be a negative impact for the first half of the year and then as we round some of the increases we had in the last year's second half, that the cost would abate. So that's -- our thoughts continue to be that the first half of the year, we'll have freight pressure and then we'll have a lower cost versus last year in the back half.
Operator:
Your next question comes from the line of Paul Lejuez from Citigroup.
Tracy Kogan:
It's Tracy, filling in for Paul. I just had a follow-up question packaway. I was wondering if you're seeing more availability in certain categories versus others and maybe perhaps in categories that are already being impacted by tariffs.
Barbara Rentler:
Well, availability is pretty broad-based in terms of categories where the tariff is -- as I'm sure, you've properly read a lot of vendors brought merchandise into the country even starting a few months ago to get ahead of the 10% tariff even before the 25%. So I would say there is -- in certain pockets of those classifications, there are vendors who own inventories. And then there are some that really don't own excess inventories. So that's kind of a mix story based on classification. And then in terms of apparel, apparels availability is broad-based.
Operator:
Your next question comes from the line of Marni Shapiro from The Retail Tracker.
Marni Shapiro:
Great job in a cold and very late Easter first quarter. I'm not going to ask about your Ladies apparel. I'm actually curious about your real estate. You were one of the few net openers of stores out there and in a space where there are a lot of people vacating. So if you could just talk to us a little bit about the tone of your -- of what you're seeing out there for your leases? And are you able to go back to some of your existing leases and renegotiate? Or what percentage of your leases are coming up for renewal each year? If you could just put some color around that.
Michael Hartshorn:
So we have seen closures with other retailers and that's been going on for quite a while. We tend to look 2 to 3 years out and feel pretty confident that we'll be able to achieve our store opening targets. We didn't really comment on the leases, but whenever there's closures, it generally means good news for everybody.
Operator:
Your next question comes from the line of Jay Sole with UBS.
Jay Sole:
A couple of questions going to where tariff was mentioned. Can you just talk about how the company is planning to handle the situation if there are new tariffs applied to apparel and footwear? And can you talk about what percent of your merchandise is imported from China into stores directly?
Michael Hartshorn:
Sure. So like everybody else, we're closely monitoring the trade talks and tariffs and at this point, it's too early to say what the potential impact could be on the industry. Our focus is to maintain a pricing umbrella versus traditional retailers and offer the best values to the customers. At this point, it's unclear how the industry would react with increases to apparel and shoes. And -- but we certainly would not be the price increased leader in that regard. The silver lining is we have a flexible business model and can react to the price increases and disruptions like this that historically meant to supply opportunities for off-price. And then we wouldn't comment on the direct-sourcing question, what percentage is directly sourced from China.
Operator:
Your next question comes from the line of Laura Champine with Loop Capital.
Laura Champine:
It is on the underperformance in the Women's apparel. Were there any changes in staffing for senior merchants? Or any significant changes in your relationship with vendors? Or any quality issues coming up with vendors that were unanticipated? I'm just trying to diagnose better what's going on and how long it might take to fix?
Barbara Rentler:
Okay. Well, in terms of the team, no, there were no significant changes. We have a very large and talented merchant team, very tenured. And it's the same team that has delivered results for many years and being able to deliver value to the customer. In terms of relationships in the market, no, we have -- again, we have a very large merchant team whether in Ladies or in the entire company. So out there -- we're constantly out there building relationships and trying to do more business. So I don't see any relationships or quality issues. The issues are really they are internal. They are execution issues and we're working diligently, as I said before, to correct those issues. But because of our size, we believe, we'll see improved performance as we move through the year. But the issues are not external, the issues are internal. It's our execution.
Operator:
Your next question comes from Alexandra Walvis with Goldman Sachs.
Alexandra Walvis:
I had a question on the category you mentioned in response to a prior question that was tracking in line with the chain. I think that represented a little bit of a deceleration in that category from prior, some of your peers and other retailers have called out some softness in home category and some difficulties with the competitive environment. I was wondering if you could comment on your experience there? How you're seeing demand, pricing and so forth?
Barbara Rentler:
From the -- just from the general, the general classification of home, again, some of our businesses are a lot better than...
Alexandra Walvis:
Yes. That's...
Barbara Rentler:
I'm sorry, go ahead.
Alexandra Walvis:
Yes. That was...
Barbara Rentler:
Walvis, go ahead and continue. Why don't you continue with the question?
Alexandra Walvis:
Yes. Sure. I was just wondering if you could comment a little bit more on your experience in the general home classification and if you have any comments beneath that level in terms of what's performing well or less well and how well the market is in that category that would also be really helpful?
Barbara Rentler:
Okay. Generally, some businesses in home are better than others. I really wouldn't go into the specifics of that on the call. I think the home category, as a general statement for the market is that's where a lot of people haven't absorbed increased costs. And so I think the market maybe depending upon the classification discipline, the market maybe a little bit more disrupted than others, some classes more than others and therefore, in some of the businesses, there's more opportunities for us and in some of the other businesses, there's less opportunity. And so -- and then -- so the balance of it maybe a little bit different than it's been probably for everyone in the last few months. Without getting into more specifics on the call, I mean, that's kind of the general gist of what's going on.
Operator:
Your next question comes from the line of Jamie Merriman from Bernstein.
Jamie Merriman:
I think in the prepared remarks you mentioned that the driver of the comp performance was the basket size increasing. But I'm just wondering if you could speak to what you've seen in traffic over the last quarter? I mean also maybe break that basket size down into price versus units.
Michael Hartshorn:
Sure. So as we mentioned in the remarks the 2% comp was driven by the increase in the basket. The basket was driven by higher units per transaction, AUR was down slightly. And with traffic, given the performance in Ladies apparel, we think that had an impact on traffic for the quarter. And again, the way we measure traffic is through the number of transactions. We actually do not have traffic cameras.
Operator:
The next question comes from the line of Dana Telsey from Telsey Advisory Group.
Dana Telsey:
Do you think about just the state of the consumer, anything you are picking up that in this first quarter was different than in quarters past that would've made a difference in top line? Whether it is delayed tax refunds or obviously the comparison? And did you see a difference in performance of dd's versus Ross?
Michael Hartshorn:
With the consumer, there is nothing I'd call out. With tax refunds, the refund cycle was completed in the quarter. So perhaps there was timing differences within the quarter. But there is nothing really that I'd call out. I mean first quarter has been tough for us and other retailers versus the rest of the year for a number of years. And dd's versus Ross -- yes, dd's actually -- we were pleased with the performance and we're ahead of last year. So we're pleased -- as we said in our commentary, we're pleased with their results.
Dana Telsey:
And on the real estate front, what are you seeing in terms of the opportunity for relocations? And as you're renewing existing leases, is there opportunity for occupancy cost improvement?
Michael Hartshorn:
So we tend to relocate on average about 10 -- relocate or -- and open about 10 stores on a year. And we're always looking to improve stores that are underperforming for various reasons. On the -- the second question was on opportunity to improve leases?
Barbara Rentler:
Yes. On...
Dana Telsey:
Yes.
Michael Hartshorn:
On occupancy overall and leases, I mean we've seen a pretty big market for the last number of years and -- so I think it's remained pretty stable to that -- to what it's been like over the last several years.
Operator:
Your next question comes from the line of Bob Drbul from Guggenheim Securities.
Robert Drbul:
I was just wondering if you could give us an update just in terms of what you're seeing on your labor costs and the outlook for the year, if there's been any change from that perspective. And then second question is just around dd's versus Ross. Can you give us an idea on sort of vendor overlap and sort of how that might be trending over the last few years?
Michael Hartshorn:
On the wage front, our most recent national increase, the $11 we did in the second quarter last year, we believe, it keeps us competitively positioned. That said, we always take a market-to-market approach in determining our wage rates and that will not change and in fact, many of our markets are well above the $11. And as we always have done, we'll make the necessary adjustments to ensure we continue to attract and retain talented associates.
Barbara Rentler:
And it pertains to dd's versus Ross with vendor overlap, the dd's customer is a lower-income customer. So there is some overlap to Ross, but not a large overlap with Ross.
Robert Drbul:
Got it. And dd's, as you open up more stores, are you able to open in the closer proximity to Ross Stores. Can you just give us an idea just in terms of like the trade areas? How you really see that developing as well?
Michael Hartshorn:
Yes. I think it -- I think we look at it market by market. There are some markets where Ross alone make sense and other markets where the 2 of them really enhance having them close by. So we take a market-by-market approach. And you'll find locations where we're next door to each other.
Operator:
Your last question comes from the line of John Kernan from Cowen.
Krista Zuber:
This is Krista Zuber, on for John. I just wanted to follow up on 2 previous questions. One on inventory and one on freight. Just in terms of where you're thinking your inventory positioning or levels will be at the end of the year? And then secondly on freight. You mentioned that sort of your guidance or your thinking was unchanged, is that a reflection of the renegotiations you'd expected to have this year for the rates?
Michael Hartshorn:
Sure. On inventory, at the end of the year, that's a long way out. But the way we have it planned is store positions to be relatively flat at this point. On freight, we have pretty good visibility on our renegotiations with our freight, again, a recap last year, the cost escalated as we moved through the year. And so in the front half, we've continued to see wage pressure -- or not wage pressure -- the freight pressure on -- just based on rates and market, inflationary cost in the freight industry. And then in the back half, we're up against those larger increases. So our viewpoint at this point is that they will -- they'll abate as we move through the year.
Krista Zuber:
And if ask -- I could just add one more follow-up. Just kind of looking at your free cash flow generation, I think you stepped up the CapEx this year to about $600 million when you gave guidance at the end of the fourth quarter. I'm just curious, is this how we should think about the run-rate of CapEx as a percentage of sales going forward?
Travis Marquette:
This is Travis. We're still planning CapEx at around $600 million for the year. And as you may recall that includes the initial investments at our next distribution center. In terms of spending going forward, we wouldn't be too specific for the future, but suffice it to say, it takes a little while to build the distribution centers. So we expect CapEx to be elevated for the next couple of years.
Operator:
I will now turn the call back over to Barbara Rentler, for closing comments.
Barbara Rentler:
Thank you for joining us today and for your interest in Ross Stores. Have a great day.
Operator:
This concludes today's conference call. You may now disconnect.
Operator:
Good afternoon, and welcome to the Ross Stores' Fourth Quarter and Fiscal Year 2018 Earnings Release Conference Call. The call will begin with prepared comments by management followed by a question-and-answer session. [Operator Instructions]
Before we get started, on behalf of Ross Stores, I'd 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 2017 Form 10-K and fiscal 2018 Form 10-Qs 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:
Good afternoon. Joining me on our call today are Michael O'Sullivan, President and Chief Operating Officer; Gary Cribb, Group Executive Vice President, Stores and Loss Prevention; John Call, Executive Vice President, Finance and Legal; Michael Hartshorn, Executive Vice President and Chief Financial Officer; and Connie Kao, Vice President, Investor Relations.
We'll begin our call today with a review of our fourth quarter and 2018 performance followed by our outlook for 2019. Afterwards, we'll be happy to respond to any questions you may have. Let me first start the discussion of today's financial results by noting that our 2018 fourth quarter and fiscal year were 13- and 52-week periods, respectively, while our 2017 fourth quarter and fiscal year were 14- and 53-week period. The 53rd week added approximately $219 million in sales and $0.10 in earnings per share to 2017's fourth quarter and fiscal year. Further, the extra week added about 70 and 20 basis points, respectively, to operating margin in last year's fourth quarter and full year. Now let's turn to today's results. As noted in today's press release, sales and earnings for both the fourth quarter and fiscal year outperformed our expectation. As we also mentioned, we achieved these results despite our own challenging multiyear comparisons and weakness in our Ladies apparel business during the holiday season. Earnings per share for the 13 weeks ended February 2, 2019, were $1.20 versus $1.19 in the 14 weeks ended February 3, 2018. Net earnings for the 2018 fourth quarter were $442 million versus $451 million in the prior year. For the 52 weeks ended February 2, 2019, earnings per share grew to $4.26 compared to $3.55 in the 53 weeks ended February 3, 2018. Fiscal 2018 net earnings were $1.6 billion, up from $1 point billion in fiscal 2017. Now let's turn to our recent sales results. For the 13 weeks ended February 2, 2019, total sales were $4.1 billion. Comparable store sales for the period rose 4% over a strong 5% gain in last year's fourth quarter. For the 52 weeks ended February 2, 2019, sales increased 6% to $15 billion with comparable store sales up 4% on top of 4% gains in each of the 3 prior years. For the fourth quarter, men's was the best-performing area and as I said, Ladies underperformed. Geographically, the Southeast and the Midwest were the strongest regions. dd’s DISCOUNTS customers continued to respond positively to its merchandise assortments leading to another quarter and year of solid gains in both sales and operating profit. As we ended 2018, total consolidated inventories were up 7% over the prior year with packaway levels at 46% of the total compared to 49% last year. Average in-store inventories were down slightly versus last year. As noted in today's release, our board authorized a new program to repurchase $2.55 billion of common stock over the next 2 fiscal years. Our recent stock prices with new repurchase program represents about 8% of the company's total market share and a 31% increase over the prior 2-year of $1.95 billion authorization that was completed in January 2019. The board also approved an increase in the quarterly cash dividend to $0.255 per share, up 13% over the prior year. The increases to our shareholder payouts for 2019 reflects the current strength of our balance sheet and our ongoing ability to generate significant amounts of cash as to funding and other capital -- funding growth and other capital needs of the business. We have repurchased stock as planned every year since 1993 and raised our cash dividend annually since its inception in 1994. This consistent record also reflects our continuing commitment to enhance shareholder value and returns. Now Michael Hartshorn will provide further color on our 2018 results and details on our 2019 full year and first quarter guidance.
Michael Hartshorn:
Thank you, Barbara. As Barbara mentioned earlier, earnings per share for the fourth quarter and fiscal 2018 year were $1.20 and $4.26, respectively. These results compared to fourth quarter 2017 earnings per share of $1.19 and $3.55 for the year. Our earnings per share results for both the 2018 fourth quarter and fiscal year reflect a onetime noncash gain of $0.07 related to the favorable resolution of a tax matter as well as a $0.19 benefit from tax reform legislation in the fourth quarter and $0.70 for the year.
In addition to the $0.10 earnings per share benefit from last year's 53rd week, our 2017 fourth quarter and fiscal year EPS results also included a $0.21 benefit from the adoption of tax reform legislation consisting of a onetime $0.14 gain due to a revaluation of deferred taxes and $0.07 from a lower tax rate. Now I'll discuss further details on our fourth quarter results. Our 4% comparable store sales gain in the quarter was driven by a combination of higher traffic and an increase in the size of the average basket. So better-than-expected operating margin of 13.2% for the period was down from last year. The 135 basis points decline was primarily due to the approximate 70 basis points benefit in the 2017 fourth quarter from the 53rd week and as expected, higher freight and wage cost. For the full year, operating margin declined 85 basis points to 13.6%, due in part to last year's 20 basis points benefit from the 53rd week. Cost of goods sold for the year increased 55 basis points, consisting of 40 basis points of higher freight costs, a 15 basis point increase in distribution expenses and a 10 and 5 basis point rise in buying and occupancy cost, respectively. These expense pressures were partially offset by a 15 basis point increase in merchandise gross margin. SG&A for the year rose 30 basis points, driven by higher wages. During the quarter, we repurchased 3.1 million shares of common stock for a total purchase price at $268 million. For the full year, we repurchased 12.5 million shares for an aggregate price of $1.075 billion.
Now let's discuss our outlook for 2019. For the 52 weeks ending February 1, 2020, we are forecasting earnings per share to be $4.30 to $4.50, up from $4.26 for fiscal 2018. Our guidance reflects the adoption of the new lease accounting standard, which is not expected to have a significant impact to our earnings results. The operating statement assumptions for fiscal 2019 include the following:
Total sales are projected to grow 5% to 6% for the 52 weeks ending February 1, 2020 compared to the 52 weeks ending February 2, 2019. Comparable store sales are expected to increase 1% to 2% on top of multiple years of strong gains. We plan to add about 100 new stores this year consisting of approximately 75 Ross and 25 dd’s DISCOUNTS locations. As usual, these numbers do not reflect our plans to close or relocate about 10 older stores. We project that operating margin for 2019 will be in the range of 13.2% to 13.4% compared to 13.6% in 2018. The forecasted decline reflects our plans for relatively flat gross margin and some deleveraging of expenses if same-store sales increase 1% to 2%.
Net interest income is estimated to be $17.6 million. Our tax rate is projected to be approximately 24%. We expect average diluted shares outstanding to be about $362 million. Capital expenditures in 2019 are projected to be approximately $600 million, which includes the initial investment for our next distribution center. And depreciation and amortization expense inclusive of stock-based amortization is forecast to be about $450 million.
Let's move now to our first quarter guidance. Given the recent underperformance in Ladies apparel, a business that becomes more important in the first quarter, we are forecasting comparable store sales to be flat to up 2%. Earnings per share are projected to be $1.05 to $1.11 versus $1.11 for the first quarter ended May 5, 2018. Other assumptions that support our first quarter guidance include the following:
Total sales are planned to increase 3% to 6%. We expect to open 22 new Ross and 6 dd’s DISCOUNTS locations during the quarter.
First quarter operating margin is projected to be 13.4% to 13.8% versus last year's 15.1%. This forecasted decline includes expectations for a negative impact from the timing of packaway-related expenses that benefited last year's first quarter and ongoing headwinds from higher freight and wage cost in the first half of 2019. Net interest income for the quarter is estimated to be about $4.9 million. Our tax rate is expected to be approximately 23%. And finally, weighted average diluted shares outstanding are projected to be around $367 million. Now I'll turn the call back to Barbara for closing comments.
Barbara Rentler:
Thank you, Michael. Again, we delivered better-than-expected sales and earnings gains for both the fourth quarter and fiscal year. Looking ahead, while we hope to do better, we continue to take a prudent approach to forecasting our business for 2019. Although we remain favorably positioned as an off-price retailer, we are facing our own difficult multiyear comparisons, a very competitive retail landscape in an uncertain macroeconomic and political environment.
Longer-term though, we remain confident in our ability to achieve ongoing profitable market share gains by consistently offering customers outstanding values throughout our store. As long as we remain focused on the careful execution of our proven off-price strategies, we believe we can continue to deliver solid growth in both sales and earnings. Before we begin the question-and-answer session, I'd like to thank John Call for his leadership and the numerous contributions he has made over more than 2 decades at Ross, including previously serving as CFO for 16 years. John begins his planned transition to an advisory role at the end of this month. At this point, we'd like to open up the call and respond to any questions you may have.
Operator:
[Operator Instructions] Your first question comes from Matthew Boss from JPMorgan.
Matthew Boss:
Congrats on a nice quarter. So, I guess, maybe my question is just on Ladies apparel, maybe on the weakness. Could you just elaborate on the drivers maybe how best to think about the timeframe to work through any excess inventory? And larger picture, what drove that and the time frame to correct it?
Barbara Rentler:
Okay. First of all, the Ladies apparel business got off course, because we didn't have the right balance of our assortments in certain categories within the total apparel business. So as a result, we left some money on the table in seasonal areas of the business. In terms of excess inventories or residual inventory left in stores, we don't have any excess issues that we need to deal with or go through. In terms of correcting the merchandise miscues, what I would say is, obviously, we'll course correct as quickly as possible, but we expect gradual improvement as we rebalance the assortment throughout the year.
Matthew Boss:
Great. And then just a follow-up on the expense front. I guess, what's the best way to think about the threshold needed from a comp perspective to leverage SG&A this year? And is there any difference in the front versus the back half of the year?
Michael Hartshorn:
Sure, Matthew. On expenses, SG&A this year the leverage point is about 3%, which is in line with our historical averages pre-2018. We would expect more deleverage in the front half. As a reminder, we increased our national minimum wage in the second quarter of last year. So we have to round that in the first and a little bit of the second quarter. In addition, in overall operating margin freight cost escalated as we moved through the year last year. So those will be more of a drag in the first half versus the second half.
Operator:
Your next question comes from Lorraine Hutchinson from Bank of America.
Lorraine Maikis:
Could you quantify the freight headwinds that you're seeing? And then, also maybe comment on some of the contracts that are coming this year? Are you seeing some relief in the rates versus this time last year?
Michael Hartshorn:
Sure, Lorraine. In terms of the impact of freight. So as we expected, first on the fourth quarter. So the fourth quarter there was 135 basis point drag. 70 basis points of the decline was due to the 53rd week. The remaining 65 basis points was a combination of higher freight and wage cost. For the fiscal year, freights we had a 40 basis point drag for the full year. As we move into 2018, the drag was, obviously, higher in the third and fourth quarter. So we'd expect a continued drag in the first and second quarter and then be somewhat neutral later in the year. Our contracts, if you compare against the spot rates, actually in many cases are lower than the spot rates. So as we go through contract renewal this year, we would expect rates there somewhat normalize.
Operator:
Your next question comes from Simeon Siegel from Nomura Instinet.
Unknown Analyst:
[ Steven Ferris ] on for Simeon. I had a question on the flat gross margin implications. You guys touched on freight, but maybe how should we think about distribution costs, occupancy and maybe how our merchant margins will shake out for the year?
Michael Hartshorn:
Sure. In my commentary, the gross margin was intended to be merchant margin so we expect merchant margin to be relatively flat for the year and we didn't provide additional guidance on DC costs. Like the rest of the business, we would expect some wage headwinds in the DCs in the first half of the year more than the second half.
Operator:
Your next question comes from Paul Trussell from Deutsche Bank.
Paul Trussell:
Just on Ladies apparel. Is the thought process [Technical Difficulty] comp in fourth quarter by a -- negatively by about a point? And is that the thought process as well for the first quarter?
Barbara Rentler:
Paul, you cut out -- the phone cut out. Could you just repeat the question?
Paul Trussell:
Yes. I just wanted to follow up on Ladies apparel. Just to maybe get a better assessment around what you thought the impact to the comp was in the fourth quarter? And I know that, that is a little bit bigger business in 1Q. Just how you're thinking about that? And any other puts and takes that you can provide around your first quarter guidance?
Barbara Rentler:
In terms of being more specific on Ladies apparel for the first quarter guidance, for competitive reasons, I wouldn't be more specific other than to say that it's built into our guidance for Ladies performance.
Paul Trussell:
Understood. And what is the impact of the packaway in the first quarter? And should we think that, that -- is that going to continue at all into the second quarter?
Michael Hartshorn:
Sure, Paul. In Q1, we're lapping the packaway-related timing -- as packaway levels rose during the quarter last year, it was worth about 45 basis points last year. Packaway levels are tough to predict, so our guidance at this point assumes that the benefit doesn't recur, and we wouldn't talk about the impact beyond the first quarter. We'll give you an update in our May conference call and first quarter results.
Operator:
Your next question comes from Ike Boruchow from Wells Fargo.
Irwin Boruchow:
So I'm sorry to jump on the Ladies apparel train. But I guess, Barbara or Michael, I think the last time you had an issue in the category I think was early 2016. I know you guys can't -- don't want to be too specific. But I'm just kind of curious, the similarities that are happening today versus back then? And then, again, when I look back then, it didn't take you long to kind of course correct, I think, you were back in a 4% comp range 3 months later. Is there anything different this time around? I guess, I'm just trying to compare today and what happened several years ago?
Barbara Rentler:
Sure. What I would tell you is that the issues really aren't related. What went on in 2016 was really wrong product coloration seasonality. What we're talking about here is that our assortments were not balanced in certain categories. And so I think these -- from a merchant perspective, they're 2 completely unrelated issues. In terms of correcting the issue, obviously, we've been trying to correct it as quickly as possible, but we're going to expect gradual improvement as the months go on.
Operator:
Your next question comes from Kimberly Greenberger from Morgan Stanley.
Kimberly Greenberger:
Oh, sorry, I was on mute. Let me make sure I congratulate John Call on a very long and distinguished career, and I wish him well in retirement. Barbara, I wanted to just ask quickly on the merchandising issue in women's. It sounds like a balance issue. Is it the case also that there was -- that the merchants' bought the wrong goods? I'm just trying to figure out if there is liable inventory here heading into Q1? Or is it -- it's simply the case that you thought you could have done more business in Ladies in the fourth quarter and maybe potentially in the first quarter if you had, for example, either more winter seasonal goods or just a better balance to the assortment? And then separately, you mentioned the Midwest and Southeast as the best-performing regions. I was wondering, if you're seeing any sort of benefit in your stores from competitor store closings? And if you've noticed, for example, Bon-Ton -- Bon-Ton's presence in the Midwest? Is there any sort of benefit that you're seeing in those stores that are co-located?
Michael Hartshorn:
Kimberly, I'll start with regional performance. As we mentioned, Southeast and the Midwest were the strongest. The Midwest has been the strongest for some time now since we entered the market in 2011. So no change -- I'd say no significant change in trend over the year. Yes, your second question was on Ladies?
Barbara Rentler:
And on Ladies, to -- trying to put this in a nutshell [indiscernible]. The imbalance to the assortment is by -- is in certain category. And then your question, Kimberly, is the game within the game of the assortment within the assortment. Yes, that varies by different business. What we did feel is that we did leave seasonal opportunity on the table because of our imbalance, which would have driven more Q4 business had we been in better shape in those businesses. As we move into Q1, we start obviously transitioning into different products. However, that does take time to change up that assortment. That's not going to be a 1 month, 2 months switch. So it will gradually take time. The other thing is in turn to get the balance -- to balance the way we want to be. The other thing in terms of having any liable inventory issues or bad packaway or anything along those lines, we don't have that. We absolutely cleaned that up, and so we need to take the time to ship the assortment to get it back to where we need it to be.
Operator:
Your next question comes from John Morris from D.A. Davidson.
John Morris:
My congratulations on a great year as well. Weather impact, I realized we did talk about the regional strength. I'm just wondering if you step back and look at it what that filter of weather, whether or not weather had a particular impact on you either in Q4 or in as much as you talk about seasonal areas with women's? And then I got one quick follow-up.
Michael Hartshorn:
Sure. Weather was relatively neutral for us year-over-year. I ment -- I know we mentioned the Southeast and Midwest, but the strength was fairly broad-based. Some of our major markets Texas, California, were in line with the chain. Florida, also a large market for us, was slightly below the chain average. It was up against 2017, when it was our strongest performing region.
Barbara Rentler:
And I don't think the weather impact -- no, I don't think the weather impact is what hurt our business.
John Morris:
Got you. And then my follow-up really is about the DC. The timing and maybe highlight some of the potential benefits you'll be getting from that in terms of the impact? I mean, is that typical in terms of your speed and your ability to distribute? Talk a little bit more about the new DC?
Michael Hartshorn:
Sure. The new DC is strictly a capacity place for us as we grow the business. That said, it's their large distribution centers. It could be as large as 1,700,000 square feet. It'll take us a couple of years to get it in place. That said, we do plan to put automation investments that we think can help our productivity.
Operator:
Your next question comes from Daniel Hofkin from William Blair.
Daniel Hofkin:
Just wondering if you could throw out a little bit more of some of the category detail. I think you just give some additional regional detail aside from men's and Ladies apparel, maybe some things like home or other categories? If there's any additional color there that you can share?
Barbara Rentler:
Basically, home performs in line with the chain average. And that's on top of solid growth over the last several years and after that most of the other businesses performed in line with the chain.
Daniel Hofkin:
Okay. And then if I could just apologize one simply this is one of the last questions about the Ladies apparel. Would you expect this fix in terms of time, the amount of time required to be shorter than really 2016 per the earlier question or similar, later?
Barbara Rentler:
Versus 2016, I think these are 2 different types of issues. My expectation is that there'll be gradual improvements. I'm not putting a specific time frame to it.
Operator:
Your next question comes from Marni Shapiro from Retail Tracker.
Marni Shapiro:
Congratulations and John congratulations. Enjoy your retirement. You were the only Mike -- or Michael, who lasted this long there it seems. For a while, it was all Mike, Mike, Michael and Michael and then John.
John Call:
Hi, Marni. It made things easier, yes.
Marni Shapiro:
Exactly, we always remembered you. So -- and actually move away from women's for just a moment, and ask just a quick breakdown, you said average basket was up. I was curious if that was driven by AUR or UPT? And then, I guess, Barbara, can you talk a little bit about any opportunity you see out there with Payless going away, which has a nice shoe business. I mean, it's a family business, which your stores are family-driven. And also Kids R Us, I don't know how often your stores crossed with them. But did you see any benefit where those stores are gone again. I view them as a family business, and I view your stores as family stores as well.
Barbara Rentler:
Sure. As it pertains to Payless going away, obviously, that would -- you would think will represent a market share opportunity because it is a family business, and having large amount of stores. So it remains to be seen how much for shopping between the customers, but we would think that would be just a market share play. In terms of Kids are Us, when that went out -- Michael, do we have -- do we think we saw any impact on any of that from the Kids R Us stores on us?
Michael O'Sullivan:
Well, I think your question, Marni, this is Michael O'Sullivan, Marni. So I think, your question was broader in terms of as other retailers go out or close down stores, as Barbara mentioned, it can only help. That sales volume has to go somewhere. And you'd expect that the remaining resellers in those areas would pick up some of that volume. And in any given year, we think we benefited from that over the last few years as retailers have closed stores or going out of business altogether. But I wouldn't say it's been material to our results over that period. And as we look forward, same thing. We should continue to benefit, if we do our jobs right, but I don't think it'll be material to the overall business.
Michael Hartshorn:
Marni, and on the component of sales so the 4 comp was driven by, as we said in the comments, higher traffic and increasing the size of the average basket. The basket was driven entirely by UPT as AUR was flat for the quarter for us.
Operator:
Your next question comes from Paul Lejuez from Citi.
Paul Lejuez:
John, congrats and best of luck, sir. Question, maybe a little bit more color on dd’s operating margin versus Ross coming out of 2018. Any more data you can give to us in terms of the size of that business and the margin? Also I'm curious if the issues that you saw in the ladies business, you also saw that on the dd’s side as well. And Barbara, just high level on Ladies, is it that your buyers weren't buying the right stuff? Or was the right stuff not available?
Michael O'Sullivan:
Yes. So Paul, on dd’s, as Barbara said in her opening remarks, dd’s customers responded very well to our merchandise assortments in Q4 and the business posted solid gains in both sales and operating profit. And as you know, we don't disclose a lot of detail on dd’s and a couple of reasons for that. One is, it's really only around about 10% of our business, so 90% of our business is Ross Dress for Less. And then the other point I would make is, in general many of the same trends that we talk about on these calls apply to Ross and to dd’s. So we tend not to give a lot of detail on -- or a lot of additional detail on dd’s.
Barbara Rentler:
And as it pertains to Ladies, it wasn't an availability issue. I would say that we brought in some wrong product and I would say that the weighting of the categories of the businesses that we had more balanced where we'd like them to be balanced. So merchandise miscue.
Operator:
Your next question comes from Michael Binetti from Crédit Suisse.
Michael Binetti:
Michael, regarding the comment that merch margins were up about 15 basis points. Last year, I think you said you -- would you mind helping us click down into that a little bit to know what the tailwinds were there? Was it IMU lower markdown levels, anything with a mix? And then what rolls off in the guidance for merch margins to be about flat this year?
Michael Hartshorn:
Sure. So for the quarter, merchandise margin was up slightly on a 52-week basis. For the full year, merchandise margin was up 15 basis points. And again, that was up against the 25 basis point improvement in 2017 and then move forward into 2019, we're planning merchandise margin to be flattish. What drove it this year was a combination of better buying and lower markdowns. Anytime we can exceed our sales plan, we can chase the business with closeouts and also leverage markdown.
Michael Binetti:
And as you -- Michael, as you look across the margin outlook for the company and really to the off-price space, you had a couple of years of pretty persistent cost pressure from freight wages. You guys navigated as well as anybody. But when you sit here on these calls with us, we get a pretty stable outlook from you for the year ahead every year with how much volatility you've always expressed a lot of confidence and be able to navigate those things. But as you look out, do you think there has to be something more dramatic for the group to get down to try and restore to what you think are the right profitability levels given that we've seen just a few years now of wages and freight?
Michael Hartshorn:
Yes, I would say for us, 2018 was the exception. Obviously, at the beginning of the year, we knew we were getting a benefit from tax reform and we made an important investment in raising our national minimum wage to $11 an hour. So that was the exception. If we look ahead to 2019, we're guiding a [ 1% to 2% ]. And with that, we're guiding $4.30 to $4.50 compared to $4.26 last year, it's up [ 1 to 6 ]. As a reminder, last year that also included a onetime $0.07 benefit from a favorable resolution, the tax matter in the fourth quarter. Excluding that onetime item we're at EPS growth of [ $1 to $2 ] and EPS about [ 3 to 7 ], which is in line with how we've historically guided the year.
Operator:
Your next question comes from Laura Champine from Loop Capital.
Laura Champine:
Barbara, on the issues in women's, do you think that some of the missteps were just driven by becoming tougher to execute an off-price model with the kind of scale that you have now? Or is it your belief that this was just purely an execution mishap that is unlikely to recur?
Barbara Rentler:
I don't -- it's a misstep and I'd like to tell you that, it'd never occur again, but I don't think I'd be saying that. I don't think anyone could ever say that about any business. I don't think it's an off-price tougher to execute model. I don't think that's the issue. I think the issues were internal, self-inflicted. It's the assortment that we built out for the customer. I don't think it has anything to do with our price model, with future, what could go on. We really just need now to go in and correct that. And so, Obviously, Ladies is a very large business in off-price and everywhere else. And so it's important for us to do, but I don't think it's a model issue. I think it -- we had merchandise miscues that we need to correct and we will go and correct them during 2019.
Operator:
Our next question comes from Alexandra Walvis from Goldman Sachs.
Alexandra Walvis:
I had a question about the relocation strategy. So it looks like the plan is for relocations and somewhat consistent with the number that you've done in prior years. And it was noticed some competitors in the retail space, who have been ramping up the number of relocations they're doing as more opportunities come up as you see closures across the market. How are you looking at opportunities here? And could that be more opportunities to ramp up relocations as those opportunities present themselves?
Michael O'Sullivan:
Sure. So Alexandra, we open about 100 new stores a year and in any given year that includes a handful of relos. I don't expect that, that number will change significantly over the next couple of years. We always respond if there are additional opportunities here or there, but I don't think it will -- it is not going to change materially.
Operator:
Our last question comes from Bob Drbul from Guggenheim.
Robert Drbul:
Just following up on Alex's question. On the new stores, can you talk about new store productivity and performance? And as you continue to do like the 100 stores a year in terms of new real estate, any changes to the real estate availability or cost that you're seeing versus the past few years?
Michael Hartshorn:
In terms of new store productivity it's actually been fairly stable over the last 5 years since we've entered the Midwest. So on average, a new store is about 60% to 65% of an average comp store in the chain and then in the first few years, it ramps faster than the chain average.
Michael O'Sullivan:
And then on your question about availability, I would say going back over the last several years, we've been running at a sort of 90 to a 100 new store rate. And we plan those stores and we look for real estate several years out. And as we look at that pipeline, no major changes in availability. I think availability has been I think reasonably good over the last several years and we expect that to continue.
Operator:
That was our last question at this time. I'll now turn the call back over to Barbara Rentler for closing comments.
Barbara Rentler:
Thank you for joining us today for your interest in Ross Stores. Have a great day.
Operator:
This concludes today's conference call. You may now disconnect.
Operator:
Good morning, and welcome to the Ross Store's Third Quarter 2018 Earnings Release Conference Call. [Operator Instructions].
Before we get started, on behalf of Ross Stores, I would like to note that the comments made on this call will contain forward-looking statements regarding expectations about future growth and financial results, including sales and earnings forecasts and other matters that are based on the company's current forecast of aspects of its future business. These forward-looking statements are subject to 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 2017 Form 10-K and fiscal 2018 Form 10-Qs 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:
Good morning. Joining me on our call today are Mike O'Sullivan, President and Chief Operating Officer; Gary Cribb, Group Executive Vice President, Stores and Loss Prevention; John Call, Executive Vice President, Finance and Legal; Michael Hartshorn, Executive Vice President and Chief Financial Officer; and Connie Kao, VP, Investor Relations. We'll begin our call today with a review of our third quarter and year-to-date performance, followed by our outlook for the remainder of the year. Afterwards, we'll be happy to respond to any questions you may have.
As noted in today's press release, both sales and earnings for the quarter were ahead of our forecast despite being up against very strong multiyear comparisons. Earnings per share for the 13 weeks ended November 3, 2018, were $0.91, up from $0.72 for the quarter ended October 28, 2017. Net earnings grew to $338 million, up from $274 million in the prior year. Our third quarter 2018 earnings results include a benefit from tax reform legislation of approximately $0.16 per share. Sales for the third quarter rose 7% to $3.5 billion, with comparable store sales up 3% over the 13 weeks ended November 4, 2017. This compares to a 4% gain in same-store sales for the prior year period ended October 28, 2017. The Midwest and Florida were the strongest regions for the quarter, while men's was the top-performing merchandise category. Though above plan, operating margin of 12.4% for the third quarter was down from last year as higher merchandise margins was more than offset by planned increases in freight and this year's wage investments. For the first 9 months, earnings per share were $3.06, up from $2.36 last year. Net earnings were $1.1 billion compared to $912 million in the prior year. The year-to-date earnings results include an approximate benefit of $0.51 per share from tax reform legislation. Sales year-to-date rose 8% to $10.9 billion, with comparable store sales up 3% over the 39 weeks ended November 4, 2017. This compares to a 4% gain for the 9 months ended October 28, 2017. As we entered the third quarter, total consolidated inventories were up 8%, with average in-store inventories up 9% compared to last year. As planned, store inventories increased due to the earlier Thanksgiving this year. Packaway, as a percent of total inventories, was 41% compared to 46% last year. Similar to Ross, dd's DISCOUNT continued to post better-than-expected gains in both sales and operating profits for the period. Turning to our expansion program. We opened 30 new Ross and 10 dd's DISCOUNT locations in the third quarter completing our 2018 store opening program. We expect to end the year with 1,477 Ross and 235 dd's DISCOUNT stores for a net increase of 95 locations for fiscal 2018. Now Michael Hartshorn will provide further color on our third quarter results and details on our guidance for the remainder of the year.
Michael Hartshorn:
Thank you, Barbara. Let's start with our third quarter results. Our 3% comparable store sales gain was driven by increases in both traffic and the size of the average basket. As Barbara mentioned, third quarter operating margin of 12.4% was down from last year, though better than forecast.
Cost of goods sold for the quarter rose 60 basis points, as a 20 basis point increase in merchandise margins was more than offset by 50 basis points of higher freight costs and increases of 15 basis points each from buying and distribution expenses. Occupancy costs were flat for the quarter. Selling, general and administrative expenses during the period increased by 30 basis points due to the previously mentioned wage investments. During the quarter, we repurchased 2.9 million shares of common stock for a total purchase price of $278 million. Year-to-date, we have bought back a total of 9.4 million shares for an aggregate price of $807 million. We remain on track to buy back a total of 1.075 billion in common stock during fiscal 2018. Let's turn now to our fourth quarter outlook. As reported in our press release, while we hope to do better, we continue to project fourth quarter comparable store sales to increase 1% to 2% versus our strongest prior year comparable store sales gain of 5%. We are now forecasting our earnings per share to be in the range of $1.09 to $1.14, which includes a onetime noncash benefit of approximately $0.07 per share related to the favorable resolution of a tax matter. This updated guidance compares to earnings per share for the 14 weeks ended February 3, 2018 of $1.19, which included a per share benefit of $0.14 from a onetime revaluation of deferred taxes and $0.10 from the 53rd week. The operating statement assumptions for the holiday period guidance include the following. Total sales are projected to decrease 1% to 2%, and operating margin is forecast to be in the range of 12.6% to 12.8% versus 14.6% last year. This guidance reflects a negative impact from the additional week last year, which benefited sales by $219 million and operating margin by 70 basis points. Net interest income is estimated to be about $3.6 million. Our tax rate is planned at approximately 19% to 20%, which includes the aforementioned onetime tax benefit. And we expect average diluted shares outstanding to be about $370 million. Based on our year-to-date results and projected fourth quarter guidance, we are now planning earnings per share for the full year on a 52-week basis to be in the range of $4.15 to $4.20. Now I'll turn the call back to Barbara for closing comments.
Barbara Rentler:
Thank you, Michael. Looking ahead to this year's holiday season, while we hope to do better, we believe it's prudent to maintain a somewhat conservative posture entering the fourth quarter. As previously mentioned, our projected same-store sales growth of 1% to 2% is on top of robust multiyear gains. In addition, we expect another intensely competitive holiday season, both in brick-and-mortar and online. Nonetheless, we remain confident in the strength of off-price and, most importantly, our ability to perform well within this sector. As long as we remain focused on the careful execution of our strategies, we believe we can continue to achieve solid gains in both sales and earnings as we have for some time now.
At this point, we'd like to open up the call and respond to any questions you might have.
Operator:
[Operator Instructions] Your first question comes from Simeon Siegel from Nomura Instinet.
Simeon Siegel:
First off, do you have a view you could share on the health of just a broader retail channel into holiday? And then, Mike, could you speak to the moving pieces you'd expect within gross margin for 4Q? And then maybe anything to keep in mind for going forward?
Barbara Rentler:
Sure. A view of the health of the broader retail channel?
Simeon Siegel:
Yes, just how you're thinking about pricing and inventory levels, the full price channel.
Barbara Rentler:
Pricing. And the full price channel? Okay. I think this fourth quarter will be as fiercely competitive as it's been in the past. So in terms of pricing, my expectation would be is that there'll still tremendous promotions and that, that's what people used to drive the business. In terms of just a general health overall of the channel, I mean, obviously, there's more money in the economy. And so one would expect that consumers would be spending, but I think it remains to be seen. And again, I really believe it's going to be highly promotional again; and the AUR, it depends. But I think it will be promotional.
Michael Hartshorn:
On the fourth quarter guidance and some of the trends. So as we mentioned in the remarks, gross margin was down 60 basis points for the quarter and that was driven by higher merchandise margin that was offset by ongoing freight cost inflation.
I would expect more of the same going into the fourth quarter. Freight costs will continue to be a headwind at similar levels. We'll also continue to see wage deleverage. As a reminder, we increased our minimum wage to $11 midyear, so the impact is greater in the back half than in the front half.
Simeon Siegel:
Great. And just any moving pieces within packaway that you'd expect?
Michael Hartshorn:
No, for the quarter, packaway was relatively neutral, and our guidance assumes it would be neutral in Q4.
Operator:
Your next question comes from Matthew Boss from JPMorgan.
Matthew Boss:
On the expense front, what was the magnitude of the wage investment in 3Q? And should we expect a similar headwind in 4Q? And then just larger picture as we move beyond this year. Is there any reason to think about a 3% comp not continuing to be the leverage point for SG&A? Just any -- maybe any headwinds or tailwinds to think about that would make it any different?
Michael Hartshorn:
Sure, Matthew. On SG&A, as we mentioned, it delevered by about 30 basis points and that was wage investments. I'd expect a similar to maybe slightly higher in Q4. Q3, we actually -- versus guidance SG&A was a bit lower as we had some good cost control there. We wouldn't comment on 2019 at this point going forward. That said, we would expect to continue to have wage and freight inflation, but we'll also be looking for efficiencies in our business to offset this cost, and we'll have more to say on that in our year-end conference call in early 2019.
Operator:
Your next question comes from Kimberly Greenberger from Morgan Stanley.
Kimberly Greenberger:
Great. Michael, could you look back at the freight inflation, which I know has been going on here for a couple of years. I think it really picked up this year, and I can't remember if it inflected in the second quarter or really more here in Q3. I'm just wondering how to think about the magnitude of potential pressure in out years. I know you're not providing 2019 guidance, but any sort of help on the cadence of freight would be great. And then, I wanted to ask about the overall retail environment. I think there was a department store largely in the Midwest that shut operations. Are you seeing any sort of benefit to the stores in your -- where you've got sort of colocation or whether or not you do have colocation with that retailer? And do you think that may give you additional opportunities for inventory -- to develop new brands or acquire inventory here over the upcoming year?
Michael Hartshorn:
On freight costs, Kimberly, it's hard to say. Like all markets at some point, will reach some equilibrium. It's hard to predict when that will be. As you know, the -- there are a number of things driving freight cost this year. Very tight capacity, higher rates driven by trucker and driver shortages. The improved economy is obviously impacting capacity. Regulations around electronically monitoring drivers and then diesel costs aren't helping that. They're at 20% -- up 20% year-over-year in the third quarter, which is at 3-year high. So we'll wait to see what happens next year. But at this point, we'd expect Q4 to look a lot like Q3.
Michael O'Sullivan:
And then, Kimberly, on your question about store closures at other retailers. In general, I would say when another retailer closes, it tends to help. It tends to help the whole -- the existed -- the remaining retailers. That business has to go somewhere. So you'd expect the remaining retailers to benefit to some degree. So as other retailers close doors, or as other retailers liquidate, we'd expect to win some of that business. It's hard to quantify the precise impact. And in any given year, it's not likely to be material. But over the long term, we think that's beneficial.
Barbara Rentler:
And in terms of supply, usually store closures generate some form of supply.
Operator:
Your next question comes from Brian Tunick from Royal Bank of Canada.
Brian Tunick:
I guess 2 questions. One, curious, Michael, about in-store inventories, I guess, up 9%. Curious what they would have been ex the Thanksgiving timing and sort of how you're thinking about in-store inventory levels maybe from here heading into next year from a philosophy perspective? And then maybe Barbara, do you want to talk about as you lap last year's very healthy 5% comp in the fourth quarter. Maybe what are 2 or 3 things that the organization is doing differently this year, whether it's marketing, product flow, mix, et cetera, to lap last year's strong performance?
Michael Hartshorn:
Brian, on the inventory, as we mentioned in our remarks, Thanksgiving is a week earlier this year. So we did flow inventory without. So in-store inventory was up about 8%. Without that, inventories would have been relatively flat. And as far as expectations for running the business going forward beyond this 53rd week comparison year, we'd expect inventory levels to be relatively flat.
Barbara Rentler:
And in terms of things we're doing to be up against the strong comparison. We're really building out on what worked well for us in the past. We've had many years of robust gains in the fourth quarter. So this isn't the first time we're up against the strong number. And really what we're building on is further opportunities in gift giving, because that really what drives the sales in the fourth quarter, and we view that as something that goes on in the entire box. Obviously, home is a place where there's always strong gift-giving opportunities, but we feel last year, we were successful in other areas in gift giving and so we're building upon that.
Operator:
Your next question comes from Lorraine Hutchinson from Bank of America Merrill Lynch.
Lorraine Maikis:
I wanted to just follow up on the packaway numbers, which were down for the second quarter in a row as a percentage of inventory. Is there anything going on with what you're seeing in the market? Or what you're deciding to hold in packaway versus flow immediately?
Barbara Rentler:
No. Actually, there's still strong availability in the market. So we haven't seen availability drop off. But the packaway can fluctuate from quarter-to-quarter, month-to-month based on what's out there. No, I wouldn't say that -- yes, I think what we're putting in packaway is appropriate. There's a lot of criteria about what we put in packaway. You have to feel as good about it as it comes out as when it comes in. So I wouldn't say there is any shift in our thinking as it pertains to packaway. And then, obviously, this quarter, as Michael said, we flowed packaway earlier this year, Thanksgiving is a week earlier, so that's really part of the shift that you're seeing right now.
Operator:
Your next question comes from Paul Trussell from Deutsche Bank.
Paul Trussell:
On the 3% comp in 3Q, very solid against tough compares. I know you said, men's kind of lead. Just curious of any other kind of takeaways or details on the top line in 3Q, especially as it relates to beauty and home, efforts and kids and outerwear. Just kind of curious what you're seeing on those fronts. And also, just on the merchandise margins being up. If you could just talk about the drivers and sustainability potential for additional gains ahead?
Michael Hartshorn:
Sure. On the performance -- comp performance during the quarter, as we mentioned in our remarks, men's was a top performer for us. Shoes and accessories also performed above the chain average. Home was relatively in line. And then in terms of apparel versus nonapparel, they were relatively similar for the quarter. As we mentioned on merchandise margins, it was up about 20 basis points. That was driven by being able to chase the business and above-plan sales and also better buying. Our strategy has always been to go in with a more conservative comp. And if we can chase the business, we can also drive merchandise margin. So that's the way we would think about it going forward.
Operator:
Your next question comes from Jay Sole from UBS.
Jay Sole:
So my question is about, you talked about how it's going to be a pretty promotional 4Q environment. Do you see that more in relation to sort of the full-price competitors or more from the off-price competitors? Secondly, how much would you be willing to sort of trade the merchandise margin, which has been very strong, in exchange for better sales?
Barbara Rentler:
Well, the promotional environment, I think, in full price, it's historically been promotional. I think it will be promotional. I think we're watching it get more promotional in the last few weeks. In terms of the off-prices, I mean, they're putting out their values the way we're putting out our values, I don't know if I consider that the same thing. Nobody promotes, nobody -- there's no POS-ing. So I think we feel that we have very strong values going out on the floor and we feel good about that. Comparisons, obviously, I'm not going to compare to my other 2 off-price large competitors. And what was the second part of your question?
Jay Sole:
If you felt like you wanted to drive sales, how much could you try to trade merchandise margin for sales?
Barbara Rentler:
I actually -- actually, I don't think we need to trade merchandise margin for sales. I think the merchants -- we have a large merchant team and a big vendor base. And they are out getting really strong values every day of the week. And so I think there's always that fine line, not the art, not the science of deciding how much money versus what the retailers where you're offering the customer the most compelling bargain that you can. And so I think that's what we do every day of the week. And I think the merchants are very, very attune to that. So I don't think that there's a direct line of, if I just choose to say we'll tighten up the IMU or just something there's a direct line to that, because I think the merchants really are out there getting the best possible values and they are out competitive shopping, looking at what full-price stores are doing, looking at what the other off-pricers are doing. So we're in the value game to each other. And that's really our strategy. And I don't think that would be a strategy we would use going forward.
Operator:
Your next question comes from Paul Lejuez from Citi Research.
Paul Lejuez:
Curious if you could talk about the sales cadence during the quarter. And I'm not sure if you mentioned, whether or not the weather helped or hurt you, if you can make any comment on weather during 3Q. And I'm also curious just near term, any impact from the fires out West? How many stores are impacted? And do you expect that to be any sort of a material impact to 4Q sales?
Michael Hartshorn:
Paul, just on the fires, we wouldn't comment on fourth quarter impact at this point. In terms of weather in the third quarter, it did not have a meaningful impact. And obviously, a lot of moving parts, with 2 major hurricanes last year and then a bounce back afterwards and then the Southeast hurricane this year. In terms of trends -- so overall weather, neutral for the quarter. And then trends during the quarter, comps were stronger earlier in the quarter. Late in Q3, we were up against the bounce back from the 2 major hurricanes last year.
Operator:
Your next question comes from Michael Binetti from Crédit Suisse.
Michael Binetti:
I know you talked about some of the cost drivers. I want to look out a little bit further than just fourth quarter, though. As we look into next year, do you guys -- will you guys have an impact from the changes in lease accounting that we think about next year? I think a competitor mentioned that also, kind of put it on the radar. And then related to tariffs. I'm just wondering if you can help us think about what the behavior in the industry is? If there's an analogy period you could point to for your own business that helps us think about how tariffs impact that business, like any past global macro events like that, that could help us think about how the players in the industry build inventories and how you guys think about what the inventory situation could look like if we have some issues at the border here?
Michael Hartshorn:
On lease accounting next year, yes, there is some impact. It's noncash related. It's purely accounting. And again, we would look to find areas in the business to offset those additional costs.
Michael O'Sullivan:
And on tariffs, Mike, I don't think there's anything -- there's any historic event that we could point to that would be a good analogy on tariffs. Other than saying in general that the tariff situation in terms of
Operator:
Your next question comes from Alexandra Walvis from Goldman Sachs.
Alexandra Walvis:
We had a question on home. Thanks for the color on some of the category drivers of the comp. We noticed that home was in line with some of the other categories this quarter having outperformed the rest of the business for some time. Is there anything specific that you can talk to there? Or any change to the strategy of increasing home penetration across the business?
Barbara Rentler:
Home was up against its very solid results last few years. And so the performance relatively in line with the chain, of above-plan chain sales for the quarter, felt okay. In terms of looking at future, looking at assortments, we're always looking to grow new businesses and look within our 4 walls to improve the assortments. So in terms of specifics, I won't go into specifics. But we do think home is a growth area. You know it's very broad-based, a large amount of different products are conglomerate into there. So we do feel good about it. And again, always looking to improve it.
Operator:
Your next question comes from Ike Boruchow from Wells Fargo.
Irwin Boruchow:
Most questions have been answered, but I guess I'll just throw it out there to the team. Just curious if you guys have looked into the tax dynamics for your consumer, mainly in early '19? Seems like the low-end consumer could have a very favorable cycle ahead for them. So just kind of curious, I want to ask if you guys have dug into that at all or had any thoughts?
Michael Hartshorn:
I guess we have looked at it and obviously, that would have an impact on the first quarter. But we'll have more to say about that going into next year. The tax rebate cycle has changed pretty dramatically over the next couple of years. So we'll have to see what we build into our expectations when we give our year-end results at the beginning of next year.
Operator:
Your next question comes from Janine Stichter from Jefferies.
Janine Stichter:
I just wanted to ask about the composition of the basket. I think in the past you've called it out as being UPT driven. Just wanted to know if there's anything to call out in terms of AUR ticket?
Michael Hartshorn:
Sure. As we mentioned, the 3% comp was driven by higher traffic. And in increase of the average basket, the basket was all driven by units per transaction. AUR was relatively flat for the quarter.
Operator:
Your next question comes from Laura Champine from Loop Capital.
Laura Champine:
I'm wondering, Barbara, to the extent that you can tell, do you think that Ross gained share or just held share in the apparel market overall? In the context for asking the question, I'm sure you can surmise, is that Ross' comp, although it was good, was well below its -- what we perceive as its nearest competitor this quarter?
Barbara Rentler:
Sure. In terms of our performance, I mean, obviously I'm not going to comment on our competitor, but on a 1-, 2- and 3-year basis, we were up against -- you had a 3%, a 4% in 2017 and a 7% in 2016. So in terms of our comp performance, overall, it was 14%. So in terms of gaining share in apparel versus our competitor, I think it's very hard for us to measure the share of apparel that we're gaining quarter-to-quarter or year-to-year. But I would say is that apparel has grown significantly over the years as our comps have grown over the years. So I think it's hard for us to compare back to one of our competitors, nor would I really compare back to that? But apparel, obviously, continues to grow.
Operator:
Your next question comes from Bob Drbul from Guggenheim Securities.
Robert Drbul:
Just a couple category questions. Can you talk about what you're seeing in the toy category and just your expectations there, especially into the holiday? And I was wondering if you could maybe talk about your footwear business, men's shoes, women's shoes and boots and just sort of the opportunities that you see in that category as well?
Barbara Rentler:
Sure. In terms of toys, we obviously see some opportunity in toys, with all the recent bankruptcies and closures. But toys is overall a small percentage of our business. So historically, toys does get bigger for us during -- a bigger part of our mix in holiday and will be, again, this year. But in terms of a brand total, total Ross, it's still a small business, but, yes, again some opportunity.
In terms of our footwear business. Our footwear business has outperformed the chain average in the third quarter. It's very broad based between the 3 businesses. And in terms of the mix itself, again, it's pretty broad. I mean, boots -- boot business with the weather, I'm sure boot business has been good, but the boot business has been good for a few years now. So I think overall it's strong execution in our business and maximizing some key opportunities.
Robert Drbul:
Great. And just a question on the wages. With the investments that you've made, do you feel like you're ahead of the curve just sort of keeping up in terms of the competitiveness? And are you seeing any challenges to sort of filling your new store openings with employees?
Michael Hartshorn:
So we feel good about where we are with the workforce today. Obviously, we've raised wages. And that's the good news for the people that we're looking to hire. And store-by-store, we really haven't seen miscues in filling our new stores.
Operator:
Your next question comes Chethan Mallela from Barclays.
Chethan Mallela:
So I just wanted to follow up on the tariffs situation. And I know it's hard to give a precise estimate particularly with close-outs. But can you just kind of frame how much your product inventory or maybe how many of your 8,000 vendors are based in China? And then how you think about the impact of the tariff that has been announced to date versus what that impact looks like if there's a more sizable extension?
Barbara Rentler:
Okay. In terms of our 8,000 vendors, we -- you have to remember, the bulk of our business is the close-out business. So we're buying close-outs. We're not tracking country of origin, right? The manufacturers manufacturing goods wherever they manufacture them and we're buying them. So in terms of answering your question about what percentage of the 8,000 vendors would impact, I really don't have that information. In terms of just tariff impact in total. I think there is -- you have certain classifications of business. Obviously, home is most impacted and some parts of accessories, but really, really home. And I would say that the trade tensions have left a lot of uncertainty in the marketplace and it could lead to supply as we go down the road, but impacts, like, to date as of this minute, I think everyone is in the process of assessing what actions to take as what is -- as it pertains to the tariff. I don't really think -- we're not the lead, we're the follow, when it comes to something like this. And there is no clear vendor strategy. I don't think the vendors -- each vendor has their own strategy. So I think we are doing what we can do to assess our actions of what's appropriate for us. And then in terms of direct exposure for us to tariff, it really is for us in the home area and we don't disclose that percentage, but it's a relatively small piece of our total mix of sale. So I think there's just a lot of moving parts as it pertains to tariffs at this point in time. Again, the vendor community, I think, doesn't necessarily have -- it's a vendor-by-vendor strategy, there is no comprehensive strategy because I think there's just so much unknown. If the tariff would have move on to apparel, then obviously that's a much larger scale issue for everyone. Inflation in apparel, we haven't seen in many, many, many years. So I think there is certainly challenges attached to that, and we'll cross that bridge when we get there.
Operator:
Your next question comes from Dana Telsey from Telsey Advisory Group.
Dana Telsey:
As you think about real estate, where, I think, occupancy was flat this quarter as compared to the leverage of 15 basis points last quarter, what are you seeing on renewals of leases and negotiations? And with these Sears boxes now available, does that provide you with locations that you may want either for dd's for even part of it or for Ross?
Michael O'Sullivan:
So Dana, I would say that, in general, we're happy with the availability of real estate locations we're seeing. We have a great real estate team and they've done a great job over the last several years finding locations for our store expansion. Certainly, store closures in terms of closures by other retailers have helped and contributed to that availability. But it depends on a specific retailer. I mean, some retailers are mall-based and that really isn't -- that isn't the kind of location we'd be interested in. And as you know, we're a strip mall retailer. So I would say, overall we're pretty happy, but when you're looking at specific retailers and the impact that they have, it really depends on what kind of real estate they operate in.
Dana Telsey:
And the fact that occupancy was flat this quarter, is there opportunity to get leverage again? Or, how do you think about it?
Michael Hartshorn:
So Dana, on the leverage point for the year for occupancy is 3%. Historically, that's been 4%. So we are in a better position this year. Remember that the comp sales and fiscal sales are 2 different metrics this year, because of the week shift. You got more leverage in the first half of the year because the fiscal sales were higher than comp sales, and that reverses in the back half. But for the year, we think occupancy costs or leverage points around 3%.
Operator:
Your next question comes from Daniel Hofkin from William Blair.
Daniel Hofkin:
Just a quick clarification, again, on the topic of the retail environment, I know the question has been asked. But you guys are typically conservative, you've talked about kind of every year being a little bit more promotional, more intense. Do you see that trajectory steepening or is it just kind of a continuation of that? That's my first question. And then my second question is as it relates port bottlenecks related to tariffs, are there any categories where even if you're not directly importing, where you're seeing maybe some full-price retailers have more disruption?
Barbara Rentler:
Well, on the retail environment, I think -- obviously, we think it's promotional. It's promotional every year. Do I think it's different from Q2 to Q3 to Q4? I think we might see some movement between Q3 to Q4. But again, every year it's promotional. So that will vary by retailer, based on their performance and their business model. So I think -- and their performance. So I think we will see more of that. In terms of the port bottlenecks and supply, I don't think we've seen any one particular place that's had a port bottleneck as it's led completely to supply. So one, you're saying, is it one product? So I think the port bottleneck, because everyone brought in goods, many manufacturers bringing goods from China because of the tariffs and they're trying to get them into the country earlier, it has, I think, affected everyone. But we haven't seen it one pure classification of business that we could say, "Gee, that's where it's going to be." I think if there's supply, that's the result of the bottleneck, it will be broad-based.
Operator:
Your next question comes from John Morris from D.A. Davidson.
John Morris:
You all have done a really good job managing expenses, with headwinds of freight and labor, and using offsets to help mitigate that. Wondering if you can give us a little bit more color on this offsets, what areas they're coming in from, so we can get a magnitude field for that and the categories? And then also second question would be, your holiday initiatives with respect to marketing, spending this year versus last year, is it about the same in terms of that spend or maybe any color there?
Michael Hartshorn:
On offset, there is no silver bullet on the offsets. I mean, there is -- we look throughout the company whether it's payroll related in the DCs and the stores on how we become more efficient. It is -- we have a strategic sourcing group that looks on how we procure either products or services and when I say products, I mean nonmerchant-related -- merchandising-related product. So we're always looking for efficiencies in our business and it's a death by a thousand paper cuts. So it's a lot of different things and we have groups that try to stay ahead of the inflation curve and will continue to do that going into next year and beyond.
John Morris:
And then on the marketing spend? Yes. Sorry, go ahead.
Michael O'Sullivan:
Yes, sorry. Second part of your question on marketing. No material changes in the amount of marketing spend in the fourth quarter.
Operator:
Your next question comes from John Kernan from Cowen.
John Kernan:
So just given the dynamic with freight, do you foresee any additional investments you might need to make around the store DC network to maybe increase efficiencies?
Michael Hartshorn:
Sure. On the DC network, our investments there certainly, with higher wages, it presents us an opportunity to invest in automation, and we'll do that over time, for efficiencies. The next reason to invest in the network is capacity-related, right now we think we have the capacity and would start the next distribution center over the next couple of years.
John Kernan:
And just one quick follow-up. Have you seen any noticeable benefit from stores that are co-located with some of the recent bankruptcies? Certainly, this don't seem like -- feel like it's going to be the end of some of the bankruptcies. So I'm just wondering if you are noticing any increase in traffic or any benefit from some of those closures?
Michael O'Sullivan:
No. Perfectly, and I would say this is sort of a general observation. As a store is closing, as it's going through its out-of-business -- sorry, going out of business period, we might actually see a bit of a negative in the local stores. But then once it's gone out of business, we typically see an uplift. And I think as I said earlier, in general, store closures of competitors tend to be good for our business, but they typically don't have a material impact in any given year. It's just over the long run as store closures accumulate, we tend to see -- that tends to be a tailwind for us.
Operator:
Your next question comes from Omar Saad from Evercore ISI.
Omar Saad:
Barbara, I wanted to ask you to dig in a little deeper on your earlier comments around your expectations that the holiday season will be -- it will continue to be very promotional, it'll be another very promotional holiday season. We're hearing from a lot of retailers that inventories are clean, you're seeing merch margins rise. And broadly speaking, in the softline space, yourself included, maybe give me a little color -- give us a little bit more color around what gives you that sense that it's going to be pretty promotional again? And then any update or color on new marketing strategy? I know you talked about the marketing spend being flat, but are you trying any new marketing strategies, digital, social, that you care to share with us?
Barbara Rentler:
In terms of the holiday season, traditionally, the holiday season is promotional. And although inventories might be leaner, we have the 53rd week, things are moving faster and I think if we really look at it between online and brick-and-mortar, as online gets more aggressive and gets aggressive early in the fourth quarter, brick-and-mortar stores will have to get more aggressive also. Plus, I don't think all performances have been created equal in Q3 based on department stores. So some department stores may promote more, some department stores may promote less. But overall, I would be very surprised if we come out of the quarter without it being promotional, especially the last week to 10 days, as while the customer's shopping, Thanksgiving is already -- it's here, it feels early. So but again, we've been watching, there has been some more promotional increases in the last few weeks as people raise the POS-ing. So I put those pieces together and I recognize that there's potentially less inventory. But you're trying -- if you're trying to drive sales, ultimately, at the end, that's what drive sales and that's what history tells us. So that's how I came to that conclusion.
Michael O'Sullivan:
And, Omar, on your question about marketing, I would split it into 2 pieces. I think first of all, in terms of the marketing strategy and the marketing message, I think that's been very consistent over time. The message being that we offer the best values in apparel and home fashions. That message isn't going to change. But what has changed is that the channels that we're using to reach the customer to get that message out have evolved. So we've always recognized that the best marketing for us is sort of word-of-mouth marketing. And over the last few years, we've been experimenting and investing in various new forms of marketing, social media, et cetera. And we find that those tools kind of represent a modern-day version of word-of-mouth marketing. So I would still describe some of the things we're doing there as early stage, but definitely it's -- that's the direction our marketing is moving in.
Operator:
That was our last question. I will turn the call back over to Barbara Rentler for closing remarks.
Barbara Rentler:
Thank you for joining us today and for your interest in Ross Stores. Have a good day.
Operator:
This concludes today's conference call. You may now disconnect.
Operator:
Good afternoon, and welcome to the Ross Stores Second Quarter 2018 Earnings Release Conference Call. [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 forecast 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 2017 Form 10-K and fiscal 2018 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:
Good afternoon. Joining me on our call today are Michael O'Sullivan, President and Chief Operating Officer; Gary Cribb, Group Executive Vice President, Stores and Loss Prevention; John Call, Executive Vice President, Finance and Legal; Michael Hartshorn, Executive Vice President and Chief Financial Officer; and Connie Kao, Vice President, Investor Relations. We'll begin our call today with the review of our second quarter performance, followed by our outlook for the second half and fiscal year. Afterwards, we'll be happy to respond to any questions you may have.
As noted in today's press release, we are pleased with the above-plan sales and earnings growth for the second quarter. Earnings per share for the 13 weeks ended August 4, 2018, were $1.04, up from $0.82 for the 13 weeks ended July 29, 2017. Net earnings were $389 million, up from $317 million in the prior year. The second quarter earnings results, including $0.18 first year benefit from tax reform legislation. Total sales for the second quarter increased 9% to $3.7 billion. Comparable store sales for the 13 weeks ended August 4, 2018, rose 5% over the 13-week period ended August 5, 2017. This growth was on top of a same-store sales gain of 4% for the 13 weeks ended July 29, 2017. For the second quarter, we saw broad-based strength across merchandise categories and geographic markets. So better-than-expected operating margin of 13.8% was down from last year as higher merchandise gross margins and leverage on occupancy and buying costs were more than offset by a combination of unfavorable timing of packaway-related expenses, higher freight costs and this year's wage investments. For the first 6 months of fiscal 2018, earnings per share were $2.15, up from $1.64 last year. Net earnings were $808 million, up from $638 million in first half of 2017. The year-to-date earnings results included $0.35 first year benefit from tax reform legislation. Sales year-to-date rose 9% to $7.3 billion, with comparable store sales up 4% versus a 4% gain for the 26 weeks ended July 29, 2017. As we ended the second quarter, total consolidated inventories were up 6% over the prior year. Average in-store inventories were up 4% due in part to the 53rd-week calendar shift, while packaway, as a percentage of total inventories, was 44% compared to 46% last year. Dd's DISCOUNTS also posted another quarter of strong sales growth, leading to solid growth in operating profits year-to-date. Turning to our store expansion program remain on schedule with the opening of 22 new Ross and 8 dd's DISCOUNTS locations in the second quarter. We also continue to project adding a total of approximately 100 locations in 2018, comprised of 75 Ross and 25 dd's DISCOUNTS. As usual, these numbers do not reflect our plans to close or relocate about 10 older stores. In addition, as noted in today's press release, we are raising our long-term projected store potential to 3,000 locations, up from the previous target of 2,500. This is based on our research that indicates we can further increase penetration in both existing and new markets. And as a result of a number of factors that include increases in population densities and new enlarged trade areas from suburban growth. As a result, we now believe that Ross Dress for Less can grow to about 2,400 locations across the country, up from our prior target of 2,000, and that dd's DISCOUNTS can ultimately become a chain of about 600 stores versus our previous projection of 500 units. This higher store potential provides us with considerable long-term growth opportunities. Now Michael Hartshorn will provide further color on our second quarter results and details on our second-half guidance.
Michael Hartshorn:
Thank you, Barbara. Let's start with our second quarter results. Our 5% comparable store sales gain was driven by higher traffic and an increase in the average basket. While second quarter operating margin of 13.8% was down 110 basis points from last year, it was better than forecast.
Cost of goods sold increased 80 basis points in the period. Merchandise margin increased 15 basis points, while occupancy and buying costs levered by 15 and 5 basis points, respectively. These gains were more than offset by an 85 basis point increase in distribution expenses from the unfavorable timing of packaway-related costs and a 30 basis point increase in freight costs. Selling, general and administrative expenses for the quarter also rose 30 basis points due to higher wage cost and the anniversarying of a 20 basis point benefit in the second quarter of 2017 from a legal matter. During the second quarter and first 6 months of fiscal 2018, we repurchased 3.2 million and 6.5 million shares, respectively, of common stock for a total purchase price of $273 million and $529 million, respectively. We remain on track to buy back a total of $1.075 billion in stock for the year. Let's turn now to our second half guidance. Given our robust multiyear sales comparisons in the third and fourth quarters, we continue to forecast same-store sales for both periods to grow by 1% to 2%. If sales perform in line with this guidance, earnings per share for the 13 weeks ending November 3, 2018, are forecasted to be in the range of $0.84 to $0.88, up from $0.72 a year ago. For the 13 weeks ending February 2, 2019, earnings per share are projected to be $1.02 to $1.07 compared to $1.19 in last year's fourth quarter, which included a per share benefit of $0.14 from a onetime revaluation of deferred taxes and $0.10 from the 53rd week in 2017. Now I'll provide operating statement assumptions for our third quarter EPS guidance. Total sales are projected to grow 5% to 6%. We expect to open 40 new stores during the period, including 30 Ross and 10 dd's DISCOUNTS locations. Operating margin is projected to be in the range of 11.9% to 12.1% compared to last year's 13.3%. This forecasted decline reflects our expectation for ongoing pressure this year from higher freight and wage investments as well as some deleveraging on occupancy and other expenses if comparable store sales only perform in line with guidance. We expect net interest income of about $2 million. Our tax rate is expected to be approximately 23% to 24% and weighted average diluted shares outstanding are projected to be about 372 million. At the end of the quarter, we expect in-store inventory levels to be up versus the prior year, as Thanksgiving is a week earlier this year due to the 53rd-week calendar shift. Based on our first half results and second half guidance of 1% to 2% same-store sales increase, we now project per share -- earnings per share for the 52 weeks ending February 2, 2019, to be in the range of $4.01 to $4.10 compared to $3.55 for the 53 weeks ended February 3, 2018. Now I'll turn the call back to Barbara for closing comments.
Barbara Rentler:
Thank you, Michael. To sum up, as I mentioned earlier, our results for both the second quarter and first half of 2018 continued to exceed expectations. Looking ahead to the balance of the year, we hope to once again outperform our projections as we have for some time now. However, we face stronger prior year comparisons over the next 6 months in the retail landscape, both brick-and-mortar and online, that will likely remain very competitive. That said, our confidence in the strength of the off-price sector and our proven ability to perform well in this space continues to fuel our optimism about the future.
Finally, we are very excited about our updated longer-term growth prospects. Our new target of 3,000 store locations offers us potential 80% increase over our current base. At this point, we'd like to open up the call and respond to any questions you might have.
Operator:
[Operator Instructions] Your first question comes from Matthew Boss from JPMorgan.
Matthew Boss:
On the gross margin, so help us to think about the freight headwind that you've embedded in the back half of the year versus the 30 basis points this quarter. And then on the wage front, is it best to think that the wage pressure [ raises over 3% ] fixed cost hurdle total until we fully lap this in the second quarter of next year?
Michael Hartshorn:
Matt, it's, Michael Hartshorn. On freight costs, obviously there are a number of factors that are contributing to the increase, including higher diesel prices. We were at a 3-year high, up 20% in the second quarter, trucker and driver shortage, and increased industry regulation enforcement tracking drivers. Built into the back half guidance, our freight pressure is similar or slightly above what we saw in the first half of the year. And then, on wage pressures, we wouldn't comment on 2019. We'll comment on that at the end of the year.
Matthew Boss:
Great. And then just a follow-up. As we think about multiyear and just given the change in the long-term store potential, which sets a really nice positive today. Is there any [ governor ] on annual growth in terms of 5% to 6% historically with the square footage growth base. Just anything to think about as we think about maybe [ governors ] to your annual growth given the increase in the store potential long term?
Michael O'Sullivan:
Matthew, it's Michael O'Sullivan. I'd be careful to distinguish between the long-term store potential number, which we released today versus the annual store opening number. The long-term store potential gives us, I guess, sort of a longer growth runway, if you like, over the longer term. But it doesn't change the way we think about the number of new stores per year. The constraints on number of new stores per year include real estate availability and also operational constraints, and they really haven't changed. So from a planning perspective, I think you should assume that we'll continue at a rate of about 100 new store openings per year.
Operator:
Your next question comes from Brian Tunick from Royal Bank of Canada.
Brian Tunick:
Curious, Barbara, if you could maybe drill down a little more into the category performance for the quarter? And sort of what do you think the biggest opportunities coming here in the back half versus last year, if you hindsight that a little? And then maybe, Michael, can you help us think through the drivers of merchandise margin expansion that you're seeing, even though, I guess, in-store inventories are now growing?
Barbara Rentler:
Sure, Brian. From a category performance, as I said in the notes, our performance was really -- was broad-based in the second quarter. Obviously, from the first quarter to second quarter, apparel clearly improved. But that's really at this point how I see the back half, I don't see it as one specific big opportunity. I see it as more broad-based. And obviously when you get to the fourth quarter, there will be more emphasis on gift giving. But even within gift giving, we see that within every business in the box. So we don't have it focused in one specific category.
Michael Hartshorn:
Brian, specifically on inventory and margins. First of all, the inventory increases you're seeing this year are a function of the 53rd-week calendar shift. So in this quarter what happens is it drives back to school earlier which means we drive earlier receipts to match the sales, which is the same that happens at the end of Q3 with the Thanksgiving holiday, which is closer to quarter end. In terms of the margin improvement, it was driven by a combination of better buying and above-plan sales that resulted in lower markdowns for the quarter. That will continue to be our biggest opportunity when it comes to merchant margin.
Operator:
Your next question comes from Lorraine Hutchinson from Bank of America Merrill Lynch.
Lorraine Maikis:
I wanted to follow up on the 85 basis points of distribution pressure. I know you called out a positive 15 basis points in the first quarter from timing of packaway. Can you talk about the timing of this particular expense increase and when you expect that to come back into the gross margin?
Michael Hartshorn:
Sure, Lorraine. So we -- our packaway accounting is we capitalize cost to procure store and process packaway merchandise, and that includes fixed cost. What happened in the first quarter is packaway levels were up, so we got a credit to the P&L. In the second quarter, that completely reversed and the DC 85 basis point deleverage was all driven by the packaway timing. You'll notice from our guidance that we flowed through the $0.05 above the high end of the guidance through to the year so -- versus our guidance there is no impact in the back half.
Operator:
Your next question comes from Kimberly Greenberger from Morgan Stanley.
Kimberly Greenberger:
Michael Sullivan, I was wondering if you have any additional details you might be able to share with us on the analysis you did for the long-term store potential? Is that with the assistance of a sort of third-party outside, or do you have a team internally who looks at that analysis? Secondarily, Barbara, you talked about a nice improvement in the profit profile or profit of the dd's division, and I'm wondering if you can just talk about the profitability of dd's relative to the Ross division, and how that's tracking compared to your expectations? And then lastly, Michael, on inventory. I don't know if it's possible to look at the average in-store inventory, if the balance sheet, for example, at the end of Q2 had closed a week earlier, would that have changed your average in-store inventory at the end of the quarter? I'm just wondering if there is a way for us to sort of understand it on an apples-to-apples basis versus last year.
Michael O'Sullivan:
So Kimberly, on the first part of your question, the modeling, our real estate team -- our internal real estate team has a model and fairly well-tested and proven model that they use to analyze and assess individual store locations -- individual new store locations. They update that model based upon changes in our actual store productivity and experience, and also based upon external demographic trends. Periodically, we use that model to roll up and estimate our longer-term store potential, and it's been a little while since we did that, so that's what really driven these updated estimates. The other point I would make is, these estimates that were provided in today's release represent a rollout, looking at opportunities in existing and new markets. I would say, the demographic trends that are driving higher estimates are fairly strong and well documented. I think given our customer base, you won't be surprised that the demographic trends are favorable to our business.
Barbara Rentler:
And Kimberly, in terms of dd's profitability, all I would say about that is that it's similar to Ross' total profitability.
Michael Hartshorn:
Kimberly, on inventories, inventories would have been up just slightly. The 4% increase was actually planned in the year to focus on that calendar shift and to impact the earlier back to school with that calendar shift. So without the calendar shift, we would have been up slightly.
Operator:
Your next question comes from Paul Trussell from Deutsche Bank.
Paul Trussell:
I wonder if you could discuss the comp composition. I believe you mentioned that traffic lead. Was there a major spread across regions due to weather? And how was apparel versus nonapparel in the quarter from a category standpoint? And then lastly, I think you also mentioned an increase in the basket. Could you discuss UPT versus AUR in the quarter?
Michael Hartshorn:
Sure. So on the components, as we mentioned in our remarks, the 5% comp was driven by higher traffic and larger basket. The higher basket was entirely driven by units per transaction. AUR for us was flat compared to last year. In terms of merchandise performance, as Barbara mentioned in her remarks, sales growth was broad-based across merchandise categories, apparel and nonapparel were relatively similar for the quarter. In terms of regional performance and weather, weather, no impact for the quarter versus last year. The -- geographically, sales were strong throughout the country. Of our major markets, Texas and Florida, were above the chain average. California was relatively in line. And then our Midwest, our newer market, continued to do well with comp sales in line with the chain average against very strong growth over the last several years.
Operator:
Your next question comes from Paul Lejuez from Citigroup.
Paul Lejuez:
On the 400 incremental Ross Stores in your new long-term plan, I'm curious if you can talk a little bit more about the mix between existing markets and new markets, as you think about that long-term Ross potential? Are there any new markets that you can maybe share with us that you're thinking about today that we haven't heard about just yet? Also curious just during the quarter, performance of your urban versus suburban locations?
Michael O'Sullivan:
So Paul, on the mix of existing versus new markets, if we would expect that we will continue -- the existing markets will continue to be the dominant share of new store openings for several years, beyond that, we wouldn't really comment about the timing of specific new market openings at this point.
Michael Hartshorn:
And then Paul, on urban versus suburban. I mean, we wouldn't break out that detail. I will say, what we track is how it trends from quarter-to-quarter, and we do not see a change in trend coming out of the first quarter.
Paul Lejuez:
And if I could just sneak one more in. I'm curious about your new store openings. What you're seeing this year and this year's class versus previous years and relative to your expectations?
Michael Hartshorn:
Sure, Paul. Our new store productivity continues to track at or above our real estate performance this year, and it's very similar to the last couple of years, where the average new store is about 60% to 65% of an average Ross store in the chain.
Operator:
Your next question comes from Michael Binetti from Crédit Suisse.
Michael Binetti:
Michael, can we get a little help thinking about how, I think, the guidance implies about 130 basis points of operating margin compression in the third quarter. Can you help us think about how that breaks down between gross margin and SG&A? And then if I could follow up a little bit on Lorraine's question from before. I guess, it's a little harder for us to forecast changes in accounting around packaway, but since that line item swung 100 basis points in the second quarter compared to first quarter, could you also help think about what your plans for the back half assumes related to packaway accounting?
Michael Hartshorn:
Sure. So on the components, we don't break out the gross margin versus SG&A. But the margin reflects ongoing pressure from freight. As I mentioned, we expect to be at or above the pressure we're seeing year-to-date. It also reflects wage investments. And wage investments, for us, will be heavier in the back half, the impact will be, because we went to $11 an hour in the second quarter and also paid onetime bonuses. The onetime bonuses, obviously, only hit the second quarter. And then we would expect some deleveraging on occupancy and other expenses if comparable store sales perform in line with our guidance. And in terms of DC, packaway is the hardest thing to predict for us because it's highly dependent on how we run in sales and what's available in the marketplace for modeling purposes, I assume that it's relatively flat [ and like that ].
Michael Binetti:
So just to clarify. The -- you went to $11 an hour and paid onetime bonuses in 2Q, but the total wages will be more of a pressure in the back half than the front half even if those onetime bonuses aren't present in the back half?
Michael Hartshorn:
No. The onetime bonuses only hit second quarter. The wages will have a bigger impact as we went to $11 in the second quarter. We also increased our lease benefits that will impact the back half more than the first half.
Michael Binetti:
Okay. If I can sneak one in on AUR. You mentioned it was flat. Would you mind just helping us speak to that as a little bit more of how you're thinking about that? I know you generally take your cues from the customer on where to go with the merchandise mix, and that influences it. But I know you guys have different strategy from your competitors, but we are hearing some AUR increases around the sector. So would you mind just telling us how you think about AUR and if there is an opportunity there for that to improve through the back half of the year?
Michael Hartshorn:
Sure. On AUR, it's completely a function of mix of business. Over the last several years and even the recent trend, it doesn't move a whole lot for us. It's been down slightly to up slightly. So flat for the quarter is our expectation. And going forward, it will be based on the mix of business.
Operator:
Your next question comes from Bob Drbul from Guggenheim.
Robert Drbul:
I guess -- I was wondering if you could comment a little bit around competitive store closures and just a couple of parts to it. But do you think that it's benefiting your business today? And I guess, how do you think about it in the back half of the year? And have the competitive store closures at all impacted that new store opening plan that you've discussed earlier?
Michael O'Sullivan:
So Bob, I would say that, like most of our peer retailers -- store closures of other retailers are nice tailwind. But in any given year, they don't really have a material impact on our comp performance. And in terms of how we think about new store openings. No, I don't think the store closures have really changed how we think about or where we think about putting new store openings.
Robert Drbul:
Got it. And has there been a variation on the dd's comp versus the Ross comp or are they both similar to the overall?
Michael O'Sullivan:
In the first half and the second quarter, dd's continued to perform very well in terms of sales, above plan. And then actually -- you didn't ask this, but on margins, dd's sort of similar trend to Ross in terms of the packaway credit and the impact on margins in second quarter. But overall for the year, I'm pretty happy with dd's from a sales and a profitability point of view.
Operator:
The next question comes from Simeon Siegel from Nomura Instinet.
Simeon Siegel:
As you performed the new store analysis, were there any thoughts towards International? And as you look to the larger dd's footprint, just how does the average revenue per dd's store compared to Ross, if you can?
Michael O'Sullivan:
Sure, Simeon. In terms of International, no. This was a piece of analysis focused just on the United States. We have 1,600 stores at this point, and we're saying the long-term potential is 3,000. So obviously, a lot of growth there. So very focused on the United States.
Michael Hartshorn:
Simeon, on the average stores, so we don't disclose the specific on dd's, suffice it to say, it's less -- it's newer concept, a newer chain. For Ross, the average store is about 9 million. So it's south of that based on maturity of the chain.
Simeon Siegel:
Okay. And then just, obviously, it's a moving number by quarter. And I think you mentioned may be timing. But any other color on the decline in packaway percentage this quarter? Any color on -- any shift in the quality of available inventory in the market?
Barbara Rentler:
No. There is a lot of supply in the market. It's still plentiful. And I think it is broad. The packaway number really fluctuated base off of what we see, plus we fueled a lot of Q2, but there is a lot of availability, and it's really the merchant's decision to decide what to packaway, how much to packaway and went to packaway. So I would say, we're in our regular process. But again, there's a lot of -- there's no change in availability in the marketplace.
Operator:
Your next question comes from Marni Shapiro from Retail Tracker.
Marni Shapiro:
I just wanted to get one clarification on the wages. Did you take wages up in-store as well as at the DC level and across the company?
Michael Hartshorn:
Yes, Marni, we took it up across the company.
Marni Shapiro:
Okay, great. And then just one follow-up as well on the new store expansion. When you're looking across the board, are there any new or shift in the mix of type of stores? Have you considered outlets or even shopping malls that are looking to expand into the off-price space that maybe hadn't in the past and things like that? And I'm curious if you're finding with dd's a similar scenario in the types of locations that do well or just dd's tend to do better more local family centers versus Ross Stores?
Michael O'Sullivan:
So Marni, no -- nothing to call out there in terms of different types of locations. The analysis was really based upon looking at the types of locations we already have, but how the demographic trends are increasing the number of those opportunities.
Operator:
Your next question comes from Daniel Hofkin from William Blair.
Daniel Hofkin:
Just a quick question first on the environment. We haven't been hearing so much in the last few years on a competitive promotional environment and, obviously, on the back of this very strong quarter for you and others. What are you seeing, what are you expecting for the second half in terms of competitive promotion? Is your 1 to 2 guidance just your typical conservatism, is there something else that you're seeing that causes you to be more cautious in the second half?
Barbara Rentler:
So the environment is still competitive, and we are thinking that it's going to remain competitive in the back half between online and in-store brick-and-mortar. And we are up against in terms of how we're feeling about the back half, but we are up against very strong multiyear comparison. So when we put those -- the multiyear comparisons and competitive environment together, that's how we came up with the guidance.
Michael Hartshorn:
And Dan, it's -- this has always been our playbook. We think it's a prudent plan to plan the business this way. Barbara mentioned that we are up against a very robust multiyear comparisons. We are up against a 7% comp in 2016 and a 4% comp in 2017 in Q3, and then for Q4 we're up against a 4% in 2016 and a 5% in 2017. That said, we hope to do better like we've done in Q1 and Q2 of this year.
Daniel Hofkin:
Yes. Maybe it's safe to say that's a bigger factor than any sort of intensification in the competitive environment?
Michael Hartshorn:
Yes. That's true.
Daniel Hofkin:
Okay. And if I could just follow up on the gross margin topic one more time. What is -- is it unit cap accounting? Is that what causes what you have an increase in packaway that helps the gross margin in that period and then reverses later? Is that what's at play here?
Michael Hartshorn:
Yes. That's exactly how it works.
Operator:
Your next question comes from Laura Champine from Loop Capital.
Laura Champine:
It's about the expectation that you can grow your store base beyond what you previously said. Does that contemplate Ross being nationwide in all regions and what would be a reasonable time frame for us to think about for you to enter new regions like the Northeast, for example?
Michael O'Sullivan:
So Laura, yes, it contemplates expansion nationally across the United States. As a reminder, right now, we're in 38 states. And this would assume that we are -- that we expand nationally. In terms of timing of when we would enter new markets, we wouldn't comment on that for competitive reasons.
Operator:
Your next question comes from Jamie Merriman from Bernstein.
Jamie Merriman:
I have a slightly maybe longer-term question. But in the past, you talked about sort of demographics and seeing an increasing number of your new customers come from younger demographics. And I'm just curious, are you seeing those customers purchasing the same brands that your maybe traditional core customer has purchased? Or are they looking for something new from you in terms of either brand mix or category?
Barbara Rentler:
Sure. Yes, we think we do well with the younger demographic, and we feel we'll do well with millennials. In terms of brand mix, I would say that, that customer is a little bit -- not quite as married to certain brands and is more open to trying different types of brands. With that being said, the very strong brands are still -- very strong department store brand is still important to them. It's just that I think that they are a little bit more open to trying other brands and, in some cases, label, that perhaps are young on the curve that eventually would become bigger brands, would be my guess. But they are not quite as traditional. But the big brands are still the big brands.
Operator:
Your next question comes from Ike Boruchow from Wells Fargo.
Irwin Boruchow:
Michael, 2 quick ones for you. First is just on the model. On the 1 to 2 comp you're laying out for Q4, just because of the calendar shifts are creating some noise, what revenue growth would that imply for the fourth quarter? And then is it fair to say that your view on freight has worsened versus 3 months ago? Just kind of curious the puts and takes there. And then again, just to clarify, are you -- have you been saying that the back half, the freight headwind should worsen from where Q2 was or from where your first half impact was?
Michael Hartshorn:
Sure, Ike. We haven't given specific revenue targets for fourth quarter. We will do that at the end of the third quarter. The one thing I will say, though, is the total revenue is impacted by the restated versus fiscal comparison in the first half that from a total sales standpoint that fiscal comparison helps us by 1 point in the back half. It's off by 1 point. And it's even more pronounced in the fourth quarter. In terms of freight, it's very similar to how we plan the year. It is a slight increase, and we found other offsets in the business to cover that. But we'd expect it to be at or somewhat elevated to what we saw in the second quarter.
Irwin Boruchow:
And Michael, is there any visibility on that line item into '19, just at a high level for us to understand?
Michael Hartshorn:
At this point, no. We wouldn't comment until we give next year's guidance.
Operator:
Your next question comes from Dana Telsey from Telsey Advisory Group.
Dana Telsey:
As you think about the new store -- long-term store targets, how are you thinking about distribution capacity and when the next distribution center needs to come up? How many do you need in order to handle that type of growth? And does this new store growth capacity does it entail an acceleration in terms of the number of new store openings?
Michael O'Sullivan:
So Dana, in terms of distribution capacity, we don't expect to need another major DC for another few years and then beyond that. Obviously, longer term, we would need additional capacity as we open up additional stores. Last part of your question was about the pace of new store openings. No, I would not anticipate that the pace of new store openings will change. Over the last few years, we've opened approximately 100 new stores per year. I would expect that it will stay around about that number.
Dana Telsey:
Just one more question. Barbara, as you think of made for off-price merchandise. Are you seeing any changes in that landscape? And is that becoming a more important part of your mix?
Barbara Rentler:
Closeouts are basically the bulk of our assortments. The makeup portion of our business sits primarily in a couple of businesses where it's unbranded such as home. But again, the bulk of our assortment really comes from closeouts, and we don't see any availability issues in the near term. So we don't really see a mix changing.
Operator:
Your next question comes from Janine Stichter from Jefferies.
Janine Stichter:
I just wanted to ask about some of the newer categories you're pushing into. I think you've called out beauty before. Any color you can give on the performance there? And then maybe some color on categories where you feel like you're maybe under-penetrated and still see some opportunity?
Barbara Rentler:
I missed the first part of the question. Could you just repeat the first part?
Janine Stichter:
Sure. Just on the some of the newer categories that you've pushed into. I think, you've called out beauty in the past. Any color you can give on the performance there?
Barbara Rentler:
Okay. I missed about beauty. Obviously, we feel that beauty is an opportunity as a lot of the business has shifted out of department store. So we think there is a lot of potential there. And from real major growth, I think that's probably the biggest one. After that, I feel like that most of our growth, I know it sounds like it's always broad-based, but it is broad-based. Beauty happens to be, I think, a trend shift in the market. So we do feel good about that.
Operator:
Your next question comes from John Kernan from Cowen.
Krista Zuber:
This is Krista Zuber on behalf of John. Just 2 quick questions, most have been answered. I believe, you previously guided to flat merchandise margin for fiscal '18. So I was just wondering if that still holds? And then secondly, on the same-store sales, which is obviously been consistently beating guidance for the 1% to 2%. As you look into the second half, what are you expecting from the traffic and basket components?
Michael Hartshorn:
Sure. On merchandise margin, we guided the year to be flat. We exceeded that in Q1 and Q2 and, frankly, that's based on ahead-of-plan sales. The guidance for the back half assumes that it would be relatively flat. And if we exceed our sales plan, there could be some opportunity. Your second question -- composition of comp. I'd expect it to be very similar. It hasn't changed a whole lot. Traffic has -- traffic and units per transaction have been the key drivers, and that's been true over the last couple of years.
Krista Zuber:
If I could just fit in one more, if I may. Just on the capital plans as it relates to your cash flow generation and if we look at the model of CapEx are generally been running up about 3% of sales. Should we kind of expect that type of run rate going forward?
Michael O'Sullivan:
So on CapEx, this year, we're forecasting around $475 million. Over the next couple of years, we'll be starting construction on new distribution center capacity. And with that construction, the capital will edge up a bit.
Operator:
There are no further questions at this time. I will turn the call back over to you, Barbara Rentler, for closing comments.
Barbara Rentler:
Thank you for joining us today and for your interest of Ross Stores. Have a great day.
Operator:
This concludes today's conference call. You may now disconnect.
Operator:
Good afternoon, and welcome to the Ross Stores First Quarter 2018 Earnings Release Conference Call. [Operator Instructions]
Before we get started, on behalf of Ross Stores, I would like to note that the comments made on this call will contain forward-looking statements regarding expectations about future growth and financial results, including sales and earnings forecasts and other matters that are based on the company's current forecast of aspects of its future business. These forward-looking statements are subject to 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 2017 Form 10-K and fiscal 2018 Form 8-Ks on file with the SEC. 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 O'Sullivan, President and Chief Operating Officer; Gary Cribb, Group Executive Vice President, Stores and Loss Prevention; John Call, Executive Vice President, Finance and Legal; Michael Hartshorn, Executive Vice President and Chief Financial Officer; and Connie Kao, Vice President of Investor Relations.
We'll begin our call today with a review of our first quarter performance, followed by our outlook for the second quarter and fiscal year. Afterwards, we'll be happy to respond to any questions you may have. As noted in today's press release, despite unfavorable weather throughout the period, we achieved above-planned growth in both sales and earnings in the first quarter. Earnings per share for the 13 weeks ended May 5, 2018, were $1.11, up from $0.82 for the 13 weeks ended April 29, 2017. Net earnings were $418 million, up from $321 million in the prior year. These earnings per share results include a $0.17 per share benefit from recently enacted tax legislation and a $0.02 per share benefit from the favorable timing of packaway-related costs that we expect to reverse in subsequent quarters. Total sales for the quarter increased 9% to $3.6 billion. Comparable store sales for the 13 weeks ended May 5, 2018, rose 3% over the 13-week period ended May 6, 2017. This growth compares to a same-store sales gain of 3% for the 13 weeks ended April 29, 2017. We estimate that unfavorable weather throughout the quarter reduced our comparable store sales by over 1%. For the first quarter, the strongest merchandise category at Ross was men's, while geographic trends were very broad-based when normalized for weather. Operating margin for the period of 15.1% was down slightly from the prior year as an improvement in merchandise gross margins and favorable timing of packaway-related expenses were offset by higher freight costs and wage-related investments. As we ended the first quarter, total consolidated inventories were up 19% over the prior year, mainly due to higher packaway levels as our buyers were able to take advantage of numerous opportunities in the marketplace. Average in-store inventories were up 2% as planned due to an earlier Mother's Day this year. While packaway, as a percentage of total inventories, was 49% compared to 46% last year. We are also pleased to report that dd's DISCOUNTS delivered another quarter of solid growth in sales and operating profits. Our store expansion program is on schedule with the addition of 23 new Ross and 6 dd's DISCOUNTS locations in the first quarter. We remain on track to open a total of approximately 100 locations in 2018 comprised of 75 Ross and 25 dd's DISCOUNTS. As usual, these numbers do not reflect our plans to close or relocate about 10 older stores. Now Michael Hartshorn will provide further color on our first quarter results and details on our second quarter guidance.
Michael Hartshorn:
Thank you, Barbara. Let's start with our first quarter results. Our 3% comparable store sales gain was driven by higher traffic and an increase in the size of the average basket.
First quarter operating margin of 15.1% was down 5 basis points from last year. Cost of goods sold improved 20 basis points in the quarter, driven by 30 basis points of higher merchandise margin and distribution cost that declined by 15 basis points, mainly due to the previously mentioned favorable timing of packaway-related expenses. Occupancy also levered by 15 basis points. These gains were partially offset by a 20 basis point increase in freight cost and 20 basis points in higher buying expenses. Selling, general and administrative expenses for the period increased 25 basis points, mainly due to higher wage-related costs. During the first quarter, we repurchased 3.3 million shares of common stock for a total purchase price of $255 million. We remain on track to buy back a total of $1.075 billion in stock for the year. Let's turn now to our second quarter guidance. For the 13 weeks ending August 4, 2018, we are forecasting same-store sales to increase 1% to 2% over the 13 weeks ended August 5, 2017. Earnings per share for the second quarter are projected to be in the range of $0.95 to $0.99, which includes the benefit from lower taxes.
The operating statement assumptions for our second quarter guidance include the following:
total sales are projected to grow 5% to 6%; we expect to open 30 new stores during the period, including 22 Ross and 8 dd's DISCOUNTS locations.
If same-store sales are in line with our guidance, then we project operating margin to be in the range of 13.3% to 13.5%. The forecasted decline from last year's 14.9% reflects the unfavorable timing of packaway-related cost as well as our previously announced wage and benefit investments. We expect net interest income of about $900,000. Our tax rate is expected to be approximately 24% to 25% and weighted average diluted shares outstandings are projected to be about $375 million. Based on our first quarter results and second quarter guidance, we now project earnings per share for the 52 weeks ending February 2, 2019 to be in the range of $3.92 to $4.05 compared to $3.55 for the 53 weeks ended February 3, 2018. As a reminder, our fiscal 2018 guidance includes the benefit from lower taxes. In addition, last year's 53rd week added approximately $0.10 to earnings per share for 2017. Now I'll turn the call back to Barbara for closing comments.
Barbara Rentler:
Thank you, Michael. To sum up, despite unfavorable weather throughout the period, both first quarter sales and earnings per share outperformed our plan. Looking ahead, we expect the retail landscape, both brick-and-mortar and online to remain very competitive throughout 2018. In addition, we face robust multiyear sales comparison as the year progresses. That said, we remain confident in the strength of the off-price sector and on ongoing ability to perform well in this space. Our focus will remain on offering customers the outstanding values they have come to expect, which has allowed us to achieve profitable growth in sales, earnings and market share over time.
At this point, we'd like to open up the call and respond to any questions you might have.
Operator:
[Operator Instructions] Your first question comes from the line of Matthew Boss from JPMorgan.
Matthew Boss:
On gross margin, can you speak to drivers of the 30 basis points in merchandise margin in the first quarter? Any change in freights? And then just larger picture, if we look through tax reform this year, I guess, has anything changed with your double-digit bottom line algorithm, if you are able to drive the 3% to 4% comps?
Michael Hartshorn:
Sure. So Matt, it's Michael Hartshorn. Let me answer those in pieces. On merchandise margin, as we mentioned in the comments, those were up 30 basis points in Q1. That was driven by better buying. In addition, we benefited from a very clean inventory position entering the quarter. In terms of freight cost, freight has been a headwind for over 1 year. Our outlook has not changed. A number of factors are contributing to the increase. Like others, we have seen significant increases in market rates due to very tight capacity. This capacity seems to be driven by driver shortages, impacts of increased regulation, and perhaps the stronger economy. In addition, diesel fuel costs were up about 20% from last year in the quarter. So we expect freight to be a headwind for the remainder of the year and that is reflected in our guidance. On your last question, certainly, this year reflects the benefit of tax reform. Our current guidance reflects the 10% to 14% EPS growth that includes about a $0.69 benefit from tax reform. Going beyond this year, there is nothing that's changed our long-term model.
Operator:
Your next question comes from the line of Brian Tunick from RBC.
Brian Tunick:
I guess, curious as we sat here on the Northeast with all the, I guess, the nor'easters to hear you guys talk about unfavorable weather. Can you maybe give us a little more clarity on sort of what markets? Was it just year-over-year in some of your key markets? Just give us a little more color on the weather issues. And then curious on the packaway inventory growth. If you can give us a better sense of maybe what categories or just a good, better, best situation. Just give us a better feel for the packaway inventory growth?
Michael Hartshorn:
Sure, Brian. On weather, as we said in our remarks, we estimate the impact to overall chain was about -- was over 1%. For us, every major region actually had negative weather comparisons during the quarter with one exception, I'd say that was the Pacific Northwest. So the areas as you can imagine that were impacted the most included the Mid-Atlantic and also the Midwest.
Barbara Rentler:
And then as it pertains to packaway, what I would say to you is that there is an abundance of merchandise in the marketplace. So we were able to take advantage of those opportunities. And they're pretty broad-based in terms of different types of products. So it isn't just one classification. And I think the merchants have been out there in the market looking to see what's available and felt that the timing was right to buy those goods as that's a big part of their job.
Brian Tunick:
And will there be any implications for the back half regarding packaway or distribution expenses?
Michael Hartshorn:
In terms of distribution expenses, well, we -- so we had a $0.02 benefit in the first quarter based on how we capitalized packaway cost and we'd expect that to reverse and be a negative impact over the remainder of the year.
Operator:
Your next question comes from the line of Lorraine Hutchinson from Bank of America.
Lorraine Maikis:
Can you talk a little bit about the composition of the comp? How much of that was traffic versus basket? And what drove the basket increase?
Michael Hartshorn:
Sure, Lorraine. As we mentioned in our prepared remarks, the 3% comp was driven by higher traffic and an increase in the size of the average basket. The higher basket was primarily driven by higher units per transaction with AUR was down slightly. And a decrease in the AUR was driven by a mix of business.
Operator:
Your next question comes from the line of Kimberly Greenberger from Morgan Stanley.
Kimberly Greenberger:
I wanted to just ask about the SG&A deleverage, 25 basis points. Obviously, I think your guidance this year includes some ongoing deleverage. Is there any guidance you have sort of on a quarter-by-quarter basis, how we should think about that? And then I just wanted to follow up on the weather question. Could we assume that you're seeing some pick up here in May assuming that weather has normalized so far here in Q2?
Michael Hartshorn:
Sure, Kimberly. On SG&A, the 25 basis point increase reflects a couple of different things. It's the lapping of market-based increase, the wage increases that we made last year as well as the impact of statutory increases that included California increasing to $11 in January. It also includes a piece of wage investments that we're making this year. Our guidance for the remainder of the year would include further deleverage as the year progresses as a result of the associated investments we announced at the beginning of the year, which includes going to $11 throughout the company, payment of one-time bonuses and also improvements to our paid [ leave ] programs. And then in terms of weather beyond the quarter, our practice is not to comment about post quarter trends.
Operator:
Your next question comes from the line of Ike Boruchow from Wells Fargo.
Irwin Boruchow:
I'm not sure who wants to take this question, but you guys have talked a little bit over the past couple of quarters around the beauty category becoming more of an opportunity for you to buy into. Any updates there on that category, specifically to Q1 and then just updated thoughts as you move forward?
Barbara Rentler:
Sure. The beauty category has been a growing category for everyone as the market has shifted around a lot. We feel good about the beauty category. And ourselves as well as many other people in the industry feel that it's an opportunity as the market itself is shifting from department stores to other sectors.
Operator:
Your next question comes from the line of Paul Trussell from Deutsche Bank.
Paul Trussell:
Just on the second quarter guidance. I believe, you outlined EBIT rates in the 13.3% to 13.5%, range or so, which is down 140, 150 basis points or so at the midpoint year-over-year. Can you just kind of rank or quantify for us to what extent that contraction is wages versus freight versus the packaway expenses in 2Q and any other puts and takes we should be mindful of?
Michael Hartshorn:
Sure. On the components, we wouldn't break down the specific levels, but I will repeat, I think, what you just said, is there is 3 main drivers. Most importantly, the wage and benefit investments. It's -- a portion of those will happen in the second quarter. So it will actually -- the deleverage will increase as we progress through the year. So that's the first main impact in the second quarter. It also includes, as we mentioned, the negative impact of timing of packaway-related costs and freights will continue to be a headwind for us.
Operator:
Your next question comes from the line of Paul Lejuez from Citigroup.
Paul Lejuez:
Going back to the traffic-first ticket question. Curious, if you saw any difference in the Ross business versus dd's on those metrics? And then, separately, also curious if you track how your performance is at centers where you are colocated with another off-pricer if you can maybe share how those stores of yours are performing in the colocated locations with a T.J. concept or Burlington versus those that are in a separate center?
Michael Hartshorn:
Sure. Paul. I would say the dd's and Ross, they were proportional in terms of mix of transaction, AUR traffic, et cetera. On the -- where -- we colocate in about 1/3 of our chain with either T.J.Maxx, Marshalls or Burlington and those stores performed in line with the rest of the chain.
Paul Lejuez:
Any comment on home versus apparel during the quarter?
Michael Hartshorn:
Overall, non-apparel was slightly above apparel given the weather.
Operator:
Your next question comes from the line of Oliver Chen from Cowen and Company.
Oliver Chen:
On the gross margin line, the buying expenses, do you expect that trend to continue? And what was underlying some of that? Also, as you think ahead and particularly in all the opportunities available in non-apparel businesses such as home, what are your thoughts about the opportunity you have ahead? And how you can seek to maximize your store space as you look at different -- new opportunities where customers still love value in other categories?
Michael Hartshorn:
Oliver, on buying, expenses can fluctuate quarter-to-quarter. In the first quarter, there was some, I would say, negative timing impacts, but it also reflects mainly that we're going to continue to make ongoing investments in our buying organization.
Barbara Rentler:
And as it pertains to opportunities in non-apparel areas such as Homes. Actually, Oliver, we think that our opportunities are very broad-based in addition to Home in the entire box. So in terms of maximizing space in the stores, we really decide what businesses we want to drive and then we figure out how it fits within the box.
Oliver Chen:
Got it. So which businesses do you want to drive?
Barbara Rentler:
Well, I think on this call, I really wouldn't be saying which businesses we want to drive, I'd just leave it with -- it's broad-based. It's not just focused on one area.
Operator:
Your next question comes from the line of Marni Shapiro from Retail Tracker.
Marni Shapiro:
I had a quick question about the sizes business. Historically, this has always been a business you guys have done well with and you've had in your stores forever. And there's quite a buzz around the business right now. So I'm curious just how it's done for you? Are you finding availability starting to be more plentiful or easier to find? And what's your thinking strategically about the business?
Barbara Rentler:
Sizes business, Marni, you mean like woman's special prices, boutiques and [indiscernible]?
Marni Shapiro:
Exactly. And even on the men's side, the big and tall business on the men's side as well.
Barbara Rentler:
Sure. Listen woman's world or plus sizes in the United States is a total growing business. So I'd be thinking apparel, it's certainly an opportunity. In terms of availability right now, there is just a lot of availability pretty much in most classifications of product. So supply is pretty plentiful. It's very broad-based actually supply. So from that perspective, there would be merchandise out there. In terms of opportunity, we grow as the customer -- based off of what the customer is telling us and those are the businesses that we go after.
Marni Shapiro:
Fantastic. That's great. And is there any reason to believe that merchandise margins will be pressured? I know you have headwinds as far as wages and freight cost and things like that, but there is a lot of availability in merchandise. It seems like generally the environment, while competitive isn't in fire sale mode. So is there any reason to believe merchandise margins shouldn't be okay rest of year?
Michael Hartshorn:
Marni, our guidance assumes that merchandise margins are relatively flat for the remainder of the year.
Operator:
Your next question comes from the line of Laura Champine from Loop Capital.
Laura Champine:
Just one more question on the weather. Can you break down sort of the methodology that you used to determine that it was about 1% hit? How do you get there or greater than 1% hit?
Michael Hartshorn:
Sure. So we use weather services to do that. And also, obviously, storms are easier to calculate, that's our methodology.
Laura Champine:
Any more detail.
Michael Hartshorn:
The only thing I'd add, Laura, that includes both temperature and precipitation.
Operator:
Your next question comes from the line of Bob Drbul from Guggenheim Securities.
Robert Drbul:
Just 2 questions, I guess. The first one is on the current marketplace, are the competitive store closures, is that providing additional opportunity for you to get product from different vendors? And I think the second question is as you continue to expand stores and your store base with -- are the -- the ability to attract talent both whether it's managers or even the labor component in the associates within the stores, are you seeing any pressure there that you could talk to?
Michael O'Sullivan:
So Bob, it's Michael O'Sullivan. First of all, in terms of the store closures, it's hard to tell what contribution that's having to availability, availability is driven by a number of things. It's possible. What's actually -- let me step back. I think the struggles that the rest of the retail industry is having certainly, is helping to drive availability. On store closures specifically it's hard to kind of rate that particular component. In terms of availability of labor, we're very happy with our ability to attract and retain people throughout the level -- throughout all levels in the company.
Operator:
Your next question comes from the line of Simeon Siegel from Nomura Instinet.
Daniel Stroller:
This is Dan Stroller on for Simeon. We just wanted to know if there's been any notable change either recently or over the past several years in what brands your shoppers are gravitating towards. Basically trying to figure out if your top-selling brands have really turned over much and gone into favor for new or up-and-coming brands?
Barbara Rentler:
For competitive reasons, we really wouldn't talk about brands on the call.
Daniel Stroller:
Okay. And then on the consumer base, anything you're seeing in terms of frequency of visit of existing shoppers or I guess, customer acquisition and the initiatives there? That would be very helpful.
Michael O'Sullivan:
Sure. We slice and dice our customer data all the time where we're often out that doing research. And I would say there is nothing to call out in terms of any changes to consumer behavior or demographics or anything of that nature at this point.
Operator:
Your next question comes from the line of Michael Binetti from Crédit Suisse.
Michael Binetti:
Could you speak a little bit more to the change in AUR and the mix base delta there. I think a lot of the competitive set is speaking to positive AURs at this point across both off-price and department stores, frankly. So I'm wondering if there is some kind of category divergence that you guys are pursuing that's causing some puts and takes on your AUR? And if you think that continues to remain a headwind through this year? If you see some reason why the categories that you guys have in inventory with the change in the inventory line there could take some pressure off on that line?
Michael Hartshorn:
Yes, I would say -- so AUR, obviously, can change from quarter-to-quarter. So it's not something that I would say strategic. But -- so as we look out for the rest of the year, it will be based on category performance. So hard to say at this point. I'd say over the last couple of years based on the categories they have done well. AUR has been down, but just slightly.
Michael Binetti:
Is it -- I mean, I was a little surprised that AUR was still a headwind in the first quarter with the weather citing, maybe you didn't move into some of the categories in the spring that I thought would have been a little bit -- they'd have been a little bit higher AUR in the comp. Was that a surprise to you at all or no?
Michael O'Sullivan:
Not really. I mean, our strategy, Michael, is over a long period of time, has been to be as sharply priced as possible to drive sales and that's the approach we took in Q1 as we've historically taken. And based upon that we were pretty happy with a 3% comp -- on top of the 3% comp that we got last year.
Michael Binetti:
Sure. I mean, can you just help us -- one last one on the model. I think the -- any kind of calendar shift cadence that we should think to? I think in 2013, you said you had about 1 percentage point benefit to sales in the first half in sales not comps and then a 1 point drag in the second half. Is it a similar map this year that we should have in our models?
Michael Hartshorn:
Yes, I would say it's similar. So to be clear, we reported on a restated basis. And you can see this in the difference between our total sales and our comp sales. So for the year I think it's accurate that the first half has a larger negative impact than the second half. So for us the difference between restating that week and not is worth about 200 basis points in the first quarter.
Operator:
[Operator Instructions] Your next question comes from the line of Jerry Merriman (sic) [ Jamie Merriman ] from Bernstein.
Jamie Merriman:
It's Jamie Merriman. My question is just about your marketing strategy. As you work on attracting younger consumers into the business, is that pivoting at all? And if so, how?
Michael O'Sullivan:
So Jamie, it's -- I would say that our marketing approach in terms of the types of media that we're using has been evolving over time. And it will likely continue to evolve, obviously, moving to less traditional forms of media. Some of that is still experimental. We'll see how those media perform. And -- but I'd expect that over time, you're going to see more of that shift for us as indeed you'll see for other advertisers as well.
Jamie Merriman:
And have you found that that -- maybe able to be a little bit more targeted and therefore, lower cost on an acquisition basis. Or are you seeing too early to see benefits like that?
Michael O'Sullivan:
I think it depends on the market. It depends upon the individual type of media you're talking about. And what exactly you're trying to do in terms of who you're trying to target. So the answer is -- the answer can be, yes, depending upon the situation or it can be no depending upon the situation. And that's kind of what I mean by saying that some of those are channels are fairly experimental. And that's why we're sort of evolving into them rather than making significant changes at this point.
Operator:
There are no further telephone questions at this time. I will turn the call back over to the presenters.
Your next question comes from the line of [ Sandra Parker ]. I think she has just removed herself again from the queue. Sorry.
Barbara Rentler:
Okay. Thank you for joining us today and for your interest in Ross Stores. Have a great day.
Operator:
This concludes today's conference call. You may now disconnect.
Operator:
Good afternoon, and welcome to the Ross Stores Fourth Quarter and Fiscal Year 2017 Earnings Release Conference Call. [Operator Instructions]
Before we get started, on behalf of Ross Stores, I would like to note that the comments made on this call will contain forward-looking statements regarding expectations about future growth and financial results, including sales and earnings forecasts and other matters that are based on the company's current forecast of aspects of its future business. These forward-looking statements are subject to 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 2016 Form 10-K and fiscal 2017 Form 10-Qs 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:
Good afternoon.
Joining me on our call today are Michael O'Sullivan, President and Chief Operating Officer; Gary Cribb, Executive Vice President, Stores and Loss Prevention; John Call, Executive Vice President, Finance and Legal; Michael Hartshorn, Group Senior Vice President and Chief Financial Officer; and Connie Kao, Vice President, Investor Relations. We'll begin our call today with a review of our fourth quarter and 2017 performance, followed by our outlook for 2018. Afterwards, we'll be happy to respond to any questions you may have. As noted in today's press release, despite our own difficult multiyear comparison and a very competitive retail climate, sales and earnings were well ahead of our expectations for both the fourth quarter and the full year. We are pleased with these results, which reflect our ongoing success in delivering broad assortments of compelling bargains to today's value-driven shoppers. Earnings per share for the 14 weeks ended February 3, 2018, were $1.19, up from $0.77 in the 13 weeks ended January 28, 2017. For the 53 weeks ended February 3, 2018, earnings per share grew to $3.55 compared to $2.83 in the 52 weeks ended January 28, 2017. Both the quarter and fiscal year include a per share benefit of approximately $0.10 from the 53rd week and $0.21 from the recently enacted tax reform legislation. Excluding these items, earnings per share on a 52-week basis for both the 2017 fourth quarter and fiscal year periods grew 14% over the prior year. Net earnings for the 2017 fourth quarter were $451 million, up from $301 million in the prior year. Fiscal 2017 net earnings grew to $1.4 billion compared to $1.1 billion in fiscal 2016. Total sales for the 14 weeks ended February 3, 2018, grew 16% to $4.1 billion with comparable store sales for the 13 weeks ended January 27, 2018, up 5% on top of a 4% increase in the prior year. For the 53 weeks fiscal year ended February 3, 2018, sales increased 10% to $14.1 billion with same-store sales for the 52 weeks ended January 27, 2018, up 4% versus the 4% increase in 2016. For the fourth quarter, sales trends at Ross were fairly broad-based across all major merchandise categories with Children's performing the best. Geographically, Florida was the strongest region. Our fourth quarter operating margin of 14.6% was up 95 basis points from last year. This improvement was mainly driven by strong merchandise margin and expense leverage from solid gains in same-store sales as well as the impact of the 53rd week. For the full year, operating margin increased 50 basis points to a record 14.5%. dd's DISCOUNTS' customers also continued to respond positively to its merchandise assortments, leading to another quarter and year of robust gains in both sales and operating profits. As we ended 2017, total consolidated inventories were up 9% over the prior year with packaway levels at 49% of the total, similar to last year. As planned, average in-store inventories were up 1%. As noted in today's release, we plan to make competitive wage and benefit-related investments. These include raising our minimum wage to $11 an hour, providing onetime bonuses for eligible hourly and store associates and improving our paid leave programs. We believe these actions will allow us to continue to attract and retain a talented and growing workforce of over 82,000 associates who have been critical to our past performance and will be key to our future success. Further, our board recently approved an increase in our stock repurchase authorization for 2018 to $1,075,000, 000, up from the previous $875 million. The board also approved a higher quarterly cash dividend of $0.225 per share, up 41% over the prior year. The increases of our shareholder payouts for 2018 reflect the current 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. We have repurchased stock as planned every year since 1993 and raised our cash dividend annually since its inception in 1994. This consistent record also reflects our continuing commitment to enhancing stockholder value and returns. Now Michael Hartshorn will provide further color on our 2017 results and details on our fiscal 2018 full year and first quarter guidance.
Michael Hartshorn:
Thank you, Barbara.
Let's start with our fourth quarter results. Our 5% comparable store sales gain was driven by a combination of higher traffic and an increase in the size of the average basket. As Barbara mentioned, fourth quarter operating margin increased 95 basis points to 14.6%, which includes a 70 basis point benefit from the 53rd week. Cost of goods sold improved 50 basis points in the quarter, driven by 40 basis points of higher merchandise margin and occupancy costs that were lower by 45 basis points. These gains were partially offset by a 20 basis point increase in buying cost and higher freight expenses of 15 basis points. Selling, general and administrative expenses during the quarter were lower by 45 basis points due mainly to leverage from both the 5% same-store sales gain and the impact of the 53rd week. For the fiscal year, operating margin increased 50 basis points to a record 14.5%, which includes an approximate benefit of 20 basis points from the 53rd week. As Barbara mentioned earlier, fourth quarter and fiscal 2017 earnings per share results are inclusive of an approximate $0.10 benefit from the 53rd week and $0.21 related to the recently enacted federal tax reform legislation. The tax savings amount is comprised of a onetime earnings per share benefit of $0.14 from a revaluation of deferred taxes and $0.07 from a lower fourth quarter tax rate. During the quarter, we repurchased 3 million shares of common stock for a total purchase price of $226 million. For the full year, we repurchased 13.5 million shares for an aggregate price of $875 million. Let's turn now to our outlook for 2018. Our guidance reflects the positive impact from recent tax legislation and the aforementioned competitive wage and benefit-related investments. For the 52 weeks ending February 2, 2019, we are forecasting earnings per share to be $3.86 to $4.03, up from $3.55 for the 53 weeks ending February 3, 2018.
The operating statement assumptions for fiscal 2018 include the following:
total sales are projected to grow 3% to 4% for the 52 weeks ending February 2, 2019, compared to the 53 weeks ended February 3, 2018. This year-over-year increase in total revenue is being affected by the 53rd week, which added approximately $219 million to sales in the 2017 fourth quarter and fiscal year.
Comparable store sales are expected to increase 1% to 2% on top of 4% gains in each of the past 3 years. We plan to add about 100 new stores this year consisting of 75 Ross and 25 dd's DISCOUNTS locations. As usual, these numbers do not reflect our plans to close or relocate about 10 older stores. If same-store sales are in line with our guidance of up 1% to 2%, then we project that operating margin for 2018 would be in the range of 13.3% to 13.5% compared to 14.5% in 2017, which, again, benefited by 20 basis points from the 53rd week. The forecasted decline reflects our plans for relatively flat merchandise gross margin and the impact of the previously mentioned competitive wage and benefit investments. Net interest expense is estimated to be about $600,000. Our tax rate is projected to decrease to approximately 24% to 25% due to tax reform legislation. We expect average diluted shares outstanding to be about 374 million. Capital expenditures in 2018 are projected to be approximately $475 million and depreciation and amortization expense inclusive of stock-based amortization is forecast to be about $430 million.
Let's move now to our first quarter guidance. For the 13 weeks ending May 5, 2018, we are projecting same-store sales to be up 1% to 2%. Earnings per share for the period are forecast to be $1.03 to $1.07 compared to $0.82 in the first quarter of last year. Other assumptions that support our first quarter guidance include the following:
total sales are projected to increase 6% to 7%, we expect to open 23 new Ross and 6 dd's DISCOUNT locations during the quarter. First quarter operating margin is projected to be 14.6% to 14.8% versus last year's 15.2%. In addition, net interest expense for the quarter is estimated to be about $600,000. Our tax rate is expected to decrease to approximately 23% to 24%, again, due to tax reform legislation. And finally, weighted average diluted shares outstanding are projected to be around 378 million.
Now I'll turn the call back to Barbara for closing comments.
Barbara Rentler:
Thank you, Michael.
Again, we are pleased with our better-than-expected sales and earnings gains for both the fourth quarter and fiscal year. As previously mentioned, these strong results were driven by our ongoing ability to deliver the best bargains possible to today's value-focused shoppers. As we enter 2018, we continue to face tough multiyear comparisons and fierce competitions from both online and brick-and-mortar retailers. As a result, we continue to take a prudent approach to forecasting our business, so we certainly hope to do better. Longer term, we remain very confident in the strength of our business model. Our performance over the past several years demonstrates our proven ability to keep ongoing profitable market share gains by consistently offering the exceptional values our customers have come to expect. This remains our top priority as we know it will always be the key to our success. Looking out over the next several years, we continue to believe that with the proper execution of our strategies, we can achieve average annual earnings per share gain in the low double-digit percentage range. At this point, we'd like to open up the call and respond to any questions you may have.
Operator:
[Operator Instructions] Your first question comes from Daniel Hofkin with William Blair.
Daniel Hofkin:
Just a couple of quick questions. I guess first, Barbara, per your comment about competition, obviously, remaining intense. Are you seeing any evidence of that becoming more intense in recent quarters, either brick-and-mortar or online? Or is it just sort of a steady trend there and that's -- you don't expect it to abate? And then just a question on your longer-term store targets. I think it's been a few years since you've kind of updated comments on those. I was wondering kind of how you're thinking about that at this point.
Barbara Rentler:
Sure, Daniel. You have a couple of questions there. On the competition being intense, look, I think competition has been intense for a few years. I think competition will remain intense. I think as we go forward, online, department stores doing better, I think whether it's highly promotional remains to be seen, but yes, I do think it will be intense.
Michael O'Sullivan:
And Daniel, it's Mike O'Sullivan. On your -- the second part of your question about our store potential. We believe we have potential for about 2,500 stores between Ross and dd's, that's 2,000 Ross, 500 dd's. Right now, we're at about 1,600 stores. And each year, we open up approximately 90 net new stores. So if you just do the math on that, this isn't how we would actually open them, but if you did the math on that, you have about 10 years worth of growth. So at this point, no. No plans to make any changes to that store potential number.
Operator:
Your next question comes from Bob Drbul with Guggenheim Securities.
Andrew Roberge:
This is Andrew Roberge on for Bob Drbul. I think you guys mentioned that Florida was one of the top-performing states. Could you quantify if any of that was a rebound from the hurricanes in the prior quarter? And then I guess our second question. Any color around the performance by category, whether that'd be cold weather or any additional color on that'd be great.
Michael Hartshorn:
Sure. On regional performance. As we mentioned in the commentary, Florida was the strongest region and some of that was a benefit somewhat from the bounce back from the hurricane. I'd say, outside of Florida, similar to the merchandise performance as we mentioned in our commentary, it was fairly broad-based. Of the major markets, California was just slightly below the chain average. Texas had a strong quarter with comps above the chain average. And then I'd mentioned the Midwest, which continue to perform well for us on top of many years of being the highest comping region. Merchandise performance, we called out Children's apparel and nonapparel had similar comps during the quarter.
Barbara Rentler:
But specifically as it pertains to cold weather, based on the weather, cold weather assortments performed well.
Operator:
Your next question comes from Marni Shapiro with Retail Tracker.
Marni Shapiro:
Could you talk a little bit -- Barbara, a little bit one question for you and then one real estate question. But do you feel like there are any segments that you are missing in your stores or that are underdeveloped in the stores? And then can you talk a little bit about real estate? Because you've been pretty consistent with the store openings, but have you changed the size or the thoughts as to where you're opening the stores over the last year or so?
Barbara Rentler:
Marni, in terms of merchandise segments, I don't really think there's whole segments that, I think, we're missing. We're always looking to enhance the treasure hunt and to add different products and classifications to the assortments. And so underdeveloped businesses often start as a couple of things you try and then they grow out into different businesses. But again, overall, I don't feel like anything particular is missing. And we continue to try new areas to grow.
Michael O'Sullivan:
And then, Marni, on your real estate question. As you know, we -- over the last several years, we've opened up a fairly steady pace, about 90 new stores a year. In 2018, it'll be closer to 100, which is more of a factor of timing and opportunity in terms of finding additional locations. In terms of anything that's changing. I would say, for some time now, we've been fairly flexible in terms of new store openings, in terms of size and also in terms of the type of location that we're moving into. And that's partly been driven by the fact -- as other retailers have gone out of business, that's created some opportunities for us to move into existing buildings. And that's basically triggered the need to be more flexible. But other than that flexibility, no other additional changes that I would call out.
Operator:
Your next question comes from Lorraine Hutchinson with Bank of America.
Lorraine Maikis:
My first question is on the higher basket that you mentioned. Have you seen any progress on AUR flattening out? I know that's been a headwind for a while.
Michael Hartshorn:
Sure, Lorraine. As we mentioned in the remarks, the 5 comp was driven by higher traffic and an increase in the basket. The basket was driven by higher units per transaction, and AUR was very similar to the trend. Throughout the year, it was down slightly. And that decrease was really a function of mix of business.
Lorraine Maikis:
Okay. And then just following up on the $11 wage increase. Are you seeing tightness in labor in your markets right now? I guess maybe just a little bit of the why behind the decision to go to $11.
Michael O'Sullivan:
So the direct answer to your question, Lorraine, is no. We're not seeing tightness across the board. There are always individual markets where there's tight labor market and where we have to respond. But across the board, we're pretty happy with the candidate pool that we're seeing for new hires and with our retention level of existing associates. So with that answer, let me give you a couple of reasons for why we're raising the minimum entry wage rate, why we're paying the onetime bonuses and improving the benefits programs. Firstly, although we're current -- as I say, we're currently happy with the hiring pipeline and our ability to retain existing associates, we recognize the labor market is pretty dynamic and competitive. And there's no doubt with the stressing economy as well as the effects of tax reform that those things are going to continue to push out wage rates. And it's important for us to keep pace with those changes. Secondly, we've been pretty successful over a long period of time. And with that success, our associates have been able to sort of benefit from competitive wages and benefits as well as career enhancement opportunities over time. And we think with that -- with our continued success and with the tax rate changes, now is a good time to sort of further recognize and reward our associates who helped drive that success. So -- and I guess the bottom line answer to your question is, we're happy with our ability to hire and retain associates today, but we want to keep it that way. And that's why we're making the changes that we're making.
Operator:
Your next question comes from Ike Boruchow with Wells Fargo.
Irwin Boruchow:
So I piggyback on the wage question. I guess, Michael, could you maybe help us out? What percentage of the store associates you have are already at $11 an hour wage versus the increase you're going to give to everyone else? And then I was wondering if maybe you could just help us with the -- maybe the EPS or the margin impact that's embedded in your guidance for the year from the higher wage.
Michael Hartshorn:
Sure, Ike. We wouldn't say specifically for competitive reasons, both on the question of how many of the associates are already at the minimum wage. I would call out that California is already at $11, so that's 20%, 25% of our store base. As far as guidance for the year, we didn't provide a specific wage and benefit impact. But just to reiterate, we're showing EBIT down 105 to 125 basis points. And that includes 20 basis points from the 53rd week comparison. We would also expect the leverage on a 1 to 2 comp. And so beyond those factors, our guidance includes the impact from these competitive wage and benefit investments, then I'd also call out, we expect freight cost to be a headwind this year.
Operator:
Your next question comes from Kimberly Greenberger with Morgan Stanley.
Kimberly Greenberger:
Mike, could you tell us when the $11 per hour wage will be worked into the system, so that we know if it's fully impacting Q1 or perhaps not until Q2? And then secondarily, I'm wondering if you can just talk about the freight in the -- or trucking headwinds that you're seeing. I think you have been experiencing some freight headwinds now for the last few years. They've generally been modest sort of in this range. Are you seeing any acceleration in those pressures? And how are you looking to manage that expense?
Michael Hartshorn:
Sure, Kimberly. On the timing. The wage and benefit investments will be -- have a larger impact half the first quarter. That said, the first quarter does have things like California that's already at the $11. In terms of freight cost, the increase in freight cost that we've seen is driven by higher market rates, which is a function of tight capacity. That appears to us to be a combination of an improving economy, regulatory impacts and driver shortages. In addition, at least in Q4, diesel prices were at a 3-year high. Our expectation is we would continue to see, I would say, similar pressure to what we saw in 2017, and we've built that into our guidance.
Kimberly Greenberger:
Okay, Michael. And can you remind us for 2017, was that a 15 basis point headwind on the full year as well as the fourth quarter?
Michael Hartshorn:
So for 2017, the impact to the freight cost was -- for the fourth quarter, it was 15 basis points. And the full year was 25 basis points.
Operator:
Your next question comes from Adrienne Yih with Wolfe Research.
Adrienne Yih-Tennant:
My question is on the ability to pass through some of these cost increases, be they freight or some of these wage increases. As the frontline distribution channel sort of cleans up their inventory and attempts to get a little bit more pricing discipline as they kind of move up their price points, does that give you some ability to pass through some of these expense increases through your AUR?
Barbara Rentler:
Sure. Sure, Adrienne. Really, well, we look at it as close to the AUR pricing is, our business is built off of a great branded values bargain. So we're in a price differential business with department stores and specialty stores. So our focus is on 2 things. It's on having that meaningful price differential and offering the right values that our customers come to expect. So I don't think it's a straight pass through on to the customer because customers absolutely want certain types of value. So I don't think it's pass through to customers now.
Michael O'Sullivan:
In fact, just adding to what Barbara just said, AUR is not where we would look to try and offset some of these expenses. If you look at our patent over the last few years, the wage inflation piece is not new. Going back over the last 3, 4 years now, we've been steadily taking up wages. And despite taking up wages, we've been able to, at the same time, actually improve our operating margin. And that's really been driven by 2 things. Number one, our very strong internal focus on managing expenses; and number two, our sales comp has been very strong and that helped us to leverage some of these expenses. So I think if you'll look at on a go-forward basis, what we're going to try and do and make sure that both of those 2 factors are still important
Operator:
Your next question comes from Simeon Siegel with Nomura Instinet.
Simeon Siegel:
Sorry if I missed it, but what are your expectations for the Q1 gross margins? And then Barbara, has there been any change in the concentration of your top vendors versus prior years? And would you expect anything to change going forward?
Michael Hartshorn:
Simeon, we didn't provide the first quarter, only for the full year.
Barbara Rentler:
And in terms of our mix of top vendors. I mean, obviously, we do business at over 8,000 resources. And we wouldn't comment on the specifics of our mix of vendor, but no one vendor represents more than 3% of our sales, so...
Simeon Siegel:
And I guess more just talking about not the specific vendors but as the concentration of top vendors. Does that change?
Michael Hartshorn:
No.
Barbara Rentler:
No.
Operator:
Your next question comes from Matthew Boss with JPMorgan.
Matthew Boss:
I just had a larger picture question. As we think about the close-out availability, I guess do you see expansion of e-commerce as creating incremental opportunity, I mean, to just the best way to think about it? And then secondly, on the department stores, if they were to maintain this leaner inventory positioning and promotions were pared back over time, how do you think this impacts your business as well? So just e-commerce and department stores, any impact positive or negative as we think about off-price in your business?
Barbara Rentler:
Well, sure. First of all, there's been plenty of availability in the marketplace, so we haven't seen any supply issues. In terms of goods coming from e-commerce or coming from department stores, it's hard to differentiate where the availability is coming from. In terms of department stores, if they keep their inventories in line and they promote less, they would be promoting less because their business is better. And if their business is better, what usually goes hand-in-hand with that is that merchants -- the vendor community has more confidence to go out and produce more goods. So typically, that's where supply would come from. So if their business gets better, the supply should be better for us.
Operator:
Your next question comes from Paul Lejuez with Citi.
Paul Lejuez:
Can you give any color on your store openings this year maybe by region? Talk about California, Florida, Texas. What percent those states make up of the openings this year? And how do you think about that Ross versus dd's? And then just a second, curious about the CapEx. Can you talk about the breakdown CapEx spend this year versus last year, what that looks like?
Michael Hartshorn:
Sure, Paul. I'll start with the capital question. So about 30% -- of the $475 million, about 30% is new stores. 30% is for, I'll call it, maintenance capital and store refreshes. 15% for supply chain-related investments and then 25% is technology and other G&A. The technology is focused on refreshing some of our enterprise systems and also information security. And then in terms of store roll out, we typically don't provide by state-level details. I'll say that we're focused, again, on about 1/3 in the new markets and then 1/3 we -- you saw a quarter is dd's store openings and the rest is in our existing markets.
Paul Lejuez:
And then how are you guys thinking about the next time we'll see you guys entering new market for Ross?
Michael O'Sullivan:
Well, we -- at the moment -- well, for the last 5 years, our major new region, if you like, has been the Midwest. So for us, that's really the focus of sort of new market openings. Now if I address your question slightly to when will we start opening outside of the Midwest, it's going to be several years. So for the next -- certainly, for the next few years, new markets for us are going to be in the Midwest. And the other point I would make is, out of the 90 net new store openings, so 100 gross, only about 1/4 of those are in our new region. The other 3/4 are in existing markets or region.
Operator:
Your next question comes from Jamie Merriman with Bernstein.
Jamie Merriman:
You've alluded a couple times about the wage increase maybe more broadly and impact that you're seeing on the economy. Do you think you're seeing any evidence of what's happening more broadly in the market in terms of wage increase starting to benefit the business yet? Or is your expectation of that still to come?
Michael O'Sullivan:
There are so many factors, Jamie, that go into the sales line. So many things that can affect our sales and our comp. It's hard to isolate one individual factor. For example, to split out the impact of wage rate increases versus reductions in unemployment versus other factors that may be driving sales. So any conceptually, it's pretty -- it's good to see if the customer has more money in their pockets because of wages or because of lower taxes that, that should help us. But as I say, it's pretty hard for us to isolate and evaluate the contribution that that's making to sales.
Jamie Merriman:
Okay. And just thinking through the comp guidance, it seems like there are still maybe more to play for if you do start to see more of that comes through. Is that the right way to think about it?
Michael O'Sullivan:
Certainly. We always hope that on the comp line, that we'll do better. And yes, when we put together our guidance, we try and weigh these factors, the positives and the negatives. On the positive side, the growing economy, the lower tax rates, the higher wage rates. But on the negative side, there are some reasons for caution, too, whether it's the strong economy might drive inflation and the cost of living or improved results from some retailers may not be sustainable. It may cause a more promotional environment. There are positives and negatives that went into our guidance. But certainly, we always hope to do better in our guidance. And I think we've demonstrated, certainly, over the last few years, that if the business is there, we can chase it. So even if we guide to 1 to 2 and manage the business as if we're going to go 1 to 2, we'll always chase if the business exists and try to overachieve those with that guidance.
Operator:
Your next question comes from Omar Saad with Evercore ISI.
Omar Saad:
I kind of want to ask you a slightly philosophical question. If we are coming off a period where there was a lot of excess inventory in play and disintermediation from the rise of digital, and we are entering a period where brands are a little bit more -- a little bit careful -- more careful department stores, the industry as a whole, a little bit more careful planning inventory. Can you help us think about historically with a better macroeconomic backdrop, maybe help us think historically how the business model has performed in those periods where the economy maybe is healthier or consumer demand is healthier, but the inventory availability maybe not be as robust as it has been the last couple of years?
Michael O'Sullivan:
Sure, Omar. So I think if we look back historically at our performance, we've done well as a business when the economy is doing poorly. And we've done well as a business when the economy is doing well. And the drivers of our performance do change based upon how the economy is doing. So when the economy is doing well, typically, what happens is the price differentiation between us and department stores and other competitors actually increases. So we actually offer even better value, and that drives business to the store. The other thing that tends to happen in an improving economy is the vendors tend to make more product. So that can also help us to fuel those sales. Obviously, in a negative economy, you end up with the flip side happening. You end up with the market becoming more promotional, which makes life difficult. But you also end up with supply because, obviously, some of the sales expectations of the department stores and other retailers aren't met. So I kind of feel like if you look at the history, we've kind of done well in both types of economy. So it's not clear to us in an improving economy that we would face any serious problems.
Omar Saad:
Do you -- point blank, do you prefer one to the other or are you indifferent?
Michael O'Sullivan:
I don't know.
Barbara Rentler:
We're flexible.
Michael O'Sullivan:
Yes. That's right.
Operator:
Your next question comes from Dana Telsey with Telsey Advisory.
Dana Telsey:
As you think about occupancy costs, which it sounds like improved in this fourth quarter, what are you seeing in terms of new store occupancy costs and how those are faring versus renewal of existing leases? And also as you think about the online business, just from online-only entities gaining some share, are you benefiting from the returns? Are they showing of an off-price in terms of the returns? And how does that margin compared to a traditional margin?
Michael Hartshorn:
Sure, Dana. I'll start with occupancy cost. I'd answer the question more generally. What we've seen is that rents have stabilized and occupancy costs have stabilized both in new rentals and renegotiation of things that are coming up for lease renewal. This year, we're actually able to level occupancy cost at -- below our historical 4% comp level. Going forward, we see occupancy cost at right around the 4% in 2018.
Michael O'Sullivan:
And then Dana, on your question about online returns. It's possible that return merchandise if it's high quality and unspoiled, it could be finding its way into the off-price channel. As long as it represents great value, we'd be interested in that product. And that could be, I underline the word could, be one of the additional things that's contributing to the abundant availability that we're seeing. It -- as Barbara mentioned in her earlier answer, it's hard for us to separate out and identify where specific product was originally intended for. What we see at the end of the day is, first, quality, unspoiled merchandise that's available for sale. And obviously, if they represent a good bargain, we're interested in that.
Operator:
Your next question comes from Albert Chen with Cowen and Company.
Courtney Willson:
This is Courtney Willson on for Oliver today. We just had a question on marketing in 2018. Are you anticipating any changes to the strategy as you continue to build out your store base or if you're planning any change in the spend versus historical level? And then as you do open new stores, are you anticipating 2018 new store productivity to remain at similar levels to 2017?
Michael O'Sullivan:
Courtney, on your marketing question. Our marketing strategy and message over the years has been very consistent. The message is that we offer the best values in apparel and home fashions. I wouldn't expect that message or that message will not change and our marketing programs, the communication will not change. That said, we will look for ways, and we always do look for ways to make the message more effective, whether that's in terms of the creative or the media strategy. But the underlying message to the customer that we offer great value will be consistent.
Michael Hartshorn:
And then on the new store productivity. Given that our focus on new stores are in similar approach over the last couple of years, the new store productivity has been somewhat consistent, around 60% to 65% for us.
Operator:
Your next question comes from Brian Tunick with RBC.
Brian Tunick:
I guess maybe Barbara, for you. Can you maybe talk about what categories might have led -- and then the company in 2017? And maybe what do you think are the biggest opportunities in 2018? And then on top of that, maybe talk about the Home business. Do you have any longer-term goals of what you think Home could grow as a percentage of the company? And then maybe, Michael, on the traffic side. Just curious, any anecdotal estimates on how much competitor, bankruptcies or store closings might have aided your traffic gains this past year?
Barbara Rentler:
Sure, Brian. In terms of categories that lagged the company throughout the year. I would say the biggest category that lagged was Accessories, although as the year went on, in the fourth quarter improved. But in terms of total company, clearly, Accessories was the business that lagged the most. Opportunities for 2018, we're feeling is very broad-based, both Apparel and Home. We feel good about our Apparel business. It's moving in the right direction and always has more work to do, particularly in Ladies but it is moving in the right direction. And in terms of our Home business growing as a percent of the company. Home has been -- had good business for a number of years now. We see that continuing to grow. We don't have a particular percent of the company in mind, just that we know it's a growth area, and we feel good about it.
Michael Hartshorn:
Brian, then on impact of store closures. We are seeing a benefit to stores in proximity to the closed stores. But given the number of stores that left is not meaningful to either our overall comp or traffic statistics.
Operator:
There are no further questions at this time. I would turn the call back over to the presenters.
Barbara Rentler:
Thank you for joining us today and for your interest in Ross Stores. Have a great day.
Operator:
This concludes today's conference call. You may now disconnect.
Operator:
Good afternoon, and welcome to the Ross Stores Third Quarter 2017 Earnings Release Conference Call. [Operator Instructions]
Before we get started, on behalf of Ross Stores, I would like to note that the comments made on this call will contain forward-looking statements regarding expectations about future growth and financial results, including sales and earnings forecasts and other matters that are based on the company's current forecast of aspects of its future business. These forward-looking statements are subject to 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 2016 Form 10-K and fiscal 2017 Form 10-Qs 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:
Good afternoon. Joining me on our call today are Michael O'Sullivan, President and Chief Operating Officer; Gary Cribb, Executive Vice President, Stores and Loss Prevention; John Call, Executive Vice President, Finance and Legal; Michael Hartshorn, Group Senior Vice President and Chief Financial Officer; and Connie Kao, Vice President, Investor Relations.
We'll begin our call today with a review of our third quarter and year-to-date performance, followed by our outlook for the remainder of the year. Afterwards, we'll be happy to respond to any questions you may have. As noted in today's press release, our third quarter sales and earnings outperformed our expectations despite being up against our toughest prior year comparison and 2 major hurricanes during the quarter. We are pleased with these results, which reflect our continued market share gains in a challenging retail environment. Earnings per share for the period were $0.72, up 16% from last year. These results include an approximate $0.01 benefit from favorable expense timing that's expected to reverse in the fourth quarter. Net earnings grew to $274 million compared to $204 million in the prior year. Sales for the third quarter rose 8% to $3.3 billion with comparable store sales up 4% on top of a robust 7% gains last year. Operating margin of 13.3% was better than expected, mainly due to a combination of higher merchandise margins and leverage on above-plan sales. For the first 9 months of fiscal 2017, earnings per share were $2.36, up 15% on top of an 11% increase in the prior year. Net earnings were $912 million, up from $817 million last year. Sales year-to-date rose 8% to $10.1 billion with comparable store sales up 4% versus a 4% gain in the same period last year. By region, trends were fairly broad-based with the Midwest performing the strongest during the period. We estimate that the hurricanes in Texas and Florida had a minimal impact for the quarter as sales rebounded significantly following the storms. By merchandise category, children's was the best-performing area, benefiting from solid execution of our merchandising strategies. Similar to Ross, dd's DISCOUNTS continued to post better-than-expected gains in both sales and operating profit for the third quarter. As we ended the third quarter, total consolidated inventories were up 4%, with average in-store inventories flat compared to the prior year. Packaway as a percent of total inventories was 46% compared to 45% last year. Turning to our expansion programs, we opened 30 new Ross and 10 dd's DISCOUNT locations in third quarter, completing our 2017 store opening program. We expect to end the year with 1,408 Ross and 213 dd's DISCOUNTS stores, a net increase of 88 locations for fiscal 2017. Now Michael Hartshorn will provide further color on our third quarter results and details on our guidance for the remainder of the year.
Michael Hartshorn:
Thank you, Barbara. Let's start with our third quarter results. Our 4% comparable store sales gain was driven by increases in both traffic and the size of the average basket. As Barbara mentioned, third quarter operating margin outperformed our projections and increased 65 basis points to 13.3%.
Cost of goods sold for the quarter improved 30 basis points, driven by a 25 basis point increase in merchandise margin and occupancy and buying costs that were lower by 20 basis points each. These gains were partially offset by 30 basis point increase in freight cost, along with 5 basis points in higher distribution expenses due mainly to the timing of packaway-related costs. Selling, general and administrative expenses during the period were lower by 35 basis points as a result of leverage on our 4% comparable store sales gain and as we anniversaried nonrecurring cost in last year's third quarter. During the quarter, we repurchased 3.6 million shares of common stock for a total purchase price of $219 million. Year-to-date, we have bought back a total of 10.5 million shares for an aggregate price of $649 million. We remain on track to buy back a total of $875 million in stock for the year under the 2-year, $1.75 billion stock repurchase program approved by our Board of Directors in February of this year. Let's turn now to our fourth quarter outlook. As mentioned in our press release, we are raising our sales expectations for the fourth quarter. We now forecast comparable store sales to increase 2% to 3% on top of strong [Audio Gap] over the last several years. We are projecting earnings per share to remain unchanged at $0.88 to $0.92, as the benefit from higher comparable store sales is expected to be offset by the aforementioned expense timing shift from the third to the fourth quarter. As a reminder, our EPS guidance for both the fourth quarter and fiscal year includes an estimated benefit of $0.08 from the extra week.
The operating statement assumptions for our fourth quarter guidance include the following:
total sales are projected to grow 11% to 12%, which includes a benefit from this year's 53rd week; operating margin is projected to be in the range of 14.0% to 14.2% versus 13.6% in the prior year; net interest expense is estimated to be about $1.5 million; our tax rate is planned at approximately 37% to 38%; and we expect average diluted shares outstanding to be about 380 million.
Based on our year-to-date results and projected fourth quarter guidance, we are now planning earnings per share for the full year on a 53-week basis to be in the range of $3.24 to $3.28. On a 52-week basis, this updated forecast for fiscal 2017 represents solid projected earnings per share growth of 12% to 13% on top of a 13% gain in 2016. Now I'll turn the call back to Barbara for closing comments.
Barbara Rentler:
Thank you, Michael. Again, we are pleased with the better-than-expected results we achieved in the third quarter despite facing our toughest prior year comparisons and 2 major hurricanes.
As we enter the fourth quarter, we are encouraged by our above-plan sales and earnings year-to-date. In addition, our merchants have done an excellent job of acquiring exciting assortment of sharply priced name-brand fashions and guests to appeal to today's holiday shoppers. While we're optimistic about our prospects for the fourth quarter, our guidance reflects an uncertain external environment and the likelihood of yet another very promotional holiday season. As Michael just mentioned, we also faced our own challenging multiyear comparisons. Nonetheless, we believe that off-price will remain a strong performing segment in retail, driven by consumers' ongoing focus on value. Most importantly, we have a consistent track record of being able to deliver the compelling bargains that our customers desire. All of this makes us confident in our ability to achieve solid growth in sales and earnings over the long term. At this point, we'd like to open up the call and respond to any questions you might have.
Operator:
[Operator Instructions] Your first question is from Simeon Siegel with Nomura Instinet.
Simeon Siegel:
So with most companies calling out hurricane and warm weather impacts, can you just share any thoughts as to why you to really didn't see those pressures? And then just any way to think about operating expenses into next year, whether it's wage, freight or just anything else to keep in mind.
Michael Hartshorn:
Sure, it's Michael Hartshorn. On the hurricane impact, so we estimate that the negative impact of the hurricanes in Texas and Florida was less than 50 basis points to comp sales for the quarter end. To be clear, that estimate includes both the initial store closures and a significant bounce back following the storms. About 15% of our stores were closed at some point during the storms, but all stores have reopened and all stores remained in our comp base throughout the quarter. In terms of other weather trends outside the hurricane impacts, weather was relatively neutral for us during the quarter.
Simeon Siegel:
Okay, great. And then any thoughts on operating expenses?
Michael Hartshorn:
Yes. So on operating expenses for next year, we wouldn't comment at this point. But in our year-end call, we'll update our guidance for the year.
Operator:
Your next question is from Matthew Boss from JPMorgan.
Matthew Boss:
Can you talk about your increased top line confidence entering the fourth quarter and just anything you're seeing by category or execution opportunity versus last year? And if you drill down by region, could you just talk about new store performance in your Midwest builds and anything in Texas post the hurricanes. Any kind of color would be great.
Michael Hartshorn:
Sure. In terms of the updated guidance in the fourth quarter, as we mentioned in our comments, we're encouraged by our above-plan sales trends, not only in the third quarter, but certainly in the last six months. And our view that we're well positioned in terms of assortment and value offering for the holidays. In terms of regional performance, as we mentioned, comments -- in our comments on the Midwest, it was the strongest performing region, and that's been the case since we entered the market in 2011. Among our other geographies, Texas actually performed above the chain average with the significant sales rebound following Harvey. Obviously, that only impacted the Houston market or mainly impacted the Houston market. Florida was below the chain average with most of the state impacted by Irma, and California performed relatively in line with the chain average. Our new store credits -- go ahead. Sorry, Matt.
Matthew Boss:
No, no, go ahead. I was just going to ask about the new store productivity exactly.
Michael Hartshorn:
Yes, so new store productivity, we've mentioned this on our past calls, it's come down over the last couple of years, certainly with the entry into the Midwest and also our dd's expansion. But that said, Midwest continues to be one of the strongest comping markets for us. Overall, Ross' new stores are in the neighborhood of 60% to 65% of the chain average, with no material change this year.
Operator:
Your next question is from Brian Tunick with RBC.
Brian Tunick:
I guess, I was curious, Barbara, when you think about the biggest opportunities versus holiday last year, when you think about marketing or gifting or flow of goods, what do you think there are a couple of opportunities are? And then maybe Michael can talk a little bit about the comp composition. Should we expect at some point? Do you think AUR can start to flatten out? Or is the model really driven by increases in traffic and the basket size?
Barbara Rentler:
Sure, Brian. In terms of a product this year versus last year, what I would say is that our business is performing -- our performance is pretty broad-based right now. So we feel good as we enter into the fourth quarter that both our apparel and non-apparel businesses are working well. In terms of difference on the floor, what I would say is you'll see an expansion of gifts. And I think in terms of values on the floor, there's been a lot of availability in the market and we've had solid execution by the merchants all year, and that translates to good values in fashions on the floor for the fourth quarter.
Michael Hartshorn:
On the comp composition of the comp sales increase, Brian, as we mentioned in prepared remarks, the 4% comp was driven by traffic and the size of the average basket. That basket was driven by increase in the units per transaction with AUR down slightly. Your question specific to AUR, it's been relatively flat for a number of years. It is down slightly, but that's driven by the mix of the business.
Brian Tunick:
Okay. And if I could just throw out one more. On the market share gains you've been talking about, so far this year, any changes in how your marketing in those store clusters? Or anything you're doing differently to capture those customers?
Michael O'Sullivan:
Brian, this is Michael O'Sullivan. The answer is no, not really. I mean, we are -- we continue to experiment in that marketing with new forms of marketing, but nothing that I would point to that really has driven our comp. What's been driving our comp is really the great values that are in the store. The marketing is reporting that, but it isn't what's driving it.
Operator:
Your next question is from Kimberly Greenberger with Morgan Stanley.
Kimberly Greenberger:
Michael, I wanted to ask about SG&A. Obviously, you delivered very nice SG&A leverage here in the third quarter. It sounded like there was a $0.01 benefit to the third quarter from a shift and you anniversaried, I think, some -- I think you said nonrecurring cost from last year. So on a normal go-forward basis on a 4% comp, let's say, I know you don't guide to 4%, but in the third quarter, you delivered a 4%, what sort of normal leverage would we expect to see out of SG&A? And then I'm wondering if you can talk to us about how you're thinking about any future impacts on SG&A from wage headwinds and how we should think about Ross navigating those wage headwinds?
Michael Hartshorn:
Sure. As we mentioned, the impact to the quarter as a reminder, last year in the third quarter, we did a 7 comp, but only levered by 5 basis points. So that included a nonrecurring matter that helped our comparison this year. Going forward, the expectation would be for us to have some leverage at the 3% comp level, that's kind of the breakeven. And looking into the fourth quarter, if we performed above the high end of the guidance, I think you should expect some leverage. In terms of wages, we're going through our budget right now and we'll provide an update at year-end. But as we've always done, we'll look to mitigate any impact from wages by being more efficient in the business. Obviously, wages could also be positive for top line sales as well. So we'll update the group on our year-end call.
Operator:
Your next question is from Omar Saad with Evercore ISI.
Omar Saad:
I wanted to ask you a question about fashion and the fashion quotient, how you think about the fashion quotient as you guys build inventory for holiday and into next year. Are there trends in the marketplace that you see are applicable across categories that create consumer interest that you see opportunities? Just anything along those lines, how you're thinking about fashion in your product, that would be great.
Barbara Rentler:
Sure. I would say that there weren't really any strong, strong fashion trends out there. I mean, there's some smaller trends, but something that would be -- would change the course of what you were doing going from a skinny jeans to a wide-legged pant. There's no major fashion trend. So I think that's part of the issue as you go through, particularly in Ladies Apparel is that there aren't any real drivers out there. The trends that are out there, however, we have in our assortment. And because we've been able to execute at such a high level and have liquidity, we've been able to chase availability and get in-season goods. And so we feel pretty good about our assortments as we enter into the fourth quarter, but I actually think a big part of the fashion quotient in the Ladies business is the lack of fashion to be honest.
Operator:
Your next question is from Marni Shapiro with Retail Tracker.
Marni Shapiro:
So fantastic that traffic was up in the basket. And I was curious if the basket, was it because of -- was it a mixed shift? Is she buying something different? Or is she buying more units? I'm curious what the complexion of it was.
Michael Hartshorn:
Sure, Marni. The basket was driven by more units. AUR was down slightly, and that's been our trend for some time now, certainly over the last year, 1.5 years. The comp has been driven by a combination of both traffic in basket.
Marni Shapiro:
And are you planning AUR down? Or is it just better buys and -- or mixed shift that's causing AUR down?
Michael Hartshorn:
It's mixed shift, Marni.
Operator:
Your next question is from Paul Lejuez with Citi.
Paul Lejuez:
Just curious about the performance of women's apparel, also the home category. And curious, as we think about fourth quarter, how are you planning merchandise margin? And also curious what's price or what's baked in from a packaway perspective. Any impact that, that might have on your gross margin?
Barbara Rentler:
Sure. In terms of performance, the Ladies business performed slightly behind the chain average and home performed slightly ahead of the chain average. And in Ladies, as you would expect, that's a difficult -- it's a difficult business in the outside world, so we were pleased with that performance and continue to work on that business. In terms of Q4 merchandise margin...
Michael Hartshorn:
Margins are planned up. In our guidance, they're planned up a bit, Paul, for the fourth quarter.
Paul Lejuez:
And what's driving that, Michael?
Michael Hartshorn:
Its trend and it's a combination of above-plan performance so far. At least year-to-date, it's been driven by availability and it's been driven by our ability to stay liquid and performing above plan. It forces us to chase the business with closeouts, and there is some leverage you get on markdowns if you turn [ classic ].
Paul Lejuez:
Got you. And then just have one other piece on the gross margins in terms of the packaway impact.
Michael Hartshorn:
Yes. We wouldn't talk about the margin impact of packaway. It's usually the best in terms of margin impact, packaway. We see it as a sales driver versus a margin driver.
Paul Lejuez:
[indiscernible] as far as how things flow in and out of the DC timing there?
Michael Hartshorn:
No change from last year.
Operator:
Your next question is from Oliver Chen with Cowen.
Oliver Chen:
We had a question related to the merchandise margins and the dynamics between mark ons versus markdowns and what you've been seeing in relation to mark ons. It sounds like it's been encouraging. The other question is about the non-apparel product mix. What's your framework for thinking about how to best utilize your square footage? You've done a really good job managing inventories, but it feels like there's a nice opportunity ahead as you evaluate what customers would want to buy from you in categories other than apparel.
Michael Hartshorn:
Oliver, in terms of the complexion of merchandise margin, it's been a mix of both the [ pioneer ] or mark on and turning faster, and that's been true all year and it was fairly true in the third quarter.
Barbara Rentler:
Sure. And in terms of non-apparel in the product mix as it relates to the store, first, we've decided what businesses we want to drive and what trends we want to drive. In terms of utilizing square footage, since we cut our inventory 40% over the last 6 years or so, that space is an issue in terms of maximizing that space. We drive that base off of really what products we want to drive into -- and put in front of the customer. We don't necessarily, just say we want to fill the space to say what is it you really want and can we deliver compelling bargains, and then that's how we decide how we're going to expand the business.
Michael Hartshorn:
[indiscernible]
Oliver Chen:
And do you have any thoughts just on mark-on trends going forward? Do you expect IMU to be a multiyear benefit? Just would love your thoughts on that. And then if you have any specificity about categories, you had incremental interest in which you don't -- which you could drive intensity in, that would be interesting.
Michael Hartshorn:
Oliver, on forward-looking margin components, that's not something we talk about on the call.
Barbara Rentler:
In terms of businesses, you're asking me what businesses we'd like to expand go forward? I mean, we'll be really successful also on the call also. We're always trying to diversify the mix in the store. But giving specifics on the call, we wouldn't talk to.
Operator:
Your next question comes from Laura Champine with Roe Equity Research.
Laura Champine:
I wanted to talk a little bit about the drivers. The UPT that's headed higher, are you doing a better job on cash wrap? Or do you have consumers buying a cross-category more than they did in the past? Or what's driving that? And then on the flip side, you said that AUR is lower because of mix shift. Is that in any specific category? Are you seeing that trend across the store?
Michael Hartshorn:
Laura, on UPT, we think it's just a function of putting great values in front of the customer, and it's a product of the merchandise. So customers in, they're buying more per visit. And the second half of your question was on AUR. AUR is just down slightly and it's mixed within mixes of business. So it's not a fundamental change for us.
Laura Champine:
And it's not focused in any one category more than others, is that true?
Michael Hartshorn:
It's not. Yes, it's not.
Operator:
Your next question comes from Bob Drbul with Guggenheim Securities.
Robert Drbul:
Just wondering if in terms of the comp performance, do you feel like you've had significant benefit from competitive store closures throughout retail? And on the children's business, can you just elaborate on what you saw in children's and what led that to be such a successful category this quarter?
Michael Hartshorn:
On the store closures, no, there's not a significant benefit. There's -- the number of stores is not only not material, it impacts about 10% of the chain. But the pickup post-liquidation is not meaningful to the overall comp.
Barbara Rentler:
And in terms of the Kid's business, the performance is broad-based. So it was every segment, infant, boys, girls, and we've had really solid execution in there. And so we were able to chase a lot of that business and offer compelling bargains to the customer.
Robert Drbul:
Great. And on dd's, are you seeing success in similar categories that you're seeing at Ross? Or is there a big difference from the merchandising mix there?
Michael O'Sullivan:
Well, yes, as Barbara said in her remarks, dd's posted pretty good sales and operating profit in the quarter. I would say that, as you know, dd's has a somewhat different customer segment. But in many ways, the same factors that drove Ross' success, they're also at play at dd's. That's the focus on value, the ability to offer great bargains through opportunistic buying, but very strong execution of our merchandising and operating strategies. Those same factors apply at dd's. But the specifics in terms of what are the merchandising strategies are different, obviously, between dd's and Ross. But the overall drivers, I would say, are very similar.
Operator:
Your next question is from Roxanne Meyer with MKM Partners.
Roxanne Meyer:
My question is on your packaway business, it's been a fairly consistent percentage. But I'm just wondering in light of the continued market availability and the trends that you've been seeing, the fact that you've been chasing business, I'm wondering if you're thinking longer term about scaling that business down or changing the way that you buy over time.
Barbara Rentler:
Well, the way we think about packaway is if there's -- there's no definitive number we go out there thinking about it with. We really do it based off of what the merchandise has offered out there is for us. So if it's great deal, we buy it. And so that, oftentimes, builds to the number of that, that you get to. You're trying to get to if we're chasing business for packaway because sometimes you're compelling bargains of seasonal goods. So if it's sweaters or outdoor or things like that, you want to pack that away because you can use those to open the season and to drive sales until you get more availability in the marketplace. So we feel good about packaway, and we feel good -- very good about the contents of the packaway that we have right now.
Operator:
Your next question is from Jamie Merriman with Bernstein.
Jamie Merriman:
My question is just a follow-up on sales productivity. As you build awareness and market share in the Midwest, would your expectation be that, that new store productivity should start to come up over time? And can you just talk about for your more mature stores in the Midwest, are you seeing sales productivity at chain average levels?
Michael Hartshorn:
Sure. Certainly, we would see stores after they open given the comp that their average store volumes are increasing. Right now, we're planning the business as if the productivity would be lower in year 1 and then comp faster in the first couple years. It's unlikely that it would reach the chain average. We have been in regions for 30 years in California, which are our most productive stores. But we would expect them to continue to grow over time for sure.
Operator:
Your next question is from Mike Baker with Deutsche Bank.
Michael Baker:
Maybe a two-part question. One on dd's, is it yet -- or at what point does it become big enough to impact the comp? In other words, does the Ross-only stores comp reflects the total company comp? Or at some point, is dd's sort of dragging up the entire comp as it becomes bigger?
Michael O'Sullivan:
Yes. So Mike, at this point, dd's represents less than 10% of the business. So just mathematically, the key driver of the corporation's comp is Ross' comp.
Michael Baker:
Understood. But if at 10% of the business, if it were less mature in comping up 500 basis points better, that could sort of lift total comps by 50 basis points and be the difference between the way you guys report a whole number. So in other words, just trying to see if the core stores are comping in line with what you're reporting for the total company. And I guess, it sounds like they are. Maybe a follow-up question, is there any big differential based on the maturity of stores? I guess, you said California, which I presume are the most mature stores are in line with the chain average. But maybe if you look at 5-year-old stores versus 10-year-old stores versus 15-year-old stores, et cetera, do the comps fall off as you go out further?
Michael Hartshorn:
Yes, I'd say the differential on comp is really in the first 5 years. After 5 years, there's not a meaningful break. Again, I used California as an example. We've been in there for 30 years. And the vast majority of those stores we've been in, 10, 15 years, and there's no break and there's no lack of confidence in the stores. So the real differential is the first 5 years.
Operator:
The next question is from Lindsay Drucker Mann with Goldman Sachs.
Lindsay Mann:
I had a follow-up question for Michael on your comment that inventory has been turning faster all year and that's helped your merchandise margin. I was curious what the key driver was of that accelerated inventory turn, whether it's related to maybe new systems or processes or a product mix. What explains it? And is there more left to go there for next year where we can expect inventory turns to be faster again?
Michael Hartshorn:
Sure, Lindsay. So first, inventories have been down over 40% over a number of years. This year, it's strictly a function of how we're executing the business in open-to-buy. We go into the year with a 1 to 2 comp. We plan inventories at that level. If we can exceed that comp, you're able to chase the business and you turn faster. So this year is really a function of how we manage the business, and I think that's going to be the opportunity going forward as well in terms of when we look into next year and beyond.
Lindsay Mann:
Got it. And one for Barbara, you highlighted in your opening remarks that you're braced for a very promotional holiday. Holidays are often very promotional. I'm curious if you think there's anything different about sort of how you think this holiday season might play out or dynamics that you think might allow it to shape up differently than other kind of promotional seasons in the past.
Barbara Rentler:
Well, it's been promotional all year. What I really think is that it will be more promotional. It's already started to be more promotional. We are starting earlier, and then that last-minute push at the very end, our expectation is that it will be more promotional than it was last year as far as that is to believe, but I do believe that. And so we're trying to posture ourselves, understanding that that's what that looks like.
Operator:
There are no further questions at this time. I will turn the call back over to Barbara Rentler for closing remarks.
Barbara Rentler:
Thank you for joining us today and for your interest in Ross Stores. Have a great day.
Operator:
This concludes today's conference call. You may now disconnect.
Operator:
Good afternoon, and welcome to the Ross Stores Second Quarter 2017 Earnings Release Conference Call. [Operator Instructions]
Before we get started, on behalf of Ross Stores, I would like to note that the comments made on this call will contain forward-looking statements regarding expectations about future growth and financial results, including sales and earnings forecasts and other matters that are based on the company's current forecast of aspects of its future business. These forward-looking statements are subject to 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 2016 Form 10-K and fiscal 2017 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:
Good afternoon.
Joining me on our call today are Michael Balmuth, Executive Chairman; Michael O'Sullivan, President and Chief Operating Officer; Gary Cribb, Executive Vice President, Stores and Loss Prevention; John Call, Executive Vice President, Finance and Legal; Michael Hartshorn, Group Senior Vice President and Chief Financial Officer; and Connie Kao, Vice President, Investor Relations. We will begin our call today with a review of our second quarter and year-to-date performance, followed by our outlook for the remainder of the year. Afterwards, we'll be happy to respond to any questions you may have. As noted in today's press release, we are pleased with the better-than-expected growth we delivered in both sales and earnings in the second quarter, especially given our challenging multiyear comparison and today's volatile retail climate. Earnings per share for the period were $0.82, up 15% on top of a 13% increase last year. Net earnings for the second quarter grew to $317 million compared to $282 million for the same period last year. Sales rose 8% to $3,432,000,000 with comparable store sales up 4% on top of a 4% gain in the prior year. Operating margin of 14.9% for the quarter outperformed our projections mainly due to a combination of higher merchandise margin and leverage on our above-plan sales. For the first 6 months of fiscal 2017, earnings per share were $1.64, up 14% on top of a 9% increase in the prior year. Net earnings were $638 million, up from $573 million in last year's first half. Sales year-to-date rose 7% to $6,738,000,000 with comparable store sales up 4% versus a 3% gain in the same period last year. Sales trends during the quarter were broad-based across all major geographic regions and merchandise category. The Midwest and Southeast were the strongest regions while shoes was the best performing merchandise category at Ross. dd's DISCOUNTS also posted strong better-than-expected gains in both sales and operating profits for the quarter. As we ended the second quarter, total consolidated inventories were up 3% compared to the prior year, with average in-store inventories up slightly. Packaway as a percent of total inventories was 46% compared to 47% at this time last year. Turning to expansion programs. We opened 21 new Ross and 7 dd's DISCOUNTS locations in the second quarter. For the 2017 fiscal year, we continue to plan for a total of about 70 new Ross and 20 dd's DISCOUNTS locations. As usual, these numbers do not reflect our plans to close or relocate a handful of stores. Now, Michael Hartshorn will provide further color on our second quarter results and details on our second half guidance.
Michael Hartshorn:
Thank you, Barbara.
Let's start with our second quarter results. Our 4% comparable store sales gain was driven by increases in both traffic and the size of the average basket. As mentioned earlier, second quarter operating margin outperformed our projections, increasing 50 basis points to 14.9% compared to 14.4% last year. Cost of goods sold for the second quarter improved 25 basis points driven by a better-than-expected 35 basis point increase in merchandise margin, 20 basis points in lower occupancy costs and distribution expenses that were lower by 10 basis points. These gains were partially offset by a 25 basis point increase in freight costs, along with 15 basis points of higher buying costs. Selling, general and administrative expenses during the period were lower by 25 basis points. This improvement includes a nonrecurring benefit of approximately 20 basis points from legal-related costs. During the quarter, we repurchased 3.6 million shares of common stock for a total purchase price of $215 million. Year-to-date, we have bought back a total of 6.9 million shares for an aggregate price of $430 million. As planned, we expect to buy back a total of $875 million in stock for the year under the 2-year $1.75 billion stock repurchase program approved by our Board of Directors in February of this year. Let's turn now to our second half guidance. For the third quarter ending October 28, 2017, same-store sales are forecast to increase 1% to 2% on top of a robust 7% gain last year, with earnings per share projected to be in the range of $0.64 to $0.67 versus $0.62 in last year's third quarter. For the fourth quarter ending February 3, 2018, we are also planning same-store sales to be up 1% to 2% on top of a solid 4% gain last year, with earnings per share projected to be $0.88 to $0.92 compared to $0.77 last year. This includes an approximate benefit of $0.08 due to the 53rd week. Now, I'll provide some additional operating statement assumptions for the third quarter EPS target. Total sales are projected to grow 4% to 5%. We're planning to add 30 new Ross and 10 dd's DISCOUNTS locations during the period. Operating margin is projected to be in the range of 12.4% to 12.6% versus 12.6% in the prior year. Net interest expense is estimated to be about $2.5 million. Our tax rate is planned at approximately 37% to 38%. And we expect average diluted shares outstanding to be about 384 million. As noted in today's press release, based on our results for the first 6 months as well as our second half forecast, we now are projecting earnings per share for the full year on a 53-week basis to increase 12% to 14% to $3.16 to $3.23 on top of a 13% gain in fiscal 2016. Now, I'll turn the call back to Barbara for closing comments.
Barbara Rentler:
Thank you, Michael.
Once again, we are pleased with the better-than-expected sales and earnings gains we delivered for both the second quarter and the first half of the year. These results were driven by our ongoing ability to offer compelling bargains to today's value-oriented consumer. Looking ahead to the second half, we realize that we face our most challenging prior year comparison and a volatile retail backdrop. So while we hope to do better, we believe it is prudent to maintain a somewhat cautious outlook for the balance of this year, which is reflected in our guidance. Nevertheless, over the longer term, we are very confident in our ability to offer customers outstanding value throughout our stores. This will always be our top priority as it has proven to be the most crucial driver in consistently delivering solid results in both sales and earnings. At this point, we'd like to open up the call and respond to any questions you may have.
Operator:
[Operator Instructions] The first question is from Ike Boruchow from Wells Fargo.
Irwin Boruchow:
Michael, I wanted to ask you about the merch margin line. You guided it flat to start the year for the first time in a long time, but it's come in well above that for the first half of the year. Just kind of curious if you could talk about what's driven that upside, any specifics you can give? And then, how you're thinking about merch margin into the back half of your year?
Michael Hartshorn:
Sure, Ike. For the second quarter, as we mentioned, merchandise margin was up 35 basis points. It was really driven by a combination of better buying, but also when we're able to exceed our initial sales plan, there's markdown leverage and it helps us move to drive the business with closeouts, so that was beneficial in the second quarter.
As we think about the third quarter, our current guidance assumes that merchandise margins are slightly lower, but that's because we're up against a 50 basis point increase from Q3 of last year.
Operator:
Your next question is from Mike Baker from Deutsche Bank.
Michael Baker:
I will ask about what you're seeing in Hispanic markets. I know you talked about some of your regional trends, but there's been some concern that some Hispanic markets might not be performing as well. Anything to call out there in terms of your same-store sales?
Michael O'Sullivan:
Mike, we track and analyze the performance of our stores based upon various different demographic factors and obviously that includes looking at Hispanic markets. And the answer is no. We have not seen an issue in those markets.
Michael Baker:
Okay. That's helpful. If I could ask one more. I was curious about the promotional environment. Some of the department stores lowered their inventories. Their gross margins were lower though, which would speak to being promotional. Obviously, you guys did well, but I'm wondering if you had any comments on the promotional environment from some of your competitors.
Barbara Rentler:
Sure. Although the inventory levels were down, the promotional environment continue to be very aggressive. And actually, we just consider that, that is the way to do business now, that, that is going to continue as we go forward through back-to-school and through holiday.
Operator:
Your next question is from Omar Saad from Evercore ISI.
Omar Saad:
I wanted to ask about marketing. How you guys are evolving your marketing strategies in this digital era? Are you using new techniques because the traffic and the comp trends are obviously quite excellent and counter to what's happening out there in the rest of the retail? I'm wondering if you can point to some new media strategies that might be working for you.
Michael O'Sullivan:
Omar, it's Michael O'Sullivan. I would say that our marketing strategy, marketing message, marketing programs remain fairly consistent. The message in those marketing programs is that we offer great values. And that's -- it's really the great values that, I think, have driven our trend and will continue to drive our trend rather than the marketing programs.
Now, within your question, you mentioned sort of new marketing techniques. It is true. We're absolutely experimenting and expanding nontraditional forms of marketing, but I'd stop short of saying that those are really making a significant contribution to our trend. They're helpful, but they're not really what what's driving our business.
Operator:
Your next question is from Lorraine Hutchinson from Bank of America Merrill Lynch.
Lorraine Maikis:
Can you provide some information around comp metrics? Was traffic positive? What did you see in ticket? And anything else that you could share to help us get a feel for how you drove that plus 4%?
Michael Hartshorn:
Sure, Lorraine. As we mentioned in our prepared remarks, the 4% comp was driven by higher traffic and an increase in the size of the average basket. Proportionately, traffic contributed more than the basket. The higher basket was driven by an increase in more units. AUR was down just slightly due to the mix of business.
Operator:
Your next question is from Paul Lejuez from Citi.
Paul Lejuez:
The Home business. Could you just comment on how Home performed during the quarter? And also, curious, what percent of your business is Home right now in Ross versus dd's? And where do you see that going over time?
Barbara Rentler:
Sure. Home outperformed the company. It continues to be a strong business for us as it is for many people. In terms of our total percent to company...
Michael Hartshorn:
Yes. We wouldn't -- Paul, on the breakout between Ross and dd's, we wouldn't break that out separately. On a total basis, it's upper 20% of the business is Home for us, 25%. It's about a quarter.
Paul Lejuez:
Got you. I'm curious, have you guys started thinking about store growth for Ross versus dd's next year? I'm just curious how far away are we from maybe seeing the growth start to skew more towards dd's versus Ross? Or is that very far off into the future?
Michael O'Sullivan:
Yes. We'll comment more at the end of the year on our specific plans for 2018, but I think for planning purposes, you can assume that our store openings will be pretty much in line with where they've been the last couple of years. 80 to 90 new stores, approximately 20 to 25 of those being dd's and the rest being Ross. I wouldn't expect a significant change in that over the next couple of years.
Operator:
Your next question is from Laura Champine from Roe Equity Research.
Laura Champine:
You just put up a very strong comp on a 2-year basis and the guidance for next quarter's comp is perhaps even better, implies that you could do even better, an 8% to 9% comp on a 2-year basis. Is your confidence in continuing to grow the comp next quarter, the one we're currently in, is that driven by trends you're seeing today? Or what else may you be factoring into that assumption?
Michael Hartshorn:
Sure, Laura. While we do face our most challenging prior year comparisons in Q3, it's clear to us that the consumer continues to favor retailers that offer compelling value. And we think that bodes well for us going into the third quarter.
Operator:
Your next question is from Oliver Chen from Cowen and Company.
Oliver Chen:
We had a question related to inventory. It's been extremely well managed throughout the years. What are your thoughts for what's next? And it feels like your stores could even have more stuff and there's nice opportunities in new categories. So just a question about different priorities with inventory management and what you can do to potentially even maximize the existing space you have? And then, longer term, I was just curious about what's in your mindset in terms of your corporate strategies and what you're thinking about with digital at large over the next 5 years?
Michael Hartshorn:
Oliver, on the inventory question, so we've gone through a period of 7, 8 years of inventory reduction. Our total inventory is down over 40% over the last number of years. So as we look at it going forward, we're comfortable operating at our current levels. That -- those reductions obviously have contributed to significant margin improvements, but we're in the very late innings of those reductions and are comfortable at the current levels.
Michael O'Sullivan:
And then on your question about digital, Oliver, if I break it into, first of all, marketing, we are -- over the last 5 to 8 years, we've gone from spending really nothing on sort of nontraditional digital marketing, so to speak, to a significant chunk of our marketing budget now goes into those media. And we're pretty happy with the results. A lot of that space is still evolving, so I think we have additional things to learn, but I would be surprised if we didn't further increase our marketing mix in that direction over time.
And then, separately, I don't think this is what you were getting at, but separately, digital sort of e-commerce, we have no plans to pursue. We haven't changed our view. We have no plans to pursue e-commerce at this point.
Oliver Chen:
Okay. And are your inventories too lean because they're so tight? I'm just curious where you will reach a point where you can do more with more?
Michael O'Sullivan:
We -- obviously, we watch very closely our inventory turns in the stores. And given our ability to continue to drive comp with a 4% comp in this past quarter on top of 4% last year, we feel pretty good. I think we're capturing the business that's out there.
Now, obviously there's always -- we always look at the mix of businesses and if some businesses are growing more rapidly, then we might be more aggressive on inventory, but that's really a business by business thing rather than overall.
Operator:
Your next question is from Michael Binetti from UBS.
Michael Binetti:
So just on your comments that the consumer is choosing value is the answer to the focus for third quarter and how we get to the comp with the difficult comparison, maybe you could help us with some of the dimensionality on a couple of things. First off, can I assume that the plan is to deliver value and that the comp assumes strong traffic and maybe some more AUR pressure than we saw last quarter? And then, maybe some help on how to think about gross margin versus SG&A. Are you willing to take some more merchandise margin pressure than we've seen in recent quarters to help you anniversary that big comp?
Michael Hartshorn:
Yes, Michael. On the comp, if we think about the components between first and second quarter and our current trends in the second quarter, the performance was fairly broad, broad-based across merchandise divisions and regions. So we feel confident that the consumer is responding to value and we feel good about our inventory entering the third quarter.
Michael Binetti:
And maybe I could ask you just a follow-up on Lorraine's question from earlier. A little bit more on the AUR. What is driving the AUR in your business today? Is it a mix function? And then, same question on what's -- you've had some nice comments on the units per transaction, too. What -- are there categories that are helping you guys drive the consumer to pick up a couple extra items and throw them in the basket?
Michael Hartshorn:
Yes. I mean, on AUR, AUR has been relatively flat over the last several years. They're down slightly. Again, that's mix-related based on what's driving the business.
I'd answer your question on the basket. If I go through the merchandising areas, all major merchandising areas were positive during the quarter as well as merchandise region. We did call out shoes during the quarter. Overall, non-apparel, during the second quarter, outperformed apparel. So feel really good about the trends and believe we're set up well for a strong back half.
Barbara Rentler:
Mike, I think the merchants have been able to deliver value to the customers. So in this promotional environment where value moves a lot, one of the critical things is for a merchant to understand the values as they move and to respond appropriately. And so with that comes potentially mix issues based off of what's available, based off what the customer wants, but really understanding that movement of value as you move along and not really recognizing how promotional it is and how it's going to remain that way, I think, is a critical part of what the merchants do every day and has added to our broad-based success in merchandise categories in Q2.
Michael Binetti:
I guess, my question was more, you've seen the bogeyman, the 7-comp coming for a long time. You knew about it a year ago. So is it -- look, the strategy here is we know value is working and the strategy for a long time has been to buy up per unit, so we'll see if the traffic component of the comp is what accelerates in the 2-year to help you guys lap that. Is that what we should expect it to be?
Michael Hartshorn:
Well, a couple of things, Michael. The -- our outlook for the back half has not changed from the beginning of the year. So again, why we feel really good, that's the way we plan the business. If you looked at our -- the way we guided the back half, it hasn't changed. The upside to the year was based on the outperformance in the second quarter. So the $0.06 that we added to the high end of the range for the year was all based on second quarter performance.
Operator:
Your next question is from Simeon Siegel from Nomura Instinet.
Simeon Siegel:
I think you spoke to the merch margins. Any color you could share on the 3 and 4Q gross margins embedded within your guides? And then, could you quantify the concentration of your top vendors within revenues at this time and has that changed at all?
Michael Hartshorn:
In terms of specific guidance in Q3 and Q4, the only guidance that we gave was my comment on merch margins and the comparison versus last year. So we wouldn't give any further detail on that on back half margin.
Michael O'Sullivan:
And then, on the vendor base, no, no real changes to that. As you know, we have a very large, diverse and fragmented vendor base with lots of vendors. And from time to time, our different vendors become more or less important, but no single vendor is particularly important in the overall mix.
Operator:
Your next question is from Kimberly Greenberger from Morgan Stanley.
Kimberly Greenberger:
I wanted to ask, the third quarter comp guidance of plus 1% to 2%, is it fair to assume or could we assume that the business is running in that range so far here in the third quarter?
And then, secondarily, it looked like there were a number of going out of business sales during the second quarter, particularly among department stores. I know the environment is tough and seems to be just getting tougher every year, but Ross seemed to sail right on through that undisrupted. I just wanted to know if there was any disruption at all in stores that were near those store closings. Or did you really just not see it at all? Obviously, we're not seeing any impact in the total company comp, but you obviously have more granular insight.
Michael Hartshorn:
Kimberly, we wouldn't comment on third quarter trends.
On the store closures, what we're seeing is stores that are located close to the stores during liquidation has a slight negative impact and then post-closure, a slight positive impact. That said, the impact to the chain is not material given -- on a base of close to 1,600 stores.
Operator:
Your next question is from Bob Drbul from Guggenheim.
Robert Drbul:
Two questions. I was wondering if you could comment on how your business performed in California. I think there was a bit of a drag in the first quarter, I think, largely weather. And I was also wondering if you might just comment on the women's business and how that's been performing for you.
Michael Hartshorn:
On regional performance, all of our major markets, California, Texas, Florida were relatively in line with the chain average in the second quarter.
Barbara Rentler:
And in terms of the ladies' business, ladies', once again, posted a positive gain in the quarter.
Operator:
Your next question is from Dana Telsey from Telsey Group.
Dana Telsey:
As you think about wages and shrink, any update on those 2 components and game plan for the second half of the year? And then, on dd's and that strong performance on sales and operating income, what are the key drivers there? And has anything changed in that business?
Michael Hartshorn:
Sure, Dana. On shrink and wage question, no changes are expected in shrink trends. We continue to operate at very low levels, record levels for us. And we typically take our physical inventory in the third quarter. So we'll have an update if any change to that trend in Q3.
On wages, we do expect the wage pressure to abate somewhat in the second half as we're now anniversary-ing the most recent company-wide wage increases that took place in last year's second quarter. As a reminder, our guidance for SG&A, the leverage point remains at about 3% for us for the year.
Michael O'Sullivan:
And Dana, on your question about dd's, as Barbara mentioned in her remarks, we were pleased with dd's' strong performance in terms of sales and operating profit in the second quarter. dd's basically continued, as it has over the last several quarters, its good results.
In terms of what's driving that, frankly, it's similar to many of the other things that we've talked about on this call so far. In particular, the dd's customer is responding well to the values that we're offering.
Operator:
Your next question is from Lindsay Drucker Mann from Goldman Sachs.
Lindsay Mann:
I was hoping -- could you tell us what proportion of your sales come from credit cards?
And secondly, on the SG&A piece, well, the leverage point on a 4-comp, you leveraged operating margins pretty nicely. SG&A growth was slower than what we had seen in 1Q. And sorry if I missed this, but can you talk about the rate of SG&A increase in 2Q being lower versus 1Q and what we should be thinking about for the back half?
Michael Hartshorn:
Sure. On your question on credit, it's about 1/3 of our business, Lindsay.
And then, on the SG&A leverage, as we mentioned in the call, we had 25 basis points of leverage on a 4-comp. 20 of that 25 was related to a nonrecurring legal matter. So baseline, 5 basis points of leverage. As I mentioned on wages in the back half, we should expect less leverage. So at a 1- to 2-comp, there may be some deleverage, but at a 3, we should get leverage.
Lindsay Mann:
Okay. Got it. And then, can you comment on how your new stores are performing, new store productivity, the productivity of your new openings for Ross and dd's relative to what you've seen in last year or years past?
Michael Hartshorn:
Sure. So as we mentioned in the past, our new store productivity has come down since we entered the Midwest in 2011 and also our growth of the dd's chain has impacted overall productivity. I would say, though, in the last couple of years, it's been very steady at or above our expectations. Overall, Ross new store is about 60% to 65% of the chain average and then tends to comp faster in the first couple of years.
Operator:
Your next question is from Brian Tunick from RBC.
Brian Tunick:
I guess, 2 or 3 questions. Number one, I know you guys don't manage to a packaway number per se, but obviously there's been a lot of concern given what the vendors have been talking about. So just curious if you can maybe talk about the buying staff, what you've been doing there, maybe turnover in your top, I think Simeon asked, 10 vendors. But just curious more about how packaway could continue to run at these levels given what the vendors seem to be saying?
Second question would be maybe from a store growth runway and the returns you're seeing on the new stores, at what point would you guys consider a new concept like Home, which seems to something people are moving into? And then, thirdly, on freight contracts, Mike, just curious, what's the length of the contracts? And how is your best viewpoint going into next year?
Michael Hartshorn:
I'll start on the last one because that's probably the easiest, Brian. On freight, we expect there to be a headwind for the rest of the year. Contracts vary. We have a pretty good viewpoint for the rest of the year and we expect it to continue to be a headwind. And then, going into the next year, we'll talk more about that on the year-end conference call.
Michael O'Sullivan:
I'll take the second question and maybe Barbara will take the first. So we'll work in reverse order.
So on the store growth runway, the -- we've put out there a store potential number of 2,500 stores, and that's 2,000 Ross, 500 dd's. We're only at 1,600. So we've got many years to go before we hit that number. You've mentioned Home specifically and moving into, I guess, the separate Home concept. We're very excited about Home. Our Home business has been one of our strongest performing businesses for a number of years, but we feel very happy with our ability to really go after that within our existing concepts and really sort of continue to grow that business within Ross and dd's rather than through a separate concept.
Barbara Rentler:
And as it pertains to packaway, the packaway number fluctuates based on availability in the market and the way the merchants see it. And there have been -- there's been plenty of branded bargains in the marketplace. So there is availability. I know there isn't a lot of talk about different vendors having different strategies, but vendor strategies fluctuate over time and net-net is that there are a lot of goods in the marketplace and a lot of branded goods. And so we feel pretty good about the position that we're in and the content that we have.
Operator:
The next question is from Mike Baker from Deutsche Bank.
Michael Baker:
Just 2 quick follow-ups that -- if I missed them, I apologize, but I don't think you talked about this. How about trend through the quarter by month? Anything to call out there?
And then, secondly, you said your buying costs were up. I'm just curious as to what happened there.
Michael Hartshorn:
Sure, Michael. So trends were steady during the quarter. May was slightly stronger than June and July, but -- which were similar.
In terms of buying costs, buying costs increased, as we mentioned, 15 basis points for the quarter, which mainly reflects higher incentive costs given our performance, but also ongoing investments that we continue to make in our most important asset, our buying organization.
Operator:
There are no further questions at this time.
I will turn the call back over to Barbara Rentler for closing remarks.
Barbara Rentler:
Thank you for joining us today and for your interest in Ross Stores. Have a great day.
Operator:
This concludes today's conference call. You may now disconnect.
Operator:
Good afternoon, and welcome to the Ross Stores First Quarter 2017 Earnings Release Conference Call. [Operator Instructions]
Before we get started, on behalf of Ross Stores, I would like to note that the comments made on this call will contain forward-looking statements regarding expectations about future growth and financial results, including sales and earnings forecasts and other matters that are based on the company's current forecast of aspects of its future business. These forward-looking statements are subject to 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 2016 Form 10-K and fiscal 2017 Form 8-Ks on file with the SEC. 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 Balmuth, Executive Chairman; Michael O'Sullivan, President and Chief Operating Officer; Gary Cribb, Executive Vice President, Stores and Loss Prevention; John Call, Executive Vice President, Finance and Legal; Michael Hartshorn, Group Senior Vice President and Chief Financial Officer; and Connie Kao, Vice President, Investor Relations.
We will begin our call today with a review of our first quarter performance, followed by our outlook for the second quarter and fiscal year. Afterwards, we'll be happy to respond to any questions you may have. As mentioned in our press release, we achieved respectable growth in both sales and earnings during the first quarter, despite the uncertainty and volatility in the external environment. Earnings per share for the period were $0.82, up from $0.73 in the prior year. Net earnings were $321 million, up from $291 million last year. First quarter sales increased 7% to $3.3 billion with comparable store sales up 3%. Sales gains at Ross were broad-based across most merchandise categories and geographic region. First quarter operating margin of 15.2% exceeded our expectations due to above planned sales and merchandise margins. As we ended the first quarter, total consolidated inventories were up 6% versus the prior year with average in-store inventory down slightly. Packaway as a percent of total inventories was 46%, similar to last year. Despite challenging multi-year comparison, dd's DISCOUNTS also saw continued solid growth in same-store sales and operating profits in the first quarter. Our store expansion program remains on track with the addition of 23 new Ross and 5 dd's DISCOUNTS stores in the first quarter. We are planning a total of 90 new locations in 2017, comprised of approximately 70 Ross and 20 dd's DISCOUNTS. As usual, these numbers do not reflect our plans to close or relocate about 10 older stores during the year. Now Michael Hartshorn will provide further color on our first quarter results and details on our second quarter guidance.
Michael Hartshorn:
Thank you, Barbara. Our 3% comparable store sales gain was driven by higher traffic as well as an increase in the size of the average basket. While first quarter operating margin of 15.2% decreased relative to last year's 15.4%, it exceeded our expectations.
Cost of goods sold was flat for the quarter. Merchandise margins improved by 15 basis points while distribution and occupancy costs declined by 15 and 5 basis points, respectively. These improvements were offset by a 35 basis point increase in freight expenses. Selling, general and administrative expenses during the period increased by 20 basis points mainly due to higher wages. Earnings per share for the quarter also benefited by $0.01 due to favorable expense timing that is expected to reverse in subsequent quarters. During the first quarter, we repurchased 3.3 million shares for a total of $215 million. We remain on track to buy back as planned a total of $875 million in stock for the year under the new 2-year $1.75 billion program authorized by our Board of Directors in February of this year. Let's turn now to our second quarter guidance. For the second quarter ending July 29, 2017, we are forecasting same-store sales to be up 1% to 2% on top of a 4% gain last year with earnings per share of $0.73 to $0.76 compared to $0.71 last year. Our guidance for the second quarter is based on the following assumptions. Total sales are projected to increase 4% to 5%. We expect to open 28 new stores during the period, including 21 Ross and 7 dd's DISCOUNTS locations. Second quarter operating margin is projected to be 13.9% to 14.1%, down slightly from last year's 14.4%, reflecting our forecast for higher freight costs and wage costs. In addition, net interest expense for the quarter is estimated to be about $3 million. Our tax rate is expected to be approximately 37% to 38% and weighted average diluted shares outstanding are projected to be about 387 million. Based on our first quarter results and second quarter guidance, we now project earnings per share for the 53 weeks ending February 3, 2018, to be in the range of $3.07 to $3.17 compared to $2.83 last year. As a reminder, our forecasted EPS for 2017 includes an approximate benefit of $0.08 per share from the 53rd week. Now I'll turn the call back to Barbara for closing comments.
Barbara Rentler:
Thank you, Michael. As I said earlier, we had a solid first quarter, despite the challenging external environment. Looking ahead, we have plenty of liquidity and are open-to-buy to take advantage of the terrific opportunities in the marketplace and offer shoppers the best bargains possible. That said, we also face our own increasingly difficult prior year comparisons, along with political macroeconomic and retail climate that are likely to remain uncertain. So while we hope to do better, we are maintaining a somewhat cautious outlook for the balance of the year. Over the longer term, we are confident the off-price sector will remain a strong performing segment of retail as consumers continue to seek value. In addition, we believe our operating strategies and ongoing investments in people, processes and systems should enable us to drive respectable growth in both sales and earnings in 2017 and beyond.
At this point, we like to open up the call and respond to any questions you might have.
Operator:
[Operator Instructions] Your first question is from Lorraine Hutchinson from Bank of America Merrill Lynch.
Lorraine Maikis:
Last year, in the first quarter, you had some challenges with the women's apparel business. Can you talk a little bit about how that performed and perhaps your learnings from last year and how you've made changes? And then, lastly, what opportunities you see for the second quarter in that division?
Barbara Rentler:
Okay. Ladies' comparable sales for the first quarter were positive. We feel that the changes we made, we no longer have those lingering execution issues that we had last year on the challenges. We feel that those are behind us. We've made the appropriate changes. A lot of those issues were around seasonality in color and execution. So we feel that, that – that we made progress during '16, that we've made additional progress in Q1 and that we're going to continue to move forward. And there are opportunities as we improve our assortments in the second quarter.
Operator:
The next question is from Oliver Chen from Cowen.
Oliver Chen:
The in-store inventories are really attractively down. It really seems like there could be opportunities for you to explore optimization space within your stores, whether that be new categories or continuing to enhance the cash [ drop ]. Could you speak to some guardrails or framework you're thinking about as you embark on just making sure you maximize the real estate space that you have? Or what you'll think about square footage to maximize ROIC given that there could be some opportunities there?
Michael O'Sullivan:
Sure. Oliver, it's Michael O'Sullivan. It's a good question because, as you know, over the last several years, we've reduced average inventory in store by about 40%. So this is a question we've actually been working on for some time. And we've been using the extra space that we've created, if you like, in stores to really look at 3 things. One is make the stores easier to shop just by organizing the store in an easier to shop way; secondly, expanding into faster growing or new categories; and then thirdly, when it comes to new stores, be more flexible in terms of the store size, the new store openings. So I would say we're actually pursuing a mix of all 3 in terms of, as you say, optimizing how we're using the space.
Operator:
Your next question is from Marni Shapiro from Retail Tracker.
Marni Shapiro:
As you guys are looking out, you're one of the few opening stores still and there are a lot of people who are closing stores. Can you talk a little bit about what you're seeing on the rent? And I guess, even the relief side beyond 2017 and I suppose even part of 2018 for your stores.
Michael O'Sullivan:
Sure, Marni. We're very happy with the availability of the real estate locations that we're seeing. And as you'll appreciate, typically, the real estate locations we're seeing now really feed the pipeline for the next 2, 3 years. So we're pretty happy with that outlook. There aren't -- as you say, there aren't many retailers out there who are opening 18 to 19 new stores a year. So therefore, landlords are pretty happy to see us. We have a great real estate team, a great network and they've done a nice job finding new locations. In terms of rent and occupancy costs, we're certainly taking opportunities where they exist to negotiate and renegotiate those. But I would say that for the most part, rents and occupancy are fairly stable at this point.
Operator:
The next question is from Lindsay Drucker Mann from Goldman Sachs.
Lindsay Mann:
Coming off of the first quarter was especially challenging for a number of large retailers, department stores, specifically with that negative traffic and tough comps. Barbara, can you talk about how that affects your business, what you're seeing in the marketplace or in your business that might be a spillover related to the broader macro?
Barbara Rentler:
Sure. What we're seeing in the marketplace is there's a lot of availability. It's pretty broad based and as you know, availability is often the result of department stores not making their plan and their forecast, so that's the one thing we would see in the immediate. In the future, obviously, it gives us an opportunity, I guess, the department store business is challenging to gain more market share.
Lindsay Mann:
Okay. And if I could follow up, I think as we started -- as we exited 4Q and you were looking at 1Q, you had a cautious tone given what seem to be a slower start to the quarter. Could you talk a bit about how the quarter played out and ultimately, allowed you to beat your initial targets?
Michael Hartshorn:
Sure, Lindsay. In terms of trends during the quarter, certainly, like you saw and I think across the retail landscape, sale strengthened as we move through the quarter.
Operator:
The next question is from Kimberly Greenberger from Morgan Stanley.
Kimberly Greenberger:
I was wondering, looking back to February, did you have any sort of impact on your business from the delay in tax refunds? And I wasn't sure if you might have had an opportunity to quantify that or not. And then Barbara, on -- you talked about sales gains were relatively broad based across most merchandise categories and regions here in the first quarter. Were there areas where you saw some, let's say, improving momentum in your business where you see opportunity to really maximize in any of those categories as we go through the rest of the year?
Michael Hartshorn:
Sure, Kimberly. It's Michael Hartshorn. The delay in tax refunds, it certainly wasn't a positive for the quarter. The volatility made it a little bit more challenging to plan and operate the business. It's hard to say though if there was a negative impact to the overall quarter from the refunds. I'll give you some stats on -- also on regional performance. For us, Southeast Florida and the Midwest were the top-performing regions. The Midwest continues to be very strong region for us, it's been a top-performing region for over 3 years. I call on other major markets. California was slightly below the chain average given the unfavorable weather with the storms during the quarter. Texas performed in line with the chain, and that's an improvement from the second half of 2016 when it was below the chain average.
Barbara Rentler:
And then, Kimberly, in terms of areas that are improving the momentum, sales really were pretty broad based throughout the company. Ladies continues to make progress. The Ladies business is always a challenging business since there's really no major sales trend, fashion trends out there unless you really have weather to drive it, particularly in Q1, Ladies continues to be a challenge. But we do feel like we are improving on our execution. And so if we continue to do what we need to do, our expectation is that it would improve as we get into second quarter. But again, there is -- one of the real problems in Ladies is there is no real overriding fashion trend to drive it.
Operator:
The next question is from Bob Drbul from Guggenheim.
Robert Drbul:
I was just wondering, there's a lot of discussion around certain vendors that are trying to pull back from the off-price channel. And are you seeing any of that in your discussions? And can you maybe just talk to any other new brand opportunities that you're seeing or categories that are becoming more available to you?
Barbara Rentler:
Sure. Yes, I know there's been a lot of discussion about vendors wanting to pull back. Well, we haven't really seen that. We continue to see plenty of branded bargains in the marketplace. And quite frankly, vendors have strategies that have fluctuated over time. And we do business with over 8,000 vendors, so we've been able to successfully navigate over the years through all of these changes. In terms of new brands, we really wouldn't talk about brands -- specific brands on the call, and same thing pretty much for new categories where we're testing.
Operator:
The next question is from Paul Lejuez from Citigroup.
Paul Lejuez:
Can you talk about how wages impacted your earnings growth this quarter versus what you expect over the next several quarters and even looking out beyond '17?
Michael Hartshorn:
Sure, Paul. We expect wages to abate in the second half of the year as we anniversary the most recent wage increases that took place in last year's second quarter for us. So our guidance though still for the year assumes an SG&A leverage point at about 30%, which is in line with historical averages.
Paul Lejuez:
Got you. And then I think -- sorry?
Michael O'Sullivan:
Well, I was just going to add, further out, I think you had asked beyond 2017, it's hard for us to be precise beyond the current year. But we've taken the view that wage pressure is probably going to be a reality for the next several years. Certainly, in some of the major states that we're in, there's legislation that's already been passed that pushes up the minimum wage over the next several years. So we're expecting continued wage pressure, but it's hard to be precise about that.
Paul Lejuez:
Got you. And I think you guys were looking for flattish merch margin for the year. Has the first quarter experience or buying environment changed that view at all? Just curious what your outlook is on merch margin specifically.
Michael Hartshorn:
No. We haven't changed our outlook, Paul, even though we exceeded merch margins by 15 basis points during the quarter. Though that was primarily driven by above plan sales, which allowed us to leverage markdowns and drive the business with closeouts. Just after 1 quarter, we wouldn't change our outlook for the year.
Operator:
The next question is from Matthew Boss from JPMorgan.
Matthew Boss:
So I guess, just to piggyback on that. As we think about the gross margin line longer term, you've taken the inventory down 40% as you outlined. Do you see further opportunity on the inventory front? And is it best to think about, at this level of comp, flattish gross margins as a whole? And then just one micro on the freight. What is the headwind? What's the magnitude in the second quarter, because I know you outlined that?
Michael Hartshorn:
So we didn't say specifically on the basis point impact, though. We -- beginning in Q4, we did -- have seen a tightening of carrier rates as well as fuel costs that are up against some very low levels last year. Right now, we expect freight costs to be a headwind for the remainder of the year and that's reflected in our guidance.
Michael O'Sullivan:
In terms of your question about the outlook for gross margin, there were really 3 things that have helped us drive our gross margin improvement over the past several years. The inventory reductions we've taken have obviously helped us to drive down markdowns, that's been important component. Improvements in our shortage control, the investments we've made there, again, have helped to drive our gross margin. And then the third component has been ahead of plan sales, driving, obviously, ahead of plan terms. As we look forward, of those 3, I think there's limited opportunity left in the first 2, the inventory reduction and the shortage control. We'll continue to manage those tightly. But I think, realistically, there's a limit to what more we can do. So most of the growth on gross margin going forward is going to have to come from the sales line in terms of ahead of plan sales.
Operator:
The next question is from Adrienne Yih from Wolfe Research.
Adrienne Yih-Tennant:
My question is on the home category. I was wondering -- there's, obviously, some of your competitors are expanding into that category more aggressively and actually launching a secondary concept here in the United States. So I was wondering what your plans are with your home sales? You obviously have a better quarter of your sales coming from there, if you can help us with the strategy there.
Barbara Rentler:
Sure. Home is actually been one of our strongest categories over the last couple of years and we believe that there is further opportunity to grow the business. But for competitive reasons, we wouldn't disclose a specific target.
Operator:
The next question is from David Mann from Johnson Rice.
David Mann:
Question about your distribution centers. You made a lot of investment, I guess, in the last couple of years, you're starting to see some benefit. Where are you in terms of the opportunity to leverage those investments and improve productivity? How much longer do you think you can get gains there?
Michael Hartshorn:
Sure, David. So in the first quarter, DCs levered by about 15 basis points, and that was all due to both efficiencies in the DCs and also fixed cost leverage. So we would, certainly, over the next couple of years expect to see -- have some ability to lever the fixed cost there as we don't expect additional significant investments in the next couple years.
Operator:
The next question is from Laura Champine from Roe Equity Research.
Laura Champine:
In California where you got your highest density of stores, do you think that market is maturing? And along those lines, as we look at next year's store openings, will those be more focused in the Midwest or other lesser penetrated markets?
Michael Hartshorn:
In terms of California, we continue to see comps there, certainly, over the last couple years. I mean, we've obviously been in the market for 30 years and we continue to comp. So we continue to believe we have opportunity to comp stores there.
Michael O'Sullivan:
In terms of the breakdown of our new store openings, I don't think that's going to change materially. I mean, from year-to-year, you could see a small adjustment, but I don't expect to see a material change. So the way to think about it, is about 1/3 of our new stores, more or less, are in the Midwest, about 1/3 are in sort of existing, if you like, Ross markets outside the Midwest and then the remainder are dd's new openings.
Operator:
Your next question is from Brian Tunick from RBC.
Brian Tunick:
Was curious regarding your stores located near the liquidation areas of Macy's or Sears and Kmart. Just any comments regarding how your stores performed in those areas? And have you thought about doing any kind of proactive marketing events with what JCPenney will be doing coming up in the second quarter?
Michael Hartshorn:
Sure, Brian. The closures were fairly recent and late in the quarter, so the impact would have been barely minor to the quarter. Over the long term though, fewer stores, fewer competitors certainly create more market share opportunities for us, which should be a positive factor for the business.
Operator:
The next question is from Ike Boruchow from Wells Fargo.
Irwin Boruchow:
Michael, just to close the loop on gross margin, I mean, the compares get a little bit more difficult as the year progresses. How should we -- is there anything we should keep in mind in our models on the gross margin line? Do you expect flat to up, remainder of the year? And is there something embedded in your fiscal year guide just on the gross margin line? Just help us out.
Michael Hartshorn:
No. I wouldn't change anything that we said in our initial call, Ike, earlier in the year that we expect going into the year that we expected merchandise margins to be relatively flat and to call out, at this point, that we think freight will be a headwind to the remainder of the year.
Operator:
[Operator Instructions] Your next question is from Mike Baker from Deutsche Bank.
Michael Baker:
I want to ask about online competition. And I think it's clear that you guys have taken share from department stores and online. May not be impacting you as you continue to comp. But I guess, how do you -- how can you tell or how do you know that your customers wouldn't buy from you online? What have you done to ask your customers because perhaps you are losing some share or losing some sales on the table without the online. But I know, economically, it doesn't work right for you but are your customers demanding it at all?
Michael O'Sullivan:
We haven't had any -- we certainly haven't had any communication from customers that they're demanding e-commerce from Ross. I think that's mainly because of the type of business we run. I mean, it's important to keep in mind we're a moderate off-price retailer, a low averaging of retail around about $10. So as you mentioned, Mike, the economics really don't work. We offer a very broad assortment which, again, is hard to replicate online. And a treasure hunt environment, which, again, is very difficult to replicate outside of the bricks-and-mortar format. So overall, we feel like it's very difficult for an online retailer, even if that retailer was us to sort of compete with what we offer in our stores. That's not to say that it's not important for us to monitor what's going on online and to monitor online competitors. We do that all the time.
Michael Baker:
Well, and I appreciate that. If I could just follow up, you said you haven't hadn't had communication with your customers. But dare I ask, have you asked them? In what way would you ask your customers, if we did have an online site, is that something that would be attractive to you?
Michael O'Sullivan:
I think it's hard to know how you would actually get at that question other than looking at our business. And if we saw our business start to fall off, and we diagnosed that and found the customers were buying online rather than coming into our stores, buying online from other people rather than coming to our stores, I think that would be a clear indicator for us. Clearly, based upon the strength of our business, we're not seeing that trend.
Operator:
Your next question is from Simeon Siegel from Nomura Instinet.
Simeon Siegel:
Has the concentration of your top vendors changed at all over the past year or so? Do you expect any shift in their percentage composition going forward? And then just to your point about the macro challenges and the tougher compares, any color on what you'd expect the comp cadence to look like in the back half?
Barbara Rentler:
Well, on the comps front, on the concentration of top vendors, I would say probably similar year-over-year without having that exact number in front of me. The supply lines have been pretty broad based with all our vendors, so I would think that there aren't any real challenges there. Could you just repeat the second part of the question on those macroeconomic piece -- macro?
Simeon Siegel:
Yes. Just think what you expect the comp cadence to look like in the back half. I think at the end of your prepared remarks, I think you mentioned the tougher comparison and just macro environment for the rest of the year.
Michael Hartshorn:
So no, we'll give -- we'll update the back half comp when we give our release in August. I'd just point you to, when we started the year, we expected 1 to 2 so you can be pretty similar across the rest of the year.
Operator:
And the next question is from Dana Telsey from Telsey Advisory Group.
Dana Telsey:
As you're thinking about inventory, how do you think about the composition of packaways going forward and what your outlook is for it? And then when you think about real estate cost and new store openings, given the current real estate environment, is rental cost or lease expense at all more flexible today than it was in the past?
Barbara Rentler:
I'll talk about packaway first. So in terms of packaway going forward, packaway are opportunistic purchases, so it's kind of hard to predict where the packaway will come from or what the composition will be. What I would say is that the criteria for putting goods into packaway, the values that we want to put out later on in the year after we sell the goods is really the main criteria. So it's kind of really hard to predict the classification or the amount quite, frankly, it fluctuates.
Michael O'Sullivan:
And then on the second question, Dana, on real estate. I would say, the truth is that store closures in the strip mall environment have been a feature for several years now, whether it's office supply retailers or sporting goods retailers or electronics retailers going out of businesses. So I would say that it's really more of the same right now. I would say that rental costs and occupancy costs have stabilized. But I think a lot of the impact that you've seen from store closures has actually happened over the last few years.
Barbara Rentler:
And just to add one thing about packaway. We feel very good about the content of our current packaway that we own today.
Dana Telsey:
And as you think about diversification of the merchandise mix, over the next few years, what do you -- how do you see the mix diversifying?
Barbara Rentler:
Between the different types of products you mean, between Home, [indiscernible]?
Dana Telsey:
Yes, exactly. Yes, yes.
Barbara Rentler:
Well, we feel good about Home. We feel that we have growth at Home, but past that I wouldn't talk about that on the call. What I would say is that we think there's opportunities broad based throughout the entire box.
Operator:
There are no further questions at this time. I will turn the call back over to Barbara Rentler for closing comments.
Barbara Rentler:
Thank you for joining us today and for your interest in Ross Stores. Have a great day.
Operator:
This concludes today's conference call. You may now disconnect.
Operator:
Good afternoon, and welcome to the Ross Stores Fourth Quarter and Fiscal Year 2016 Earnings Release Conference Call. [Operator Instructions]
Before we get started, on behalf of Ross Stores, I would like to note that the comments made on this call will contain forward-looking statements regarding expectations about future growth and financial results, including sales and earnings forecasts and other matters that are based on the company's current forecast of aspects of its future business. These forward-looking statements are subject to 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 2015 Form 10-K and fiscal 2016 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:
Good afternoon. Joining me on our call today are Michael Balmuth, Executive Chairman; Michael O'Sullivan, President and Chief Operating Officer; Gary Cribb, Executive Vice President, Stores and Loss Prevention; John Call, Executive Vice President, Finance and Legal; Michael Hartshorn, Group Senior Vice President and Chief Financial Officer; and Connie Kao, Vice President, Investor Relations.
We'll begin our call today with a review of our fourth quarter and 2016 performance, followed by our outlook for 2017. Afterwards, we'll be happy to respond to any questions you may have. As noted in today's press release, we are very pleased with our better-than-expected sales and earnings results for both the fourth quarter and fiscal year, especially given our strong multiyear comparison and the highly competitive and promotional holiday season. Our results continue to benefit from our ability to offer customers great values on a wide assortment of gifts and fashions for the family and the home. Earnings per share for the fourth quarter grew 17% to $0.77 on net earnings that rose 14% to $301 million. Sales for the quarter increased 8% to $3.5 billion, with comparable store sales up 4% on top of last year's 4% gain. For the 2016 fiscal year, earnings per share grew 13% to $2.83, while net earnings rose 10% to $1.1 billion. Sales grew 8% to $12.9 billion, with comparable sales up 4% on top of a 4% gain in 2015. dd's DISCOUNTS customers also responded positively to its merchandise assortment, which led to solid growth in sales and operating profit at dd's for both the quarter and fiscal 2016. For the fourth quarter, Shoes and Men's were the best-performing merchandise categories at Ross, while the Midwest and Southeast were the strongest regions. Our fourth quarter operating margin of 13.6% was up 90 basis points from last year. This improvement was mainly driven by our above-plan sales, along with a favorable comparison of packaway-related costs versus last year's fourth quarter. For the full year, operating margin increased 40 basis points to a new record of 14%. As we ended 2016, total consolidated inventories were up 7% over the prior year, with packaway levels at 49% of total inventories compared to 47% last year. Average in-store inventories were up slightly at year-end. As noted in today's press release, our board authorized a new program to repurchase $1.75 billion of our common stock over the next 2 fiscal years. This represents a 25% increase over the prior 2-year $1.4 billion authorization that was completed at the end of the fourth quarter. The board also approved an increase in the quarterly cash dividend to $0.16 per share, up 19% on top of a 15% increase in the prior year. The continued growth of our shareholder payouts reflects our ongoing confidence in the company's ability to generate significant amounts of cash after funding our growth and the other capital needs of our business. We have repurchased stock as planned every year since 1993 and raised our cash dividend annually since its inception in 1994. This consistent record also reflects our unwavering commitment to enhancing stockholder value and returns. Now Michael Hartshorn will provide further color on our 2016 results and details on our fiscal 2017 full year and first quarter guidance.
Michael Hartshorn:
Thank you, Barbara. Let's start with our fourth quarter results. Our 4% comparable store sales gain was driven by a combination of higher traffic and an increase in the size of the average basket. As Barbara mentioned, fourth quarter operating margin increased 90 basis points to 13.6%. Cost of goods sold improved by 110 basis points in the quarter, driven primarily by 65 basis points of lower distribution expenses, mainly from the timing of packaway-related costs that negatively impacted last year's fourth quarter. Merchandise margin improved by 15 basis points, while buying and occupancy costs were lower by 40 and 5 basis points, respectively. These improvements were partially offset by a 15 basis point increase in freight costs. Selling, general and administrative expenses during the period increased approximately 20 basis points due mainly to higher wages.
Turning to our stock buyback program. During the fourth quarter, we repurchased 2.6 million shares for a total purchase price of $170 million, which completed our previous 2-year $1.4 billion stock repurchase program. For the year, we repurchased a total of 11.6 million shares for an aggregate price of $700 million. Let's turn now to our guidance for 2017. Earnings per share for fiscal 2017 are forecast to be $3.02 to $3.15, up 7% to 11% from $2.83 in fiscal 2016. Incorporated in this guidance range is an estimated benefit to earnings per share of approximately $0.08 from the 53rd week in 2017 and $0.03 in lower tax rate related to our adoption of the new share-based payment accounting standard. The operating statement assumptions for fiscal 2017 include the following. Total sales for the 53 weeks ending February 3, 2018 are forecast to grow 6% to 7%. Comparable store sales, on a 52-week basis ending January 27, 2018, are expected to increase 1% to 2% on top of a 4% gain in 2016. We plan to add about 70 Ross and 20 dd's DISCOUNTS locations. As usual, these numbers do not reflect our plans to close or relocate about 10 older stores. If same-store sales are in line with our guidance of up 1% to 2%, then we would project operating margin for 2017 to be in the range of 13.9% to 14.1%. This EBIT margin range assumes merchandise margin for 2017 will be relatively flat on top of strong growth over the past several years. Also incorporated in this operating margin guidance is an estimated benefit of about 15 basis points from the 53rd week. Net interest expense is estimated to be $13 million. Our tax rate is projected to be approximately 37% to 38%. We expect average diluted shares outstanding to be about 386 million. Capital expenditures in 2017 are projected to be approximately $400 million. And depreciation and amortization expense, inclusive of stock-based amortization, is forecast to be about $400 million, up from $377 million in 2016. Let's move now to our first quarter guidance. For the 13 weeks ending April 29, 2017, we are projecting same-store sales to be up 1% to 2%. Earnings per share for the period are forecast to be $0.76 to $0.79. Included in this guidance is an estimated $0.02 benefit from a lower tax rate related to the aforementioned adoption of the new share-based payment accounting standard. Other assumptions that support our first quarter guidance include the following. Total sales are projected to increase 4% to 5%. We expect to open 23 new Ross and 5 dd's DISCOUNTS locations during the quarter. First quarter operating margin is projected to be 14.7% to 14.9% compared to last year's 15.4%. The forecasted decline in EBIT is mainly due to higher wage and freight costs. In addition, net interest expense for the quarter is estimated to be about $3.5 million. Our tax rate is expected to be approximately 36% to 37%, resulting from the previously mentioned accounting change. And finally, weighted average diluted shares outstanding are projected to be around 390 million. Now I'll turn the call back to Barbara for closing comments.
Barbara Rentler:
Thank you, Michael. Again, we are very pleased with our better-than-expected financial performance for both the fourth quarter and fiscal year. As previously mentioned, this is notable considering our own robust sales and earnings growth over the past several years and the ongoing competitive retail climate. As we look ahead to 2017, there continues to be a great deal of uncertainty in the political, macroeconomic and retail climates. In addition, we face tough prior year sales and earnings comparisons. As a result, while we hope to do better, we believe it is prudent to remain somewhat cautious in planning our business for the coming year.
Nevertheless, we are confident that the off-price sector will remain a strong-performing segment of retail, especially given consumers' continued focus on value. This, combined with our proven ability to deliver exceptional values our customers have come to expect, makes us optimistic about our prospects for future growth. As a result, over the longer term, we continue to believe we can achieve average annual earnings per share gain in the low double-digit percentage range. At this point, we'd like to open up the call and respond to any questions you may have.
Operator:
[Operator Instructions] Your first question is from Kimberly Greenberger from Morgan Stanley.
Kimberly Greenberger:
I'm wondering -- Michael, I think you mentioned that inventory at the end of the fourth quarter in-store is up slightly. That seems to be -- I think over the last several quarters and the last several years, it was down slightly. It seems like maybe you're getting to the point where inventory is turning about as fast as it can turn in-store, and so now you're maybe looking a little bit more at sort of stable inventory to up slightly. Is it a change in strategy? Or was there something going on with the timing? And then if you, might comment, you obviously can choose not to, but if you saw any sort of softness in -- I think there was a delay in tax return payments. It seems to be affecting some retailers in, let's say, the second and third week of February. Do you see any kind of mid-month softness? And if so, have you seen a re-acceleration since then?
Michael Hartshorn:
Sure, Kimberly. On inventory, I think at the end of the year, it's timing. As you know, we've reduced inventory by over 40% over the last number of years. I think our perspective is, at this point, that we'd expect stable inventories going forward. There's not additional room for improvement in that strategy or process. So I think as we look forward to 2017, we'd expect our in-store inventory levels to be relatively flat year-over-year. In terms of tax refunds, it's been our practice not to comment on intra-quarter trends.
Operator:
The next question is from Omar Saad from Evercore ISI.
Omar Saad:
I wanted to see if I could get you to give a little bit more color on the comment you made around merchandise margins. It sounded like you think they're going to flatten out a little bit this year after some nice expansion over the recent years. Is there something going on in the mix dynamic there? It sounds like basket is still rising, but I'm not sure about unit prices. But I would love kind of any detail of how you're thinking about the evolution of the merchant margin component of gross margin.
Michael Hartshorn:
Sure, Omar. As we -- we said in our comments the planning assumption going into the year, that they'd be relatively flat. And that's very simply based on anniversary-ing many years of strong merchandise margin gains as well as what we believe to be an ongoing challenging and promotional retail environment.
Omar Saad:
Okay, great. And then can I ask about the home category? You're seeing a lot of retailers really go after this category. It's a big and important category for you guys, too, of course. I mean, are you seeing any changes in the dynamics around that part of the business? Or do you still feel that's a key component of another growth strategy going forward?
Barbara Rentler:
Sure. I think home is definitely a very important category for us and has been an important category in all of this year. But what I would also add to that -- and we feel good about home. But what I would also add to that is we believe that we have growth opportunities beyond home throughout the rest of our business.
Operator:
The next question is from Laura Champine from Roe Equity Research.
Laura Champine:
There's obviously a lot of speculation about a potential tax or tariff on imports. What's your thinking on that? And what would your strategy be if something like that were to be rolled out?
Michael Hartshorn:
Sure, Laura. Obviously, for us, direct imports comprise a very small portion of our overall business. I'd say it's still too early to speculate on what specific tax policies will actually get enacted, but we'll continue to watch it closely. For us, volatility has historically been a good thing for us.
Operator:
The next question is from Lorraine Hutchinson from Bank of America.
Lorraine Maikis:
You called out a couple of pressures for first quarter margins, freight and wages. Can you expand on that and just talk a little bit about how you see that playing out through the year, what the drivers are and how big of an impact it'll have on earnings?
Michael Hartshorn:
Sure. So we said in the commentary that EBIT is planned down 50 to 70 basis points. For us, if sales perform in line with the 1% to 2% comp, we would lose some leverage on fixed costs. In addition, we expect wages to be a greater headwind in the first half of the year than the back half as we raised wages in the middle of 2016. And then further, we expect freight costs to be a headwind in 2017, as we've seen higher carrier rates. In terms of the full year guidance, stripping out the 53rd week and the impact of the accounting change, we're guiding up 3% to 7% on a 1% to 2% comp. That's very consistent how we've guided the previous years. That, with the 53rd week included, shows EBIT margin relatively flat, and then without the 53rd week, it's down slightly.
Operator:
The next question is from Michael Binetti from UBS.
Michael Binetti:
Can we talk a little bit about how you're thinking about the year and maybe even -- maybe just in the front half as far as near-term planning? We've got the department stores who seem to be focused on lowering markdown levels in their stores and are certainly buying inventories lighter. We did hear from a big competitor, Target, today talking about getting much more aggressive on pricing, I think, including categories where you guys would overlap. So how do you think about your competitive positioning here? And how are you thinking about relative pricing spread strategy in the near term given some diverging strategies in the marketplace right now?
Barbara Rentler:
Sure. I think the way we think about pricing is the way we always think about pricing. I mean, we go out and we look in the competitive market, and we see what's out there. And we're in the value business, so our job is to make sure that the merchants are out there, understanding the pricing and then buying so that we keep that value differential. So that is part of their ongoing job, the way they do it in the fourth quarter. We've been in this promotional -- highly promotional environment for an extended period of time, so Target is kind of an addition into the picture. But that is what we do every day for a living. And so going in with a conservative sales plan gives us the ability to chase back. And when we're chasing back, we're chasing back at values that we know are competitive to the outside world.
Michael Binetti:
Right. And I think one thing that's been a little bit more noticeable, I guess, from the public companies that are brands that sell into the department stores, there seems to be a fairly urgent focus on getting inventories down and getting in front of a couple years of -- quite a bit of excess. If we see that those brands do what they're planning and start reducing the inventories that they bring into the country, how do you think about -- obviously, in the near term, you'll always say there's good supply in the channel. But is there anything you should be thinking about longer term if the inventory availability were to tighten up on a strategic basis more medium or longer term from those retailers?
Barbara Rentler:
Sure. Let me -- so first, on the short term, in terms of as people tighten up on their supply, whether it's the vendors or in department stores, supply comes from struggle with full-line retailers forecasting their sales. So in the shorter term, that's where a lot of goods come from store closures, Penney's closed stores, [indiscernible] closed stores. So in the short term, that's where the supply comes from. In the longer term, as we think about supply, we speculate about everything that could happen with a lot of changes that are going on out there. We're always studying the retail landscape and how that might change, and we're looking at that constantly. We don't see near-term supply issues in the next 2 to 3 years. So that's kind of how we're looking at supply at this moment in time. And over time, we may need to be more creative in terms of supply, but that's how we look at it today.
Michael O'Sullivan:
And over the longer term, one of the things you've heard us talk about in the past is investing in our merchant organization. That's something we plan to continue to do. And we regard that as, frankly, the best defense, the best strategic asset for long-term success in the off-price sector.
Operator:
That next question is from Matthew Boss from JPMorgan.
Matthew Boss:
On the SG&A front, is expense leverage possible this year at 3% same-store sales? Or do we need to think about that higher fixed cost hurdle this year just given the wages? Just any other investments to consider or headwinds in the SG&A line.
Michael Hartshorn:
Sure, Matthew. So for SG&A, in 2016, the costs were up about 15 basis points. Obviously, that was slightly above our 3% leverage point. That said, we were obviously pleased with our overall operating margin expansion. Our guidance for 2017 projects SG&A leverage at about the 3% leverage point, which is consistent with our historical levels.
Operator:
The next question is from Simeon Siegel from Nomura/Instinet.
Simeon Siegel:
Do you know and could you share roughly what percent of your traffic increase is coming from new customers versus repeat visits? And maybe what's your average -- your shoppers' average trips per year? How does that look now versus the past several years?
Michael O'Sullivan:
It's hard to break that out, Simeon. We do regular customer research, where we try and identify existing customers versus new customers. But it gets pretty murky in terms of if someone had shopped off-price a couple of years ago, do they still count as an existing customer or are they a new customer? The one thing that we take from the research is that what the new customers and the existing customers are both looking for is the same set of things. It's the same set of, well, basically great values. But in terms of splitting them out like that, it's a little more difficult to answer that question.
Simeon Siegel:
Okay, great. And then just -- you ended the year with just meaningfully higher cash, recognizing the authorization of quarterly dividend. Any other uses of cash we should consider? Or just -- or do we assume the growing cash continues to flow to the dividends and repurchases? And do you guys have a target payout ratio you could share?
Michael Hartshorn:
Yes. I mean, I would answer it generally to say we have a long history of delivering excess cash to shareholders, and we've done that in a planned and deliberate fashion. So anytime we look at the deployment of cash, we're looking at it over kind of a longer period. But that process is, at the same time, of maintaining a very strong balance sheet. So I would not expect that to change going forward. And the significant increases in our dividend and share buyback programs announced today reflect that commitment.
Operator:
The next question is from Brian Tunick from RBC.
Brian Tunick:
I guess 2 questions. Curious, I guess, Barbara, on the merchandise categories. I know, certainly, here in Q1 from last year, there was some noise around some of the missy and sportswear products. Can you maybe talk about -- do you think there's a great opportunity here in the first quarter to course-correct some of the issues last year, even though we have a later Easter? And then second question. On store plans for 2017, can you maybe discuss are you guys planning to enter new markets, both for Ross and dd's, and how we should be thinking about the rollout from a geographic perspective?
Barbara Rentler:
Sure. I'll take the first part, ladies sportswear. We feel like in 2016, we made progress in improving our assortments, and we believe that we've made the right adjustments for our ladies merchandising strategy. And that will take us to leading to further improvement in 2017.
Michael O'Sullivan:
On the store plans, Brian, our store plans for new stores this year are very much in line with the last few years, 18 to 19 new stores a year in terms of new market. So as we categorize it, the Midwest, for some years now, has been our major new market and major new region. That continues to be how we think about new markets. There's no additional new markets outside of the Midwest that we're planning to move into this year.
Brian Tunick:
And same for dd's?
Michael O'Sullivan:
That's right.
Operator:
The next question is from Paul Lejuez from Citi.
Paul Lejuez:
We saw a bunch of Macy's stores close about a year ago, 40 stores. Just curious if you've tracked how your stores in those markets have performed. Separately, if you could just talk about what were your weaker regions and categories in the fourth quarter.
Michael Hartshorn:
I'll start with the regional performance, Paul. As we mentioned, the Midwest and the Southeast were strongest. The Midwest, obviously, has been a very strong region for us, as the best-performing category over the last 3 years or so. Southeast likely benefited from favorable weather. I'd call out other major markets. California was in line. Texas performed below the chain average in Q4. For us, beyond the possible impact of the oil industry, we believe there were other factors that impacted the region, including the stronger dollar as well as negative weather during the quarter.
Michael O'Sullivan:
And Paul, on your question about store closures, it's difficult to respond to, specifically, the Macy's example that you gave, specifically how that affected our stores. There's just too much noise to pick out the impact of those individual store closures. What I would say, though, is in general, with store closures -- competitor store closures, there's a short-term effect, which is as that competitor store is doing a going-out-of-business sale, that can impact our business negatively for the weeks that that's happening. But then obviously, once that store is closed, there's one less competitor in the market, so in general, it tends to be a good thing for us in the medium to long term.
Operator:
The next question is from Oliver Chen from Cowen and Company.
Oliver Chen:
Regarding these new stores, are there any thoughts on how the store, the future looks versus your existing store base? And also, as you just continue to have a great store base, what are your thoughts for remodels or how you continue to add at your existing stores? And any in-store initiatives, whether that be the cash wrap, the dressing room or managing shrink to your liking, in terms of what we should think about for next year?
Michael O'Sullivan:
Sure. So Oliver, in terms of how we think about our stores, we think of our stores very much in terms of a sort of evolution rather than a revolution. We look at different parts of the store, and we look at opportunities, particularly in areas that are growing or categories that are growing very rapidly, to maybe give them more room within the store, maybe give them new indiscernible], that kind of thing. We also look at opportunities to update other aspects of the store, whether it's the front end or signage. But we do those on a sort of evolutionary basis, so it's not something that really happens overnight. There are individual initiatives, obviously, that roll out from year to year but nothing dramatic that I would call your attention to at this point.
Oliver Chen:
Okay. And on the Accessories front here, have you been pleased with the execution? And are there opportunities? Or where do you think that category is heading with respect to what your buyers are seeing versus consumer demand?
Barbara Rentler:
Our accessory business continues to be difficult. It trails the chain in the fourth quarter. In terms of what we see in the outside world, accessories is really driven by handbags, and handbags tends to be a weaker business in the outside world.
Operator:
The next question is from Adrienne Yih from Wolfe Research.
Adrienne Yih-Tennant:
My question is on packaway. I was wondering if you had any notable advantage from buying opportunistically last year, either in margin or in helping comp? And then what is your open-to-buy -- in-season open-to-buy for the spring season?
Michael Hartshorn:
In general, in packaway, we see it as a sales driver, not a margin driver. So that's what I think about it.
Barbara Rentler:
And in terms of spring, we're well positioned to take advantage of packaway opportunities.
Operator:
The next question is from Ike Boruchow from Wells Fargo.
Irwin Boruchow:
Just to piggyback on Tunick's question that he asked, can you maybe update us on how the merchants are buying within the ladies apparel category right now? I think I remember you had talked about merchants taking a more conservative buying approach after the spring execution issues last year. So just trying to figure out, are we back to normal at this point within that category or still not quite yet?
Barbara Rentler:
In terms of our buying approach, I guess I would say back to normal, whatever you're defining back to normal as. The merchants are out there shopping the market and buying it the way they see it. So I guess if that's how you're defining back to normal, that would be true.
Operator:
The next question is from Roxanne Meyer from MKM Partners.
Roxanne Meyer:
My question is on CapEx this year. I'm just wondering, your guide from new stores and relocations, if there are any major projects that are being earmarked. And then in terms of the comp, the average transaction size being up, if you could break it down between AUR and units.
Michael Hartshorn:
Sure, Roxanne. On CapEx, so we're guiding at about $400 million. That's higher than 2016, which was the lowest level since 2011. So that was lower than normal. In terms of the breakout of the $400 million, about 30% is new stores; 30% is for store refreshes and maintenance capital; 15% for supply chain investments; and 25% for, call it, technology and other G&A capital. In terms of the components of sales, as we mentioned in our prepared remarks, the 4% comp was driven by higher traffic and an increase in the size of the average basket. The higher basket was driven by higher units per transaction, with AUR down slightly compared to last year.
Operator:
The next question is from Bob Drbul from Guggenheim Securities.
Robert Drbul:
I was just wondering if you could expand on the success you've seen in the most recent quarter in the footwear business. And with some of the store closures of competitors out there, are you seeing more willingness for brands that haven't sold you significantly in the past to be a little bit more open with availability for you?
Barbara Rentler:
Sure. As it pertains to the footwear business, similar to our last 2 prior quarters, our shoe performance was very broad-based. In terms of the marketplace and competitors being open to selling us, I think we've shown over the years that we have really good vendor relationship. And I would say that most brands are open to doing business with us. Yes, they're open to doing business with us.
Operator:
The next question is from Mike Baker from Deutsche Bank.
Michael Baker:
I was going to ask you about the buying environment, and a number of relatively high-profile vendors have sort of said they're not as open to selling to off-price as much as they were in the past. Now I don't need to go down the list, but I'm sure you guys have heard the public comments from some big public vendors. So how does that impact you? I mean, have you, frankly, seen some of these vendors pull back already to selling to you guys? And does that change the way you think about going to market in the future?
Barbara Rentler:
It's actually been a very positive buying environment. With the difficult fourth quarter, obviously, there's supply in the marketplace. So I would say that overall, high-profile or broad-based all the way through moderate vendors, there's still been a willingness for people to sell us merchandise.
Michael Baker:
Is there a concern that, as you go through the year, that slows down when you have all these vendors saying publicly that they just don't want to sell as much to off-price?
Barbara Rentler:
I think -- I'm sorry, go ahead, Michael.
Michael O'Sullivan:
Yes, that's always a concern. We're always concerned about supply. But one point Barbara had made a little bit -- a little while ago is that what really drives supply is other retailers and their inability to forecast their own sales. And if they're not able to forecast their own sales, that tends to mean there's greater supply availability.
Michael Baker:
Yes, okay. Understood. If I could ask one more follow-up. Easter is 3 weeks later this year. Historically, that tended to help you guys as people have a longer season in which to buy Easter-related products.
Michael Hartshorn:
Mike, I think historically, weather has had a more meaningful impact on performance during the first quarter than the timing of Easter, which is what we've seen in the past.
Operator:
The next question is from Marni Shapiro from Retail Tracker.
Marni Shapiro:
I'm curious. I know online is not a conversation for you as far as sales, but you do have sign-ups online and customers that are coming into stores. I'm curious, are you seeing a growing file of people signing up online or even in stores? And what are you doing with these lists? And are you considering any kind of consumer outreach or anything like that beyond just emails?
Michael O'Sullivan:
So Marni, we do have a database of customer emails. We do use that for some of our marketing activities. But more broadly, beyond that, we also, over the last few years, have been experimenting with other forms of sort of online marketing, whether it's direct online advertising or social media marketing. So that's how we think about it. There has been -- we've been investing more in those media channels over the last few years, and that's driven a lot of the growth and a lot of the customer sign-up. But it's really a marketing activity rather than a sort of, in any way -- it's not teeing up e-commerce in any way. It's really about marketing.
Marni Shapiro:
That makes sense. And are you guys finding any change in the hiring landscape out there as some of the department stores try to be off-pricers? I'm saying try with all seriousness. I don't think they're excelling at it.
Michael O'Sullivan:
I'll let Barbara answer on the merchant side. On the operating side, no, no impact at all.
Barbara Rentler:
Are you trying to ask me if they're trying to steal our people, Marni?
Marni Shapiro:
Kind of. Are you finding it -- or are you having to pay more, are you finding it more difficult to find people?
Barbara Rentler:
Listen. I think we have a very strong -- a strong merchant team. I think we have -- Ross has a great culture. We have a lot of long-tenured employees. And I think that in terms of the retail landscape and hiring people, there are obviously a lot of people out there that are now looking for jobs, and so we are kind of sorting our way through that. I think, listen, it's a very competitive market for talent, and so I think people do look to try to steal our talent. But we do run pretty low turnover rates. And I think Ross -- I can't be objective here. I think Ross is a great place to work. It's a great place to work. So yes, so hopefully, that answers your question.
Operator:
The next question is from Lindsay Drucker Mann from Goldman Sachs.
Lindsay Mann:
I wanted to ask on wages. On the wage inflation, you called out for calendar '17, is the majority of that from mandated minimum wage increases? Or are there any other factors at play?
Michael Hartshorn:
So Lindsay, last year, we took our wages across the board in the company up to $10 an hour based on tenure. Obviously, it includes mandated minimum wages, and our upcoming guidance takes into consideration the mandates that we're aware of today.
Lindsay Mann:
Is there anything incremental that you guys expect outside of mandated increases in terms of your own effort to raise wages?
Michael Hartshorn:
Not at this point.
Lindsay Mann:
Okay. And then, Barbara, in your comments, you referred a couple of times to the really intense competitive environment, and I was just curious. I think that you've oftentimes and the environment often has been competitive. Is your characterization of the competitive environment today any different than what you might have described it in the past? In other words, is it any more competitive or any worse than what you're used to seeing?
Barbara Rentler:
I think the competitive environment for the last 2 years has been pretty intense, and I don't foresee that going away. I think that's kind of what business is about now. And I think that's built into how you have to think about your business and how we think about our business and how we think about our values and how we chase our business. But I think it's been competitive for a long time, and I think that's now the norm of business as usual.
Operator:
The next question is from Dana Telsey from Telsey Advisory Group.
Dana Telsey:
As you think about the store footprint, the Ross Stores and dd's, are you seeing -- are you changing anything in terms of size of stores? And what's happening on the occupancy cost fund, percentage rents versus fixed rents? And then just as you think about new store openings and the annualized new store opening rate, has anything changed there?
Gary Cribb:
I'll take the first part. Over the last 10 years, we've decreased the size of our stores by about 15%, and the decrease is really just based on the reductions of inventory that we've seen over the years. Today, as we go out and look for new stores, we rightsize them based on the market and demographics, et cetera.
Michael O'Sullivan:
On the other part of your question, Dana, I would say that occupancy costs are fairly stable at this point. They have good availability. In terms of locations, but rents are fairly stable. And our new store opening rate is about -- we add about 6% more stores every year on the base of stores that we have. We open 18 to 19 stores, which is about 6% increase each year. And I would expect it will stay more or less at that level for the next few years.
Operator:
The next question is from David Glick from Buckingham.
David Glick:
Most of my questions have been answered. Just a quick follow-up there. dd's is approaching 200 stores. And when you look at the mix of stores that you opened, are you at the point where that is a part of your business that you may want to accelerate the store opening rate?
Michael O'Sullivan:
As Barbara said in her remarks, we were very happy with dd's performance in Q4 and for the full year 2016. It turned in a very solid sales and profit performance. And actually, over a longer period of time, we've been pleased with that business. But we've always been fairly deliberate about how we roll out and grow our businesses. This was true with Ross, and that's also true with dd's. That on a base of about 200 stores. We feel pretty comfortable being able to open 20-ish, 20, 21, 22 stores. I think it's unlikely that we would accelerate that. I think there are constraints in terms of being able to do that in a high-quality way, whether it's real estate locations or building the operational team. We prefer to open and roll out dd's in a much more deliberate way. Yes, that's my answer.
Operator:
The next question is from Christian Buss from Crédit Suisse.
And there are no further questions at this time. I will turn the call back over to Barbara Rentler for closing remarks.
Barbara Rentler:
Thank you for joining us today and for your interest in Ross Stores. Have a great day.
Operator:
This concludes today's conference call. You may now disconnect.
Operator:
Good afternoon, and welcome to the Ross Stores Third Quarter 2016 Earnings Release Conference Call. [Operator Instructions]
Before we get started, on behalf of Ross Stores, I would like to note that the comments made on this call will contain forward-looking statements regarding expectations about future growth and financial results, including sales and earnings forecasts and other matters that are based on the company's current forecast of aspects of its future business. These forward-looking statements are subject to 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 2015 Form 10-K and fiscal 2016 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:
Good afternoon. Joining me on our call today are Michael Balmuth, Executive Chairman; Michael O'Sullivan, President and Chief Operating Officer; Gary Cribb, Executive Vice President, Stores and Loss Prevention; John Call, Executive Vice President, Finance and Legal; Michael Hartshorn, Group Senior Vice President and Chief Financial Officer; And Connie Kao, Vice President of Investor Relations. We will begin our call today with a review of our third quarter performance followed by our outlook for the fourth quarter, after which we'll be happy to respond to any questions you may have.
As noted in today's press release, we are very pleased with our better-than-expected sales and earnings growth in the third quarter as customers responded favorably to the compelling values we offer throughout our stores. Earnings per share for the period were $0.62, up 17% on top of a robust 15% increase in the prior year. Net earnings grew to $245 million compared to $216 million last year. These earnings results include a benefit of about $0.01 per share from favorable timing of expenses that are expected to reverse in the fourth quarter. Sales for the third quarter rose 11% to $3.1 billion, with comparable stores sales up 7% versus a 3% gain last year. Operating margin was above plan, growing 55 basis points to 12.6%, driven mainly by higher merchandise margins. For the first 9 months of fiscal 2016, earnings per share were $2.06, up 11% on top of 15% increase in the prior year. Net earnings were $817 million, up from $757 million last year. Sales year-to-date rose 8% to $9.4 billion, with comparable store sales up 4% on top of a 4% gain in 2015. dd's DISCOUNTS continued the year-to-date trend with strong performance in the third quarter. California was the strongest region during the period while shoes was the best-performing category at Ross. Our ladies' apparel business also continued to strengthen as shoppers responded to our improved merchandise assortment. As we ended the third quarter, total consolidated inventories were up 4% compared to the prior year, with average in-store inventories down slightly. Packaway as a percent of total inventories was 45% compared to 48% at this time last year. As planned, we completed our 2016 store opening programs during the third quarter, with the addition of 25 new Ross and 9 dd's DISCOUNTS. We expect to end fiscal 2016 with 1,338 Ross and 192 dd's DISCOUNTS, an increase of 84 locations for the year. Now Michael Hartshorn will provide further color on our third quarter results and details on our guidance for the fourth quarter and fiscal year.
Michael Hartshorn:
Thank you, Barbara. Let's start with our third quarter results. Our 7% comparable store sales gain was driven by increases in both traffic and the size of the average basket.
As Barbara mentioned, third quarter operating margin was better than planned, increasing 55 basis points from last year to 12.6%. Cost of goods sold improved by 50 basis points, driven by 50 basis points in higher merchandise margin combined with a 20 basis point decline in occupancy costs. This was partially offset by an increase of 20 basis points in buying expenses. Selling, general and administrative expenses during the period improved by 5 basis points as leverage on the 7% increase in comparable store sales was partially offset by higher wages and certain other nonrecurring costs. During the quarter, we repurchased 2.8 million shares of common stock for a total purchase price of $179 million. Year-to-date, we have bought back a total of 9.1 million shares for an aggregate price of $530 million. We remain on track to spend a total of $700 million for the year to complete the 2-year, $1.4 billion stock repurchase program approved by our Board of Directors in February 2015. Let's turn now to our fourth quarter outlook. While we hope to do better, we are maintaining our same-store sales guidance for a 1% to 2% increase. This range is on top of strong 6% and 4% gains in 2014 and 2015, respectively. We expect earnings per share for the 2016 fourth quarter to be $0.72 to $0.75, which reflects the impact from the previously mentioned expense timing that benefited the third quarter. This updated range compares to earnings per share of $0.66 last year.
The operating statement assumptions for the fourth quarter include the following:
total sales are projected to grow 4% to 5%; operating margin is forecast to be 13.2% to 13.4% versus 12.7% in the prior year as we anniversary higher packaway costs that negatively impacted last year's fourth quarter. Net interest expense is estimated to be about $4 million. Our tax rate is planned at approximately 36% to 37%, and we expect average diluted shares outstanding to be about 392 million.
Based on our year-to-date results, along with this fourth quarter forecast, we are now projecting earnings per share for the full year to increase 11% to 12% to $2.78 to $2.81 on top of a 14% gain in fiscal 2015. Now I'll turn the call back to Barbara for closing comments.
Barbara Rentler:
Thank you, Michael. Again, we are very happy with our third quarter sales and earnings that were well ahead of our expectations. As Michael just mentioned, we faced our most challenging multi-year comparisons this holiday season. There is an ongoing uncertainty in the macroeconomic, political and retail environments that could, once again, lead to a very promotional fourth quarter.
Despite these potential headwinds, we believe we are competitively positioned for the fourth quarter as our merchants have done a terrific job of acquiring a wide array of exciting and sharply priced name-brand fashions and gifts to appeal to today's value-driven holiday shoppers. To sum up, we see consumers' increased focus on value continuing for the foreseeable future. This, along with a solid execution of our short- and long-term strategies, makes us optimistic about our prospects for continued growth in sales and earnings. At this point, we'd like to open up the call and respond to any questions you might have.
Operator:
[Operator Instructions] Your first question is from Paul Lejuez from Citi.
Paul Lejuez:
Can you remind us of what your merchandise margin typically looks like on packaway merchandise compared to your normal in-season buys? And has there been anything in the quality of packaways you've seen over the past few quarters that's changed that relationship at all?
Michael Hartshorn:
From a margin perspective, Paul, the margin on packaways is very similar to flow of merchandise or direct store merchandise. To us, it's the best value for the customer.
Paul Lejuez:
And consistent?
Michael O'Sullivan:
Yes, it's been consistent over time, Paul. So no real change over the past several quarters.
Paul Lejuez:
Got you. And then just one follow-up. It looks like D&A growth slowed substantially. Can you talk about what might be going on, on that line?
Michael Hartshorn:
So on G&A, we -- obviously, the 7% comp, we were 5 basis points lower partly driven by...
Paul Lejuez:
D&A, I'm sorry, Michael [indiscernible]
Michael Hartshorn:
Yes. Sorry, as I said, G&A. So on capital spending, we're forecasting for the year about $315 million in capital, which is lower than we projected at the beginning of the year due to delays in corporate office and supply chain projects that we expect to push into next year.
Paul Lejuez:
Any initial thoughts on the CapEx budget for next year?
Michael Hartshorn:
Expectation at this point would be around $400 million, similar to how we started this year.
Operator:
The next question is from Lindsay Drucker Mann from Goldman Sachs.
Lindsay Mann:
I was hoping to dig in a little bit on the drivers in D&A. I think that you mentioned some nonrecurring costs that happened in SG&A in the quarter, but also some timing benefits that happened in the third quarter? So could you just add a little more color there?
Michael Hartshorn:
Sure, so I'll break the timing in the quarter. The timing in the quarter was actually gross margin component. Packaway ended a little higher than we had in our current original expectations when we entered the quarter, so that timing moved from Q3 to Q4, which is why the Q4 guidance came down by about $0.01. In terms of G&A, we ended up 5 basis points better. We would have expected more leverage on the 7% comp. That was driven by higher wages and, as we mentioned on the call, onetime nonrecurring expenses.
Lindsay Mann:
Okay. And your inventories per store were actually down despite a really strong comp. I was wondering if you could talk about -- we've seen inventories down significantly, the number of department stores. How would you characterize the buying environment or the availability of product? And also, the driver of your own inventory reductions per store with a strong comp?
Michael O'Sullivan:
Lindsay, I'll separate that into 2 pieces. First of all, just the availability, and I'll let Barbara comment on that in a moment. But in terms of the inventory in our stores, that's driven by our own plans. We tend to plan our inventories with some discipline just to make sure that we can drive turns that the sales trend is strong. So even though, obviously, our sales trend was very strong in Q3, we've kept our inventories in line as we go into Q4. I'll let Barbara comment in terms of the availability of merchandise.
Barbara Rentler:
In terms of availability, it's pretty broad-based and spread through all the markets. There's been, obviously, a lot of availability despite the fact that department stores have kept their inventory bases in line. There is definitely more goods out in the market at this moment.
Operator:
Your next question is from Adrienne Yih from Wolfe Research.
Adrienne Yih-Tennant:
My question was on the resolution of the spring product issue. It seems like that's clearly behind. But I was wondering if there was any impact to whatsoever into the third quarter. And then how much chase or open-to-buy do you actually still have available to get to a higher comp, similar to what you did in the third quarter?
Barbara Rentler:
In terms of impact to spring product? Just to clarify, the spring product going into the third quarter?
Adrienne Yih-Tennant:
Sorry, the spring product issue that was from Q1.
Barbara Rentler:
Just the issue itself, a hangover effect? We did not have a hangover effect.
Adrienne Yih-Tennant:
Yes, the hangover effect, exactly.
Barbara Rentler:
Okay. So we did not have a hangover effect in terms of product moving into the third quarter. And can you just clarify the second piece of the question, again?
Michael O'Sullivan:
I think on the second piece, just to -- I think I answered that already. Our business is all about chasing sales trends, so I'll remind you, coming into Q3, our guidance was a 1 to 2 comp in Q3, and we're able to chase it up to a 7. So we feel pretty good about our ability to go out and get extra merchandise in Q4 if the sales trend is there.
Adrienne Yih-Tennant:
Okay. And then can you [indiscernible] about over levering to some of the upsize inventory that was out there?
Michael O'Sullivan:
Sorry, Adrienne, you were cutting out there. Could you just repeat the question?
Adrienne Yih-Tennant:
I'm sorry. Just on the packaway opportunity that you have, how opportunistic was the buying last year in terms of perhaps any margin upside? Does that make sense? So to the extent that you were able to buy at better-than-historic pricing, average unit cost?
Michael O'Sullivan:
Yes. I think we would expect to see a lot of margin expansion from that. What we would have done is, to the extent we're able to buy great product opportunistically and put it into the hotel, put it into packaway, when we flow it out, what we're really doing is trying to drive sales. So that's really where look for those bargains to really drive sales rather than add to our margin.
Operator:
The next question is from Omar Saad from Evercore ISI.
Omar Saad:
I wanted to ask if you could talk about how much scale the current supply chain, the distribution centers, the infrastructure you have, how much they can handle? And when do you expect, as you think out over time, the next kind of major round of investments in IT and supply chain?
Michael O'Sullivan:
Sure. So in terms of major processing facilities, major distribution centers, just as a reminder, we added a new distribution center last year, that was in 2015, and we had added one before that in 2014. So some pretty lumpy investments that we've now worked our way through. Given our current growth projections, we would expect that we would need additional major distribution capacity, probably about 4 or 5 years from now. And if you back off that, you probably start some of the capital spending 1 year or 2 below -- before that. So it's going to be a while before we have those kind of lumpy investments again.
Omar Saad:
Okay. If I could have one follow-up. In terms of the great comp number that you put out this quarter, if you think about the upside to perhaps where your expectations were 3, 6 months ago, is more of the upside coming from the packaway product or the regular flow?
Michael O'Sullivan:
It's a combination, I wouldn't call out one or the other. The truth is the upside really comes from the customer coming in and buying more product. And we've been able to get great packaway product and great flow product in order to fuel that sales trend.
Barbara Rentler:
So the merchants are chasing the sales trend as we go.
Operator:
[Operator Instructions] The next question is from Marni Shapiro from Retail Trackers.
Marni Shapiro:
So I was curious if there were any segments in the quarter that surprised you either to the upside or to the downside, be it home, personal care, juniors, other than, I believe, you called out footwear. Any other callouts?
Barbara Rentler:
I wouldn't say that, that surprised us. Our home business continued to perform well, shoes has been performing well all along, and we felt good about our assortment in ladies as we were starting to move and improve the assortment, so we did -- we were happy with that performance. I guess, that would be -- if anything, that would be a surprise is that business has been moving from quarter-to-quarter in the right direction. But overall, I wouldn't say major surprises because home and shoes have continued and have been good all year.
Marni Shapiro:
And within ladies, was it activewear, was it juniors, or was it across the board?
Barbara Rentler:
In ladies -- well, activewear is performing just fine. I would say it's really more in ladies and juniors would be at this moment in time.
Operator:
The next question is from Lorraine Hutchinson from Bank of America.
Lorraine Maikis:
Just wanted to follow up on the increase in basket size that you commented on in the prepared remarks. What was the driver of that? Was that a unit or a pricing increase?
Michael Hartshorn:
Sure, Lorraine. As we mentioned in the prepared remarks, the 7 comp was driven by higher traffic and an increase in the basket size. Traffic was slightly a larger increase than basket. The basket was all driven by higher units per transaction. AUR was relatively flat.
Lorraine Maikis:
Okay. And what do you expect for AUR trends going forward?
Michael Hartshorn:
I don't think we'd comment at this point, but it's run relatively flat all year round for us.
Operator:
The next question is from Brian Tunick from Royal Bank of Canada.
Brian Tunick:
I'm curious, I guess, for Barbara. Maybe can you talk about what categories might be the biggest opportunity you see for next year or maybe where some of your buying team is spending their time? And then, I guess, also curious on the real estate pipeline. Any initial thoughts from a planning perspective why either the store growth rate or mix could look different than what we saw this year?
Barbara Rentler:
Sure. In terms of categories for next year, we still feel very good about our home business. We feel there's a lot of opportunity that goes on in home, it's very broad-based. If we continue to execute our strategies effectively in ladies, we would be feeling positive about our ladies' business as long as we stay on track and execute appropriately. And in terms of where the merchants are spending their time, all the merchants are spending their time in the market, not just home merchants, not just in specific areas that we think we would expand for next year, all merchants are spending their time in markets, again, because there's so much availability and potential opportunities.
Michael O'Sullivan:
And, Brian, on your question about real estate and number of stores obviously, we'll be more specific when we talk about 2017 guidance in February. But I think it's fact that if you look at our store openings over the past several years, we run at typically 80 to 90 net new stores a year. I wouldn't expect a dramatic deviation from that going forward.
Brian Tunick:
And if I can just throw in just one more question. Obviously, you guys have talked about wage pressure now and some of the things you're doing to absorb it. But are there other additional opportunities, both in the supply chain on the store side that you guys are finding to offset the wage pressure?
Michael O'Sullivan:
There always are. I mean, as a company, we go through a very rigorous and detailed budget process. There's a lot of sort of expense discipline within different functions within the company. So we're always looking for new opportunities to find efficiency and drive savings. And again, we'll talk more about that when we give 2017 guidance. I mean, I would say that we feel pretty good about our ability to offset the wage increases that we've absorbed in the last couple of years. There's a limit to the degree to which we can offset those increases going forward.
Operator:
The next question is from Michael Binetti from UBS securities.
Michael Binetti:
Let me just ask you, the department stores have come up a few times, it seems like your strategy has been to reduce their inventories to try and lower their markdown cadence. If they are successful, and you guys wake up tomorrow and see the department stores kind of leading their industry to higher AURs, what -- how do you strategically think about that? Does that bring an AUR opportunity for you? Or do you guys typically look for opportunities to gather market share in that situation?
Michael O'Sullivan:
I would say we would welcome that. I think if it got less promotional, we would see that as an opportunity to gain more share and to drive sales. So specifically for us, it would be about sales rather than margin. But I think as Barbara said in her remarks, the indicators that we see, cause us to think that the fourth quarter will likely be very promotional. And so those indicators include the fact that we're seeing plenty of merchandise supply, presuming that supply was made for someone; that, secondly, when we looked at Q3 results that have been reported so far, they look relatively weak across the retail sector; and then, thirdly, as Barbara said in her remarks, the political and economic environment looks uncertain. So if you mix all those together, it suggests that the environment is likely to remain promotional rather than the other way around.
Michael Binetti:
And then if I could maybe continue on that, I feel like there's not a week that goes that we don't hear another one of the department store brand companies updating their strategy to include significantly lower inventory buys going forward, so maybe there is still some inventory out there today but in general, the off-priced channels continue to come and that inventory in the marketplace remains robust. You guys have certainly benefited from better inventory turns, but better merchandise margins over time. If the brands do follow through with that strategy and take inventory lower, it becomes a bit counterintuitive for us to keep hearing the off-priced industry in general, they're saying that we still see plentiful inventory out there. How do you think forward to if inventories do get a little bit harder to come by, how you look at approaching your business for next year?
Michael O'Sullivan:
Those are good questions. I think it all depends on what sales those departments stores are able to do and the comparison between those sales and the inventories that they've bought themselves into. I mean, right now, as I say, based upon what we're seeing in the marketplace, we see no problem with supply.
Operator:
The next question is from Laura Champine from Roe Equity Research.
Laura Champine:
I wanted to ask again about your expectations for Q4 because the comp guidance you've given does look very conservative given what you just put up in Q3. Would your expectation be in Q4 to continue to gain share within apparel? Is it conservative on apparel just generally and on retail generally? Or is there something that gives you pause about your own performance?
Michael O'Sullivan:
I think it's nothing specific to us, Laura, I think it's more about the external environment and really the things that Barbara had mentioned, that the broader political and economic environment looks uncertain. The Q3 -- the third quarter results that have been reported so far look relatively weak, and that suggests that it could get pretty promotional as retailers try and either hold onto or avoid losing share. So the combination of those 2 things makes us relatively concerned about the external environment. The only thing that's specific to us, I suppose, is the fact that we're up against our toughest year-over-year comparisons in the fourth quarter on a 2- and 3-year basis. So that's the other thing that's sort of factored into our guidance.
Operator:
The next question is from Oliver Chen from Cowen and Company.
Oliver Chen:
Congrats on the best in comps and retail. Regarding the comps and the traffic gains, what was happening with traffic with respect to how they were -- it was so impressive. Were you able to chase in the categories? And did you have to delay shipments in terms of some of the seasonal weather? Just curious about how that traffic number was so impressive. A related question is just on the merchandise margins. Is that attributable to the strong inventory control?
Michael Hartshorn:
Oliver, I'll start with the merchant margins. We obviously outperformed the high end of our comp sales targets, so that meant we had faster turns resulting in markdown leverage. We also benefited from our ability to take advantage of buying opportunities in the marketplace. So both of those factors contributed to the higher merchandise margin.
Barbara Rentler:
And in terms of chasing into the categories, again, there's been a lot of availability in the marketplace so the merchants were out in the market every day looking for opportunities, so they've been able to chase into categories that we're selling. In terms of seasonal products, we had relatively conservative seasonal plans for the Q3, and so seasonal performance has been overall fine at this point in time, and the categories go forward remains to be seen what we find out in the marketplace as we chase our way across.
Operator:
The next question is from Matthew Boss from JPMorgan.
Matthew Boss:
So just on the 7 comp, was performance pretty consistent throughout the quarter? And then just as you dig into your performance versus the choppy macro backdrop that you call out, are you seeing a broadening of the customer base, new customers shopping the store? Just the best way that you track it, I'm curious what you are seeing.
Michael Hartshorn:
In terms of trends during the quarter, Matthew, the comps were similar across all 3 months in the quarter.
Michael O'Sullivan:
And in terms of what's driving that 7% comp, it's hard for us to tell, Matthew, but it's almost certainly a combination of certainly some new customers and then some existing customers who are just shopping us more, looking for values and happy with what we're able to offer them.
Matthew Boss:
Got it. And just a follow-up on margins. For the fourth quarter, what's the best way to think about recapturing the 100 basis points related to the packaways last year? Just curious how we should think about recapture of that loss from last year.
Michael Hartshorn:
So the guidance assumes some recapture of the 100 basis points. We didn't -- we don't -- our practice is not to call out specifically in upcoming guidance, but it's part of the driver of the EPS growth in the fourth quarter.
Operator:
The next question is from Kimberly Greenberger from Morgan Stanley.
Kimberly Greenberger:
Michael, I wanted to just ask about wage inflation and SG&A leverage. It seems like the leverage point today, perhaps starting in the third quarter, sits a little bit higher because of the wage increases. So I'm wondering if you can just talk to your -- what comps you need to leverage SG&A in a normal environment. And then it seems like starting in the third quarter and continuing maybe through the first half of '17, that comp needed is a bit higher because of the incremental wages. Could you just talk us through that?
Michael Hartshorn:
Sure, Kimberly. The third quarter levered by 5 basis points on the 7% comp. As we mentioned in our comments, that was partly driven by wages, and that really hasn't changed from the first part of the year, but it was also impacted by onetime nonrecurring charges we took in the quarter. So I'd say the leverage point change in the quarter was those nonrecurring costs. At this point, we continue to believe at least in the next couple of years that the leverage point continues to be about 3%.
Kimberly Greenberger:
About 3%. Okay, great. And I'm wondering if there was any year-over-year increase in incentive compensation, either driving that 20 basis points of gross margin deleverage or in your SG&A. And then lastly, Barbara, I apologize if I didn't hear this correctly, but could you just comment on the apparel execution in the women's business? I think on the August earnings call, you had mentioned you'd made a great deal of progress in the second quarter, but you weren't entirely happy yet. I'm just wondering if you can just update us on the progress there.
Michael Hartshorn:
Kimberly, on the incentive cost, yes on both gross margin and SG&A. In our notes, we mentioned that buying expenses were 20 basis points higher than last year, and that was mainly from higher incentive costs given the outperformance during the quarter.
Barbara Rentler:
And, Kimberly, in terms of the ladies' business, we do feel like we're making progress. We are moving in the right direction, and we are expecting as long as we execute effectively where we have some real major execution issues in Q1, that we're going to continue to see a strengthening in the business. So it's month-to-month improving business by business, but we do feel like we've made progress, and we do feel like we're on track as long as we continue to execute appropriately.
Operator:
The next question is from Ike Boruchow from Wells Fargo.
Irwin Boruchow:
Michael, just a quick one on wages. Can your remind, as much as you shared this, what kind of EPS headwind wage inflation has been or do you project will be for you guys this year? And then just, not asking for guidance, but just simplistically when we think about next year, does that headwind -- is it similar, does it lessen, or does it increase?
Michael Hartshorn:
So Ike, we obviously haven't called out the impact of wages because we've been able to offset the impact today. Obviously, we're working through our -- finalizing our 2017 budget and we'll be in a better position at the end of the year when we give our guidance for 2017 on the potential impact.
Operator:
The next question is from Bob Drbul from Guggenheim.
Robert Drbul:
I just had 2 questions. The first one is regionally, you called out California, I was just wondering if there are any other callouts? Specifically, the Midwest has been pretty consistent for you guys, how you're doing in the Midwest. And then the second question would be -- I know it's early, a lot of subjectiveness to this, but if tax -- corporate tax rates were to be reduced, could you maybe just help us think about how to think about the possible uses of cash in a scenario where additional cash became available in size for you?
Michael Hartshorn:
Sure. So on the original performance, geographically, the strong comp performance was very broad-based. We mentioned California. The Midwest also performed very well. On tax policy, I think it's really too early to comment on the impact and what policy changes ultimately get implemented.
Operator:
The next question is from Roxanne Meyer from MKM Partners.
Roxanne Meyer:
I just have a follow-up question on category performance. Obviously, home and shoes were called out as standouts. I'm just wondering if you could also share other categories that were both above and as well as below the chain average.
Barbara Rentler:
I would say that other businesses fell pretty much closer in line in apparel. In terms of probably some of our weaker performances, we're still struggling in accessories as we're working our way through that. But after that, I would say pretty much most of the businesses fell in line.
Operator:
The next question is from Dana Telsey from Telsey Advisory Group.
Dana Telsey:
Any update on dd's and what you're seeing there and how are you thinking about it for 2017? And also, any update on shrinkage?
Michael O'Sullivan:
Dana, on dd's, as Barbara mentioned in her remarks, dd's continued its strong performance in Q3. The business is on track for another good year. We -- as we have over the last several years, this year, we opened about 20 new dd's stores. And again, we'll be more specific when we give 2017 guidance, but if have to speculate, I would say that you could expect that we're not going to deviate materially from that going forwards.
Michael Hartshorn:
On shrink, we finished our physical inventory, as we do every year, in the third quarter. Shrink results were slightly better than our expectations. That said, shrink was a slight headwind versus last year as we anniversaried better-than-expected results from the prior year.
Operator:
The next question is from Simeon Siegel from Nomura Instinet.
Simeon Siegel:
So if I missed it, but just any thoughts on where you expect the inventory to end the year? And then any color on the long term merch margin opportunity from here?
Michael Hartshorn:
In terms of inventory for the year, I mean, I think we'll continue to operate the business at slightly down, and I don't think our expectation would change for the year-end inventories.
Michael O'Sullivan:
And then in terms of longer-term margin opportunity, at this point, it's really about the sales line. I kind of feel like in terms of the things that have driven our margin improvement over the last several years, those things have included tighter inventory control which has, obviously, driven lower markdowns and improved shortage control. There might be some incremental opportunity in both of those areas, but it will be relatively small. So the real upside opportunity on margin is going to come from the head of planned sales.
Operator:
There are no further questions at this time. I will turn the call back over to Barbara Rentler for closing comments.
Barbara Rentler:
Thank you for joining us today, and for your interest in Ross Stores. Have a great day.
Operator:
This concludes today's conference call. You may now disconnect.
Operator:
Good afternoon, and welcome to the Ross Stores Second Quarter 2016 Earnings Release Conference Call. [Operator Instructions] Before we get started, on behalf of Ross Stores, I would like to note that the comments made on this call will contain forward-looking statements regarding expectations about future growth and financial results, including sales and earnings forecasts and other matters that are based on the company's current forecast of aspects of its future business. These forward-looking statements are subject to 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 2015 Form 10-K and fiscal 2016 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:
Good afternoon. Joining me on our call today are Michael Balmuth, Executive Chairman; Michael O'Sullivan, President and Chief Operating Officer; Gary Cribb, Executive Vice President, Stores and Loss Prevention; John Call, Executive Vice President, Finance and Legal; Michael Hartshorn, Group's Senior Vice President and Chief Financial Officer; and Connie Kao, Vice President, Investor Relations.
We'll begin our call today with a review of our second quarter and year-to-date performance, followed by our outlook for the remainder of the year. Afterwards, we'll be happy to respond to any questions you may have. As noted in today's press release, both sales and earnings results in the second quarter were ahead of our forecast. Earnings per share for the period were $0.71, up 13% on top of an 11% increase in the prior year. These results include an approximate $0.01 benefit from favorable expense timing that is expected to reverse in the second half. Net earnings for the second quarter grew to $282 million compared to $259 million for the same period last year. Sales rose 7% to $3,181,000,000, with comparable store sales up 4% on top of a 4% gain in the prior year. Higher merchandise gross margin during the second quarter drove a 50 basis point increase in operating margin to 14.4%. For the first 6 months of fiscal 2016, earnings per share were $1.44, up 9% on top of a 15% increase in the prior year. Net earnings were $573 million, up from $541 million in last year's first half. Sales year-to-date rose 6% to $6,270,000,000, with comparable store sales up 3% versus a 5% gain in the prior year period. dd's DISCOUNTS again posted better-than-expected gains in both sales and profits for the quarter as customers continued to respond positively to their merchandise offerings. During the quarter, California and the Midwest were the strongest regions, while shoes and home were the best-performing merchandise categories at Ross. We also made some progress improving the assortments in our ladies' apparel businesses, where we struggled during the spring season. As we ended the second quarter, total consolidated inventories were up 3% compared to the prior year, with average in-store inventories down 1%. Packaway as a percent of total inventories was 47% compared to 46% at this time last year. Turning to our expansion program. Store growth remains on track as 24 new Ross and 7 dd's DISCOUNTS opened in the second quarter. For the full year, we continued to plan for a total of 70 new Ross and 20 dd's DISCOUNTS locations. As usual, these numbers do not reflect our plans to close or relocate a handful of stores. Now Michael Hartshorn will provide further color on our second quarter results and details on our second half guidance.
Michael Hartshorn:
Thank you, Barbara. Let's start with our second quarter results. Our 4% comparable store sales gain was driven by increases in both traffic and the size of the average basket. As mentioned earlier, second quarter operating margin was better than expected, increasing 50 basis points from last year to 14.4%. Cost of goods sold improved 60 basis points in the quarter, driven by 45 basis point increase in merchandise margin and distribution and buying costs that were lower by 10 and 5 basis points, respectively.
Selling, general and administrative expenses during the period increased by 10 basis points due mainly to higher wages. During the quarter, we repurchased 3.1 million shares of common stock for a total purchase price of $176 million. Year-to-date, we have bought back a total of 6.2 million shares for an aggregate price of $352 million. As planned, we expect to buy back a total of $700 million in stock for the year to complete the 2-year $1.4 billion stock repurchase program approved by our Board of Directors in February 2015. Let's turn now to our second half guidance. For the third quarter ending October 29, 2016, same-store sales are forecast to increase 1% to 2% on top of a 3% gain last year, with earnings per share projected to be in the range of $0.52 to $0.55 versus $0.53 in last year's third quarter. For the fourth quarter ending January 28, 2017, we are also planning same-store sales to be up 1% to 2% on top of a 4% gain last year, with earnings per share projected to be $0.73 to $0.76 compared to $0.66 last year. The difference in earnings per share growth between the third and fourth quarters is mainly due to timing of packaway-related costs compared to the prior year. Now I'll provide some additional operating statement assumptions for our third quarter EPS target. Total sales are projected to grow 4% to 5%. We're planning to add 25 new Ross and 9 dd's DISCOUNTS locations during the period. In addition to the previously mentioned timing of packaway-related costs, if same-store sales perform in line with our guidance for 1% to 2% gain, there would be some deleveraging on occupancy and other expenses. Thus, operating margin is projected to be 11.6% to 11.8% versus 12.1% in the prior year. Net interest expense is estimated to be about $4.5 million. Our tax rate is planned at approximately 36% to 37%. And we expect average diluted shares outstanding to be about 394 million. As noted in today's press release, based on our results for the first 6 months and the second half forecast, we are now projecting earnings per share for the full year to increase 7% to 10% to $2.69 to $2.75 on top of a 14% gain in fiscal 2015. Now I'll turn the call back to Barbara for closing comments.
Barbara Rentler:
Thank you, Michael. To sum up, our sales and earnings growth improved from earlier in the year, with second quarter results that were above our projections. As previously mentioned, we have made some progress improving the assortments in our ladies' apparel businesses where we struggled during the spring season. However, we know we still have more work to do in this very important area. So as we move into the second half and beyond, we will continue to place additional emphasis on further improving our merchandise offerings in this business. We are well positioned with plenty of open-to-buy in order to take advantage of the large availability of products in the marketplace today, not only in ladies' apparel but throughout the store. This flexibility will allow us to offer plenty of appealing fashions and compelling bargains to our customers. That said, we still face an increasingly uncertain macroeconomic, political and retail environment. So while we hope to do better, we believe it is prudent to manage our business conservatively over the balance of the year. At this point, we'd like to open up the call and respond to any questions you might have.
Operator:
[Operator Instructions] The first question is from David Mann from Johnson Rice.
David Mann:
I guess, my question is on the third quarter guidance. Can you talk about the comp guidance you're giving for the third quarter? Why we should expect that to decelerate a little bit from what you saw in the second quarter? And how much is that packaway expense, the differential that you're talking about impacting Q3 versus Q4?
Michael O'Sullivan:
So David, on the comp guidance, first of all, I think as Barbara said in her remarks, as we look at the back half, we think we continue to face an increasingly uncertain macroeconomic, political and retail environment. And I would say that the retail environment we're expecting is likely going to be promotional, given relatively poor performance levels that have been reported recently and also some store closure announcements that have been made. So weighing all those factors together, it kind of makes sense for us to be relatively conservative in our guidance. We'll do our best and certainly, we have to do better.
Michael Hartshorn:
David, on the timing of packaway, as we noted in our comments, the difference between the third and fourth quarter is mainly due to the timing of packaway-related costs. As a reminder, we saw benefits from the timing last year in Q3 and a significant negative impact in Q4. So while we hope to do better, Q3 and Q4 taken together implies a 5% to 10% EPS growth on a 1% to 2% comp versus the 9% increase in the first half of the year at the 3% comp.
Operator:
Next question is from Brian Tunick from Royal Bank of Canada.
Brian Tunick:
I guess, 2 questions, just trying to understand -- it sounds like a lot of retailers are calling out July being the strongest month of the second quarter, people talking about back-to-school off to a good start. I know you guys had fewer, I think, tax-free days in Florida this year. So just curious, when you gave your third quarter guidance, how you view those inputs. And then if you could talk about the buckets of merchandise margin drivers, what's still are the biggest opportunities ahead of the company?
Michael Hartshorn:
Brian, it's Michael. In terms of trends during the quarter, for us, similar it sounds like to other retailers. July was slightly higher than May and June, and May and June were relatively similar. In terms of margin performance for the quarter, the higher margin -- merchandise margin was driven by above plan sales and somewhat better execution. I'd say in the longer term, the best thing that we can do to drive sales is sales productivity -- or drive margin is sales productivity.
Brian Tunick:
And do you have an outlook on inventory per store decline goals? What do you think is left in the opportunity there?
Michael Hartshorn:
Overall, since we started cutting inventory, we have inventories down over 40% in front of the customer. And I think going forward, we'll try to operate the business with slightly lower inventories. But I think we're certainly in the ninth inning of reducing significant inventory in front of the customer.
Operator:
The next question is from Oliver Chen from Cowen and Company.
Oliver Chen:
Regarding the ladies business, it sounds like you've made some really nice progress here. If you could elaborate on your thoughts on what work is left to do and also how this has interacted with traffic. It feels like it's been on its way to being corrected, but I know that you're thinking that there's more opportunity. And that was very nice to see that momentum in traffic, which has been tough for retailers as a whole. So I'm curious about those 2 and how the interplay going forward.
Barbara Rentler:
So Oliver, I'll talk a little bit about the ladies improvement. We feel like we've improved slightly in Q2. The assortments, I would say, are moving in the right direction. But I would also say that we feel like we have a ways to go. We believe that we're addressing the correct issues in the assortment, but it takes time to completely address those merchandise issues. So, although we've made some improvements, we know we still have -- we have a little bit of road ahead of us.
Michael O'Sullivan:
And Oliver, on -- go ahead, Oliver.
Oliver Chen:
Well, on that topic, is weather something we should think and watch about? Because I know weather plays a role on the risk factor in terms of properly assorting. So if there's a way to think about that aspect -- that axis of risk or not, it would be interesting to hear your thoughts.
Barbara Rentler:
The weather, I would say, what really happened in terms of our assortment issues that we had in Q1, I don't think it directly related to the weather, I think it directly related to how we assorted the total assortment. I mean, obviously, we were taking some considerations of news of El Niño into consideration, but the weather itself wasn't the main driver. We just -- we really just had execution issues and the assortments got off course. We feel at this point like we've identified issues, in the process -- of addressing and correcting those issues, but we still feel like we have improvements to make ahead of us.
Operator:
Your next question is from Ike Boruchow from Wells Fargo.
Irwin Boruchow:
I guess, maybe, Michael, on the expense front. It seems like you have a little bit more flexibility on the SG&A line than maybe your larger peer right now. I guess, my question is, it sounds like wage inflation should continue to be a headwind into next year, especially given your California exposure. Maybe just simplistically, would you expect next year to have similar amount of headwinds that you're seeing this year or more or less? Just kind of curious ballpark, how do you think about that.
Michael Hartshorn:
Sure, sure, Ike. Clearly, labor costs will be an expense headwind for us and, frankly, the whole retail industry. We entered this year in 2016 and we've taken minimum wages up across the chain, and the impact of those adjustments are reflected in our full year guidance, which is currently a 7% to 10% increase. So we've done a good job organizationally finding efficiencies throughout the business. We will go through our 2017 planning process later this year and like last year, do our best to find efficiencies throughout the business to attempt to mitigate further wage increases. And we'll be providing an update on that when we give guidance early next year.
Operator:
The next question is from Lindsay Drucker Mann from Goldman Sachs.
Lindsay Mann:
I was hoping you could comment on whether when you had some of your larger big-box apparel retailers go out of business in a local market, whether that impacts your business and how you feel about occupying some of that space for -- especially if it's on mall.
Michael O'Sullivan:
So Lindsay, I guess, I would say that there’s a short-term impact and then more of a medium, long-term impact. The short-term impact is when a retailer goes out of business or when they close stores, that just adds to the promotional environment. And as Barbara mentioned in her earlier remarks, we're kind of assuming that the -- back half of the year will be fairly promotional and those store closures will add to that. In the medium- to long-term though, once those stores have closed, what we've found in the past is that when there's less competition, we have an opportunity to gain share. So longer term, there should be a benefit there. On the third part of your question about, is there opportunity for space, it all depends on a particular store. I mean, as you know, we're a strip mall retailer, and it will depend upon the size of the store that's being closed, is there an opportunity to chop that up, et cetera, and that's something that our real estate group is pretty expert at looking at. So hard to answer that in terms of specific opportunity.
Operator:
The next question is from Mike Baker from Deutsche Bank.
Michael Baker:
So department store inventories came way down this quarter that did a good job clearing a lot of product. I think their inventories are down on a year-over-year basis as much as they have been in about 5 or 6 years. How does that impact your business in the back half of the year? On one hand, does it mean that there might be less excess inventory available? Are you that much more important to your vendors now that they're looking for someone to buy some product and what does it do to promotional high atmosphere?
Barbara Rentler:
Mike, I think that's a few different things. As their inventory comes down and in terms of having less excess inventory, the market is full of excess inventory now. There's a tremendous amount of availability in the market more than their normally would be. So in terms of excess from now through fall, I don't think there'll be any inventory issue. In terms of how promotional they get, I mean, I still believe that, that, even with less inventory, there's so many uncertain factors out there, the macroeconomic environment, political environment, even though stores are positioned perhaps with less inventory than they have last year, that doesn't necessarily mean that, that sales will materialize. So it's kind of remains to be seen. So what we're viewing is that the fourth quarter what Michael O'Sullivan said that the fourth quarter will be highly promotional and then, I guess, that will determine the additional excess supply that could be there beyond what we're seeing in the marketplace today.
Michael Baker:
Okay. If I could ask one more. You said that the third -- the second quarter, I think you said benefited from a timing expense that will reverse in the back half. But that's not the packaway that you're referring to. Is it? Or is it something else?
Michael Hartshorn:
No, it is packaway. Packaway ended a little bit higher.
Michael Baker:
Okay, that's what you're referring?
Michael Hartshorn:
Yes, yes.
Operator:
The next question is from Michael Binetti from UBS.
Michael Binetti:
Let me just ask you about -- I guess, one of the questions earlier was related to labor for next year. And I guess, we're trying to figure out, for the most part, what the algorithms look like for next year in the space where I know you guys run a very tight box, and you guys have done a nice job on inventory. So you pointed to the 7% to 10% EPS growth this year. Flavor is somewhat similarly incremental next year. Can you help us think about maybe what the fix versus floating is in the rest of SG&A so to your point earlier that the best source of leverage from here will be store level productivity?
Michael Hartshorn:
Sure, Michael. When we talk about our long-term model, we've said that low double-digit EPS growth is our long-term model, and that's based on a comp between 3% to 4%. So that's really what the most important driver of achieving that low double-digit growth. The other thing I'd say in terms of SG&A and occupancy, the leverage points for both of those have not changed. Currently, our guidance assumes SG&A for the year is about 3% and occupancy is about 4%.
Michael Binetti:
Okay. And then would you mind just clarifying the comment earlier on the comps getting a lift from average basket size? Is that UPT or average unit retail? And what do you think was driving that, a little bit more color, please?
Michael Hartshorn:
Sure. As we mentioned in the remarks, the 4% comp was driven by both traffic and the size of the average basket, and the higher basket was driven mainly from higher units per transaction. So for us, that's always about the merchandise and the assortment we put in front of the customer, and that's what we think is driving it.
Operator:
The next question is from Omar Saad from Evercore ISI.
Warren Cheng:
This is Warren Cheng online for Omar. I just had a follow-up to Ike's question on the wage inflation. Can you just -- as you kind of look ahead and look at wage inflation for the next year and beyond, is this something that you look to proactively get ahead of based on the competitive environment? Is it more based -- it is more determined by legislation that passed, kind of vary by state? Just trying to get a little bit of a framework for how long this could last and how you think about this, and how you make these decisions.
Michael O'Sullivan:
Sure. So Warren, just a little bit of recap in terms of what we've done. Last year, we moved minimum entry wage rate to $9. And as we've mentioned on our previous call this year, we took our minimum hourly rate up to $10 for eligible store associates. But our expectation is that there's going doing to be wage pressure in the general economy over the next several years. And we also know that in some states, some very important states like California, there's already legislation that's passed or close to being passed that's going to set up multiple years of minimum wage increases. So those are things that we're looking at and as part of our budget and longer-term planning process, we'll look for ways to offset some of those minimum wage increases. It will get harder over time. I think we've done a good job so far, as Michael Hartshorn said, in absorbing those wage rate increases in the last couple of years. But that's probably a limit to how much we can absorb. So that's our expectation over the next few years.
Operator:
The next question is from Matthew Boss from JPMorgan.
Matthew Boss:
On your store growth, what's the maturity curve for new stores? Do you see 90 stores roughly as a good number of net adds the next few years? And just what have you seen from your latest Midwest sales?
Michael O'Sullivan:
So Matthew, yes, I think that 90 store, give or take a few stores, is a level we've been running at for the last several years now and it's a level we're pretty comfortable with in terms of availability of good sites and our operational capabilities in terms of being able to open stores in a high-quality way. So yes, we feel good about that number. In terms of the new region, the Midwest, we entered the Midwest 4 or 5 years ago now. And I would say, we're very pleased with how it's going. I mean, you all have heard on these calls over the last couple of years, certainly over the last 1.5 years, the Midwest has been one of our top-performing regions. So we're very good about the business we're building there.
Operator:
The next question is from Paul Lejuez from Citigroup.
Tracy Kogan:
It's Tracy filling in for Paul. Two things. I was wondering if you guys could tell us what the comp gap was between your better and your worst-performing regions? And then secondly, what impact did ladies' apparel have on the comp? Or how much did it drag?
Michael Hartshorn:
Tracy, it's Michael. Answer that, just telling you some general outline of the regional performance. The strength in comp was relatively broad-based. As we mentioned in our comments, the Midwest and California were our strongest regions. The Midwest, as Michael O'Sullivan just said, has been very strong over the last several years. California, for us, likely benefited from more seasonal weather during the quarter, and then of our larger markets, Florida and Texas were in line with the chain. In terms of absolute comp on ladies, that's not something we would disclose on a call like this, but suffice it to say, ladies did underperform the chain, but that is somewhat of an improvement versus Q1.
Tracy Kogan:
So it was less of a drag than it was in the first quarter?
Michael Hartshorn:
Yes.
Operator:
The next question is from Lorraine Hutchinson from Bank of America Merrill Lynch.
Lorraine Maikis:
Barbara, when do you think you'll have the ladies' apparel business fixed or aligned with where you'd like it to be? And then could you also talk about where you see the greatest opportunities for the holiday assortment?
Barbara Rentler:
Sure. The ladies business, it's a very big business in that -- at our size, it's not the easiest business to turn around. I don't have -- we continually are making progress. I don't have a definitive date of when I think I could say at a certain period of time, we're going to be 100% fixed. It's a work in progress, and so we feel like we're correcting the right things. We think we've identified our issues, but that -- that's a very big business and a very long haul, so I really couldn't give you a definitive time frame. In terms of holiday, we'll have an emphasis on gift-giving the way we did last year. It will be broad-based throughout the entire box with, obviously, the key classification, the home businesses, which are traditionally good gift-giving businesses. But really, we see that throughout the entire box everywhere.
Operator:
The next question is from Laura Champine from Roe Equity Research.
Laura Champine:
In this holiday season, being an election year and another fiercely competitive year, are there any significant changes that you expect to make to your media spend or advertising plans?
Michael O'Sullivan:
Laura, the short answer is no. Our marketing strategy and message has been fairly consistent over the year. The message is pretty straightforward that we offer the best values in apparel and home fashions. That’s still the strategy. It’s still the message, so no significant changes.
Laura Champine:
Got it. And then as we look forward into 2017, with everything we know today about changes in department store footprints, with the macro environment and the cost environment, would you see any significant step up or step back in your square footage growth?
Michael O'Sullivan:
Not at this point, no, no. We plan, as you appreciate, with the nature of retail real estate, we have a pipeline of stores that we plan to open. So at this point, our 2017 openings are fairly far long. As I said in an earlier answer or an answer to an earlier question, we're pretty happy with that 90-or-so level of new store openings.
Operator:
The next question is from Roxanne Meyer from MKM Partners.
Roxanne Meyer:
First, I guess, I'm curious to get a little bit more color in the home category. Wondering what's driving performance there. Is there anything you're doing differently in execution or certain categories that are outperforming?
Barbara Rentler:
Well, the home business, our performance has been very broad-based. Obviously, the merchants are out there continually looking for better values and broader assortments. But in grand total home, it's very broad-based.
Roxanne Meyer:
Okay, great. And then as it relates to issues in the women's business, I'm just wondering if there's anything that you're doing differently going forward to both correct the issues and prevent future ones in terms of whether it's change in processes or otherwise and anything you can describe.
Barbara Rentler:
What I would say about ladies is, we've done a lot of drill down, a lot of analysis, to understand what issues need to be corrected and obviously, when you do anything like that and you look within your 4 walls, you're really going in and saying, reviewing everything from processes to total assortments. So I would say no stone left unturned. Really, you're looking at every component of it.
Roxanne Meyer:
Okay, great. And then just last, inventory ended cleanly. But I'm wondering within your composition of inventory, if you have any clearance carryover within women's or whether you're able to end the 2Q in a clean inventory position within the women's merchandise.
Michael O'Sullivan:
We ended pretty cleanly.
Operator:
Your final question comes from Kimberly Greenberger from Morgan Stanley.
Kimberly Greenberger:
Barbara, it sounds like you made progress in ladies. You're still -- you still have targeted additional work to do. I guess, I was surprised that the comp trend has reaccelerated so quickly to that 4% level with ladies still being a drag. I'm wondering if there are other categories that sort of filled the gap there. And then Michael, just a clarification. Could you remind us the basis point impact in 3Q and 4Q from that packaway shift? And can we just simply use that as a guidepost this year? Or does it depend actually on your packaway balances at the end of 3Q and 4Q and it's maybe somewhat difficult to forecast?
Michael Hartshorn:
Yes, the guidepost from last year, frankly, is going to change based on the volume this year. I think the best guidepost is to take the difference between EPS growth between Q3 and Q4, and the primary difference there is the timing of packaway.
Barbara Rentler:
And Kimberly, in terms of filling the sales gap to get to the 4, as we said in our comments, our home and our shoe business has been very strong.
Kimberly Greenberger:
And Barbara, was that an acceleration from the trends that you have seen in the first quarter and/or the fourth quarter? Or was there a different category may be that you saw acceleration in?
Barbara Rentler:
No, there was an acceleration in that trend in those businesses.
Operator:
I will now turn the call over to Barbara Rentler for closing comment.
Barbara Rentler:
Thank you for joining us today and for your interest in Ross Stores, and have a great day.
Operator:
This concludes today's conference call. You may now disconnect.
Operator:
Good afternoon, and welcome to the Ross Stores First Quarter 2016 Earnings Release Conference Call. [Operator Instructions]
Before we get started, on behalf of Ross Stores, I would like to note that the comments made on this call will contain forward-looking statements regarding expectations about future growth and financial results, including sales and earnings forecasts and other matters that are based on the company's current forecast of aspects of its future business. These forward-looking statements are subject to 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 2015 Form 10-K and fiscal 2016 Form 8-Ks on file with the SEC. 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 Balmuth, Executive Chairman; Michael O'Sullivan, President and Chief Operating Officer; Gary Cribb, Executive Vice President, Stores and Loss Prevention; John Call, Executive Vice President, Finance and Legal; Michael Hartshorn, Group Senior Vice President and Chief Financial Officer; and Connie Kao, Vice President, Investor Relations.
We will begin our call today with a review of our first quarter performance, followed by our outlook for the second quarter and fiscal year. Afterwards, we'll be happy to respond to any questions you may have. Earnings per share for the first quarter was $0.73 or a 6% gain on top of a robust 19% increase in the prior year period. Net earnings for the quarter were $291 million, up from $282 million last year. Sales increased 5% to $3,089,000,000, with comparable store sales up 2% on top of a strong 5% gain in the first quarter of 2015. Despite facing our strongest prior year comparisons, along with merchandising execution issues in ladies' apparel, sales performed at the high end of guidance, while earnings per share were slightly above our targeted range. During the quarter, home and shoes were the best-performing merchandise categories at Ross, while ladies' apparel underperformed. Geographically, the Midwest and Mid-Atlantic were the strongest regions. Although our first quarter operating margin of 15.4% was down from last year, it was slightly above plan, mainly due to higher merchandise margins that partially offset the expected impact from the unfavorable timing of packaway-related expenses. As we ended the first quarter, total consolidated inventories were flat versus the prior year, with average in-store inventories down slightly. Packaway as a percent of total inventories was 46% compared to 45% at this time last year. Both sales and operating profits at dd's DISCOUNTS were better-than-expected in the first quarter, as customers continued to respond positively to dd's value offering. Our store expansion program remains on track as we opened 22 new Ross and 6 dd's DISCOUNTS stores in the first quarter. We continue to expect to add a total of 90 new locations in 2016 comprised of approximately 70 Ross and 20 dd's DISCOUNTS. As usual, these numbers do not reflect our plans to close or relocate about 10 older stores during the year. Now Michael Hartshorn will provide further color on our first quarter results and details on our second quarter guidance.
Michael Hartshorn:
Thank you, Barbara. Our 2% comparable store sales gain was driven by an increase in the size of the average basket. As Barbara mentioned, first quarter operating margin of 15.4% was down 30 basis points from last year, which was better than our guidance for a 50 to 70 basis point decline.
Cost of goods sold increased 10 basis points in the quarter, mainly due to a 55 basis point increase in distribution expenses from the expected impact of a new distribution center we opened in the second quarter of last year as well as the unfavorable timing of packaway-related costs that benefited this period in 2015. These expense pressures were partially offset by merchandise margins that rose a better-than-expected 35 basis points and 10 basis points in lower-volume costs. Selling, general and administrative expenses during the period increased by 20 basis points due to a combination of deleverage from the 2% increase in comparable store sales and also higher wages. During the first quarter, we repurchased 3.1 million shares for a total purchase price of $176 million. This keeps us on track to buy back as planned a total of $700 million in stock for the year, which will complete the 2-year, $1.4-billion program authorized by our Board of Directors in February 2015. Let's turn now to our second quarter guidance. We continue to forecast same-store sales for the 13 weeks ending July 30, 2016, to be up 1% to 2% on top of a 4% gain in the second quarter of 2015, with earnings per share of $0.64 to $0.67 compared to $0.63 last year. Our guidance for the second quarter is based on the following assumptions. Total sales are projected to increase 4% to 5%. We expect to open 31 new stores during the period, including 24 Ross and 7 dd's DISCOUNTS locations. Second quarter operating margin is projected to be relatively flat at 13.8% to 14.0% compared to last year's 13.9%. In addition, net interest expense for the quarter is estimated to be about $4 million. Our tax rate is expected to be approximately 38% to 39%, and weighted average diluted shares outstanding are projected to be about 397 million. Based on our first quarter results and the second quarter guidance, we now project fiscal 2016 earnings per share to be in the range of $2.63 to $2.72 compared to $2.51 last year. Now I'll turn the call back to Barbara for closing comments.
Barbara Rentler:
Thank you, Michael. As mentioned earlier, even though we faced our toughest prior year comparison and comparable store sales came in at the high end of guidance with earnings per share performing slightly above our targeted range, we feel we should have done better.
In hindsight, we now know that we had some merchandise execution issues in ladies' apparel during the quarter that are now in the process of being addressed. Looking ahead, we have plenty of open-to-buy, which gives our merchants the ability to select the best values from the large volume of product available in the marketplace today. Seeing this position will enable us to offer customers even more fresh and exciting new bargains as we move through the second quarter and the balance of 2016. As always, providing customers with the most compelling name brand values possible is the key driver of both our short- and long-term success. At this point, we'd like to open up the call and respond to any questions you might have.
Operator:
[Operator Instructions] Your first question is from Paul Lejuez with Citi.
Paul Lejuez:
On the last call, I believe you mentioned that you were holding back a little bit on -- some of your potential packaway buys, which [indiscernible] were going to get even better. I'm just wondering if that came to fruition throughout the quarter. And if so, when do you plan to flow those goods into the stores? And also just kind of curious about performance in some of your largest states, California and Texas, Florida?
Barbara Rentler:
Okay. Paul, as it pertains to packaway, yes, we did buy packaway goods in the first quarter that we would use for second quarter and for fall. We're actually pleased with the packaway assortment that we have. And in terms of...
Michael O'Sullivan:
I think your other question, Paul, was on region. So Michael, do you want to comment on?
Michael Hartshorn:
Sure. On the regions, Paul, the Midwest and the Mid-Atlantic, as we said in the comments, were the strongest regions. The Midwest has been very strong over the last several years, while the Mid-Atlantic benefited from a favorable weather comparison versus last year. In terms of other states, you mentioned California, our largest region performed slightly below the chain average. Texas was above the chain average on top of a strong performance last year when it was also above the chain average. And then Florida, trailed the chain average. We believe some of the merchandising issues that Barbara mentioned in her comments had a bigger impact to Florida as we transition spring product earlier there.
Paul Lejuez:
And then just 1 follow up. What's the timing and when you feel like you might have the merchandising issues fixed on the ladies' apparel side?
Barbara Rentler:
At this point, we're working on the issues. So they are in the process of being addressed. We're working to fix them as quickly as possible, and it's embedded in our guidance for Q2. So we hope to do better.
Operator:
And the next question is from Neely Tamminga with Piper Jaffray.
Neely Tamminga:
I was wondering if you could elaborate a little bit more on the ladies' apparel merchandise issue. Is it within specific categories? Or is it kind of more broad based? We're just trying to better understand that issue.
Barbara Rentler:
Well, what I would say is that we could have done a much better job of executing our merchandise game in ladies, and it was mainly in the transition to spring products that we made some execution errors.
Operator:
And your next question is from Ike Boruchow with Wells Fargo.
Irwin Boruchow:
I think this is the first time in the last 4 or 5 quarters that you didn't call out transactions as being up in the driver of comp. Is that all attributable? I assume that's not a real traffic number. If the transaction is not being called out, does that mean transactions were down? And again, is that all related to the ladies' apparel category?
Michael Hartshorn:
I guess, we mentioned in our remarks that the 2% comp was driven by the size of the average basket. Transactions are approximately[ph] for traffic was flat during the quarter. The higher basket was driven mainly from higher units per transaction.
Barbara Rentler:
Well, what I would add, Ike, is that, that I believe in our assortments in ladies' apparel are not up to the standards that our customers come to expect. That probably makes us a little less compelling to shop.
Operator:
The next question is from Daniel Hofkin with William Blair & Company.
Daniel Hofkin:
Could you maybe quantify what comps might have been in other categories or give us some sense of what that impact would have been from ladies' apparel? And moving forward, kind of how you see that, it sounds like you are in the process of fixing it. Do you think it's realistically fixable by holidays, third and fourth quarter?
Michael Hartshorn:
Sure. In terms of other merchandise performance, we did have categories that performed well. Home and shoes did very well for us. In terms of trying to understand the impact, it's always hard to do. That said, our comparable store sales did slow 1 to 2 points from our trends in the back half of last year.
Barbara Rentler:
And what I would say is, we're going to -- we're working to address the issues and to fix them as quickly as possible. We've been doing this for a long time. We've made mistakes before, and we're going to get it fixed.
Operator:
Your next question is from Stephen Grambling with Goldman Sachs.
Stephen Grambling:
Just clarify on an earlier question. As you think about the distribution headwinds as well as the packaway headwinds, can you just clarify how that should progress over the course of the year?
Michael Hartshorn:
Sure, Stephen. So in the quarter, distribution costs were 55 basis points higher than last year, and that's split fairly evenly between anniversary-ing our -- the opening of our distribution center in the second quarter of last year and also the timing of packaway-related costs. As we get into the second quarter, the impact of that DC will be about half of what it was in the first quarter, and we'll have it fully anniversaried when we get back to the back half of the year. In terms of timing of packaway, if you recall last year, we got a benefit in the first quarter, we got a benefit in the third quarter and took a charge in the fourth quarter. So we're up against those this year. So we had a -- about half of the 55 basis points was a drag. In this first quarter and our upcoming second quarter, the guidance assumes packaway is relatively flat.
Stephen Grambling:
That's very helpful. And then turning back to the top line, is there any comments that you can provide on the trend throughout the quarter, especially as it relates to traffic? Was it pretty consistent? Or was there any particularly strong changes as the quarter progressed?
Michael Hartshorn:
Sure, Stephen. Sales were relatively consistent throughout the quarter. Comp sales for March and April combined which removes the impact of the Easter calendar shift, were very similar to what we saw in February.
Operator:
Your next question is from Kimberly Greenberger with Morgan Stanley.
Kimberly Greenberger:
Great. Barbara, I'm not sure if there's anything else that you'd like to share about just your observations on the transit -- the spring transition in ladies' apparel. So obviously, we'd love to hear them. And I'm wondering, obviously, that is impacting, I would imagine, the start here to the second quarter. Do you think that there's an opportunity perhaps for that ladies' business to get back on track by the time we get it to the July time frame? Or do you really think that the full second quarter will be impacted? I would imagine that the issues here do not -- you would not expect them to continue into the back half of the year. But I just want to make sure that's a fair assumption.
Barbara Rentler:
So let me start with -- in terms of the transition of ladies', the only other flavor I would put to it is that, really, what we found is that we had wrong fabrications and colors. They were not appropriate. So our assortment was, I would say, off course. In terms of the starts to the second quarter, we, obviously, wouldn't comment on that in the quarter that we're in. In terms of the back half, we're working on it. We're drilling in, figuring out what's wrong, working on it and trying to fix things as quickly as possible, but it's hard to predict. So we've got it embedded in our guidance, and we're hoping to do better.
Kimberly Greenberger:
Great. And just 1 last question. Obviously, this execution challenge relates to current in season product that you got in the stores. Can you reflect on the product that's been print packaway? And do you think that there's some risk that some of the product that's been put into the packaway could also have suffered from a similar execution issue? Or do you have different guardrails around the product that goes into the packaway relative to what you've got in the stores at this time?
Barbara Rentler:
No, we're comfortable with what we have in packaway. We don't think the 2 issues relate.
Operator:
The next question is from Brian Tunick with RBC.
Brian Tunick:
A couple of questions. I guess, number 1, from an in-store inventory reduction opportunity, can you maybe just give us an update there on sort of what we should think about the rest of the year could look like? Obviously, you've made great strides. How you're thinking we should expect in-store inventories to play out? And then, Q1 is usually choppy between the tax refunds and obviously there was the gas price relief. Did you guys have any chance to parse out? I guess, California saw the wage hikes first? You call that, I think, underperforming the chain. Just any perspective as you think about the tax refunds, the gas price relief, the wage hikes for your consumer?
Michael O'Sullivan:
Sure. So Brian, I'll take the second part of your question first. Maybe Michael Hartshorn will respond on the expectations we met for reductions throughout the rest of the year. But in terms of some of the issues you raised like gas prices, wages, et cetera, I mean our business is always affected by sort of external variables and when we came into the year, we did -- we raised some about concerns about the economic in the consumer outlook. It's difficult, as you say, parse out those different components and quantify their impact. What I would say though is that I think we've always acknowledged that our performance is more than anything driven by our own execution. So although many of those things that you mentioned were important in Q1, I think our own execution was most important thing. That's why Barbara called it out in her comments.
Michael Hartshorn:
Brian, on inventory levels, we came into the year expectations that after many, many years of inventory reductions that our expectation we're going to operate the business with slightly lower inventory this year, and that expectations hasn't changed.
Brian Tunick:
Okay, and then lastly, on dd's, does it have any of the same women's sportswear issues that Barbara is talking about it at Ross?
Barbara Rentler:
No.
Operator:
Your next question is from Matthew Boss with JPMorgan.
Matthew Boss:
So your forward-looking caution on the overall retail backdrop last quarter, I mean, proved pretty spot on. And I guess, any changes to your larger picture outlook today versus where you were 3 months ago? How are you guys thinking about price competition in the back half? And then just any categories of particular close-out opportunity that you're seeing right now in the landscape?
Michael O'Sullivan:
So Matthew, on the first piece, again, I would see the external environment is one of the number of things that affects our performance. If consumer spending goes down and that leads to a more promotional competitive environment, then that's generally not good. But having said that, we showed in the past that we can perform well in a tough -- even in a tough economic environment. And again, in Q1, we performed at the high end, but we feel like we should have done better but for the execution issues that Barbara described. So we remain cautious as we were when we came into the year in terms of the rest of the year, and that's -- again, it's factored into our guidance.
Barbara Rentler:
In terms of supply, the supply is very broad based. There's a lot of supply in the market.
Operator:
Your next question is from Bob Drbul with Nomura.
Robert Drbul:
I just had a couple of questions. I think the first one is in the strength in shoes, is it the women's shoes, or is it athletic? Can you talk a little bit about your trends in athletic overall? And then strength in home, is it hard home or soft home? Like, what are you seeing in home? And do you feel like that's a sustainable trend that should continue for the rest of the year?
Barbara Rentler:
Actually, our strength in shoes is broad based, both in brown shoe and athletics. As is our strength in home is broad based between decorative home and bed and bath. So both businesses are pretty healthy across the board.
Robert Drbul:
Okay. And when you look at the wage pressures that your business is seeing, do you feel like that's still a containable issue for you as the year progresses? Or do you think it's getting any worse? How do you have that planned in for the rest of the year?
Michael O'Sullivan:
Bob, we feel pretty good about our guidance with respect to the impact of wages this year. Obviously, as you'd expect, we're looking at the longer term as well, and we're working on our various plans to sort of deal with wage pressures over a longer period of time. And more to come on that in the future, but for this year, we feel very comfortable.
Operator:
The next question is from Richard Jaffe with Stifel.
Richard Jaffe:
Could you talk about the trends at average retail price at Ross and at dd's? And then if you just comment on the cash balance, which seems to be growing. I'm wondering if you -- perhaps do you want to get more aggressive on buybacks or dividend or what's your thought on the cash balances?
Michael Hartshorn:
AUR trend at both Ross and dd's are pretty stable, pretty consistent with the prior year. In terms of the cash balance, we look at it time to time, we typically -- we're in the middle of a 2-year authorization, we'll look at it next year in term with -- along with our longer-term plans and make a decision at that point.
Operator:
The next question is from Michael Binetti from UBS.
Michael Binetti:
Maybe I can ask about the -- I guess, on the inventory a little bit of a different way, but this is, I guess, 2 quarters in a row where you've commented I think that the inventory in store has been negative. I don't know if that's related to the women's apparel call out, but are there any -- may be looking a little bit of there, were there any other categories where you felt like maybe you're a little bit too light on inventory to drive the comp?
Michael Hartshorn:
No, that was unrelated, and that's how we operate the business. That was our plan, and it's really [indiscernible].
Michael Binetti:
Okay. And then maybe if I could just look a little bit longer term, I want to think about maybe 2017, if we just take a look at inventory in the past 9 months in the channel, the department stores have really missed their business plans by a significant amount. We can already see in your comps, in the fourth quarter, you benefited from that. I think you just had first quarter, sounds like inventory is fairly wonderful. But if we assume a more rational inventory ordering pattern from the department stores heading into this holiday and also fairly common theme from the brands like PVH and Ralph Lauren, lately that their big corporate strategies are to slow, inventory flows into the department stores going forward. Do you have maybe a good point history you could point to and say, "Here's what year like 2017 might look like as we lap a period of very favorable inventory situation?"
Michael O'Sullivan:
No. I can't really think about a period in history that, that would be analogous. So what I would say is many of the things that you just said, Michael, are things that frankly people say at the beginning of the every year in terms of here's why supply is going to tighten up. And certainly, we haven't seen any sign of that so far this year, and so we're not expecting to see a major reduction in supply opportunities either for the remainder of this year and maybe it's too early to tell for 2017, but at least no signs of that at this point.
Barbara Rentler:
Actually, our history would show that the supply will take time. As the department store sector, even though they pulled back, their business is way of, and it's very difficult I think for vendor to get ahead of that. So history would show that there would be plentiful supplies to go forward.
Operator:
The next question is from Omar Saad with Evercore ISI.
Omar Saad:
I was wondering if you guys could talk a little bit about how you track your customer data, customer behavior and if you ever thought about something along the lines of the loyalty program or rewards program, even private label credit. It would be helpful to know what your thoughts on those things.
Michael O'Sullivan:
Sure, Omar. Yes, we periodically look at various programs like loyalty program, credit card, et cetera, and it's something we'll continue to look at. But our experience, and what's worked for us, I would say, over many years is to keep it simple and to focus on having the right assortment and great values. And at least all of our customer research tell us more than anything else. That's what the off-price customer cares about, and that's what's going to drive our loyalty over time, quite apart from any sort of loyalty program on the side. It's really all about the right assortment and great values. And if I just think about the most recent quarter, it's clear that in Q1, we didn't miss opportunities because we didn't have a loyalty program. If we missed opportunities that was because we may have had some assortment misses.
Operator:
Your next question is from Mike Baker from Deutsche Bank.
Michael Baker:
So as mentioned, comps slowed 1% to 2% from the end of last year. I guess, what I'm going to ask is how much of that do you think is because of the ladies' apparel assortment issue? And how much is that you mentioned a couple of times that you correctly predicted the consumer was a little bit soft? So is this all because of the ladies' issue? Is it a little bit of both? And then I will have a follow-up to that.
Michael O'Sullivan:
Sure. It's hard for us to say. I would say that what we typically try and do in our business is focus on what we can control. And -- so it's not very helpful for us to sort of dwell on external things that we can't really do anything about. What we think we can do something about and what we could have done something about in Q1 is sort of making sure that we execute as well as possible, and that's really the focus rather than any external issues.
Michael Baker:
But did you see a similar slowdown that you saw in ladies' apparel? Do you see anything you can close that or any kind of slowdown in any other major categories?
Unknown Executive:
No.
Barbara Rentler:
No. Actually, we felt good about our home business, our shoe business, and we're pretty pleased with our junior business. So it really was ladies' apparel.
Michael Baker:
Okay, so that helps us triangulate that. But the follow-up question is, in the past -- and I understand that these things happen. You can't get the buying right every time. But how long does it typically take to fix it? Is it just you live with the bad buys for the season and then you hope the buy is better for the next season? Or can it be fixed inter season with some late buys right now?
Barbara Rentler:
So what I would say is that we're working to fix it as quickly as possible. So we are a 1,300 store chain. It takes a little bit of time, but we've done this before. And so that's why we have it built in our guidance. And we hope to do so [ph].
Michael Baker:
It wouldn't last into the next season because that's a different buy, presumably?
Barbara Rentler:
Yes, obviously, that's a fair -- you're saying just pure product to product?
Michael Baker:
Correct.
Barbara Rentler:
Yes, I would say that's a fair assessment.
Operator:
Your next question is from Marni Shapiro with Retail Tracker.
Marni Shapiro:
I just want to dig in a little bit to what was going on at the store level away from women's. Are you finding that when she's coming into the store, if she's just not finding what she wants in women's, she's moving into home? And with that in mind -- or into non-apparel, with that in mind, could you shed any light on how the accessories business, handbags and jewelry, what have you -- how that business did? And any insights you have as to what might be driving up the UPT? Is it a function of fewer trips, buying more when she comes in or just great product that she has to have everything?
Barbara Rentler:
Okay, Marni, that's a few different things I would say, as she's coming into the store, in Q1 if she wasn't buying ladies' apparel based on our performance in home and in shoes and other areas of the company that she bought other products. And in terms of accessories, our accessory business is still difficult, really, based on our handbag business, in particular, which is pretty of the industry-wide issue. In terms of UPT, Michael?
Michael Hartshorn:
Yes -- no, so Marni, the UPT has grown for us for a while. It helped drive our comp last year, and our perspective is that the consumer is coming in and we have great bargains in the store and they're buying more per transaction. It's hard to delineate the pieces of that.
Marni Shapiro:
Yes, I know I guess that makes. And then just on like-for-like items, your pricing has remained if I recall and I think you mentioned -- sorry, I'm trying to do 2 at once, but your pricing has remained fairly stable like-for-like, sweater for sweater, bag for bag kind of thing?
Barbara Rentler:
The AUR?
Marni Shapiro:
Yes.
Barbara Rentler:
I would say the AUR sweater for sweater might be the same, the value might be better. So when there's a lot of supply in the market, and you get close outs on, say, better or branded product that you could put out at a lower retail, the AUR could be the same, but the value could be significantly better.
Marni Shapiro:
Fair. And just 1 last follow-up on that note. Are you finding that -- I mean, there's a lot of inventory out there. Have you been able to open vendors that you haven't been able to get into before over the course of the last couple of months and even 6 months?
Barbara Rentler:
I would say that the vendor community is pretty much open to doing business with us everywhere. I mean here.
Operator:
Your next question is from Roxanne Meyer from MKM.
Roxanne Meyer:
Two questions. One, I'm just wondering what your 2Q guidance maybe your 3Q guidance assumes about merchandise margin decline related to getting out of some of the women's apparel that's not working. And then secondly, as it relates to the Midwest markets, it's been outperforming for about 9 quarters now. Just wondering what it is that's really driving the outperformance and whether or not you see that continuing.
Michael Hartshorn:
Roxanne, on guidance. So we'd only give -- we only give one quarter at a time. We'll talk about Q3 after the second quarter. But the second quarter guidance assumes some increase in merchandise margin for the quarter.
Michael O'Sullivan:
And then on the Midwest, Roxanne, yes, as you say, we're very happy with how the Midwest has performed, not just in Q1, but over the last couple of years. It's been one of our top-performing regions. When we entered the Midwest in 2011, we said it would be a very successful business, but it would take time. And we're certainly very pleased with the progress so far. I think it's about having the right values in front of the customer. So we're very pleased with how we've done in the Midwest.
Operator:
Your next question is from David Mann from Johnson Rice.
David Mann:
In terms of the comment you made about the ladies' issue being included in guidance, I guess, I see that your full year guidance seemed to have gone up equal to the amount of the beat in the first quarter. So where in the guidance for the rest of the year would we would see changes in assumptions for this ladies' issue? And what else might have -- you have changed to offset any impact from that?
Michael Hartshorn:
So David, what, I think, we're saying is we could -- we're going -- we expect to achieve our original guidance despite the ladies' issue because that's what happened for the full year. We raised our full year guidance by the $0.01 in the quarter.
David Mann:
And I guess, I'm curious where -- what would be some of the factors that might give you that confidence that you would be able to offset that?
Michael O'Sullivan:
We were able to in the first quarter. So in the first quarter, we hit the high end of our comp guidance of 2% despite the issues that Barbara has described on the ladies' side probably because there were other businesses that did very well. So if you play that out over the year, we feel good about our original guidance.
David Mann:
Very good. And then 1 other question on the wages issue. Do you have an initial thoughts on the potential impact on [indiscernible] overtime regulation? How it might affect your business?
Unknown Executive:
So we've looked at it, and any impact at all would be nonmaterial and we're comfortable with our guidance as we go forward.
Operator:
The next question is from Randy Konik with Jefferies.
Randal Konik:
Quick questions. I just want to clarify when you make the comment the issues are embedded in the guidance. What does that mean exactly for the ladies' apparel? Does that mean that assumes it stays at the single trend it was in the first quarter or even assumes some incremental degradation in the category? Just can we get some, I guess, first color there. And then just a little bit more around the execution side comments. Can you just get a little more clarity what you exactly mean part of the execution? Was it some sort of systems issue, just bought the wrong things, got it in the wrong stores at the wrong time? Just a little bit more of meat on the bone of what the actual issue is?
Michael Hartshorn:
Randy, on the guidance, just to repeat what Barbara said earlier, the issues are going to take some time to fix, and we're focused on, as an organization, to try to get that done quickly. Despite that, like in the first quarter, we obviously missed some opportunities, thought we could have done better, thought we could have beat our original guidance. The guidance going forward is unchanged, and we hope we can do better.
Barbara Rentler:
And in terms of the execution issues in ladies', really, it's a mix issue. We just -- we bought wrong products in fabrications, in colors, we just didn't transition into spring product appropriately.
Randal Konik:
Okay. And then your outlook for merchandise margin already accounts for potential -- the issues around this category, right? So everything you feel for the second quarter guidance, you're properly accounting for the issue to be this ladies' apparel issue to stay kind of confined, is that correct?
Michael Hartshorn:
That's correct.
Unknown Executive:
Yes.
Barbara Rentler:
That's correct.
Randal Konik:
Okay. And then, I guess, lastly how should we be thinking about some of the items that we're seeing out there in the marketplace around different geographic performance? One of your competitor had, I guess, more strength in traffic trends versus you talk more about the basket size driving the comp. What do you think is a little bit of a difference in maybe the varying traffic trends you might have seen versus others?
Barbara Rentler:
I think, as I said before, I believe that when our assortments in ladies' apparel are up to standards, the customer comes to expect. That probably makes us a less compelling place to shop, and that would affect our traffic trends.
Michael O'Sullivan:
And also, I mean, there are some other factors and we were up against very strong prior year comparisons, which I think you always have to look at that when you're comparing our performance with other retailers. And then you also factor in the point Barbara has been making about the ladies' apparel business being a pretty important business and a pretty key driver of traffic. You take those two things together. I think that explains why our traffic has held off a little bit in the first quarter.
Randal Konik:
So you were you able to comment -- are you able to lastly -- on last question here is, are you able to see that potentially in tracking, let's say, customer visits per quarter where you're saying if a customer stood in the store month one of the quarter, she loves what she sees, she's probably going to be back a month later or something. You said you saw visits per store, per person, per quarter in the quarter decelerate the same person? Did you see that? Were you able to see that or tracked the credit card data to look at that?
Michael O'Sullivan:
No. We can't. Our business doesn't lend itself to that kind of sort of -- it would be quite interesting, but our business doesn't lend itself that kind of scientific approach. When we met a traffic just to be clear, we are measuring number of transactions. So we're not looking at actual visits. We don't have the capability to track actual visits, we're looking at number of transactions and we use that as a proxy for traffic, but it's an imperfect proxy.
Operator:
There are no further questions at this time. I will turn the call back over to Barbara Rentler for closing comments.
Barbara Rentler:
Thank you for joining us today and your interest in Ross Stores. Have a great day.
Operator:
This concludes today's conference call. You may now disconnect.
Operator:
Good afternoon, and welcome to the Ross Stores Fourth Quarter and Fiscal Year 2015 Earnings Release Conference Call. [Operator Instructions]
Before we get started, on behalf of Ross Stores, I would like to note that the comments made on this call will contain forward-looking statements regarding expectations about future growth and financial results, including sales and earnings forecasts and other matters that are based on the company's current forecast of aspects of its future business. These forward-looking statements are subject to risk and uncertainties that could cause actual results to differ materially from historical performance or current expectations. Risk factors are included in today's press release and the company's fiscal 2014 Form 10-K, Fiscal 2015 Form 10-Qs 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:
Good afternoon. Joining me on our call today are Michael Balmuth, Executive Chairman; Michael O'Sullivan, President and Chief Operating Officer; Gary Cribb, Executive Vice President, Stores and Loss Prevention; John Call, Executive Vice President, Finance and Legal; Michael Hartshorn, Group Senior Vice President and Chief Financial Officer; and Connie Kao, Senior Director, Investor Relations. We'll begin our call today with a review of our fourth quarter and 2015 performance, followed by our outlook for 2016. Afterwards, we'll be happy to respond to any questions you may have.
As noted in today's press release, we are pleased with our sales and earnings results for the fourth quarter, which exceeded our expectations despite the highly promotional holiday selling environment. Additionally, we faced our most challenging sales comparisons from the prior year. Our results were driven by the competitive values we offered on a wide assortment of name-brand bargains and gifts throughout our stores. Earnings per share for the fourth quarter grew 10% to $0.66 on net earnings that rose 6% to $264 million. Sales for the quarter increased 7% to $3,251,000,000, with comparable store sales up 4% on top of last year's 6% gain. For the 2015 fiscal year, earnings per share grew 14% to $2.51 on top of strong multiyear increases. Net earnings rose 10% to $1,021,000,000, with comparable sales up 4% for the year. dd's DISCOUNTS also posted better-than-expected gains in sales and operating profit for both the quarter and year, as customers continued to respond positively to their value offering. missy sportswear was the best-performing merchandise category at Ross for the fourth quarter while the Midwest was the strongest region. Our fourth quarter operating margin of 12.7% was down from last year as improved merchandise margins and strong expense control were more than offset by the timing of packaway-related costs. For the full year, however, we are pleased that operating margin increased 10 basis points to a record 13.6%. As we ended 2015, total consolidated inventories were up 3% over the prior year, with packaway levels at 47% of total inventories compared to 45% last year. Average in-store inventories were down approximately 2% at year-end. During the fourth quarter, we repurchased 3.2 million shares of common stock for a total price of $170 million. For the full year, we repurchased 13.7 million shares for an aggregate price of $700 million. We expect to complete the $700 million remaining under our current 2-year $1.4 billion program by the end of fiscal 2016. As noted in today's release, our board recently approved an increase in our quarterly cash dividend to $0.135 per share, up 15% on top of an 18% increase last year. The continued growth of our shareholder payouts reflects our ongoing confidence in the company's ability to generate significant amounts of cash after funding our growth and the other capital needs of our business. We have repurchased stock as planned every year since 1993 and raised our cash dividend annually since its inception in 1994. This consistent record reflects our unwavering commitment to enhancing stockholder value and return. Now Michael Hartshorn will provide further color on our 2015 results and details on our fiscal 2016 full year and first quarter guidance.
Michael Hartshorn:
Thank you, Barbara. Let's start with our fourth quarter results. Our 4% comparable store sales gain was driven by a combination of higher traffic and an increase in the size of the average basket. As Barbara mentioned, while full year operating margin was up 10 basis points compared to last year, fourth quarter operating margin declined 45 basis points to 12.7%.
Cost of goods sold increased 75 basis points in the quarter, driven by 100 basis points of higher distribution expenses due to the timing of packaway-related costs that benefited earnings earlier in the year. Freight and buying expenses also rose 15 and 5 basis points, respectively. These increases were partially offset by merchandise margin improvement of 35 basis points from the prior year and 10 basis points of lower occupancy costs. Selling, general and administrative expenses during the period improved by 30 basis points, benefiting from strong cost control and leverage on the 4% comparable store sales increase. Our tax rate for the quarter was lower than expected due to the passage of federal tax credit legislation and also the favorable resolution of a state tax matter. Let's turn now to our guidance for the upcoming quarter and year. Earnings per share for fiscal 2016 are forecast to be in the range of $2.59 to $2.71, up 3% to 8% from $2.51 in fiscal 2015. The operating statement assumptions for fiscal 2016 include the following. Total sales are forecast to grow 4% to 5% on a comparable store sales increase of 1% to 2%. We expect to add about 70 Ross and 20 dd's DISCOUNTS locations. As usual, these numbers do not reflect our plans to close or relocate about 10 older stores. If same-store sales are in line with our guidance of up 1% to 2%, then we would project operating margin for 2016 to be 13.5% to 13.7%. This forecast calls for a slight increase in merchandise margins that would offset some deleveraging on operating costs. Net interest expense is estimated to be $17 million. Our tax rate is projected to be approximately 37% to 38%. We expect average diluted shares outstanding to be about 395 million. Capital expenditures in 2016 are projected to be approximately $425 million, and depreciation and amortization expense, inclusive of stock-based amortization, is forecast to be about $385 million, up from $346 million in 2015. Lastly, our guidance includes our plans to raise the minimum wage for eligible hourly associates to $10 per hour in the second quarter of 2016, up from the current $9 minimum. These wage adjustments will help keep us competitive in our hiring practices and enhance our ability to retain talented associates to provide the shopping experience our customers have come to expect. Let's move now to our first quarter guidance. We are projecting same-store sales to be up 1% to 2% and earnings per share to be flat to up 4% at $0.69 to $0.72. Following are the assumptions that support this range. Total sales are projected to increase 4% to 5%. We expect to open 22 new Ross and 6 dd's DISCOUNTS locations during the quarter. First quarter operating margin is projected to be 15.0% to 15.2% compared to last year's 15.7%. The forecasted decline is mainly from the timing of packaway-related costs that benefited the first quarter last year and also the impact of a new distribution center that opened in the second quarter of 2015. In addition, net interest expense for the quarter is estimated to be about $4.5 million. Our tax rate is expected to be approximately 38% to 39%, and weighted average diluted shares outstanding are projected to be around 400 million. Now I'll turn the call back to Barbara for closing comments.
Barbara Rentler:
Thank you, Michael. We are very pleased with our strong performance in 2015 as we were once again able to convert our better-than-expected revenue gains into solid double-digit earnings per share growth. These results are due to the resilience of our off-price business model and are a testament to the talented people we have throughout our organization. They have demonstrated once again their ability to deliver compelling bargains to our customers, which will always be the key to success in our business.
As we move into 2016, we are well positioned to take advantage of the best opportunities in the marketplace. However, we continue to face our own challenging multiyear sales and earnings comparison. And with the increasing uncertain and volatile macroeconomic climate, it doesn't appear that the retail landscape will get any less competitive or promotional in 2016. So while we hope to do better, we believe it's prudent to maintain a conservative posture when forecasting our business for this year. As we look ahead over the longer term, we remain confident in our ability to deliver average annual earnings per share gain in the low double-digit percentage range. This view is rooted in our belief that the off-price sector will remain a strong performing segment of retail, especially given consumers' ongoing focus on values. Equally important is our proven ability over time to maximize our favorable industry position by delivering the exceptional values our customers have come to expect. At this point, we'd like to open up the call and respond to any questions you might have.
Operator:
[Operator Instructions] Your first question comes from the line of Michael Binetti from UBS.
Michael Binetti:
Would you help us think about the timing shift that you pointed to with the merch margins up and the packaway, I guess, taking away a little bit of that merch margin upside that we saw and how to think about those dynamics as we roll forward into the -- at least into the first half of 2016, please?
Michael Hartshorn:
Yes. So as we mentioned on the call -- Michael, it's Michael Hartshorn. For the quarter, it impacted us by about 100 basis points. And to walk through that timing of what happened during the year. Q1, we got about a $0.03 benefit last year; Q3, we've got about $0.01; and then Q4 when $0.05 was a charge to earnings. So as we think about it going forward, in the first quarter, as we called out in our guidance, we expect some headwind in the first quarter. It's hard to predict how it will fall out during the rest of the year, and that's based on market availability of merchandise.
Michael Binetti:
Right. And it sounds like the -- you're pleased with the inventory available in the channel in the quarter, as you head into the first half of the year. I'm trying to think about areas where you perhaps -- that will see -- as we walk around the stores here in the first quarter, where are some of the areas that we're going to see that you found to be more readily available perhaps than you thought as we get into the year?
Barbara Rentler:
Actually, I think the availability, Michael, is pretty broad-based. I mean, it's really -- when you think about the sectors of the market where business was difficult, it's apparel and it's home. So we feel that the opportunity is in all businesses.
Michael Binetti:
Okay. And then if I could just sneak in one final one. Obviously, we get a lot of questions about new entrants coming into off-price, and everyone seems focused on getting their fair share of the growth that you talked about and the optimism you have in the category longer term. In the markets where you have seen a rising count of competitors that would fall somehow into the off-price umbrella, would you mind talking about sales dynamics that your -- the competitive dynamics that you've seen in those markets?
Michael O'Sullivan:
Sure. So Michael, it's Michael O'Sullivan. We really haven't seen any impact at this point. If you think about the size of some of those new off-price entrants that's not too surprising, that is too small to have made much of an impact. But I guess I'd say more broadly, we try not to get too distracted by what other companies are doing and what new entrants are coming into the market. We operate in a very competitive marketplace, and we try and focus on what we're good at and to make the best use of the advantages and strengths that we have. And as we look at the fourth quarter, the 4% comp on top of the 6% comp last year suggests that we're doing pretty well in that regard.
Operator:
Your next question comes from the line of Omar Saad from Evercore ISI.
Omar Saad:
I was wondering if you could -- you mentioned the promotional environment a few times in your prepared remarks. I was wondering if you could elaborate on that a little bit. Are you seeing any impact on your customers or the marketplace given the broader more promotional environment in the quarter? I mean, obviously, a really good comp, merchandise margins up. But how do you see that impacting the business? Or what are you concerned about how that might affect how consumers behave -- your customers behave in 2016?
Barbara Rentler:
Well, I think the increased promotional environment, I think what we saw in the fourth quarter, especially in the department store sector is what we're going to see as we continue through 2016. I think what it means for the customer, what it means for us -- I mean, obviously, we're not economists, so we can't determine what the customer is thinking. But I think what it means to us and our business is that we need to continue to deliver great value. And so value is something that moves based of what goes on in department stores and specialty stores. So we need to make sure that we do 2 things
Omar Saad:
Okay. But to be fair, it seems like -- and tell me if I'm reading this wrong. It seems like, thus far, your business has held up really well, and you haven't seen kind of any negative detrimental impacts from just how promotional it was in the holiday quarter.
Barbara Rentler:
Well, that's because we went into the quarter with 2 things. We went into the quarter with very strong packaway values, and we also -- we exceeded our sales expectations, so we also chased a big part of that through closeouts. And the key to delivering value to the customer is understanding what goes on around you. So you really need to have liquidity just to make sure that you keep that relationship so that the customer is satisfied.
Operator:
Your next question comes from the line of Richard Jaffe from Stifel.
Richard Jaffe:
Appreciate all the color on the packaway, and that seems to be the gift that's going to keep on giving as we go into 2016. Looking at the product in the warehouse, do you see more quarters -- or quarters that will be more impacted by packaway or less, that is, say, maybe you have gloves that will come out in November or swimsuits that will come out in August? Any direction or is it evenly balanced on a quarterly basis or seasonal basis, I should say?
Michael O'Sullivan:
Richard, I would say it's fairly evenly balanced. Nothing to call out on a quarter-by-quarter basis.
Richard Jaffe:
That's helpful. And despite the environment and the competitive pressure we talked about earlier, looking into 2016, your caution remains. And is that the same old issues that, let's say, we've talked about before, the competitive pressure, department stores discounting? Or are there new things that are fueling your caution despite the high level of success in tremendous headwind?
Michael O'Sullivan:
Richard, I'd say it's partly a mix of new, partly a mixture of old things that sort of bubble up, I think, to 2 main factors. The first is the sort of the uncertainty in the macroeconomic and retail environment. And I know you've heard us say that before, but this year seems to have gotten off to an especially wobbly start in terms of the economy. So that's one reason for precaution. And then the other is our own top multiyear comparisons. And again, you've heard us say that before. But again, if I just compare this coming quarter Q1 versus last year, we're up against a 5% comp. So again, a reason to be cautious there in our guidance.
Operator:
Your next question comes from the line of Bob Drbul from Nomura.
Robert Drbul:
I just have a couple of questions, I think. On the geographical performance, can you comment a little bit on the West Coast business, how you did in Texas and in the Southwest? And I just wondered if you could maybe comment on how some of the outerwear businesses did throughout the quarter for you.
Michael Hartshorn:
On geographic performance, Bob, as we mentioned, the Midwest continues to be our strongest region. That's been true over the last 8 quarters. California, our largest region, also performed ahead of the chain average. And I think you also asked about Texas. Texas was relatively in line with the chain on top of very strong comps last year when it was one of our top-performing regions.
Barbara Rentler:
And as it pertains to outwear, outerwear performed below company average, as you would expect, based off the weather and not dissimilar to other retailers.
Robert Drbul:
Great. Can you just comment on how you plan freight for 2016 as a cost going forward?
Michael Hartshorn:
We do see in freight some cost increases, carry rate increases, but it's -- just up slightly over 2015 is what we had on plan.
Operator:
Your next question comes from the line of Matthew Boss from JPMorgan.
Matthew Boss:
So new store productivity in the quarter looks a little lighter than in the past where we've seen it. Can you just talk about performance in your latest store openings versus some of the more mature stores? Are there any timing shifts which maybe could have impacted this quarter? And then just as a reminder, what comps do you guys see from new stores in the first 3 years versus the chain? And what's the average payback period?
Michael Hartshorn:
Sure. On new store productivity, there's nothing to talk about in the quarter. There's always a mix of whether you're opening new market stores or existing market stores. We have said in the past that the overall new store productivity has come down over the last couple of years with our entry into the Midwest and also our dd's expansion. That said, you can see the Midwest continues to be our strongest comping market as we continue to gain name recognition there. What we usually see on the comp curve is over the first 5 years, we comp faster than the chain, and we settle into about the chain average in year 5. Overall, we'll put about $1.5 million of capital and working capital into a store, and the payback is about 2 years.
Matthew Boss:
And then just one quick follow-up on that. When would you anticipate entering the Northeast?
Michael O'Sullivan:
Not for a little while. We entered the Midwest about 4 years ago now. And the Midwest is a fairly big region, so we feel like we've got plenty of opportunities to build out that region. That's probably going to keep us going certainly for the next few -- the next several years, so it's going to be some time before we enter the Northeast.
Operator:
Your next question comes from the line of Oliver Chen from Cowen and Company.
Oliver Chen:
Regarding the year ahead, as you are making these investments in labor, what are the major corporate strategies you're thinking about in terms of in-store execution opportunities with shrink or how you may think about the ratio of tops to bottoms or other opportunities like micro merchandising? And then I just had a question for modeling. On the basket, can we assume that merch margin, like AUR -- was AUR up as merch margins were up? I'm just curious about the dynamic there.
Michael Hartshorn:
So I'll start with the components of comp, Oliver. As we mentioned in our prepared remarks, the 4% comp was driven by a combination of higher transactions, which, for us, that's our proxy for traffic; and an increase in the size of the average basket. The higher basket was driven both by higher units per transaction and AUR was up a bit a well -- as well. So all the components were up over last year, and that's pretty consistent with the trend we've seen throughout the year in 2015.
Barbara Rentler:
And Oliver, as it pertains to tops to bottoms, we wouldn't talk about that in this form.
Oliver Chen:
Okay. And what about labor and how you're staffing stores? And any efficiencies that you can drive just as we think about incremental year-over-year opportunities? Because your execution has just been stellar, so if you're able to share with us any corporate strategies there, it would help us just illuminate how we think about your numbers next year.
Michael O'Sullivan:
Sure. So Oliver, as Michael Hartshorn mentioned in the prepared remarks, we are going to be making further wage rate adjustments this year, including taking up the minimum hourly rate to $10 per eligible associate in the second quarter. And those costs, to be clear, are built into our guidance. Now as we put together -- we have a very detailed and rigorous budgeting process, as you might expect. And as we went through the budget for this year, we look to lots of different areas that we could go after to try and capture efficiencies and offset some of those increased expenses -- increased wage expenses. There wasn't one big silver bullet. There were lots and lots of small savings initiatives that will add up to a lot, and it's all the things you'd expect. Some of them are reengineering processes in the stores to better utilize labor hours. But there's also things like looking for savings in terms of services and supplies that we purchase from the outside, looking for higher productivity in our DCs, looking for opportunities to trim non-merchant G&A. There's a whole bunch of, I would say, relatively small savings opportunities that add up to a lot and have allowed us to cover the wage rate increases that Michael Hartshorn mentioned earlier.
Oliver Chen:
Okay. And just finally, on the merch margins, it's great that you're making progress there. What's the rationale for you being able to have that attractive view of merch margins going forward in the context of some of your conservatism about how the marketplace looks?
Michael Hartshorn:
Well, let me start by talking about fourth quarter. So fourth quarter, we obviously outperformed the high end of our comp sales targets, so that meant we had faster inventory turns resulting in lower markdowns. We also benefited from our ability to take advantage of buying opportunities in the marketplace. So both of those factors really contributed to better-than-planned merchandise margin. Now what we said in our guidance is we expect merchandise margin up slightly for the year. We did operate with lower inventories throughout 2015 and ended at down 2% on an average store basis. And we'd expect to operate a bit lower in 2016 as well, and that should drive some margin improvement.
Operator:
[Operator Instructions] Your next question comes from the line of Brian Tunick from Royal Bank of Canada.
Brian Tunick:
Curious, if you look at the merchandise mix of the business this past year and then you think 3 years from now, what do you think would be the biggest changes? Would it be home growing faster than the rest of the business? Would it be gifts and beauty? Just curious if there's any categories you see moving over the next couple of years from where they are today. And then the second question, really on new customer acquisition or your marketing initiatives. Anything you could share with us, if you've done any work or studies over the last 12, 18 months about your sort of where your customers are coming from or what they're saying about Ross right now?
Barbara Rentler:
Okay. Brian, in terms of the merchandise mix, we basically see growth in all our areas. If I had to select one area, I would say probably home would be that area. We've got a lot of initiatives going on in there. And gift was a big portion of our fourth quarter success in home this year, so if I had to pick one, it would be home.
Michael O'Sullivan:
And then, Brian, on your second piece about the customers and the new customers specifically, our new customers, frankly, look a lot like our existing customers. We are -- as we do research on the demographics of customers and what they're looking for, the new customers' demographically look very similar. What all our customers have in common no matter what the demographics is they're all looking for great values and great bargains. So in terms of making sure that we can attract more customers and retain customers, our main focus is having the best assortments we can, the best value that we can offer.
Operator:
Your next question comes from the line of David Glick from Buckingham Research.
David Glick:
I wanted to go back to some of the differences that you were talking about between 2016 and 2015. One important difference seems like the department stores missed their plans by a much more significant margin in the fourth quarter, assuming they're deep, a lot more packaway opportunity as a result. And they're also pulling back more aggressively on their receipts that they plan for 2016. So it does feel like they are being a little more conservative with their sales and receipt plans, particularly in the second half of this year. And I'm just wondering, how does that scenario play out for you guys? And what are the pluses and minuses given kind of what you see -- if I've characterized it correctly, what you see today?
Barbara Rentler:
Well, from the supply side, department stores have pulled back over the last couple of years in total in how they plan. But it's not about how you plan it, it's really about the sales that materialize and the rate at which you spend your receipt money. So as you look at where the department stores ended in January, most of them ended with more inventory and, clearly, ended with more clearance. And so as we enter into the spring season, one would expect that there would be a bubble of inventory that we would see in spring, which we could use to fuel the spring. And back to your point on packaway, that would help us drive through packaway. So it's relative to how department stores plan. It's relative to how the vendors plan with department stores and how much risk they're willing to take. So we do feel there are trends -- there will be opportunities in the marketplace. As long as traditional retailers continue to perform the way they're performing, you would think that there'll be more opportunities there. So from that perspective on the supply side, we feel good, which is why we're keeping ourselves liquid and feel we're well positioned to take advantage of the opportunities in the marketplace.
David Glick:
And if department stores' inventories are more in line in the back half and -- I mean, they're always promotional, obviously. But if they're not in as much of a liquidation-type scenario as they were in the fourth quarter of 2015, how does that impact your business? Is that an opportunity on the merchandise margin front? I'm just trying to think through what -- if that's potential opportunity as well.
Barbara Rentler:
So just on the -- back to the supply line. Sales are the key contributors to what happens with excess inventory. So sales are not stable in the world. The sales -- if you look at sales, they've been volatile, and you're watching department stores drop down. So again, receipts versus sales are 2 different scenarios. That's what creates that bubble. In terms of margin, obviously, chasing closeouts and keeping tight inventory control helps us to get better position and to improve our merchandise margin.
Michael O'Sullivan:
And the other thing I'd say, David, is when it's less promotional, clearly, we have more price differentiation, we can offer better value. That tends to be better for us. But as you look at this year, certainly, the way this year has started, there are a lot of sort of economic uncertainty out there, and who's to say whether or not the department stores are going to hit their sales plans later this year or not. Anything can happen, which is why it makes sense for us to be relatively cautious as we plan our business for the year.
Operator:
Your next question comes from the line of Marni Shapiro from The Retail Tracker.
Marni Shapiro:
I remember many, many years ago when off-price is to be the least respected space and now it's like the most coveted space out there. It's kind of nice. I guess, I have 2 quick questions on dd's. The first is as I wasn't sure, do you do packaways at dd's? And will you break out the percent if you do? And you have a new president in place in dd's and the business is doing well. I guess, you're opening about the same amount of stores each year. I guess, what do you need to see to take it to the next level of store openings at dd's?
Michael O'Sullivan:
So thank you for your respect, Marni.
Marni Shapiro:
You've always had my respect.
Michael O'Sullivan:
So on dd's, a couple of quick answers to your q&a part of your question. Yes, dd's does indeed, use packaway, and no, we don't break it out, just because, yes, dd's is a relatively small part of the corporation, so we don't break out, disclose that information. On the second part of your question, what would we need to see, actually we're kind of already seeing it. We're pretty happy with dd's performance over the last several years. We've kind of been in a pattern here with dd's, with better than expected gains in sales and profits over -- a few years now. So we opened just over 20 new dd's stores a year, which on a base of 170 stores, is quite a big growth rate. So I don't think you should expect that we're going to ramp that up significantly, maybe in a given year, it could go up to 25, but it's not going to increase dramatically. Our history, as you know, because you've been following us for a long time, is that we're relatively conservative as we grow our business, as we've grown Ross, and we'll apply the same thinking as we grow dd's. So the -- opening stores of 20 to 25 new stores a year is probably the right planning assumption.
Marni Shapiro:
That seems fair. And I guess along the same lines as growing the organization along with the stores, Ross always had many more buyers than your largest competitor for many years. You had an impressive merchandising staff considering the size of the store base. How do we -- how should I think about that at dd's? Has the merchandising staff and buying staff, is it much bigger relative to the size of dd's? Are you fully staffed there or is that still going to be a growing part of the business?
Michael O'Sullivan:
It's very much the same model as you just described for Ross. We believe it's fundamentally an off-price, having the strongest buying team is a key competitive advantage and that applies to Ross and to dd's. So dd's -- have -- we've invested in dd's buying team over the last several years, and we've built a very strong asset there. Actually, I didn't really answer -- you had asked a question earlier about Brian Morrow joining. I think enhancing and strengthening the merchant leadership has also been a part of the investment that we've made.
Operator:
Your next question comes from the line of Mike Baker from Deutsche Bank.
Michael Baker:
So I just wanted to follow up real quickly on the wages issue, the move from $9 to $10. Could you, did you and if you didn't, could you quantify what kind of impact that will have on your total cost structure this year, and how that might compare with any increases that you took in 2015?
Michael Hartshorn:
We didn't quantify the impact because what we said is, we've been able to substantially mitigate those costs. As Michael O'Sullivan referred to before, that was there are numerous cost efficiency projects than frankly -- no silver bullets. The savings came from many different projects across many areas of the business, non-payroll and payroll-related activities, so given that we've offset them in the guidance and offset them in 2015, we haven't quantified the impacts.
Michael Baker:
So with all the offsets, a similar impact in '15 versus '16? In other words, impacts that you can manage to offset?
Michael Hartshorn:
Yes. And I would say, remember, we went to $9 last year and $10 this year, so the impact's actually larger in '16 than it was in '15.
Michael Baker:
But still, you're able to offset it?
Michael O'Sullivan:
Yes, Mike, within the guidance, yes.
Michael Baker:
Okay. Second -- just another quick one. Did the earnings growth, how does it pace throughout the year? So we see the full year, we see the first quarter, so some quarter throughout the year is going to be have to be better than the first quarter, and with the wage increase coming in the second half of the year, I would think that, that would impact that, then again, the packaway thing is reserving, so I guess, which quarter should be bigger than others, in terms of earnings growth?
Michael Hartshorn:
So we only give one quarter at the time. It's really going to be driven by sales. I mean, that's the impact, the biggest impact on earnings. But we wouldn't quantify the quarters until we get to the conference call previous to the quarter.
Michael Baker:
Understood, yes. You're guiding to the same comp growth throughout the year, which is why I wanted to understand why the earnings growth would be different. But okay, I guess, we can figure that out in our own model.
Michael Hartshorn:
Sure.
Operator:
Your next question comes from the line of David Mann from Johnson Rice.
David Mann:
Question, or a couple of questions on the balance sheet. The inventory growth in the fourth quarter was only like 3%, up 3%, which was the slowest growth all year, which seems a little counterintuitive, given the abundant availability merchandise that we all are hearing about. So I'm curious if you can reconcile that, it's the reason you weren't more aggressive with taking advantage of the availability or we see availability, maybe not as strong as we are all thinking?
Barbara Rentler:
No, David, there is availability in the market. But as you're talking about buying packaway, there's few things involved with buying packaway. There is price, there is a value, there is the timing of delivery. So when we went in there and assessed what we bought, we ended at 47% versus 45%, so we were comfortable with that number, and we'll continue to buy goods as we come across, using that same criteria, understanding where we believe value will go in the future.
David Mann:
Okay. And then, one other balance sheet item. The accounts payable leverage has been trending down all year. It's -- even though you're obviously turning the merchandise pretty fast, Michael, anything you can share on that, about why that's going down and where we would think that would go, perhaps in '16?
Michael Hartshorn:
Yes, I think in '16, it would be similar levels to this year. At year-end, there was a timing difference. If you recall, last year, we had the port disruption in -- as part of our mitigation efforts, we brought in inventory early that had a brought up leverage last year, so we were up against that compare. But really, it's a function of timing of receipts, including packaway receipts.
Operator:
Your next question comes from the line of Kimberly Greenberger from Morgan Stanley.
Kimberly Greenberger:
Barbara, I just wanted to follow up on David's question regarding the 3% growth in inventory in the fourth quarter. Would the right conclusion be -- based on the comments that you just made, that your view of where the value, or where they -- maybe the market price of goods is going in the short term, might be down, and so you were basically holding back, committing to packaway goods given your cautious outlook? And then, as a result of that, your view would then be, you might be able to in fact buy even more goods in the February, March, even April time frame, relative to those that you could acquire in November and December? Is that the right read on the situation?
Barbara Rentler:
I think the way I would look at this situation is, whenever we buy packaway, whether it was this past fourth quarter, or any fourth quarter, those are the metrics we look at
Kimberly Greenberger:
Great. And just one follow up to that. Do you -- the vendors in general seem to have a somewhat challenging 2015, including a tough Q4. Were you hearing from any of your vendors that they thought, maybe there might be a change in strategy, opportunity in 2016 or a different way to approach their own inventory management? Do they reveal that information to you? And do you have any color on perhaps what may be happening broadly among the vendor community that you might be able to share in this forum?
Barbara Rentler:
Yes. Not really, Kimberly. I mean, vendors aren't going to be quick to be telling us that they're going to have more or less inventory. So it's really -- each vendor does their own thing, and so I can't really determine that, to be honest with you.
Operator:
Your next question comes from the line of Daniel Hofkin from William Blair & Company.
Daniel Hofkin:
Just a couple of quick questions. So thinking about, beyond, and I know you haven't given guidance for next year yet, is it fair to say that you would likely expect further wage increases beyond this year, similar to what your largest competitor has discussed? And I guess, related to that, what enables you beyond this year to kind of get to the low double digit, sort of normalized EPS growth, given that this year's wage increases, that you're offsetting them in a number of ways on SG&A. And then I have one follow up.
Michael O'Sullivan:
So Daniel, as you say, next year, no, we haven't released guidance for 2017 yet. But I think we've said before that we would expect that over the next few years, if the economy or if the economy picks up, that we may see more expense pressures, not just us, but in general, companies and retailers will face more expense pressures, including higher wage rates. Obviously, as we start to plan 2017, which won't be for some time, but as we start to plan for 2017, we'll start to look at what are the kinds of things that we can put in place to offset those kinds of expense pressures. Too early to comment on those now, but that's the kind of process that we would go through.
Daniel Hofkin:
Okay, is there any, just big picture theme, in terms of like, that allows you to get to more normalized low double-digit EPS growth over time?
Michael Hartshorn:
Well, just to be clear, I mean, we ended the year with EPS up 14%, despite the wage increase on the 4 comps. And certainly, in between a 3 and 4 comp, we think we can get to double-digit EPS growth over the longer term.
Michael O'Sullivan:
And it's worth underlining that point. Our guidance this year is obviously 1% to 2% comp, and that's what's driving the EPS guidance. As Michael Hartshorn just said, in a more normalized comp, I think we've said in the past that our long term model includes a 3% to 4%, comp. At those levels, we expect low double-digit EPS growth.
Daniel Hofkin:
That's helpful. And then as it relates to AUR, in a slightly different trend for you versus the main competitor, any comment there in terms of what -- I know it's presumably not in the inflation, there's probably some mix there, but what's driving this, the moderately higher AUR for you guys versus the other company?
Michael Hartshorn:
Yes, I mean for us it's a bit of mix, but also, we continue to operate with lower inventory levels, which means we're taking markdowns, we're turning faster, and it has an impact on AUR you saw on higher prices. I'd say so between those 2 mix and our lower markdowns is what's driving the higher AUR.
Operator:
Your next question comes from the line of Paul Lejuez from Citi.
Paul Lejuez:
Guys, just wondering, as far as CapEx, once we look beyond this year, is there anything lumpy we need to be thinking about over the next several years? It might be on your radar screen that you can share with us. And also, just thinking about separately where are your customers cross-shopping? Which retailers do you see the most overlap with? And curious if you've looked at, when you see a big box department store retailer close, what sort of a lift do you get in nearby stores if, in fact, you take a look at that?
Michael Hartshorn:
Paul, on capital, at least over the next couple of years, it'll look very similar to what we said for 2016. Call it 4 25 to 4 50 range, I would say. So nothing extraordinary currently in our, our longer, or at least over the next couple of years.
Michael O'Sullivan:
And Paul, on the other 2 pieces of your question, customers, we operate in a very -- we operate on a pretty large and very competitively fragmented marketplace. So when we ask our customers if you haven't spent that $30 at Ross today, where would you have spent it? We get a long, long list of companies that they would have spent that money at. So from cross-shopping point of view, we're competing with everyone, which is why we need to make sure we have the best personal values out there. In terms of your...
Paul Lejuez:
What do you think tops that list?
Michael O'Sullivan:
It depends on the particular store, the particular market that we're looking at. Nationally, I think you could probably just pick our closest peers, and nationally, obviously, they would show up on that list. But the point I'm trying to make is, none of them account for a very large share of that list, that the list itself, is very fragmented and spread between many, many competitors, which is why we need to make sure that we sharp versus all those competitors. The last part of your question though, big-box department stores going out of business, and how that affects any of our individual stores. It's really hard to say, because the truth is, that there are a lots of things that go into the business that an individual store does, including traffic levels to that strip mall, the competitive intensity in that strip mall. Sometimes actually having more off-price contenders, in that strip mall can actually be helpful. So it's hard to say whether or not a large retailer nearby going out of business helps us or hurts us. It depends who replaces them in that place, what happens to the traffic level in that strip mall, et cetera.
Paul Lejuez:
Got you. Just one more. Any changes in your store size for your openings next year as you manage inventories down? Just wondering if you're continuing to bring the size of the store down.
Michael O'Sullivan:
Sure. So the time that we brought down our average inventory per store by about 40% over the last several years does -- has presented us with a few opportunities to make the stores easier to shop, so we've certainly been doing that, expand into faster-growing or new categories, again, we've been doing that. And then as you're referencing, also to reduce the store size, obviously, that's feasible for new stores rather than existing stores, but we've also been doing that to some degree as well. So I would say that the lower inventory levels have given us the opportunity to do a number of things, with regard to the size of the store and how we use the space in the store.
Operator:
Your next question comes from the line of Roxanne Meyer from MKM Partners.
Roxanne Meyer:
My question is a follow-up on the Home category. I know that Barbara mentioned that over the next few years you would think about Home maybe presenting the best opportunity. And I'm just wondering how it performed in 4Q, and what opportunities do you see in 2016.
Barbara Rentler:
Well, Home performed better than the company, and it was really driven by gift giving in Q4. And the thing about the Home category is it's so broad-based, there's so many product classifications in there. It's -- when you think about it versus apparel, there's just more things to go into, which is why I feel that Home is a good category for us for grow.
Roxanne Meyer:
Okay, great. And just really quickly, what comp do you need in 2016 to leverage your fixed costs?
Michael Hartshorn:
You saw what we said in the past, Roxanne, and it hasn't changed for 2015. At 3 comp, we should be able to lever SG&A and 4 comp, for occupancy costs.
Operator:
Your next question comes from the line of Lorraine Hutchinson from Merrill Lynch.
Lorraine Maikis:
Just wanted to clarify a comment that you made earlier on the call about the rough start to the year, and just confirm that you're talking about the overall macro, not Ross, specifically?
Michael O'Sullivan:
Yes. To be clear, I was just referring to the fact that the overall economy, there seems to be a number of, sort of concerns and questions out there about the overall economy, and we don't know to what degree that will impact retail in our business over the coming 12 months.
Lorraine Maikis:
Great. And then as wages continue to rise, are there any investments to make in your distribution centers to maybe make them a little bit more efficient?
Michael O'Sullivan:
Yes, that's actually one of the things, as we put together the budget for this year, as you'd expect, one of the things that we look at for any efficiencies, any areas of the DC, any processes in the DC that we can reengineer or automate, and certainly that's one of the areas that we've pursued in terms of coming up with offsetting savings. I would say it's just one of the areas. There are other areas in the company as well, such as stores, processes in stores, G&A, supply cost, et cetera, we've also looked aggressively at.
Operator:
Your next question comes from the line of Stephen Grambling from Goldman Sachs.
Stephen Grambling:
Just wanted to make sure I'm clear on the gross margin packaway topic. This was one of the biggest swings as it relates to the impact on both of these in years. So can you just clarify some of the drivers of these factors, given the absolute percentage of packaway didn't seem to move much?
Michael Hartshorn:
So the absolute dollars of packaway did drop during the quarter, Stephen. So as we've talked about in the past, we capitalized the cost to the store and process packaway, including fixed cost. And for us, we charge gross margin or charge cost of goods sold when it sells. So for us, the absolute dollar value of packaway fell during the quarter, which means we had to take a charge and that was greater than the previous year. Of the 100 basis points of distribution center deleveraged in the quarter, all of that was related to the packaway time.
Stephen Grambling:
That's helpful. And then, an unrelated question. Some of your peers have had some pretty good success with loyalty programs. Can you just remind us about your own thinking there?
Michael O'Sullivan:
Sure. So we don't have any plans right now to launch a loyalty program. We're always willing to look at new ideas. But frankly, over time, we've found that the most effective way to build customer loyalty with the off-price customer is to consistently offer great deals, great bargains. So more than anything else, that's how we build loyalty.
Operator:
Your next question comes from the line of Jeff Stein from North Coast Research.
Jeffrey Stein:
A quick question on the Junior category, that's historically been one of the stronger performing businesses for you, and no mention of it on the call. Just wondering how it performed.
Barbara Rentler:
Juniors performed in line with the chain average, and it was up against very strong comparison in the prior year. So we're pleased with the Junior business.
Jeffrey Stein:
Okay. And with regard to packaway, I'm just kind of curious, do you still have goods and inventory from the port slowdown last year? Because I would imagine that would be some pretty high-margin stuff that you could put out now, if you still have some?
Barbara Rentler:
Well, as it pertains to the mix -- you're talking about the actual mix we own in our program? It's hard to tell. I'm sorry, go ahead.
Jeffrey Stein:
No, I was going to say because yes, it depends on the mix that you have in your packaway, so I'm wondering what percent of your packaway, for example, might be goods that you bought during the spring, and perhaps early summer last year as a result of the port slowdown? And how much of that might flow through your P&L during the first quarter?
Michael O'Sullivan:
I would say, Jeff that most of the port issues were really in the first quarter of last year. And given that timing, I think there would be very little that we bought that long ago, that could still be in packaway. That said, the port slowdowns could have had some knock-on effects in terms of inventory that became available in subsequent quarters. It's hard for us identify and quantify that, but certainly, anything that we bought in more recent quarters could well still be in [indiscernible].
Barbara Rentler:
And so it's hard to tell at a certain point what was coming from just business being off in the department store sector, the supply that came from there and the supply that came from the port. After a while, it just became one large supply.
Operator:
There are no further questions at this time. I turn the call back over to Barbara Rentler.
Barbara Rentler:
Okay. Thank you for joining us today, and for your interest in Ross Stores. Have a great day.
Operator:
This concludes today's conference call. You may now disconnect.
Operator:
Good afternoon, and welcome to the Ross Stores Third Quarter 2015 Earnings Release Conference Call. [Operator Instructions] Before we get started, on behalf of Ross Stores, I would like to note that the comments made on this call will contain forward-looking statements regarding expectations about future growth and financial results, including sales and earnings forecasts and other matters that are based on the company's current forecast of aspects of its future business. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from historical performance or current expectations. Risk factors included in today's press release and the company's fiscal 2014 Form 10-K and fiscal 2015 Form 10-Q and 8-K is on file with the SEC.
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 Balmuth, Executive Chairman; Michael O'Sullivan, President and Chief Operating Officer; Gary Cribb, Executive Vice President, Stores and Loss Prevention; John Call, Executive Vice President, Finance and Legal; Michael Hartshorn, Group Senior VP and Chief Financial Officer; and Connie Kao, Senior Director of Investor Relations.
We will begin our call today with a review of our third quarter performance, followed by our outlook for the fourth quarter. Afterwards, we'll be happy to respond to any questions you may have. As noted in today's press release, we are pleased with the better-than-expected sales and earnings growth we achieved in the third quarter. These results demonstrate that customers continue to respond positively to the wide assortments of fresh and exciting bargains we offer throughout our stores. Earnings per share for the third quarter grew 15% to $0.53. Our net earnings that rose 12% to $216 million. Sales increased 7% to $2,783,000,000, with comparable store sales up 3% on top of last year's 4% gain. For the first 9 months of fiscal 2015, earnings per share grew 15% to $1.85, while net earnings rose 12% to $757 million. Year-to-date sales increased 8% to $8,689,000,000 with comparable store sales up 4%. dd's also posted better-than-expected gains in sales and profits for the quarter and year-to-date periods. Men's was the strongest category at Ross during the quarter, while the Midwest was the top-performing region. Third quarter operating margin increased 30 basis points to 12.1%. These results were above plan and primarily driven by higher merchandise margins. As we ended the quarter, total consolidated inventories were up 14% over the prior year with packaway levels at 48% of total inventories compared to 42% last year. Average in-store inventories at quarter-end were down approximately 1% versus last year. As planned, we completed our 2015 store opening program during the third quarter with the addition of 19 Ross and 7 dd's DISCOUNTS locations for a grand total of 84 new stores this year net of closures. We expect to end fiscal 2015 with 1,274 Ross and 172 dd's DISCOUNTS stores. Now Michael Hartshorn will provide further color on our third quarter results and details on our guidance for the fourth quarter and the year.
Michael Hartshorn:
Thank you, Barbara. Let's start with our third quarter results. Our 3% comparable store sales gain was driven by a combination of higher traffic and an increase in the size of the average basket.
As Barbara mentioned, third quarter operating margin was better than planned, rising 30 basis points from last year to 12.1%. Cost of goods sold declined 45 basis points, driven by a 45 basis point increase in merchandise margins and a 5 basis point improvement each in freight and buying costs. This was partially offset by a 10 basis point increase in distribution expenses related to recent infrastructure investments that were partially offset by the favorable timing of packaway-related costs. Selling, general and administrative expenses during the period increased by about 15 basis points due in part to higher wages. During the quarter, we repurchased 3.6 million shares of common stock for a total purchase price of $179 million. Year-to-date, we have bought back a total of 10.4 million shares for an aggregate price of $530 million. We remain on track to repurchase a total of $700 million in common stock for the year under the 2-year, $1.4 billion stock repurchase program approved by our Board of Directors in February of this year. Let's turn now to our fourth quarter guidance, which remains unchanged from what we communicated in August. For the 13 weeks ending January 30, 2016, we continue to expect same-store sales to be flat to up 1% on top of a strong 6% gain last year, with earnings per share projected to be $0.60 to $0.63 compared to $0.60 last year.
The operating statement assumptions for our fourth quarter guidance include the following:
Total sales are forecasted to grow 4% to 5% on the previously mentioned comparable store sales forecast of flat to up 1%. If sales perform in line with this guidance, operating margin is projected to be 12.6% to 12.8% versus 13.1% in the prior year.
The forecasted decline versus last year is mainly due to our expectation for higher distribution expenses from recent infrastructure investments and the timing of packaway-related costs. Net interest expense is estimated to be about $5 million. Our tax rate is planned at approximately 37% to 38%, and we expect average diluted shares outstanding to be about 403 million. Based on this guidance, we now project earnings per share for the full year to be in the range of $2.45 to $2.48, up 11% to 12% over $2.21 in fiscal 2014. Now I'll turn the call back to Barbara for closing comments.
Barbara Rentler:
Thank you, Michael. As we enter the fourth quarter, we are pleased with our fresh and exciting assortments of name, brand, bargains and gifts for this holiday season.
Despite outperforming our sales and earnings target throughout 2015, there are a number of factors that still cause us to be cautious on forecasting the fourth quarter. First, we're up against our toughest sales comparison of the year. As Michael mentioned, comparable store sales in last year's fourth quarter were up a robust 6%; second, there is ongoing uncertainty in the macroeconomic environment; and third, based on the current retail landscape, we expect the upcoming holiday season to be highly promotional. As a result, while we always hope to do better, we believe it is prudent to maintain a conservative posture.
Over the longer term, we remain confident about our prospects for respectable sales and earnings growth. This is based on 2 key factors:
Our belief that off-price will remain a strong performing segment especially given consumers' ongoing focus on value; and our own proven ability to offer our customers compelling bargains on an everyday basis. This is and always will be the key to success in our business.
At this point, we'd like to open up the call and respond to any questions you may have.
Operator:
[Operator Instructions] The first question is from Ike Boruchow with Wells Fargo.
Irwin Boruchow:
I guess, my question I wanted to focus on the packaway number, 48% of inventory. It seems like that's the highest it's been in about 2 years, give or take. Just kind of curious, your view of the environment, the buying environment out there. It sounds like a lot of vendors are canceling orders and the department stores aren't doing so well. Just your view of the environment and your packaway strategy and how you look at that right now.
Barbara Rentler:
Well, the buying environment, we continue to see a really strong supply of excess goods in the marketplace. As it pertains to packaway, packaway is typically the best bargains we carry on merchandise. We go in the market, we see what's available, we see what the great deals are and then we go in and pack it away. So we don't focus so much on the number itself, Ike. What we focus on is the value and the brands that we can offer to the customer.
Operator:
Your next question is from Paul Lejuez with Citi Research.
Paul Lejuez:
Can you maybe talk a little bit more -- give us more detail on regional performance specifically Texas and the oil impacted markets? And also curious just higher-level Ross versus dd's and then also the performance of those 2 within those Texas and other oil region markets.
Michael Hartshorn:
This is Michael Hartshorn. The sales performance was fairly broad-based across regions as we mentioned the Midwest was our strongest region, which has been true over the past 7 quarters. California, our largest region performed in line with the chain. And then as far as Texas, Texas was in line with the chain average for the quarter.
Paul Lejuez:
And then what about with dd's?
Michael O'Sullivan:
Your question about dd's. As Barbara mentioned in her remarks, dd's posted better-than-expected sales and profits. We don't typically break dd's out at the regional level, but, overall, we are very happy with dd's performance.
Paul Lejuez:
Got you. Michael, you've had pretty positive things to say about dd's for several quarters now. Are you at a point where you might feel more comfortable accelerating the growth of that concept beyond doing let's say 20 -- in the low-20s per year? Can that be accelerated as we think about next year?
Michael O'Sullivan:
I think it's unlikely. We -- as you say for several years now, we've been very happy with how the dd's business has developed. And we feel very good about the business over the longer term. But we opened, as you say, just over 20 stores a year of dd's. The chain is now around about 170 stores. So 20 stores a year on the base of 170 is still relatively large incremental addition every year. So we think it's likely that we'll remain in that ballpark, 20 to 25 stores a year.
Paul Lejuez:
Got you. And just to piggyback one last one, off of Ike's question. On the packaway merchandise, can you talk about the performance of that product that you've seen. Let's say, in this most recent quarter, is it meeting your sales and merch margin expectations? That's it for me.
Barbara Rentler:
Well, packaway typically represents the best bargains we have. So we feel that in the third quarter this merchandise likely benefited sales, and we expect it to help our sales in the fourth quarter as well.
Operator:
Your next question is from Kimberly Greenberger from Morgan Stanley.
Kimberly Greenberger:
I wanted to just follow up quickly on Paul's question on packaway. I think that packaway is probably a more broadly used term in Ross than maybe some of the other off-price stores. Can you just confirm the composition of packaway? Is it strictly goods that are shipped off and put into your packaway warehouse? Or do you also consider packaway goods that are sitting ready for current season distribution to stores that were maybe partially already distributed in the current season? In other words, goods in a variety of distribution centers and not necessarily shipped off and stored for 6 months. So it's a bigger representation of the product that you've got, held in your distribution center. Does that make sense?
Barbara Rentler:
We're a little unclear. I think...
Michael O'Sullivan:
Let me have a crack at that, Kimberly. Packaway, we think of packaway as goods that aren't for sale. They're packed away in our warehouses to be released for sale in subsequent months or even next season. So I don't know if that helps. Yes, does that answer your question?
Kimberly Greenberger:
It does. Are there examples where you actually have a current season order, you partially distribute, let's say, 70% of the goods to existing stores, held -- hold back 30% of your distribution centers as an example and then use that to fill in based on sales trends? Would you consider that 30% that you hold back part of your packaway? Or would that be just inventory in the distribution center that you would not put in your packaway calculation?
Michael O'Sullivan:
As long as it hasn't been released for sale, we treat it as packaway. Once it's released for sale, then it counts as part of our selling store inventory.
Kimberly Greenberger:
Sorry, Michael, go ahead.
Michael O'Sullivan:
I actually was just going to make a point that, I guess, in Barbara's remarks, she broke out total inventory. So the way to think about is our total inventories are up 14%. Our selling store inventory, the inventory that's actually in the store for sale, was down slightly. Obviously, that's a key metric for us because with a 3% comp and within store inventory down slightly, that means that we're achieving cost returns and better merchandise margin.
Kimberly Greenberger:
Okay, great. So if I should look at your total inventory bucket, there's a piece of it that's in-store and the other piece of it that's packaway. Is there a third bucket of inventory that would be neither considered in-store or packaway that you would classify?
Michael Hartshorn:
Yes, yes, Kimberly. So there's a couple of buckets. You mentioned there is packaway inventory, there's store inventory and there's also in-transit inventory on the way to the distribution center. As we mentioned, total inventory was up 14% and packaway was up at 48% of total inventories. In-transit inventory for us was actually down versus last year because we're up against the start of our mitigation efforts because of the slowdown in the port. So those are the primary 3 buckets.
Kimberly Greenberger:
Okay. So anything that's in your distribution center that is not available for sale would be included in the packaway bucket.
Michael O'Sullivan:
That's right. Anything else in our distribution center is on its way to the -- it's being processed. It's on it's way out the door, and therefore would not count as packaway.
Kimberly Greenberger:
Okay, great. So as I think about the wage increase, this is the first quarter really where we've had any -- this was the first full quarter, I think, of the wage increase. I think you said in your prepared remarks of the 15 basis points increase in SG&A, it was largely driven by wages. Michael, I'm wondering if you can just give us was it the majority, was it the full piece and were there any other moving parts in the SG&A?
Michael Hartshorn:
The primary difference and the reason we called out wages is typically we'd say 3% is our leverage point. And as you know, there's always timing differences from quarter-to-quarter. A part of that deleverage was due to wages and there are some other timing differences that were not as meaningful. Longer term, we still believe that we think we can lever at the 3% comp point.
Kimberly Greenberger:
Would that be your expectation in 2016 as well just given the wage increases that we have going through that, I guess, probably 3% comps you'll be able to leverage?
Michael Hartshorn:
Yes, I mean, it's a good question. We're obviously in the midst of our budget cycle today and would expect to be able to provide some more color on the fourth quarter call. As we previously mentioned, we took our minimum wage up to $9 across the chain this year, and those adjustments, along with any offsets are included in our guidance this year for 11% to 12% EPS growth. We do view the labor markets as dynamic. We think, as the economy improves over the next couple of years, there will be additional wage pressure out there. But like this year, we will do our work and where we can, we'll find efficiencies throughout our business to attempt to mitigate the impact of any cost pressures we have in our business.
Kimberly Greenberger:
And do you think there's a possibility that part of your traffic increase is actually that some of the consumers who shop at Ross Stores are seeing the benefit of some of those wage increases? Or is it very difficult for you to sort of draw that loop and to come to that conclusion?
Michael O'Sullivan:
It's the latter, Kimberly. Conceptually, we think if the customer has more money in their pockets, that's a good thing for us. But very hard for us to sort of dissect that and split it out in terms of to what degree that's a driving our comp.
Operator:
The next question is from Michael Binetti from UBS.
Michael Binetti:
I think as you look ahead to 2016, you said you think you can hold the 3% leverage point. There's obviously the well-documented labor inflation that you guys are already starting to get into, you'll have a full year that, next year maybe some more. Do you have merchandise margin room on your side to offset that upside margin compression next year? How should we think about margin compression -- or I'm sorry, merchandise margin as one of the levers that you have to toggle next year?
Michael Hartshorn:
I think, at this point, Michael, we'll be in a better position to answer questions on 2016 in our fourth quarter call.
Michael Binetti:
Okay. Maybe then, if we just kind of ask something about the competitive backdrop here. I think you mentioned that, let's see, it looks like it's starting out to be a very promotional holiday, very competitive. As you look at the environment, you're clearly gaining share of traffic. And certainly, with the industry backed up, you would seem that a strong value message would continue to drive those share gains in the fourth quarter and then into the medium term. What do you think is the right thing to do with IMUs or with starting prices? Do you think it's a good idea to say strategically maybe even dig a little deeper on the value at this point? Or do you think the merch margin is maybe where you prefer to see some of the flow through come from?
Michael O'Sullivan:
Yes. Michael, I don't think we get into that level of detail in terms of how we go after the business. But it's suffice to say that we agree with you. We think what's really driving the retail environment right now is that the customer's looking for value and our focus is to provide the best value we can, put the best bargains in front of the customer, and that's what will drive the business.
Operator:
The next question is from Laura Champine with Cantor Fitzgerald.
Laura Champine:
I was just wondering if you could comment on strength in categories. Was home stronger than apparel? Any particular strength in women's versus men's? Or anything you can say there on category strength?
Michael Hartshorn:
In terms of merchandise performance, home and apparel were fairly -- they're both in line with the chain overall. And frankly, the only other call out we'd say is what we said in the comments was men's was our strongest performance, merchandise category.
Operator:
The next question is from Oliver Chen with Cowen and Company.
Oliver Chen:
The merch margins are really impressive. Could you just elaborate on the main drivers? I think it probably had something to do with your low level of in-store inventories and markdown levels. The in-store inventory level is also very impressive. Are you expecting that to kind of continue to be negative? I'm just curious about how that will trend just because the momentum's been so strong at your comp line.
Michael Hartshorn:
Sure, Oliver. So we outperformed the high end of our comp sales target during the quarter. So that meant that we had faster inventory turns resulting in lower markdowns, that was also helped by the fact that we ran at -- with inventories down about 1% during the quarter. We also benefited from our ability to take advantage of buying opportunities in the marketplace. And in addition, we did see some benefit from ongoing improvements in our inventory shortage we typically take, our physical inventory in the third quarter. So all of those contributed to do better-than-planned merchandise margin during the quarter. In-store inventories for the fourth quarter, we are, again, planning them to be down during the quarter so that should answer the question.
Oliver Chen:
And you guys have been ahead of the curve with looking about the marketplace and the environment that's happening. Were August, September, October kind of steady in cadences? Or was there a fair degree of volatility that you were seeing in the way that consumers are behaving?
Michael Hartshorn:
For us, relatively steady throughout the quarter.
Oliver Chen:
Okay. And our last question was the comp looked nicely driven by this healthy composition between traffic and basket. What's happening with basket that's enabling you to have that momentum? Is that kind of the balancing that you think will continue as you look forward on a medium and longer-term basis between traffic and both the basket?
Michael Hartshorn:
So Oliver, as you mentioned, so the 3% comp was driven by both higher traffic and an increase in the size of the average basket. The higher basket was a combination of higher units per transaction and also a higher AUR. I mean, for us, the way we do that is that we've been successful delivering great bargains to the customer, and that's the way we think about it. We don't look at the composition when we're planning our comps.
Operator:
Your next question is from David Mann with Johnson Rice.
David Mann:
I'm not sure if you pointed this out, but merch margin expectation within your fourth quarter guidance, how should we think about that?
Michael Hartshorn:
I think, at this point, David, if we perform ahead of plan like we did in third quarter, I think our expectations would be that it's up a bit over last year.
David Mann:
Okay. And then in terms of the packaway impact on distribution cost, I think you suggested there was a benefit in the third quarter. How much -- how many basis points would that have been?
Michael Hartshorn:
We didn't call it out separately. We did call out obviously, the DCs. We said DCs were going to be a drag on the back half with the Central Valley DC of about 30 basis points. But we didn't call out the packaway piece separately.
David Mann:
In terms of what you're thinking about in the fourth quarter in your guidance about that packaway impact on distribution cost, how should we think about that? Are you assuming packaway normalizes to some extent as [indiscernible]?
Michael Hartshorn:
Yes, So, our guidance -- yes, it's a good question. Our guidance assumes that it does normalize by year-end. We said overall operating margins were going to be down 30 to 50 basis points, primarily driven, really, by 3 things
David Mann:
And could you quantify how much that timing of packaway was? Would you be willing to do that?
Michael Hartshorn:
No, we didn't call that out.
David Mann:
Okay. And then last question on the home side of the business, I know you've been making great strides there with some outperformance in some of the recent quarters. I guess, this quarter was more in line or at least 2 of the last -- or 3 of the last 4 quarters, I think that was the case. Are you at a point now where you think that some of the benefits there have more stabilized? Or do you still think there's some opportunities to drive some outperformance?
Barbara Rentler:
We still feel good about home. We feel like we're well positioned for the holiday and for the fourth quarter. And we feel that in future '16, '17, there's still room to grow there.
Operator:
Your next question is from Lorraine Hutchinson with Bank of America.
Lorraine Maikis:
I wanted to follow up on the higher AUR during the quarter. Is there a mix shift happening there? Or what's driving the tickets higher?
Michael Hartshorn:
Lorraine, it's Michael. Really two things. One because we operated with less inventory, it means that we had less clearance so that drives a portion of the AUR increase and then there's always mixes by business that contribute.
Lorraine Maikis:
And then can you quantify the shortage benefit from the third quarter?
Michael Hartshorn:
So of the 45 basis point improvement, last year, it's about a third of it -- a little less than a third.
Operator:
Your next question is from Brian Tunick with Royal Bank of Canada.
Brian Tunick:
I guess, first question was on the category side. Did you guys say men's was your strongest category? I don't think I've heard that in quite some time. Is there any context you can put around that? And is that because the either juniors or women's is slowing? Just curious what you're reading into that? Was that great buys or something like that? And then maybe some more context on the Midwest stores. I know they continue to lead the chain here. Is that how the new store maturity curve is playing out? Is that the micro-merchandising? What are you learning from that as you think about your next markets? And when could we hear about a new market in the next year or 2?
Barbara Rentler:
Brian, as it pertains to men's, for years, we had difficult business in men's. But over the last couple of years, we continue really just to improve our execution. So we're just literally doing a better job than we had done before. So our men’s business, we feel pretty good about.
Michael O'Sullivan:
And then Brian on your question about Midwest, so yes, we're very happy with performance in the Midwest. I think Michael Hartshorn had mentioned earlier that actually for the past 7 quarters now, the Midwest has been one of the top performing regions. Yes, when we entered the Midwest just over 3 years ago, we said that we expected it to be a very successful business over time. And we're certainly pleased with the progress that we've made and that reinforces our confidence in the region.. In terms of additional new markets, I mean, the Midwest is, I think you will appreciate, it's a pretty big area and there are a lots of individual markets within the Midwest. So our focus right now and probably for the next few years is going to be to build out our presence in those markets.
Operator:
The next question is from Bob Drbul with Nomura.
Robert Drbul:
Just a couple of quick questions. The first one is, during the quarter, the environment in terms of the promotional level of activity from the competition, did you see any changes then as the quarter progressed? And I guess, you didn't really change at all the fourth quarter prospects in terms of your guidance or your plans. So my question is, has the environment at all given you the thoughts around changing it in terms of the pricing umbrella from department stores probably being a little bit more promotional as you think about your prospects for the fourth quarter?
Michael O'Sullivan:
I'll handle the second piece of your question there, Bob, on the fourth quarter. And I think as Barbara had outlined in her remarks, we think it makes sense to be relatively conservative in the fourth quarter with the ongoing economic uncertainty. Secondly, the environment looks like it will be fairly promotional. Some of that is based upon just what we're seeing in terms of the recent reports in department stores. Those reports we have to think this could be a very promotional fourth quarter. And then the final point, but perhaps most important is that we're up against the 6% comp. Last fourth quarter, we reported really the terrific 6% comps. So we're up against that number. The other point I'd make is in our business, we typically plan our business relatively conservatively. That's kind of -- probably the first bullet point in our playlist. We plan the business conservatively, and then we know we can chase the business if the sales are there. So I think, we think it's best to plan conservatively, but then hope to do better.
Barbara Rentler:
As it pertains to the...
Robert Drbul:
Go ahead, sorry.
Barbara Rentler:
As it pertains to the promotional level during the quarter, it actually was pretty promotional during the entire quarter. It felt like there were a couple events that department stores added in October. But actually quite frankly, it's been promotional since Q2 and just kind of came across through back-to-school and then increased, I'd say, slightly in October.
Robert Drbul:
And then, in terms of categories, can you just talk about how your cold weather categories are performing and how you're positioned there? And if you could just give us an update in terms of what you're seeing from the business in terms of the handbags and accessories categories?
Barbara Rentler:
Cold weather has been, I would say, difficult. I mean, it was difficult in October. We have relatively conservative plans in cold weather. We chased part of that business at the back-end of the season. So we can adjust as we come along the way. But it did start out slower than we would have liked. In terms of handbags and accessories, the business is still behind the chains performance, and we're still working our way through that.
Operator:
The next question is from Marni Shapiro with The Retail Tracker.
Marni Shapiro:
Just a question on dd's. So has Michael been running dd's all this time? And will he stay onboard to transition Brian in the role? And for how long will he stay on board? And are there any other leadership positions open at dd's that you need to fill at this point?
Barbara Rentler:
So Michael,-- dd's, yes, dd's has reported to Michael for this period of time. Michael will -- Brian will report directly to me. Michael will be involved in -- heavily involved in this transition of Brian into the company. And there are no other senior management jobs opened at dd's at this point.
Marni Shapiro:
That's fantastic. And then just on the traffic side, have you guys seen traffic still increase or flat at Ross and dd's?
Michael Hartshorn:
They're up in both during the quarter.
Operator:
The next question is from Mike Baker with Deutsche Bank.
Michael Baker:
So I'm just curious, the department stores, it seem like they got really got hit with a lot of heavy inventory because it got warm. So it seems like they're worse off now than they thought they were 3 months ago. Yet, you haven't changed your guidance. So I guess did you predict -- correctly predict how bad it'd be for the department stores? Or is there some other reason why you wouldn't change your guidance or you're just doing much better? And I guess related to that, inventories were high, just as high as they are now at the end of the previous quarter. Yet, your margin is getting better, not worse. So I'm just curious how you're sort of bucking that trend and why that wouldn't be the same in the fourth quarter?
Michael O'Sullivan:
Let me answer the first part of your question, Mike, about department stores. Yes, when we think about our guidance for the quarter, a lot of factors go into it. Obviously, our performance in the third quarter, the outlook for the fourth quarter, the macroeconomy, how promotional we think it's going to be. And I would say as look at this fourth quarter, the fact that we're up against the 6% comp. So all of those things kind of go into the mixer for us to come up with the guidance for the fourth quarter. So I think I probably answer your first question. I don't think I really understand your second question about inventories. Could you just repeat that?
Michael Baker:
Yes, also one of the concerns is that inventories are high right now and so that leads to a promotional environment and that might hurt your margins in the fourth quarter. And that makes sense, except I just point out that inventories were high at the end of the second quarter and they were also pretty high at the end of the first quarter I think due to the average department store inventories at the end of the first, second and third quarter, was up about 5% or 6% pretty consistently. Yet, even with the high inventories throughout the year, your merchandise margins are getting better, not worse, so is there reason to expect that, that wouldn't continue into the fourth quarter?
Michael O'Sullivan:
Yes, I think it's not all about inventories. I think it's a combination of inventories and sales trend and at least what we've seen, and you've seen the same numbers, the data we've seen suggest that actually the sales trend hasn't lived up to people's expectations. So, although the inventory levels may not move that much from quarter to quarter, the sales trend has deteriorated, and that's what could really drive it be more promotional in the fourth quarter.
Michael Baker:
Okay, that's helpful. If I can ask one more sort of longer-term question. You guys always guide that we start the year at 1% to 2% comp. I can't remember the last time you actually comped at something in that range. As people -- as I do my model out, is it probably more correct to think about your annual growth as something higher than that typical guidance, probably in the 3% to 4% range? How do you guys really think about it longer term?
Michael O'Sullivan:
I think we've described our longer-term model as we believe that our long-term average comp should be in the region of 3%. We feel pretty comfortable about our ability to achieve that kind of comp number. And certainly, if you look out at the last 10, even further back 15 years, the data would suggest that, that's a reasonable expectation. Now in any given year, it could be plus or minus 1 or 2 points in any of the direction depending upon the circumstances, the economic environment, the competitive environment, the comps were up against, et cetera. But I think if you're modeling in 3% on an average basis, I think that's appropriate.
Michael Baker:
Okay, make sense. One more, I promise. How does this work? When inventories are high in the environment right now, are you more likely to get the excess product from vendors because they're getting inventory pushed back to them? Or they're not able to send it to the department stores? Or more likely to get it directly from the department stores? In other words, department stores have already taken possession of it, but now they're going to send it to you.
Barbara Rentler:
We'd actually buy the merchandise from vendors direct.
Operator:
Your next question is from Anne-Charlotte Windal from Bernstein.
Anne-Charlotte Windal:
So this may be a moot point given the availability of goods on the market. But with competition increasing in the off-price space, are you seeing any change in the competitive dynamics? Are you seeing any of your competitors becoming more aggressive in terms of what they're willing to pay for some brands?
Michael O'Sullivan:
Charlotte, no really, no. I mean the new competition I think you're referring to frankly is just too small to really have any kind of impact, so no.
Anne-Charlotte Windal:
Okay, I just have to ask.
Operator:
The next question is from Neely Tamminga with Piper Jaffray.
Neely Tamminga:
Barbara, I just wanted to follow back up on the appointment of Brian Morrow for the company. Coming from Stein Mart, obviously, there's more of a national brand presence that exists in that format relative to what dd's currently has. So should we be reading into something around that into his chief merchandising experience? Or I would imagine anybody at this point, you've got your pick of the litter, like who wouldn't want to come work for Ross, right? So what specifically have you seen in Brian that's going to be very specific and relevant for dd's?
Barbara Rentler:
Well, Brian has a very deep, broad-based experience. I mean, he has over 30 years of experience in a variety of sectors, including moderate department stores and most recently off-price retail. So this experience, along with his strong leadership skills, we think he's really going to be a valuable resource for dd's. Worrying about whether he can make the transition to a low to moderate customer, we don't foresee that as any problem. We think he's a very good merchant and a good merchant can merchandise, all areas.
Operator:
The next question is from Matthew Boss with JPMorgan.
Matthew Boss:
So as we think about your square footage expansion profile from here, first, how are your more recent stores performing? And then second, what's the best way to think about how many years left in the existing markets in the Midwest versus how we best should think about time line for a Northeast entrance?
Michael O'Sullivan:
So Matthew, in terms of the new stores, I would say that we've been very happy with the performance of our new stores actually over the last several years and this year has been no exception. We've been happy with how they performed. Certainly, this year, I think for the last few years, they have exceeded our initial sales plan. In terms of a time frame for new markets, I wouldn't give you a time frame at this point. I think we have -- we have plenty of opportunity left in, frankly, in our existing markets as well as in the Midwest. So I think that's going to keep us busy certainly for the next few years.
Matthew Boss:
Okay, great and just a follow-up. I mean, you guys have spot on with your call on the retail environments. In terms of the product availability that you're seeing, I mean, are there any particular categories of particular opportunity as it relates to some of the buys that you see coming in the pipeline?
Barbara Rentler:
Actually, the supply is very broad-based. It's a great time to be a buyer. We'll leave you with that.
Operator:
The next question is from Roxanne Meyer with MKM Partners.
Roxanne Meyer:
My first question is a follow-up on inventory. I guess, I want to appreciate, what are your guardrails around inventory in terms of how high you're willing to grow inventory on an absolute basis relative to your sales plans? Does that have a limit? How do you think about your inventory strategy in total?
Michael O'Sullivan:
Sure. So Roxanne, I think, we think, well, I know we think about our inventory on a segmented basis. We think about in-store inventory, which is really the inventory that's available in front of the customer, but we manage that very tightly and as we talked about earlier on this call. Over the third quarter, that showed a slight decline versus last year, and that's what we look for. We look for some ability to drive returns and therefore drive markdown improvement and margin improvements. So that's how we think about the in-store piece of inventory. Separately, we think about packaway based upon what's available in the marketplace. And if we see terrific opportunities in the marketplace, our merchants are encouraged to take advantage of those and that means packing away those goods. And if packaway rises over a period of time, that's because we've seen great bargains in the marketplace that we like. So that's kind of how we think about inventory, the different buckets of inventory.
Roxanne Meyer:
Okay. So the buyers just have the ability to take advantage of deals in the market, and it doesn't seem like there's too many constraints around -- at some point, you just have to get cut off. But you're willing to extend yourself knowing that it's for future periods.
Barbara Rentler:
The buyers have plans. It's not just free-for-all, they're out there buying. There's strategy, there's a plan, there is a plan by business segment of how much we think it's appropriate. All that being said, one of the benefits of our model is that we're flexible. So if we were to see a large amount of product in a classification or a business we weren't planning on particularly driving and that product could help us drive the business, we would put money into the plan, and we would flex. So that's just one of the benefits of being in the off-price business.
Michael O'Sullivan:
One other point on that, Roxanne, is we do -- as you'd expect, we have pretty significant controls over what's in packaway. So we control very carefully sort of the aging of packaway, how long it's allowed to stay in there, what kind of goods. We manage all aspects of that as you'd expect.
Roxanne Meyer:
Okay, great. And then just curious on the traffic increases that you're seeing. Can you talk about what portion of the traffic is coming from new versus repeat buyers? Are they continuing to skew younger, are existing customer shopping more? I mean some of that, maybe the demographics behind it would be great.
Michael O'Sullivan:
Sure. The new customers that we've attracted, frankly over the last several years demographically, they look a lot like our existing customers. What they all have in common is they're all looking for great value. For great bargains. In terms of your point about the age, we've always disproportionately attracted slightly younger customers, and that continues to be true. When you look at the growth of our Juniors business over time, that's a good manifestation of that. But as I say, I would say that demographics of our new customers pretty similar to the demographics from our existing customers.
Operator:
The next question is from Jeff Stein with Northcoast Research.
Jeffrey Stein:
Barbara, this was the first quarter that I could remember that you did not call out Juniors as the best or one of the best-performing categories. And I'm just curious, anything notable around that? Is that customer spending less or suddenly men's just exploded during the quarter?
Barbara Rentler:
Juniors performed slightly above the chain and was up against a very tough compare. With that, we had a couple of execution issues, which we have corrected.
Jeffrey Stein:
And what would execution mean? Is that -- would it be merchandising or...
Barbara Rentler:
Wrong timing on some products.
Jeffrey Stein:
Okay. And real estate costs, what's going on there? It's one thing to compete against other companies for merchandise. I'm sure there's plenty of that. There's less availability when it comes to real estate. Are you seeing real estate costs go up and perhaps choice locations becoming more difficult to identify?
Michael O'Sullivan:
Yes, I think we're pretty happy with the availability of real estate locations and the rents we're seeing. There's a lot going on in the retail industry, not just in the apparel retail, but in others sectors, office supplies, electronic, et cetera, which means that there is availability of real estate. And we have a terrific real estate team who over the years, have been able to secure great locations, that afford us great deals. So we're pretty happy with the outlook there.
Jeffrey Stein:
Okay. And one more real quickly for Barbara. During a period where you've got a lot of promotional activity going on and there's an overabundance of product, is there a chance or risk that packaway may not prove to be as great a value because perhaps you bought it 6 months ago at a higher price and today, you could rebuy it at a much lower price?
Barbara Rentler:
So we actually -- Michael talked about all the difference metrics we have to measure packaway. We actually constantly look at the values that we have in there. Now, the merchants, when they put merchandise in packaway, they're thinking of it from a promotional perspective. So the packaway that we own today would have been packaway we would have bought end of Q2, into Q3 when they were -- we were already seeing that promotional environment coming across. Say they know when they put it in there, that there has to be a variance to what's going on in the world. All that being said, if there was something in packaway that we didn't think was the right value during our processes, we would capture that. And there's a lot of size, a lot of size around packaway and what's in there, we would put it out, and we would mark it down and we would move on. But really the heads-up for merchants with something in packaway is, they have to feel comfortable that when they take it out. It really is going to be a great branded bargain. And so there's a lot of size and rules and questions around what that looks like before they put it into packaway.
Operator:
The next question is from Richard Jaffe with Stifel.
Richard Jaffe:
Just 1 more question on packaway, please. How long do something stay in packaway? What's the average life of it's time in packaway, ballpark or some time frame?
Michael Hartshorn:
Richard, it's about 3 to 4 months.
Richard Jaffe:
3 to 4 months, that's great. And I assume you're going to be able to -- you're be in a position to take advantage of what it looks like a tremendous amount of product in the marketplace as, again, I assume cancellations are out there. I'm sorry, go ahead.
Barbara Rentler:
We're in a good position going into what we would call a volatile climate. So we feel pretty comfortable with where we are.
Richard Jaffe:
Okay, I think volatile maybe a kind word. Going one way unfortunately.
Barbara Rentler:
[indiscernible] other.
Operator:
The next question is from Stephen Grambling with Goldman Sachs.
Stephen Grambling:
I had 1 quick follow-up, which, I guess, is just on the cost efficiencies that you captured this year. Can you just talk to some of the biggest buckets there? And maybe what is still left?
Michael Hartshorn:
Stephen, it's Michael. So, I mean, we're looking everywhere. We're looking at nonpayroll, payroll. We're looking for efficiencies throughout the business. So I think we'll continue to do that. We're doing that in our budget process, and we'll be able to give you an update at the end of the year.
Stephen Grambling:
I'll shoot 1 more in there, which is just there's has been some investor concern around one of your larger off-price competitors going after lower AURs. Clearly, the overall comp hasn't reflected any impact. Can you just remind us if you have seen any difference in comps by proximity to off-price peers?
Michael O'Sullivan:
Yes, Stephen, we always slice and dice our business. We look at how different stores are doing based characteristics like demographics, cotenants, et cetera. And frankly, there's nothing to call out there. It's been broad-based. There's been nothing there that's really impacted us.
Operator:
The next question is from David Glick with Buckingham.
David Glick:
Most of my questions have been answered. I just wanted to follow up again on the Midwest. Obviously, that's a newer market for you and for most retailers, it was the most challenging region because of very warm weather. I just wonder if you could help me understand how you could outperform in that market? Obviously, when you turn your inventories faster, you're less relying on seasonals, which gives you guys an advantage versus department stores. But just a little more color on that, help me understand that, that would be great.
Michael O'Sullivan:
So David, I would say that what always drive our business as a chain and actually regionally is having great product in the stores. And I think, we feel very good about the assortments that we have in our Midwest stores and ultimately that's really what's driven our business there over the past couple of years.
Operator:
There are no further questions. I will turn the call back over to Barbara Rentler for closing comments.
Barbara Rentler:
Thank you for joining us today, and for your interest in Ross Stores. Have a great day.
Operator:
This concludes today's conference call. You may now disconnect.
Operator:
Good afternoon, and welcome to the Ross Stores Second Quarter 2015 Earnings Release Conference Call. [Operator Instructions]
Before we get started, on behalf of Ross Stores, I would like to note that the comments made on this call will contain forward-looking statements regarding expectations about future growth and financial results, including sales and earnings forecasts and other matters that are based on the company's current forecast of aspects of its future business. These forward-looking statements are subject to 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 2014 Form 10-K and fiscal 2015 Form 10-Q and 8-Ks on the file with the SEC. 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 Balmuth, Executive Chairman; Michael O'Sullivan, President and Chief Operating Officer; Gary Cribb, Executive Vice President, Stores and Loss Prevention; John Call, Executive Vice President, Finance and Legal; Michael Hartshorn, Group Senior Vice President and Chief Financial Officer; and Connie Kao, Senior Director of Investor Relations.
We'll begin our call today with a review of our second quarter and year-to-date performance followed by our outlook for the remainder of the year. Afterwards, we'll be happy to respond to any questions you may have. As a reminder, all earnings per share results and forecasts for both the current and prior year reflect our recent 2-for-1 stock split that became effective June 11, 2015. As noted in today's press release, we are pleased with our solid sales and earnings growth for both the second quarter and first 6 months. These results reflect that our assortments of compelling name-brand bargains continue to resonate with today's value-focused customers. Earnings per share for the second quarter increased 11% to $0.63, up from $0.57 in the prior year. Net earnings for the quarter grew to $259 million compared to $240 million for the same period last year. Sales rose 9% for the quarter to $2,968,000,000 with comparable store sales up 4% over the prior year. While second quarter operating margin of 13.9% was down from last year, it was slightly better than expected. The quarter benefited from higher merchandise margin and tight expense control that partially offset a planned increase in distribution costs related to recent infrastructure investment. For the first 6 months of fiscal 2015, earnings per share increased 15% to $1.32, up from $1.15 in the prior year. Net earnings were $541 million, up 12% from $583 million (sic) [ $483 million ] last year. Sales for the year-to-date period rose 9% to $5,906,000,000 and comparable store sales increased 5%. Similar to Ross, dd's posted better-than-expected gains in sales and profits for the quarter and year-to-date period as customers also responded positively to their value offering. The strength in merchandise and geographic sales trends for Ross during the second quarter were relatively broad-based. Juniors and Home were the best-performing departments while the Midwest continued to be the strongest region. As we ended the second quarter, total consolidated inventories were up 20% over the prior year with packaway levels at 46% of total inventory compared to 43% last year. Average in-store inventories at quarter end were down slightly versus last year while total inventories were higher as we have taken advantage of increased closeout availability in the marketplace. Now let's turn to our expansion program. Store growth remains on track with 19 new Ross and 8 dd's DISCOUNTS opening in the second quarter. For fiscal 2015, we continue to plan for about 70 new Ross and 20 dd's DISCOUNT locations. As usual, these numbers do not reflect our plan to close or relocate a handful of stores. Now Michael Hartshorn will provide further color on our second quarter results and details on our second half guidance.
Michael Hartshorn:
Thank you, Barbara, and let's start with our second quarter results. Our 4% comparable store sales gain was driven mainly by an increase in the size of the average basket with the number of transactions up slightly from last year. As mentioned earlier, while second quarter operating margin of 13.9% declined 35 basis points from last year, it was better than expected.
Cost of goods sold increased 20 basis points, mainly from a 40 basis point increase in distribution expenses that were impacted by the opening of a new distribution center during the second quarter. Freight and buying costs also increased 10 and 5 basis points, respectively. These unfavorable items were partially offset by a 25 basis point increase in merchandise margin and occupancy leverage of 10 basis points. Selling, general and administrative expenses during the period increased by about 15 basis points. Last year's second quarter included a onetime benefit of about 20 basis points from the resolution of a legal matter. This prior year comparison more than offset the expense leverage we realized from the 4% comparable store sales increase. During the quarter, we repurchased 3.5 million shares of common stock for a total purchase price of $176 million. Year-to-date, we have bought back a total of 6.9 million shares for an aggregate price of $352 million. As planned, we expect to buy back a total of $700 million in stock for the year under the 2-year $1.4 billion stock repurchase program approved by the Board of Directors in February 2015. Let's turn now to our second half guidance. For the third quarter ending October 31, 2015, same-store sales are forecast to increase 1% to 2% on top of a 4% gain last year with earnings per share projected to be in a range of $0.48 to $0.50, up from $0.46 in the 2014 third quarter. For the fourth quarter ending January 30, 2016, we are planning same-store sales to be flat to up 1% on top of a 6% gain last year with earnings per share projected to be $0.60 to $0.63 compared to $0.60 last year. Now I'll provide some additional operating statement assumptions for our third quarter EPS target. Total sales are projected to grow 5% to 6% on the previously mentioned comparable store sales forecast of up 1% to 2%. We're planning to add 19 new Ross and 7 dd's DISCOUNTS locations during the period. Operating margin is projected to be 11.3% to 11.5% versus 11.8% in the prior year. We are forecasting merchandise margins for this year's third quarter to be relatively flat while distribution costs are expected to remain elevated over the prior year. The higher distribution costs reflect the recent infrastructure investments and unfavorable timing of packaway-related expenses. Net interest expense is estimated to be about $4 million. Our tax rate is planned at approximately 35%. And we expect average diluted shares outstanding to be about 406 million. Based on our results for the first 6 months and second half forecast, we are now projecting earnings per share for the full year to be in the range of $2.40 to $2.45, up 9% to 11% over $2.21 in fiscal 2014. Now I'll turn the call back to Barbara for closing comments.
Barbara Rentler:
Thank you, Michael. While we are pleased by our better-than-expected results for the first half, we face more challenging sales and earnings comparisons over the balance of the year. In addition, the macroeconomic environment remains uncertain and we expect the retail landscape to be highly promotional during the fall season, especially given the recent results from other retailers. Based on these factors, while we hope to do better, we believe it is prudent to remain cautious in our forecasting our business for the second half of 2015.
To maximize our results, we will continue to dedicate our resources to address our top priority:
offering customers the best bargains possible on a wide assortment of fresh and exciting name-brand fashion for the family and the home. This will be the key of delivering respectable growth in sales and earnings both now and in the future.
At this point, we'd like to open up the call and respond to any questions you might have.
Operator:
[Operator Instructions] Your first question comes from the line of Lorraine Hutchinson from Bank of America Merrill Lynch.
Lorraine Maikis:
Can you discuss any regional differences that you saw during the quarter and if you felt an impact from either the back-to-school tax shifts or the later Labor Day?
Michael Hartshorn:
Sure, Lorraine. It's Michael. On the -- across regionally, the results were actually fairly good from a broad-based perspective. We mentioned the Midwest continues to be our strongest region, which had been true over the last 1.5 years. In terms of back-to-school markets, like all other retailers, we're impacted by later sales tax holiday events. But overall, that did not have a big impact for us for the quarter.
Operator:
Your next question comes from the line of Daniel Hofkin from William Blair.
Daniel Hofkin:
Just wanted to understand kind of the traffic-versus-ticket dynamic, a little bit different than one of your competitors. Just curious whether you feel like, going forward, pricing is a lever that you might choose to pull a little bit more even if it means sacrificing some ticket to drive more traffic. And just obviously, you have harder comparisons in the second half, but the 1% to 2% guidance versus the 2% to 3% initial guidance going into this quarter, is it based on seeing a slower kind of underlying trend? Or are you just being conservative given the tougher compares that you have?
Michael Hartshorn:
Dan, on your first piece, as we mentioned in the remarks, the 4% comp was driven by a combination of a larger basket and a slight increase in the transactions. The basket was primarily driven by an increase in the unit per transaction and AUR was up slightly. In terms of overall traffic, I mean, the way we think about our sales is we focus on overall sales and it comes down to merchandising. So based on that, we'll continue to do what's best and that is we'll try to deliver the most compelling bargains to our customers.
Michael O'Sullivan:
And Daniel, on AUR, I think your question was would we sacrifice AUR to drive sales. I think we do that all the time. I think our pricing has always intended to be very sharp and I think that's driven our performance over the long term. We're all about offering great prices and great bargains. So our AUR is always an area of focus for us. In terms of the guidance, the 1% to 2% in the back half versus the 2% to 3%, we've been very pleased with our performance the last couple of quarters, but there are a couple of reasons to be conservative in our guidance. There's ongoing uncertainty in the macroeconomic and retail environment and you get a sense of that in some of the recent retailers' results, particularly from some of the department stores. And then the second reason to be conservative is we're up against some pretty tough multiyear comparisons in the back half. Last year's third quarter was a 4% comp, last year's fourth quarter was a 6% comp so we're going up against those numbers. So putting all that to the side, you and others who followed us for a while will know that this is sort of a -- this is very much from our playbook. We tend to manage the business relatively conservatively, but we hope to do better. And certainly, if the sales trend is there, we'll chase it. So that's kind of the outlook.
Operator:
Your next question comes from the line of Marni Shapiro from The Retail Tractor (sic) [ The Retail Tracker ].
Marni Shapiro:
It sounds like there's, as always, a lot of inventory in the market and a lot that you've packed away. I'm just curious if there was any -- were there any segments that you found were tougher out there and there's just really exceptional deals? And are they segments that have done well in your stores that maybe weren't doing well in other stores?
Barbara Rentler:
Actually, I think the deals are pretty broad based. I mean, are you talking about which classifications of business?
Marni Shapiro:
Yes.
Barbara Rentler:
Actually, the deals have been pretty broad based. I mean, the supply lines have been in almost every business that we touch. So our assortments are broad in the stores, the availabilities for it, so that's why we've been able to maximize a lot of deals in the market.
Marni Shapiro:
Fantastic. And are you guys doing anything differently in the back half marketing-wise to maybe further boost traffic or drive home the values?
Michael O'Sullivan:
Marni, not really. Our marketing strategy and message is pretty consistent. The message is always that we offer the best values. So there's really nothing new there. I mean, the focus really in terms of driving traffic is really to have the best bargains in the store.
Operator:
Your next question comes from the line of Oliver Chen from Cowen and Company.
Oliver Chen:
We're just curious about the back half and how you're thinking about inventory planning. Your inventories have been managed quite tightly and you've done a good job keeping your open-to-buy pretty open. Also, I wanted to just ask you about your comments on the uncertain environment and the highly promotional landscape. Just because at some of the more broadline retailers, we've seen some really good momentum in apparel, so I was curious about how there's mixed messages out there in the marketplace.
Michael O'Sullivan:
Sure. So on the second part of your question on the uncertain environment, I would say the results have been fairly mixed, some good, some not so good. And certainly, when we're out in the market looking for the goods, it seems like there's plenty of supply, which, again, reinforces for us that there is some uncertainty in terms of the economic environment. On inventory planning -- just repeat your question, Oliver, on inventory planning, what were you looking for there?
Oliver Chen:
Just curious about how you're planning in the holiday season and if you can continue to kind of grow at a lot less than sales. And if there's anything we should know about the timing of which you'll do gifting or floor sets relative to last year.
Michael O'Sullivan:
Sure. In terms of how we're planning inventory, I think in Barbara's remarks, she said that in-store inventory levels were down slightly and that's kind of how we're planning them going forward. In terms of timing, I don't know that there's any different there, Barbara, on, yes?
Barbara Rentler:
No, in terms of the floor sets and the gift setups, no, the timing is similar -- will be similar to last year. In terms of the promotional landscape, Oliver, the promotional landscape in Q2, it was aggressive in certain segments of the market. So we were planning on being aggressive, it was aggressive. I think when back-to-school comes to an end, we're going to see that, that was very aggressive and that we're going to see that continue going into the fall season, especially if some retailers are going into fall with high inventory levels. So that was the inventories.
Oliver Chen:
Okay, that's helpful. Just lastly, as we look at the weather, do you have any differentiation in terms of how you're thinking about certain categories in light of the forecast? I was just curious about outerwear and any read-throughs there about categories as it relates to weather as we approach the back half.
Michael O'Sullivan:
Nothing that we'd call out that this point, Oliver. No, nothing at that detailed level.
Operator:
Your next question comes from line of Richard Jaffe from Stifel.
Richard Jaffe:
Just a follow-on. So the inventory build-up we should assume is in packaway and you've been able to take advantage of some of the disruptions in the ports to buy opportunistically. Is that the correct assumption?
Michael O'Sullivan:
Yes, Richard, that's right. As Barbara said, total inventories were up and that was entirely packaway.
Richard Jaffe:
That's great. And I know there's been an open job at dd's. I'm wondering if there's a change in your thoughts about filling that job or just changing the reporting structure and operate without a president. Can you comment on that?
Michael O'Sullivan:
No changes in how we're thinking about that. We're still thinking about it in terms of replacing that position. That said, the dd's business has been doing pretty well over the last couple of quarters. We have a strong team in place. But no changes in terms of how we're thinking about the long-term leadership structure.
Richard Jaffe:
Okay. And you'll call us when El Niño hits and you'll get it first on the West Coast, right, so you'll just give us the heads-up?
Michael O'Sullivan:
We will.
Operator:
Your next question comes from the line of Kimberly Greenberger from Morgan Stanley.
Kimberly Greenberger:
Anyway, so -- okay. Excellent quarter, nicely done. Can you just remind us what the packaway inventory was doing? How first quarter ended in terms of packaway? What percentage of inventory? So -- in other words, did you see a nice kind of sequential acceleration in the second quarter in packaway? And I'm wondering if you can tell if the goods you're getting were sort of dislocated goods from the ports? Or is it really quite difficult to tell actually how the goods are getting to you?
Michael Hartshorn:
In terms of overall levels, Kimberly, they're very similar to where we ended the first quarter.
Barbara Rentler:
In terms of trying to understand where the goods came from, I would say at this point it's really difficult to tell. I mean, department store business was difficult and so some goods are clearly coming from that market. And at this point, it's much more homogenized than the beginning when we saw huge amounts coming everywhere in every business from the port.
Kimberly Greenberger:
So Barbara, do you think it's just the additional availability that you're seeing it's just sort of a function of a tough environment with vendors really trying to find a home for goods just given the disappointing numbers we're seeing out of department store space? Is that your read of the situation?
Barbara Rentler:
At this point, yes.
Operator:
Your next question comes from the line of Laura Champine from Cantor Fitzgerald.
Jason Smith:
This is Jason Smith on for Laura. I was just wondering if you can give a sense as to how your competitor going down market may impact you guys going forward?
Barbara Rentler:
What I would say about that it we're clearly operating in a very promotional and competitive environment and that's really true across the entire retail landscape, including our biggest competitor. But our focus really is on our own business. So our top priority really remains providing the best compelling bargains possible to the customers and that's really not going to change. So that's really what our focus is, how we feel about it.
Operator:
Your next question comes from the line of Anne-Charlotte Windal from Bernstein.
Anne-Charlotte Windal:
Two questions, if I may. The first one, I was wondering if you had any update to share with us on the potential impact from the wage increases and your ability to absorb costs from that. And my second question is one of your big competitors is talking a lot about the strength of their global sourcing capabilities. I was wondering if you'd give us a little bit of an update on how global, I mean, you are at this point from a sourcing standpoint. So I know thinking about your buying teams, I mean, where do you have active buying offices internationally?
Michael O'Sullivan:
Sure. So on the first part of your question, wage increases. As we mentioned on the call in May, we've taken up our minimum entry-level wage to $9 an hour. That adjustment, together with any offsets, is built into the earnings guidance for the rest of the year. In terms of further increases, we think the labor market is fairly dynamic and we like to sort of follow the labor trends before making decisions on any future moves. But I think, in general, we think if the economy improves over the next couple of years, it's likely that there'll be additional wage pressures out there.
Barbara Rentler:
And in terms of the global sourcing availability, we buy from a lot of different sources around the world, so we feel that we have a wide assortment from a variety of countries and it's pretty widespread.
Operator:
Your next question comes from the line of Matthew Boss from JPMorgan.
Matthew Boss:
So as we think about gross margins, can you walk through the drivers of the merchandise margin expansion this quarter? And how should we think about the margin opportunity in the second half and on a multiyear basis from here?
Michael Hartshorn:
Matthew, it's Michael Hartshorn. So in terms of margin -- merchandise margin for the quarter, it's actually a mix. We continue to operate the business with lower in-store inventory, which is what we ended the quarter at down -- slightly down 1%, so that helps drive faster terms and lower markdowns and it also included better buying, so a little bit on total margin.
Michael O'Sullivan:
In terms of margin on a multiyear basis, Matthew, I think, as you know, we've taken a number of steps that have helped to drive margin over the last several years in terms of very significant reductions to inventory, very significant improvements to shrink. Now look, we've been chipping away at those, but I think on a go-forward basis, I think any improvement in margin -- EBIT margin is likely to come from ahead-of-plan sales.
Matthew Boss:
Okay, great. And just a quick follow-up. On the uncertain retail landscape commentary, I mean, can this provide opportunity for your model? Or does a more promotional environment actually condense the value spread? Just curious kind of the puts and takes on some of those the larger-picture commentary and how it relates to your model.
Barbara Rentler:
Well, there's a couple of things. From the pricing and value perspective, it goes to our being prudent about how we plan the back half because as the department stores promote and they have a lot of inventory, the values move. So we chase our business back, so we understand what's going on there and where our values need to be. As it pertains to supply, when business is uncertain and difficult, it creates supply. Any disruption in business creates supply. So you would think ultimately that there would be a bubble of good that results from, let's say, if back-to-school turns out to be more difficult than people anticipated that there would be good that are the results of that. So you kind of get it on both sides.
Operator:
Your next question comes from the line of Jeff Stein from Northcoast Research.
Jeffrey Stein:
Just a quick question on your Home performance, wondering how it performed relative to the rest of the store. And then if you could distinguish between hard home and soft home.
Barbara Rentler:
Okay. Well, Home performed about the chain average. And actually, both segments of Home were good. I would say the decorative piece was even better than the bed and bath piece.
Operator:
Your next question comes from the line of Omar Saad from Evercore ISI.
Omar Saad:
A couple of quick questions. First, I want to make sure I understood. It sounded like part of the reasons behind your conservatism in the back half was the -- sounds like you're seeing a pretty fairly promotional environment out there. I want to understand a little bit more what's driving that and why you think that affects your business -- or you consider that it might affect your business. And then I have one follow-up, please.
Michael O'Sullivan:
So Omar, yes, I think really 2 key reasons to be -- well, I guess, 3 key reasons to be conservative in our outlook. One is the multiyear comparisons that I mentioned. Secondly, in our business, we can always chase good news. We can always chase a good trend, so it makes sense to manage conservatively, so we keep expenses and inventory in check and then ultimately we can chase. And then the third piece, which is what you're getting at, which is sort of the outlook, I think a combination of things. I think mixed results and -- actually weak results among department stores causes us to think that the environment, which is already fairly promotional, will continue to be pretty promotional in the back half. And how that affects us is we're all about price differentiation. The difference between the value at Ross and the value elsewhere and to the extent that other stores, department stores, et cetera, promote that obviously eats into that price differentiation. So that's what's built into the conservatism.
Omar Saad:
That's very helpful. And then kind of along a similar vein, if I look at your merch margin, it's been up, I think, 50 to 60 bps the last couple of quarters and slowed a little bit this quarter, up 20 or 30 bps. But the packaway percentage is still up year-over-year. Is it the promotional environment that's kind of causing that differential? With the packaway up, I guess, I'd expect to see -- still see some more merchandise gains like you were seeing the last couple of quarters. Or am I being too cute here, reading too much into it?
Michael Hartshorn:
No, so there was a differential in the first versus the second quarter. In addition, entering 2015, we had lower clearance levels, so that's actually helped us this year versus last year. And our comp was a little higher over planned in the first quarter versus the second quarter. So both of those factors resulted in more favorable margin in Q1 versus the second quarter.
Operator:
Your next question comes from the line of Jill Nelson from Johnson Rice.
Jill Caruthers:
Just given the energy crisis, what we're hearing about the oil and gas market, could you talk about maybe your performance in Texas and if you felt any pressure there?
Michael Hartshorn:
Texas, overall, has consistently been a good performer for us. In the second quarter and year-to-date, it's performed above the chain average for us. So it continues to be one of our best-performing regions.
Michael O'Sullivan:
And Jill, we don't know whether that's -- it could be that consumers are trading down from more expensive retailers in that region. We don't really know what's driving that.
Jill Caruthers:
Okay. And then I know you said dd's comp outperformed. Could you just give a little bit more clarity on how its performance was in the second quarter?
Michael O'Sullivan:
Sure. So as Barbara mentioned in her remarks, dd's posted better-than-expected gains in sales and profits in the quarter and that's actually been the pattern over the last several quarters. We've been doing a number of things the last couple of years at dd's to drive sales and actually to drive profitability, particularly more tightly controlling inventories and expenses, so we feel good about how that's gone. In terms of longer term, we're very confident in the dd's' business model. Last year, we opened about 20 dd's stores and we're on track to do about the same. So we're pretty happy with that business.
Operator:
Your next question comes from the line of Stephen Grambling from Goldman Sachs.
Stephen Grambling:
One of the other differentials impacting gross margin, I think, was the step-up and the deleverage on the DC. Can you give us a little bit sense for how that line item should progress over the year? And could you actually see some leverage as you move into next year and lap some of those costs?
Michael Hartshorn:
Stephen, it's Michael Hartshorn. Yes, so in the first quarter, we actually got a benefit in distributions and we actually expect that to turn around in the back half. So distribution centers are going to be impacted both by the packaway-related timing costs and the fact that we just opened a new distribution center in Central Valley, California during the second quarter. As you move into next year, you'll still have a hangover from the additional DC in the first half of the year and then you should be able to leverage in the back half.
Operator:
Your next question comes from the line of Bob Drbul from Nomura.
Robert Drbul:
I guess, the question that I have is as you progress throughout the second quarter and as you look into fall, have you had to make price adjustments on any of your merchandise given the competitive landscape that you're seeing out there?
Barbara Rentler:
No, we haven't had to take price adjustments. We chase a big part of our business as we go, which is one of the reasons why we run usually with a conservative plan so that we can watch the promotional activity and understand where we need to be in relation to department stores. As Michael said, it's a value game, department stores to off-prices.
Robert Drbul:
And I guess, the second question that I have is with packaway being up, does it at all hinder your ability to buy sort of very close to need? Or are you making the investment in inventory now? Will that change the way you approach the business going forward? Or you have complete flexibility around it?
Barbara Rentler:
It doesn't hinder anything. We have complete flexibility around it.
Operator:
[Operator Instructions] Your next question comes from the line of Patrick McKeever from MKM Partners.
Patrick McKeever:
Just on the wage increase, I don't know if you've quantified the impact on margins, what kind of headwind, I guess, that amounted to in the quarter, but if -- I would like to know that. And if not, I mean, maybe some broad parameters around the wage increase, percent of employees that got it, that sort of thing. And how are you measuring the impact with Walmart there combining the wage increase with training and more flexible scheduling and some other things, just hoping to improve the in-store experience for customers. So I guess my thought is -- or my question is what's the ultimate objective there with you?
Michael O'Sullivan:
So let me start with the last piece. I mean, our ultimate objective is to continue to attract and retain great associates and we've been very pleased with our ability to do that over the last several years. The reason to take up wage rates this year was to ensure that we could continue to do that going forward. Now the impact on margin in the second quarter, there really wasn't one because we were able to find offsets in the business to neutralize the impact of the wage rate increase and that we were able to do that for the back half of the year, too. So as a result, it didn't really have an impact overall. In terms of more broadly looking at how we manage our resources, our labor, our associates, we're always looking for ways to improve how we do that. I'm not familiar with some of the examples that you just described, but we're always looking at other ways to improve both our customer experience and actually also our associate retention at Ross.
Patrick McKeever:
Okay. So Michael then, you're saying for the back half of the year, it's more -- this is going to continue to be more of a neutral factor as it relates to margins?
Michael O'Sullivan:
That's right. So it's in our guidance for the back half, that's right.
Operator:
And this concludes our Q&A session. I now turn the call back over for closing remarks.
Barbara Rentler:
Thank you for joining us today and for your interest in Ross Stores. Have a great day.
Operator:
And this concludes today's conference. You may now disconnect.
Operator:
Good afternoon, and welcome to the Ross Stores First Quarter 2015 Earnings Release Conference Call. [Operator Instructions]
Before we get started, on behalf of Ross Stores, I would like to note that the comments made on this call will contain forward-looking statements regarding expectations about future growth and financial results, including sales and earnings forecasts and other matters that are based on the company's current forecast of aspects of its future business. These forward-looking statements are subject to 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 2014 Form 10-K and fiscal 2015 Form 8-Ks on file with the SEC. 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 Balmuth, Executive Chairman; Michael O'Sullivan, President and Chief Operating Officer; Gary Cribb, Executive Vice President, Stores and Loss Prevention; John Call, Executive Vice President, Finance and Legal; Michael Hartshorn, Group Senior Vice President and Chief Financial Officer; and Connie Wong, Senior Director of Investor Relations.
We'll begin our call today with a review of our first quarter 2015 performance followed by our outlook for the second quarter and fiscal year. Afterwards, we'll be happy to respond to any questions you may have. As noted in today's press release, we are pleased with our better-than-expected first quarter sales and earnings. Our results continue to benefit from value-focused customers responding favorably to our fresh and exciting assortments of name brand bargains. Earnings per share for the first quarter were $1.37, up from $1.15 in the prior year. Net earnings for the quarter grew to $282 million compared to $244 million for the same period last year. These earnings results include a benefit of about $0.04 per share mainly from the favorable timing of packaway-related costs that are expected to reverse in subsequent quarters. Adjusting for this expense timing, first quarter 2015 earnings per share rose 16% over the prior year period. Sales rose 10% for the quarter to $2,938,000,000 with comparable store sales up 5% over the prior year. Like Ross, dd's DISCOUNTS also posted better-than-expected gains in sales and profits for the quarter as customers continued to respond positively to their value offering. The strength in merchandise and geographic sales trends for Ross during the first quarter were relatively broad based. Juniors continues to be the best-performing category during the quarter, while the Midwest was the strongest region. Our first quarter operating margin grew to 15.7%, up from 14.6% last year. As we ended the first quarter, total consolidated inventories were up 20% over the prior year, while packaway levels were about 45% of total inventory. Average in-store inventories at the end of the first quarter were down slightly versus last year. The growth in total inventory reflects our ability to take advantage of increased closeout availability, a portion of which is from the ongoing West Coast port disruption. In addition, we increased inbound in-transit inventory to mitigate longer lead times from this situation. Let's turn now to our expansion program. Store growth remains on track with 32 new Ross and 5 dd's DISCOUNTS opening in the first quarter. For fiscal 2015, we continue to plan for about 70 new Ross and 20 dd's DISCOUNTS locations. As usual, these numbers do not reflect our plans to close or relocate about 10 older stores. Now Michael Hartshorn will provide further color on our first quarter results and details on our second quarter guidance.
Michael Hartshorn:
Thank you, Barbara. Let's start with our first quarter results. Our 5% comparable store sales gain was driven by a combination of higher transactions and an increase in the size of the average basket. As Barbara noted, first quarter operating margins grew to 15.7%, up from 14.6% last year. Cost of goods sold improved by 80 basis points driven primarily by a 60-basis-point improvement in merchandise gross margin and a 5 basis points of leverage on occupancy. In addition, distribution center costs were lower by 25 basis points due to the previously mentioned favorable timing of packaway-related costs. These improvements were partially offset by a 10-basis-point increase in freight costs.
Selling, general and administrative expenses improved by about 25 basis points during the period mainly from leverage on the 5% same-store sales increase. During the first quarter, we repurchased 1.7 million shares of common stock for a total purchase price of $176 million. As planned, we expect to buy back a total of $700 million in stock for the year under this new 2-year $1.4 billion stock repurchase program approved by our Board of Directors in February 2015. Let's turn now to our second quarter and updated full year guidance. For the 13 weeks ending August 1, 2015, same-store sales are forecast to increase 2% to 3% with earnings per share projected to be in the range of $1.19 to $1.24, up from $1.14 in the prior year period. Adjusting for our recently announced 2-for-1 stock split that becomes effective June 11, 2015, second quarter 2015 EPS is forecast to be $0.59 to $0.62, up from $0.57 in the prior year period.
The operating statement assumptions for this year's second quarter are as follows:
total sales are projected to grow 6% to 7% on a comparable store sales increase of 2% to 3%. We are planning to add 18 new Ross and 8 dd's DISCOUNTS locations during the period. Operating margin is projected to be 13.6% to 13.8% versus 14.3% in the prior year. As a reminder, the second quarter of last year included a onetime benefit of approximately 20 basis points from the favorable resolution of an outstanding legal matter. We are forecasting a slight increase in merchandise margins for this year's second quarter that is expected to be more than offset by higher costs from recent infrastructure investments, including the opening of a new distribution center in California during the quarter. In addition, we expect some deleveraging on expenses from higher wage costs. Net interest expense is estimated to be $2 million. Our tax rate is planned at 37% to 38%, and we expect average diluted shares outstanding before the effect of our recently announced 2-for-1 stock split to be about 205 million or 410 million post split.
Moving to our outlook for the full year. As mentioned in today's press release, based on our first quarter results and second quarter guidance, we now project earnings per share for fiscal 2015 to be in the range of $4.72 to $4.87 compared to our initial guidance of $4.60 to $4.80. On a split-adjusted basis, earnings per share are forecasted to be $2.36 to $2.44, up 7% to 10% from $2.21 in fiscal 2014. Lastly, we will be making competitive wage adjustments beginning in the second quarter that are included in both our second quarter and updated annual earnings guidance. Now I'll turn the call back to Barbara for closing comments.
Barbara Rentler:
Thank you, Michael. As mentioned earlier, we are pleased with our solid start to the year. For the balance of 2015 and beyond, we remain confident in our ability to successfully execute the strategies that have enabled us to deliver solid financial results over the past several years.
Our top priority remains providing the most compelling values possible to our customers. The best way to accomplish this is by continuing to make strategic investments in our buying organization. We believe this unwavering focus combined with our ability to tightly control both in-store inventories and expenses will enable us to show respectable sales and earnings growth over both the near and the long term. At this point, we would like to open up the call and respond to any questions you may have.
Operator:
[Operator Instructions] Your first question is from Ike Boruchow with Sterne Agee.
Irwin Boruchow:
I guess, Michael, maybe for you. To talk about the merchandise margin line, I mean, just, you guys are putting up some very impressive numbers there. Is that more a function of less markdown and less clearance in the store? Is it more a function of just the merchants getting -- being -- getting better buys? Just can you add some more color there for us?
Michael Hartshorn:
Ike, the margin improvement was really a combination of both. We did operate the business with lower inventories during the quarter, so that helped us have more full-price selling. In addition, we had some pretty good buys during the quarter.
Operator:
Your next question is from Matthew Boss with JPMorgan.
Matthew Boss:
So understanding there's a lot of noise in the retail landscape today. Can you guys just kind of elaborate on some of the drivers between the more recent 4% to 6% comps that you're seeing today versus your multi-year 3% to 3.5% base case run rate?
Michael O'Sullivan:
Sure. Matthew, it's Michael O'Sullivan. I'll answer that. Yes, we've been very pleased with our performance over the last few quarters, but there are a few reasons to be a little bit conservative as we look forward. Firstly, we think the macroeconomic and retail outlook remains pretty uncertain. You see that, and you get a sense of that in the recent results that have been announced by other retailers. Actually, that feeds into a second concern, which is those results themselves may cause the environment to become more promotional over the next few months. And then the third reason for conservatism is that we're up against our own tough multi-year comparisons. Now those of you who'd followed us for some time will know that this is straight from our playbook. In an uncertain environment, it makes sense for us to manage the business conservatively. If the markets promote -- sorry, weak or promotional, we can protect earnings, and if sales trend is there, we can chase the business.
Operator:
The next question is from Randy Konik with Jefferies.
Randal Konik:
I guess, Barbara, can you talk a little bit about the different long-term investments you want to make in the buying organization, what areas you think you need more kind of bulk in, what have you and why? And then as it relates to just dd's, kind of what do you -- so how should we just be thinking about the long-term economic model from here versus how you're thinking about the different profit -- obviously, the great profit margins you're able to put up in the Ross Stores? I'm just curious how we should be thinking differently or the same about dd's' economic model long term from here.
Barbara Rentler:
Randy, do me a favor. Just repeat on the first part where you said the long-term investment more. I missed the word you said.
Randal Konik:
Oh, I'm sorry. Just in the buying organization, just like what areas -- you talked about kind of adding to it. What areas do you really want to focus on and why? And then just the second question was more around the long-term economic model around dd's' concept.
Barbara Rentler:
Well, I would say from a merchandise perspective, it's very broad based. Our total business is very broad based. We've been pleased with some of the progress and things that we've made in some of our core businesses like Home. Our Junior business continues to be good. But overall, our total business is pretty broad based, and that is kind of how we're approaching it for the future. At this point in time, I would say, if I had to select one particular area, I would say it would be the continued investment in our Home business. As it pertains to dd's on the longer-term basis, Michael, economically.
Michael O'Sullivan:
Sure. So as it was mentioned in the earlier remarks, Randy, dd's posted better-than-expected gains in sales and profits for the quarter. That's been a common theme, actually, over the last couple of years, dd's achieving good sales and profit improvements, driven by, frankly, pretty similar actions to those that we've taken at Ross, particularly tight control of inventories and expenses. At this point, dd's has very similar four-walled economics to Ross. So we -- as we look out over the longer term, we're very confident with the dd's business model. We've opened -- well, we opened just over 20 stores, dd's stores in 2014. We're going to open a similar number of new dd's stores this year, and as we described before, we expect dd's can be a chain of about 500 stores.
Operator:
The next question is from Daniel Hofkin with William Blair & Company.
Daniel Hofkin:
Just wanted to understand a little bit. So you said roughly a $0.04 benefit from the packaway timing. Can you just explain a little bit how that works and also the math on getting from that to the 25 basis points in gross margin? Was there something else within SG&A that wasn't specifically quantified? Just a little color on that would be helpful.
Michael Hartshorn:
Sure, Dan. It's Michael. So for packaway, we capitalize cost to procure store and process packaway merchandising, and that includes fixed cost. So we capitalize until those items are sold. When sold, we charge those to expenses or cost of goods sold. So in a period of rising packaway levels, the higher capitalization means there's a benefit to earnings. This year, packaway levels increased during the first quarter versus last year when they declined. In terms of impact, that $0.04 is worth about 45 basis points of favorability to the quarter.
John Call:
And Daniel, this is John. You mentioned -- you referred to G&A, but our DC costs are in our gross margin line.
Daniel Hofkin:
Okay, maybe I didn't -- okay, so the 25-basis-point favor, I thought you said 25-basis-point favorability on the DC. Did that include the 45 within that, so to speak?
Michael Hartshorn:
It does. And what it means is the distribution center cost without the packaway would have delevered, and that's given the opening of the new DC in the middle of last year.
Daniel Hofkin:
Okay. Is that basically the unit cap? Is that kind of another -- is that the same thing when people talk about unit cap method?
Michael Hartshorn:
Yes, that's a good way to look at it. Unit cap's really for tax purposes, but it's the same concept.
Daniel Hofkin:
Okay. And then I -- just one follow-up if I could. So did you feel like -- or is there anything where you saw, over the course of the quarter, a change in trend to the upside? Or anything where you could point to benefits from on the sales side or the cost of goods sold side from the port issues so far?
Michael Hartshorn:
In terms of trends for the quarter, Dan, comp trends were steady throughout. After adjusting for the impact of the Easter shift, which fell 2 weeks earlier this year, there was not a meaningful disparity in trends either from a margin or a sales standpoint.
Operator:
The next question is from Stephen Grambling with Goldman Sachs.
Stephen Grambling:
Could you give us a little bit of a better sense of the wage increase and how this potentially changes the SG&A leverage point, maybe not only this year, but perhaps over the next 18 months?
Michael O'Sullivan:
Yes. Stephen, on the first part of it, what are we planning to do on wages? We've mentioned in the call -- on the call in February that we expected to see more wage rate pressure this year and that we'd be making adjustments to keep wage rates competitive. One of the adjustments we will be making in the second quarter is to raise our minimum entry-level hourly rate to $9, and that adjustment, together with any offset, is built into the earnings guidance.
Stephen Grambling:
And then in terms of...
Michael O'Sullivan:
And then your second question on [indiscernible] ...
Stephen Grambling:
Yes, just in terms of the leverage point, does this change that leverage point longer term?
John Call:
I would say now, Stephen, as we look through fiscal 2015, we're working to offset those costs, so the leverage point would the same. And going forward, it's a little of an open book as to what [indiscernible] are going to do with their wage rates at this point.
Stephen Grambling:
Okay. And then may be taking a step back, certainly, there's been a lot of new competition and testing from some of the peers. How do you think about the primary competitive advantage of the Ross model? And maybe if you rank kind of scale buying supply chain for us.
Michael O'Sullivan:
So we operate in a very competitive and fragmented market. We're always expecting that there's going to be competitors or new entrants that are trying to capture share, and frankly, we wish them the best of luck. But we know that with our off-price model, when it's executed well, we can compete very effectively against all comers. So there's no single competitor or new entrant that we're worried about. As long as we offer great branded merchandise at attractive discounts, we're going to do just fine.
Barbara Rentler:
Stephen, I would also add that we're well positioned. We have buying team, a buying organization of 700 merchants, so this is our core business. And we've made a strategic investment over the years to build that team to be able to compete in all types of environments.
Operator:
The next question is from Lorraine Hutchinson with Bank of America.
Lorraine Maikis:
I wanted to follow up on the inventory increase in your packaway. Is most of that product -- will be flowing through the stores over the next couple of quarters? Or will we wait to see it coming through next spring? And I guess, just specifically, how that relates to the $0.04 of cost coming through the COGS line.
Michael Hartshorn:
Lorraine, on packaway, obviously, it varies by merchandise category. It's hard to predict what availability will look like over the remainder of the year. We view packaway as a top line driver as it represents some of the best values for the customer. Our guidance assumes that the additional packaway we had in the first quarter would flow through the store through the balance of the year, and that's also reflective of our guidance on the packaway credit.
Operator:
The next question is from Oliver Chen with Cowen and Company.
Oliver Chen:
As we look forward to the comp going forward, do you feel like it will also be split by our transaction and size of the basket? And also, related to the inventory build, can you contextualize for us, was this in line with kind of your expectations? Or did you witness more bargains than you expected with the dislocation? I'm just curious about the context of the rising inventories and how that happened strategically and competitively relative to your actions.
Michael Hartshorn:
On the inventory, as we mentioned in the remarks, there were really 2 factors that drove the inventory increase. The first is higher packaway inventory as we were able to take advantage of the increased closeout availability. A portion of that was related to the port disruption. That piece was harder to predict, and we take advantage of what the market gives us. And in terms of the other piece, which is the inbound in-transit levels, that was our efforts to mitigate the longer port lead times, and we planned to do that as we will continue to watch the port. There's still longer lead times, and we'll continue to mitigate that with higher in-transit levels. And higher in-transit levels, thus, means we're putting stuff, imports on the water earlier or trying to ship around the West Coast port.
Michael O'Sullivan:
The other sort of key inventory metric to look at is average in-store inventory, and as Barbara mentioned in her remarks, that was down slightly versus last year. And what that tells you is that our in-store inventory is pretty fresh and in pretty good shape. With a 5% comp, we were able to achieve higher turns, which is 1 of the contributors to the higher margin.
Michael Hartshorn:
Oliver, on your other question on the components of sales, we have no reasons to believe that, that trend would change.
Barbara Rentler:
I just want to add...
Oliver Chen:
Okay. Just a final question -- sorry, go ahead.
Barbara Rentler:
No, I just wanted to add on the packaway. Part of what drives that number is really the great deals that we've gotten in the marketplace. Between the port dislocation and mixed sales results in Q1, there was a lot of availability, so we feel very good about the packaway that we have. It's a branded product at really great values that our customers expect, so we feel like it's a very good thing for us.
Oliver Chen:
Got it. And just a final question. You've had such stellar execution throughout the year and last year and holiday and back to school. So do you have any initial thoughts on your inventory flow versus last year and Gifting initiatives versus last year as you anniversary your own outstanding performance?
Barbara Rentler:
From the Gifting perspective, we were very happy with what happened in Gifting last year, but we feel like we haven't maximized that business yet. So that is one of the things in the fourth quarter that we will be focused on. Last year, we expanded in some new -- into some new classifications. We tested some new classifications, so we feel that we have a lot of room to grow in the fourth quarter. We recognize that we're up against some very big numbers. In terms of inventory flow, you mean just literally how the goods will [indiscernible]? Just trying to make sure I understand the question.
Oliver Chen:
Yes. And that was very helpful with categories. And you also mentioned Home in your earlier remarks. Is that something that is an opportunity for you? I guess, I'm asking as you post game holiday from last year, if you feel there were any elements that we should think about that's lower-hanging fruit as you approach it this year.
Barbara Rentler:
Well, I don't know if I think there's anything that's low-hanging fruit, but what I would say is that we don't feel like we've maximized -- we obviously don't feel like we've maximized those businesses. Our Home business has been getting progressively better over the last few quarters, and for competitive reasons, we wouldn't talk too more about -- too much more about it. But I would say is, again, we tested a lot of classifications, and we do that every year in an effort to increase the treasure hunt, drive sales, give the customer better experience. And so we feel that we can anniversary those numbers.
Operator:
The next question is from Mike Baker with Deutsche Bank.
Michael Baker:
I just wanted to ask, if I could, about the promotional environment. You talked about -- I think you were referring to potentially being more promotional. But is that in reference to anything you're seeing? And if I can just say one thing, where monitoring is -- department store inventories, which are up about 4% year-over-year, higher than they have been over the last couple of quarters. So is that giving you guys any pause to think that the promotional environment might be a little bit more intense over the coming quarters?
Barbara Rentler:
Yes, we do believe the promotional environment in Q2 will be much more aggressive than it was in Q1 based off the mixed sales results.
Michael Baker:
Right, okay, and so that's presumably in your guidance for the second quarter. Is that something that is also contemplated in the guidance for the full year?
Michael Hartshorn:
It is, Mike.
Operator:
The next question is from Laura Champine with Cantor Fitzgerald.
Laura Champine:
My question is really if you can update us on new store economics. On the new stores you're building this year for Ross and dd, how much do those cost? What do you think you'll see in first year sales? And what are the cash-on-cash returns from those new stores?
John Call:
Sure. In terms of the earnings [indiscernible], Laura, it hasn't changed that -- quite that much. Our CapEx is probably, given the mix of whether we take on a property we have to improve or whether you get a store that's already built out, on average, it's about $1.5 million. Working capital is another about $200,000. So if you take those economics, we get in our new stores lower volumes than our existing base, as one would assume. And as we roll out dd's a little more aggressively and enter the markets, the average volumes are probably in the 60s. You do that math. You get in-store returns in the mid-teens. You get a cash-on-cash return of right around 2 years.
Operator:
The next question is from Bob Drbul with Nomura.
Karyn O'Brien:
This is Karyn O'Brien filling in for Bob. I was just curious. Have you guys seen any material effects or underperformance in the regions more sensitive to the oil industry? You mentioned last quarter that you hadn't, but just curious if that -- if you'd seen any changes there.
Michael Hartshorn:
I would -- this is Michael. I'll answer that in terms of regional performance. As we mentioned on the call, the Midwest was the top-performing region, and that's been the case for the last year. In terms of our larger markets, which includes Texas, Texas and Florida were slightly above the chain, and California, our largest market, was in line with the chain.
Operator:
The next question is from Jeff Stein with Northcoast Research.
Jeffrey Stein:
Yes. Just a follow-up on that prior question. Within Texas, and I can't remember if you have any dd's locations in Texas, do the dd's -- and if you do, have those locations performed any differently than the Ross locations within Texas?
Michael Hartshorn:
No, they haven't. No, they haven't, Jeff.
Jeffrey Stein:
Okay. And I can't recall. I don't think you mentioned. Did Home underperform, perform in line or outperform apparel during the quarter?
Michael Hartshorn:
Home was slightly ahead of the chain, average.
Jeffrey Stein:
Slightly ahead. Okay, great.
Operator:
The next question is from Patrick McKeever with MKM Partners.
Patrick McKeever:
Question on the website and what you're doing with social media. Looks like there's been a recent redesign of the website. I could be wrong but looks different to me. So is that the case? And then with marketing, maybe you could talk through what you're doing with social media, Facebook and Pinterest, those kinds of things. And do you feel like what you're doing is having much of an impact on the business, particularly the Juniors business, which continues to be very strong?
Michael O'Sullivan:
Sure. So Patrick, we -- a few years ago, we started experimenting with social media, and now we actually -- we do allocate a portion of our marketing budget to those kind of media. And we've been pretty happy with the results, and you can expect to see more of that over time. What we like about social media is that the best marketing for us has always been word-of-mouth marketing. The customer finds a great bargain at Ross and then tells all her friends about it. And social media provides a way to sort of simulate that but to do it more extensively. So yes, so social media is certainly something we plan to do more of.
Patrick McKeever:
And the website, is that a redesign?
Michael O'Sullivan:
Yes. We recently redesigned the website, and we do that periodically every couple of years.
Patrick McKeever:
Okay. And then just -- I know we're talking 1 or 2 stores, but with some of the announcements that have come out of some of the department stores, including Macy's and I guess, today, there's talk about Kohl's opening a sort of a maybe not off-price concept but some kind of a concept, smaller store with deeply discounted product. So the question is, is that a -- as you think about that becoming perhaps a bigger part of retailing, some of the bigger players getting into off price or opportunistic buying and merchandising, is that a concern?
Michael O'Sullivan:
I think that we're happy that people want to grow the off-price category. If they want to grow each share of the off-price segment, probably at the expense of other retail formats, that would be fine. But we actually have -- we think we have quite a strong skill set and set of capabilities that put us in a pretty strong position, and we've always operated in a very competitive environment. We never take the customer for granted, and we know that if we can execute well on our off-price model and deliver great bargains for the customer, we'll do well no matter who the competition is.
Operator:
The next question is from Kimberly Greenberger with Morgan Stanley.
Kimberly Greenberger:
I'm wondering if you could help us with order of magnitude either on the transaction increase, driving your comp or a average dollar sale that it's sort of equally split or was one a bigger driver of the quarterly comp.
Michael Hartshorn:
Kimberly, the -- as we mentioned, the 5% comp was transactions, which is our proxy for traffic, and also an increase in the basket. Between those 2, it was fairly equal. The basket increase was mostly driven by units per transaction, but AUR was up just slightly.
Kimberly Greenberger:
Okay, excellent. And then I'm wondering if you can talk about the sort of cadence of wage increases that you're looking to make. Michael, you obviously talked about the move to $9 here in the second quarter. Are you contemplating a move in 2016 to $10? Or how are you sort of thinking about the wage environment?
Michael O'Sullivan:
Sure. So yes, we think the labor market is fairly dynamic, certainly, on a market-by-market basis, so we prefer to make wage rate decisions on a closer-end basis based upon what we're seeing in terms of the market trends. As we've said before though, we expect wage rates are going to move up over the next few years. I think you're seeing that in the press almost everyday. So it's certainly something that we expect that we're going to be talking more about as we get into our budget for 2016 and our longer term plans. And certainly, when we think talk about our earnings guidance next February, my guess, it'll be part of that discussion, too. But I should say that although we're expecting wage rate pressure, 2 things
Kimberly Greenberger:
Terrific. My last question is just on the $0.04 benefit here in Q1. It sounded like you're expecting the packaway to be sold throughout the next 3 quarters of the year. Does that mean that the $0.04 benefit here in Q1 just sort of gradually gets rents through the cost of goods sold line in Q2, 3 and 4? Is that how we should think about it?
Michael Hartshorn:
Kimberly, yes. At this point, packaway for us is really hard to predict, and it's based on what's available in the market. But our guidance assumes that it flows throughout the remainder of the year.
Operator:
The next question is from Anne-Charlotte Windal with Bernstein.
Anne-Charlotte Windal:
Was wondering if you could elaborate a little bit on the traffic trends you're seeing and what type of order of magnitude are you seeing in terms of increase in traffic. And then if you could also elaborate a little bit on any type of traffic-driving initiative that you are either implementing right now or like looking forward to implementing during the balance of the year, so from a marketing standpoint.
Michael Hartshorn:
As we mentioned on traffic, what we said was about 1/2 of the 5% comp was -- was traffic.
Michael O'Sullivan:
In terms of our initiatives to drive traffic, I think I would say our approach is the same as it ever was. You've heard us say this before. The most effective way for us to drive traffic is to have great bargains in the store. That means the customer will show up, and through word of mouth, more customers will show up. So there's nothing new that we're going to be doing that's different to drive traffic. It's more of the same focus on value.
Operator:
[Operator Instructions] The next question is from Marni Shapiro with Retail Tracker.
Marni Shapiro:
I'm sorry if I missed this. I have been hopping on a few calls. But you've a great temporary leader in place at dd's, and I was curious what kind of changes or things are happening there, let's say, you're implementing that you've seen any traction with. And also along the lines of dd's, are you seeing traffic to that website? And is it getting any kind of consistency?
Michael O'Sullivan:
Sure. So on dd's, first of all, we certainly are making some improvements and changes at dd's, but that's a business that we're pretty happy with how dd's has been performing over the past several quarters. So we're very confident in the long-term future of that business. So I don't think there's anything I would call out at this point in terms of changes that we're making. In terms of the website, the website, really, is informational. We are -- as you know, we don't have any commerce business. We do track traffic to our website, and over time, we've seen a growth in that traffic. But it is, I want to be clear, is an informational website rather than a e-commerce website.
Marni Shapiro:
Great. Are you seeing increased traffic? Is the brand building more awareness at all?
Michael O'Sullivan:
On, what, dd's, specifically?
Marni Shapiro:
Yes, dd's.
Michael O'Sullivan:
So yes, dd's growth of traffic both to the website and Facebook page and other areas of social media, we've seen quite significant growth in traffic targeting dd's across those different media.
Marni Shapiro:
Fantastic. And then just one follow-up also on dd's. As you go to the market for dd's merchandise, are you able to leverage the Ross power? Are you going in there and saying, look, this is Ross' little sister and potentially bigger sister, who knows, but this is Ross' little sister. And is that helping you to gain access to brands that maybe you might not have had access to?
Barbara Rentler:
I would say a little. On occasion where we think it's appropriate for the 2 teams to travel together, they'll travel together. But overall, really, dd's, at this point, is 150-some-odd stores. We have a pretty big pencil, and they go out, and they shop different resources, different vendors, and they do it on their own. But there is some slight overlap.
Operator:
There are no further questions. I will turn the call back over to Barbara Rentler.
Barbara Rentler:
Thank you for joining us today and for your interest in Ross Stores. Have a great day.
Operator:
This concludes today's conference call. You may now disconnect.
Operator:
Good afternoon, and welcome to the Ross Stores Fourth Quarter and Fiscal Year 2014 Earnings Release Conference Call. [Operator Instructions]
Before we get started, on behalf of Ross Stores, I would like to note that the comments made on this call will contain forward-looking statements regarding expectations about future growth and financial results, including sales and earnings forecasts and other matters that are based on the company's current forecast of aspects of its future business. These forward-looking statements are subject to 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 2013 Form 10-K, fiscal 2014 Form 10-Qs and fiscal 2014 and 2015 Form 8-Ks on file with the SEC. 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 Balmuth, Executive Chairman; Michael O'Sullivan, President and Chief Operating Officer; Gary Cribb, Executive Vice President, Stores and Loss Prevention; John Call, Executive Vice President, Finance and Legal; Michael Hartshorn, Senior Vice President and Chief Financial Officer; and Connie Wong, Director of Investor Relations. We'll begin our call today with the review of our fourth quarter and 2014 performance, followed by our outlook for 2015. Afterwards, we'll be happy to respond to any questions you may have.
As noted in today's press release, we are pleased with our fourth quarter sales and earnings, both of which were well ahead of our expectations as our value offering on a wide assortment of name brand bargains and gifts resonated well with our customers. Earnings per share for the fourth quarter increased 18% to $1.20, up from $1.02 in the prior year. Net earnings for the quarter grew to $249 million, up from $218 million last year. Sales rose 11% for the quarter to $3,033,000,000 with comparable store sales up 6% over the prior year. For the 2014 fiscal year, earnings per share grew 14% to $4.42, up from $3.88 in 2013. Net earnings in fiscal 2014 grew to $925 million on sales of $11,042,000,000 with comparable store sales up 3% for the year. Like Ross, same-store sales at dd's DISCOUNTS posted solid gains for the quarter and for the year as their customers responded favorably to dd's value offering. As a result, dd's DISCOUNTS was able to deliver another year of solid growth in ongoing operating profit in 2014. The strength in merchandise and geographic sales trends for Ross during the fourth quarter were relatively broad based. Juniors continue to be the best performing category for both the quarter and the full year, while the Midwest was the strongest region for both periods. Our fourth quarter operating margin rose 45 basis points to 13.1%, benefiting from slightly higher merchandise gross margin and leverage on expenses from our robust comparable store sales gain. In addition, operating margin for the full year increased 13% -- 13 points to 13.5%. As we ended 2014, total consolidated inventories were up 9% over the prior year while packaway levels were about 45% of total inventory compared to 49% last year. Average in-store inventories were down approximately 3% at the end of 2014. As noted in today's release, our board recently approved a new program to repurchase $1.4 billion of common stock over the next 2 years through fiscal 2016. This represents a 27% increase over the prior 2-year $1.1 billion program that was completed at the end of the fourth quarter. The board also recently approved an increase in the quarterly cash dividend to $0.235 per share, up 18% on top of an 18% increase in the prior year. The growth of our stock repurchase and dividend program has been driven by the significant amounts of cash our business generates after funding store expansion and other capital needs. We have repurchased stock as planned every year since 1993, and this is the 21st consecutive annual increase in our cash dividend. This consistent record reflects our unwavering commitment to enhancing stockholder value and return. Now Michael Hartshorn will provide further color on our 2014 results and details on fiscal 2015 full year and first quarter guidance.
Michael Hartshorn:
Thank you, Barbara. Let's start with our fourth quarter results. Our 6% comparable store sales gain was driven by a combination of higher transactions and an increase in the size of the average basket. As Barbara noted, fourth quarter operating margin grew 45 basis points to 13.1%. Cost of goods sold was flat to last year with merchandise gross margin increasing 10 basis points.
Occupancy levered by 15 basis points and freight declined by 10 basis points. Distribution expenses were also lower by 10 basis points due to the timing of packaway costs. These favorable trends were offset by a 45 basis point increase in buying expenses mainly driven by higher incentive and severance costs. Selling, general and administrative expenses improved by 45 basis points during the period mainly due to leverage on the 6% same-store sales increase. During the fourth quarter, we bought back 1.5 million shares of common stock for a total purchase price of $132 million, which completed our 2-year $1.1 billion stock repurchase program. For the year, we repurchased a total of 7.4 million shares for an aggregate price of $550 million. Let's turn now to our 2015 guidance. As noted in today's press release, while we hope to do better, we believe it's prudent to remain somewhat cautious in our outlook due to a combination of ongoing volatility in the macroeconomic and retail climates as well as our own tough multi-year comparisons. In addition, our 2015 guidance incorporates pressure on earnings from recent infrastructure investments we've been making to support our long-term growth. As a result, for fiscal 2015, we are forecasting earnings per share to be in the range of $4.60 to $4.80, up 4% to 9% from $4.42 in fiscal 2014. The operating statement assumptions for the full year in 2015 are as follows. Total sales are projected to grow 5% to 6% on a comparable store sales increase of 1% to 2%. We are planning to add about 70 Ross and 20 dd's DISCOUNTS locations. As usual, these numbers do not reflect our plans to close or relocate about 10 older stores. Operating margin for 2015 is projected to be 13.3% to 13.5% versus 13.5% in fiscal 2014. This reflects our plans for a slight increase in merchandise margin that is expected to be offset by some deleveraging on operating costs if same-store sales are up 1% to 2%. Net interest expense is estimated to be about $14 million, which includes the impact from our bond offering in last year's third quarter. Our tax rate is planned at 37% to 38%, and we expect average diluted shares outstanding to be about 204 million. Capital expenditures in 2015 are projected to be about $450 million, down from $650 million in 2014 when we purchased our New York buying office. Depreciation and amortization expense inclusive of stock-based amortization is expected to be approximately $340 million, up from $290 million in 2014. Let's move now to our first quarter guidance. For the 2015 first quarter, we are targeting earnings per share to be $1.21 to $1.26, up from $1.15 in the first quarter of 2014. Following are the assumptions that support this range. Total sales are projected to increase 6% to 7% over the prior year. This sales growth is based on our plans to open 32 new Ross and 5 dd's DISCOUNTS with same-store sales projected to increase 2% to 3% on top of a 1% increase in last year's first quarter. If sales are within this range, we would expect first quarter operating margin of 14.6% to 14.8% compared to last year's 14.6%. In addition, we're planning about $4 million in net interest expense in the first quarter. Our tax rate is expected to be in the range of 38% to 39% and weighted average diluted shares outstanding are estimated to be about 206 million. Now I'll turn the call back to Barbara for closing comments.
Barbara Rentler:
Thank you, Michael. To sum up, our ongoing ability to deliver compelling bargains on wide assortments of fresh and exciting name brand fashions for the family and the home resulted in another year of solid sales and earnings growth in 2014. For the balance of 2015, we will continue to focus on the initiatives that have driven our success over the past several years.
First, our top priority will always be delivering the best values possible to our customers. As a result, we will continue to make strategic investments in merchandising. The people and processes of this critical organization are key to gaining access to the most desirable name brand products available in the marketplace. Second, we will continue to operate our business with lean selling store inventory levels. Over the past several years, we have reduced in-store inventories by more than 40%, which has contributed to improved sales and gross margins. Again, in 2015, we are planning selling store inventories to be down slightly on top of these multiyear declines. And finally, we will continue to maintain tight expense control in our distribution centers, stores organizations and back-office functions. This has helped drive profitability while still enabling us to invest in the most vital areas of our business to support our long-term growth. We believe the ongoing execution of these initiatives will result in respectable sales and earnings growth in 2015 and beyond. At this point, we'd like to open up the call and respond to any questions you may have.
Operator:
[Operator Instructions] The first question is from Paul Lejuez with Wells Fargo.
Paul Lejuez:
Just wondering if you're seeing a pickup in product availability as a result of the port slowdown and if you're assuming the benefit on the merchandise margin side in your guidance. And then just second, separately, where are you from an AUR and basket size right now Ross versus dd's? And how does -- how do you figure that, that changes as you look to 2015 and beyond?
Barbara Rentler:
Okay, Paul, you have a few questions there. First question, port availability, there's been significant port availability and we see that continuing as we go into Q1. Whether the seasonality becomes packaway or flow remains to be determined. Benefit on the gross margin, it's hard to estimate what that would look like without knowing what it is that you're buying, so we feel that our guidance is appropriate for where we sit today. AUR and basket, I think...
Michael Hartshorn:
I'll take that one, Paul. So the basket for Ross is a little over $30. It's been like that for some time. Obviously, we had a benefit in the basket this year. In terms of AUR, Ross is a little over $10. For both of those, dd's is about 20% less than Ross.
Operator:
And the next question is from David Mann with Johnson Rice.
David Mann:
A couple quick questions. In terms of traffic, it looks like traffic is starting to pick up a little bit again for you. Can you just talk about what you're thinking about in terms of how you're driving improved traffic and the outlook for '15? And then my follow-up or other question would be, you've had a change in leadership, I guess, at dd's. The other executive left. Can you just give us some context of that if possible and what changes have happened?
Michael O'Sullivan:
Sure. So on your first question, David, traffic, yes, we've been very happy with how traffic has picked up over the last couple of quarters. In terms of plans to drive traffic, it's always the same with us. It's all about having the best merchandise in the stores. We found over time that's really the one thing that really stimulates traffic. In terms of dd's, what I'd say about dd's' is we're very happy with how dd's performed in the fourth quarter. Actually, its comps was in line with Ross, which is obviously very good, and we're very pleased with how that business is doing from a sales and a profitability point of view. We continue to see dd's as a chain that can grow to 500 stores or so. Now there has been a change of leadership at dd's as you mentioned. We have a very strong senior leadership team -- sorry, senior merchant team at dd's and for now they're going to be reporting to Michael Balmuth.
Operator:
The next question is from Lorraine Hutchinson with Bank of America Merrill Lynch.
Lorraine Maikis:
You have a number of infrastructure costs running through the P&L this year. Once those are lapped, are there other areas of investment that you expect? Or would you think that sales gains would flow through a bit stronger to the bottom line?
Unknown Executive:
Lorraine, on the infrastructure cost, we think that in the P&L for 2015, it's probably worth about between 20 and 30 basis points of EBIT. And obviously, there's the interest related to the bond that we offered to purchase in the New York buying office. So I think we are -- obviously based on the guidance we provided for 2015, we're working hard to find offsets of those costs. And once those are dialed in and we anniversary those costs, we won't be up against the same level of headwind.
Michael Hartshorn:
Lorraine, the only thing that I would add to that is because our last distribution center will open midyear, it will still have some drag as we move into 2016.
Operator:
The next question is from Marni Shapiro with Retail Tracker.
Marni Shapiro:
Can you just give us a quick update on the stores in the Midwest and plans to expand further? And Michael, did I just hear that you were taken from the CEO role back to chief merchant in charge of dd's? It made me laugh a little bit.
Michael O'Sullivan:
So Marni, we may not comment on the second point. But...
Marni Shapiro:
Fair enough.
Michael O'Sullivan:
On the first point, the Midwest, we're very happy with how Midwest performed in Q4 and actually throughout last year. Actually, over the last several quarters, the Midwest has been one of our top performing regions. If we step back a little bit, when we entered the Midwest 3 years ago, we said we are expecting to build a successful business there over time. And certainly, the recent progress has reinforced our confidence in that.
Marni Shapiro:
Was there a change in the way you're merchandising the stores? Or it's just building blocks and as it gained momentum it's going in the right direction?
Michael O'Sullivan:
No, I would say in the back half of 2013, we saw some opportunities for improvement in terms of merchandising and planning, and we executed on those at the end of 2013, and I think we saw the benefit of that during the course of 2014.
Michael Balmuth:
And Marni, this is Michael. Yes, you did hear correctly. I will do that in addition to my other responsibilities, and I hope I can be up to this task.
Marni Shapiro:
Well, welcome back. I might move back to 7th Avenue and sell you some goods. I promise you a good deal.
Operator:
The next question is from Daniel Hofkin with William Blair & Company.
Daniel Hofkin:
Just you may have itemized this a little bit at the beginning, but could you talk a little bit about some of the better and if there were any underperforming categories or at least categories that weren't quite as strong as the chain average? A little more detail on that in regional. And then just a follow-up question, if you could flush out maybe a little bit more on what the infrastructure investments are, and just any comment on certain other major retailers recently announcing planned wage increases. What's -- any view on that?
Michael Hartshorn:
Dan, it's Michael Hartshorn. I'll start with your sales question on regional performance. As we mentioned in our comments, the Midwest was our strongest region. Among our other regions, Texas was also very strong for us. California, our largest region, performed just below the chain. In terms of merchandise performance, actually performance is very broad based. We did mention Juniors. Again, it's our best performing category. In terms of infrastructure investments, if you recall last year, we purchased our New York buying office. We also opened a distribution center in the Southeast. So both of those had a headwind in the back half of last year. In addition, we are planning to open another distribution center midyear. So those investments taken together will have about 30 -- 25 to 30 basis points drag on earnings in 2015.
Michael O'Sullivan:
And Daniel, I think you were also alluding -- in the last part of your question, alluding to some of the recent announcements about wage rate increases. Obviously, those announcements are fairly recent. But we would expect that they will have an impact on wage -- on industry wage rates. Of course, they will. In fact, we'd expect the labor market will tighten up in general as the economy improves. We evaluate labor market trends over time and that will include looking at these recent announcements. And typically, we set rates on a market-by-market basis, and we'll certainly make adjustments to keep our wage rates competitive. It's very important that we continue to attract and retain great people. I should say that as we always do, if we do make changes, we'll look to mitigate the impact of any cost increases through reductions or productivity improvements elsewhere in the business. Just one final thought though, I think it's worth noting that rising wage rate is actually -- it's a good thing in the sense that it shows that the economy is picking up and suggest the consumer will have more money in their pockets. So it could have a beneficial impact to retail sales.
Operator:
The next question is from Anne-Charlotte Windal with Bernstein.
Anne-Charlotte Windal:
I was wondering what your outlook is at this point on the overall consumer health and the moderate income consumer in particular.
Michael O'Sullivan:
We're not economists. We're not trained experts in terms of what's likely to happen in the economy. But clearly, there are some positive signs. I think lower unemployment, lower gas prices, those are good things. But we have no way of knowing whether those trends will be sustained over time. So for us, given sort of what continues to be an uncertain environment, the best thing for us to do is to manage our off-price business to be as nimble and flexible as possible, which means planning and operating our business relatively cautiously especially at the start of the year, and then that gives us a chance to chase business if the sales trend ends up being stronger. So bottom line is we don't really know what's going to happen in the economy, but if we manage our business flexibly, we should do just fine.
Anne-Charlotte Windal:
I guess my question is also around, so obviously, you're seeing a pickup in traffic. And so do you think this is mostly driven by the fact that you have a very compelling assortment and value? Or do you think that's also -- is that the consumer in general is getting stronger?
Michael O'Sullivan:
It's always -- in retail, in our business, it's always about value. So I do think that our merchant team did a great job in the fourth quarter in particular in terms of putting great bargains in front of the customers. But that's certainly helped to the extent that the consumer's feeling better maybe because of gas prices or because of lower unemployment or for whatever reason. So I think it's kind of a combination of things.
Operator:
The next question is from Bob Drbul with Nomura.
Robert Drbul:
I guess the question that I have is, on the store expansion plan, are you seeing any heightened competition for locations in terms of leases and opportunities out there?
Michael O'Sullivan:
We continue to be pretty happy with the real estate availability that we're seeing. Obviously, we plan these things several years in advance, 2 to 3 years out. And we have a very strong real estate team, and we are very happy with the pipeline of locations that we're seeing.
Robert Drbul:
Got it. And I don't know if you went over this, but can you comment a little bit on the Home business in terms of the trends within Home and how you guys are executing that?
Barbara Rentler:
Our Home business, we were very pleased with the Home business in the fourth quarter. It was in line with the strong comps that the company had. I would say that basically, if you broke the Home business down into 3 buckets, we have various different levels of development. So in the decorative portion of our business, we're moving forward at a pretty good rate. In the bed and bath portion of our business, it's selling a little bit behind but we feel that we're moving in the right direction. And then in some of the other businesses, the one-off businesses that don't kind of fit into those main businesses, pet or things along those lines, we feel like we're moving in the right direction. So overall, our Home business starting from 2 years ago fourth quarter has been moving in the right direction. And in some businesses, it's just taking us a little bit longer than others, but we feel very confident in where we're going. We feel like we have a good vision and a direction, and we feel positive about it in '15.
Operator:
The next question is from Ike Boruchow with Sterne Agee.
Irwin Boruchow:
Just a quick one on dd's. I was curious, are you seeing continued margin expansion within that business? Could you talk about store productivity there? And then has anything you've seen over the last 12 or 24 months helped you when you kind of think about your ultimate long-term store target within that concept?
Michael O'Sullivan:
So Ike, yes, as I mentioned a little bit earlier, we were very happy with dd's sales performance in Q4 and actually throughout 2014. And along with that, the business also showed very solid gains in profitability. That's actually been a theme over the last few years with dd's, achieving solid sales gains and significant profit improvements. That expansion in terms of the operating profit has happened because we pursued very similar actions at dd's to what we've taken at Ross in terms of tight inventory control, tight expense control. So we're very happy with that performance. In terms of anything we've seen in the past year or so that's caused our outlook to change, no, nothing really. I think we put a figure out there a few years ago now of 500 stores that we thought dd's was capable of getting up to a 500 store number. It's currently 150. We opened around about just a little over 20 stores last year. We'll open a similar number this year. So we continue to be very positive about dd's' outlook.
Operator:
The next question is from Mike Baker with Deutsche Bank.
Michael Baker:
A couple of follow-ups. So you're planning on 20 to 30 basis points of expenses to run through the P&L this year. Can you remind us what it was in 2014? I know your initial guidance was that same 4% to 9%, but you came in significantly above that. So did the investment cost come in lower than the 20 to 30 basis points, which looks to be about $0.07 to $0.10 or so?
Michael Hartshorn:
No, it was -- Mike, this is Michael Hartshorn. It was in line with that 20 to 30 basis points. It was in the back half of the year, so you'd have to half that for the full year impact, but very similar to the back half of the year. Then I'd say remember, so in the first half of the year, we'll be anniversary-ing the investments we made in the third and fourth quarter of 2014 and then we're putting a new DC in midyear in 2015 that [indiscernible].
Michael Baker:
So I guess in that sense, the expenses are actually higher in 2015, if we're sort of taking just a half year in 2014 and a full year in 2015. Is -- am I thinking about that right?
Michael Hartshorn:
That's right, with the new distribution center.
Michael Baker:
Okay. And then one other follow-up, just on the wage discussion. Can I infer from your comments that a wage increase is not necessarily in your guidance right now, although it is something that you might contemplate and try to mitigate at some point in the year, not really in the guidance yet?
Michael O'Sullivan:
Well, there's some wage rate pressure in the guidance. Obviously, we operate in a number of states that have relatively high or increasing minimum wages. Obviously California being a prime example, so we built in those wage rate increases. But there could well be, for all the reasons people have -- for all the reasons you read in the papers, there could be more wage pressure ahead. That's certainly a risk and as I said, we'll look for ways to mitigate any of those increases.
Operator:
The next question is from Oliver Chen with Cowen and Company.
Oliver Chen:
Regarding the comp, could you give us a rough sense of the breakout between traffic and ticket? And in your guidance, is it mainly traffic driven in terms of what you're thinking initially?
Michael Hartshorn:
Oliver, sure. In terms of the comp, as we mentioned in our prepared remarks, the 6% comp was driven by a combination of higher transactions, which for us is our proxy for traffic, and an increase in the size of the average basket. The basket increase was mostly driven by an increase in units per transaction, but AUR was up slightly as well. And then in terms of how we think about the comp, we don't look at the breakout of traffic or transaction size. We just look for the overall number when we're doing [indiscernible].
Oliver Chen:
Okay. And just a broader question, bigger picture as you think about long-term growth drivers and how your consumer is moving. How do you think omni-channel and mobile will play out? I know your ticket isn't particularly elevated and shipping is a real consideration in terms of the economics. But is he or she have cross-shopping aptitude?
Michael O'Sullivan:
I think the answer is yes, I'm sure. We have quite a diverse customer base I'm sure. Many of our customers are cross-shopping. But I would say that the one thing that our customer -- the big driving factor with our customer is that they're looking for value. So as long as we can offer them great value, we'll do well in terms of capturing business for that customer. You made a couple of points about the ticket and delivery cost, et cetera. It's very hard for someone, a $10 average unit retail, to offer the kind of value that we offer in our stores.
Operator:
The next question is from Kimberly Greenberger with Morgan Stanley.
Kimberly Greenberger:
Barbara, you mentioned in your prepared remarks and in the press release that you're maintaining a sort of cautious outlook here in 2015. The fourth quarter was a 6% comp and 18% earnings growth is probably going to stand out as one of the very best in retail. Is there anything happening in your own business that's sort of giving you that cautious outlook? Or are you just looking out more broadly speaking across the retail landscape and believe this is the most prudent way to manage the business?
Michael O'Sullivan:
Actually, Kimberly, it's Michael, I'll answer that. It's really the second bucket that we look out over the landscape. We don't see anything specific, but the environment continues to be fairly uncertain and volatile in terms of the macroeconomy in the retail sector. And we have our own fairly tough multiyear comparisons that we're up against. So it's really those 2 main factors that cause us to be a little bit conservative. And as you've certainly heard us talk about in the past, we feel like managing our business conservatively works for us no matter what happens. If the market is weak or promotional, it allows us to protect earnings. If the market is stronger, we've shown, for example, in the most recent quarter, we've shown our ability to chase earnings -- to chase business.
Kimberly Greenberger:
Great. I just have a follow-up for Michael Hartshorn. Can you comment on new store productivity? It looks like the spread between sales, growth and comp growth would suggest a 75% to 80% new store productivity number. But if there's a better number I could use, that would be really helpful.
Michael Hartshorn:
Sure, Kimberly. That's actually a little high. I mean, as you can imagine, as we've grown our store base in the new markets and also grown the dd's brand, our new store productivity has come down a bit. It's in the range of 60% to 65% is kind of the current level for Ross. We don't talk about dd's. And the good news about that is as you can see from our Midwest performance, these newer stores tend to comp faster and turned up to be overall average.
Operator:
And the next question is from Roxanne Meyer with UBS Securities.
Roxanne Meyer:
Two questions for you. First, just wondering if you could comment on your 1Q comp guidance of 2% to 3%. It's obviously above your full year guidance and typical guidance, and I'm just wondering what you're seeing out there to give you that confidence. And secondly, I'm wondering if you could comment on your marketing strategy. Was there anything that you did differently that really helped you drive that 6% comp in the fourth quarter? Or anything new to talk about for your plans for 2015?
Michael Hartshorn:
Roxanne, it's Michael. In first quarter guidance, we wouldn't talk about trends as we enter the year. But suffice it to say that, that was our easiest compare for the -- versus last year.
Michael O'Sullivan:
And then Roxanne, on your question about marketing, no, nothing really changed here. Our marketing message and our marketing strategy is typically very consistent. It's all around we offer the best values, and nothing really changed in that regard in the last quarter.
Operator:
And the next question comes from Neely Tamminga with Piper Jaffray.
Kayla Berg:
This is Kayla Berg on for Neely Tamminga. Just wondering if you could give us any color on store performance by state. And specifically looking at Texas, have you guys seen any of an impact there with oil job loss?
Michael O'Sullivan:
Kayla, I think in Barbara's remarks, she pointed out that the top performing region was the Midwest. What I can tell you is Texas was pretty close behind that. So it was one of our top performing regions. So I guess the answer is no, we've seen no fallout from any of the oil and gas price declines in Texas.
Operator:
The next question is from Dutch Fox with FBR Capital Markets.
Dutch Fox:
I had 2 questions, one regarding the new stores you're opening. Should we think about those as fill-in stores? Are you exploring new markets? You mentioned that you're opening up a DC in the middle of '15. Would that be to support some new markets? Or is the stores you're building this year, is that more backfill in existing markets? And I'll follow up.
Michael Hartshorn:
Dutch, our supply chain network, our DCs -- all DCs shift to our stores, so there's no regional supply chain strategy for us. So the new DC will support actually the whole chain. And in terms of store growth, we'll continue to grow in existing markets. We'll continue to grow in the new Midwest region that we opened in -- that we entered in 2011.
Dutch Fox:
Okay. Great. And also, I noted in your prepared comments you said that the packaway was at 45%. And I may have misunderstood your commentary regarding the port strike. It made -- the packaway was down year-over-year. You made it sound like you're not quite seeing any disruption yet from the port or availability from the ports, but you possibly anticipated seeing it forward. Is that right?
Michael Hartshorn:
Just real quickly in terms of the numbers. So at the absolute packaway levels, we're actually flat to last year. The percentage was lower because we had a lot more in transit because of the port strike. So absolute packaway levels were actually flat with last year.
Barbara Rentler:
And we are seeing availability from the port. We saw it in the fourth quarter and we continue to see it now.
Michael O'Sullivan:
One other follow up to what Michael Hartshorn just said. Although total inventory levels were up, as Michael said, that was largely because inbound was up. If you look at average inventory per store, the selling inventory, it was actually down 3% on an average store basis.
Dutch Fox:
Okay. Great. And I guess just one last one, the $4.60 to $4.80, just to 100% clarify, that does not include any sort of wage rate, just to be perfectly clear on it. If you were to raise wages, that would impact the high end of that $4.80 that you guided to?
Michael O'Sullivan:
It does include wage rate increases that we know about, such as minimum wage increases such as California. It doesn't include further wage rate pressure. But then again, as I said in my early remarks, we may well look for ways -- we'll certainly look for ways to mitigate any expense increases that we may face because of further wage rate pressure later in the year.
Operator:
[Operator Instructions] The next question is from Howard Tubin with Guggenheim Securities.
Howard Tubin:
I'm just curious to know how you feel about the overall promotional environment as we enter the spring season, whether you see it as more aggressive than it was last year.
Barbara Rentler:
Well, I think what we're going to see in the promotional environment in 2015 is more of what we saw in the fourth quarter. I mean, it was a very aggressive retail environment, and we think that, that's going to continue into Q1.
Operator:
And the next question is from Dana Telsey with Telsey Advisory Group.
Dana Telsey:
As you think about the level of CapEx, which comes down a bit this year given the real estate last year, what is the -- where should we see a steady-state level of CapEx? Is 450 the right number? And how do you bucket the breakdown in CapEx and what it's spent on? And lastly, on the improvement in merchandise margin that you've been seeing, how do you see that going forward? Does it come from categories? Does it come from pricing?
Michael Hartshorn:
Dana, in terms of capital spending, 450 is a -- it's pretty decent baseline for future years. In terms of what -- how that breaks down, about 1/4 of that is for new stores, 1/4 is for remodels and in-store maintenance, 1/4 is for supply chain capital spend with our new distribution centers and other projects in the supply chain and 1/4 is technology and all other capital spend.
Operator:
The next question is from Patrick McKeever with MKM Partners.
Patrick McKeever:
A question on the weather in the fourth quarter and just I'm wondering if you think it had much of an impact one way or the other. It was pretty warm out west and a good -- across a good portion of your store base. And of course, it was colder in the Midwest and you had outperformance in that region, but wondering if there's anything notable there with the weather.
Michael Hartshorn:
Patrick, I'd say overall, weather wasn't a factor. I think we did get a benefit in January. We were up against pretty tough weather last year, but I think that's the only factor we saw in the quarter.
Patrick McKeever:
How about the earlier Easter? Is -- I assume that's in the guidance. Do you expect that to be a negative or not much of an issue?
John Call:
I'd say, in fact -- this is John. I don't think the early Easter is much of a factor. Weather clearly has a much more determined impact on the overall first quarter results than a shift in the Easter calendar.
Operator:
There are no further questions at this time. I will turn the call back over to Barbara Rentler for closing remarks.
Barbara Rentler:
Thank you for joining us today and for your interest in Ross Stores. Have a great day.
Operator:
This concludes today's conference call. You may now disconnect.
Operator:
Good afternoon, and welcome to the Ross Stores Third Quarter 2014 Earnings Release Conference Call. [Operator Instructions]
Before we get started, on behalf of Ross Stores, I would like to note that the comments made on this call will contain forward-looking statements regarding expectations about future growth and financial results, including sales and earnings forecasts and other matters that are based on the company's current forecast of aspects of its future business. These forward-looking statements are subject to 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 2014 Form 10-K and fiscal 2014 forms 10-Qs and 8-Ks on file with the SEC. Now I'd like to turn the call over to the company's Chief Executive Officer, Barbara Rentler.
Barbara Rentler:
Good afternoon. Joining me on our call today are Michael Balmuth, Executive Chairman; Michael O'Sullivan, President and Chief Operating Officer; Gary Cribb, Executive Vice President, Stores and Loss Prevention; John Call, Executive Vice President, Finance and Legal; Michael Hartshorn, Senior Vice President and Chief Financial Officer; and Connie Wong, Director of Investor Relations.
We'll begin with a review of our third quarter performance, followed by our outlook for the upcoming holiday season, after which, we'll be happy to respond to any questions you may have. As noted in today's press release, we are pleased with our better-than-expected performance in the third quarter. Our results benefited from our ongoing ability to deliver compelling bargains to our customers, which drove above-plan sales gains and strong merchandise gross margins. Earnings per share for the third quarter of 2014 were $0.93, up 16% from $0.80 in the prior year. Net earnings for the quarter were $193 million, up from $172 million last year. Sales rose 8% to $2,599,000,000, with the comparable store sales up 4% over the prior year. For the first 9 months of 2014, earnings per share were $3.22, up 13% from $2.86 for the same year-to-date period in 2013. Net earnings grew to $676 million, up from $619 million for the first 9 months of 2013. Sales increased 7% to just over $8 billion, with comparable store sales up 2% over the same period in 2013. Similar to Ross, same-store sales at dd's DISCOUNTS increased for the quarter and year-to-date periods, as their customers also responded favorably to dd's' value offering. Juniors and Home were the strongest businesses at Ross during the quarter, while the Midwest and Texas were the top-performing regions. Operating margin of 11.8% was up about 55 basis points over last year due to a 40-basis-point improvement in cost of goods sold and a 15-basis-point decline in selling, general and administrative expenses. Michael Hartshorn will provide additional color on these operating margin trends in a few minutes. As we ended the third quarter, total consolidated inventories were up 5% over last year, while packaway levels were 42% of total inventories compared to 45% at this time in 2013. Average in-store inventories were down 2% at the end of the quarter, and we continue to target selling store inventories for the balance of the year to be down 1% to 2%. We also completed our 2014 store expansion program during the third quarter. After closing some older locations at year end, we expect to end fiscal 2014 with 1,210 Ross and 152 dd's DISCOUNT locations for a net addition of 86 new stores this year. With respect to infrastructure investment, we closed on the purchase of our New York buying office property in September as planned, financing the transaction with proceeds from our recent public bond offering of $250 million. During the quarter, we also brought online a new distribution center in Rock Hill, South Carolina. While these investments create some expense headwinds in the short term, we are confident they will enhance our prospects for the continued profitable growth to our enterprise over the longer term. Now Michael Hartshorn will provide further color on our third quarter results and details on our guidance for the fourth quarter and the year.
Michael Hartshorn:
Thank you, Barbara. Our 4% comparable store sales gain in the third quarter was driven by a combination of slightly higher traffic and an increase in the size of the average basket.
As Barbara noted, third quarter operating margin grew 55 basis points to 11.8%. Cost of goods sold improved by 40 basis points, benefiting from a 55-basis-point increase in merchandise gross margin and a 5-basis-point improvement in distribution costs due to the timing of packaway-related costs. This was partially offset by a 10-basis-point increase each in freight and buying. Selling, general and administrative expenses improved by about 15 basis points during the period, mainly due to the leverage on the 4% same-store sales increase. During the quarter, we bought back 1.9 million shares of common stock for a total purchase price of $141 million. Year-to-date, we have repurchased a total of 5.9 million shares for an aggregate price of $418 million. We remain on track in 2014 to repurchase a total of $550 million in common stock, which would complete the 2-year, $1.1 billion authorization approved at the beginning of 2013. Let's now turn to our guidance for the fourth quarter. As noted in today's press release, for the 13 weeks ending January 31, 2015, we continue to project a 1% to 2% increase in same-store sales and earnings per share in the range of $1.05 to $1.09. This compares to $1.02 for the 13 weeks ended February 1, 2014.
For the fourth quarter of 2014, operating statement assumptions include the following:
Total sales are forecast to increase 5% to 6% on the previously mentioned 1% to 2% projected increase in same-store sales. If sales are within this range, we would expect fourth quarter operating margin to decline about 30 to 50 basis points to 12.2% to 12.4% on relatively flat merchandise gross margin with some deleveraging on expenses.
As previously mentioned, buying and distribution costs are forecast to increase as a percent of sales due to the acquisition of our New York buying office and the ramp-up of our new distribution center in South Carolina. In addition, we are planning about $2 million in net interest expense in the fourth quarter mainly related to our aforementioned bond offering. Our tax rate is expected to be 37% to 38%, and weighted average diluted shares outstanding are estimated to be about 207 million. Again, if the fourth quarter sales and margin perform in line with our forecast, then we project that earnings per share for the 52 weeks ending January 31, 2015, would increase 10% to 11% to $4.28 to $4.32. Now I'll turn the call back to Barbara.
Barbara Rentler:
Thank you, Michael. To sum up, our ongoing focus on delivering compelling bargains on name-brand fashions for the family and the home have driven respectable sales and earnings per share growth in the first 9 months of the year. It's important to note we achieved these gains in a very challenging climate for apparel retail, especially given the ongoing difficult and volatile macroeconomic backdrop that continues to especially pressure the low- to moderate-income customer.
Looking ahead, we are pleased with our assortments as we enter the important fourth quarter. Our merchants have done a terrific job of acquiring a wide array of exciting and sharply-priced name-brand fashions and gifts to appeal to today's value-driven shoppers. That said, we believe it is prudent to maintain a cautious outlook as we have all year, given continued uncertainty in the overall environment and the likelihood of an intensely competitive and promotional holiday season. To address these headwinds, we will stay focused on operating our business with lean selling store inventories and tight expense control. As always, our most important priority is our unwavering commitment to offering our customers the best bargains possible. We are confident that the investments we are making in infrastructure, people and processes will further strengthen our ability to deliver the value our customers expect. As we have said a number of times, consistently delivering on this mission will always be the key to maximizing our potential for future sales and earnings growth over both the near and the long term. At this point, we would like to open up the call and respond to any questions you may have.
Operator:
[Operator Instructions] Your first question comes from the line of Lorraine Hutchinson of Bank of America Merrill Lynch.
Lorraine Maikis:
I just wanted to ask about your fourth quarter merchandise margin guidance of flat. Is there an opportunity there, given the decline that you saw in the fourth quarter of last year on the gross margin line? And anything to call out as opportunities there?
John Call:
Lorraine, this is John. As Barbara mentioned, similar to how we've operated during the year, we are entering the quarter cautiously, optimistic that if things go our way, we can do better. So I wouldn't read anything into the -- in terms of how we have it planned flat. We think we do have some upside if we can operate into what looks to be a very, very competitive fourth quarter.
Operator:
Your next question comes from the line of Marni Shapiro of The Retail Tracker.
Marni Shapiro:
Can you just talk a little bit about -- we heard a lot of noise about the weather, and I know it's not something that's usually a big deal for you guys. But now that you're in the Midwest and we're coming up against a very cold third quarter of last year, can you think -- can you talk a little bit about the Midwest and how you're thinking -- how the third quarter was and how you're thinking about this winter versus last winter?
Michael O'Sullivan:
Yes, I guess -- Marni, it's Michael O'Sullivan. Let me cover that with 2 points. First of all, in terms of weather, weather can always be more or less favorable, especially at this time of the year going into the fourth quarter. Certainly, in the third quarter, weather really wasn't a factor. We don't know what's ahead of us in the fourth quarter from a weather perspective. In terms of the Midwest, more broadly though, we've been very happy with how we performed in the Midwest over the last few quarters. And I think we've mentioned almost a year ago that we were unhappy with some aspects of the Midwest, particularly the assortments. And we don't think those were -- those problems were caused by the weather. They were caused by internal issues in terms of how we plan those assortments. We've corrected those, so we're hoping to do better. And as we go into the fourth quarter, we'll have to find out whether those things have paid off or not.
Marni Shapiro:
Fantastic. And if you could just give us an update as well on the Accessories part of the business, any color around it?
Barbara Rentler:
The Accessories business, the first half of the year really struggled, but we saw in the third quarter that we've seen some improvements. It's still trailing the chain. We feel a little bit better about it in the fourth quarter, and we expect to be back on track by spring of '15.
Operator:
Your next question comes from the line of Paul Lejuez of Wells Fargo.
Paul Lejuez:
As you're thinking about growth, store growth for next year, I'm just wondering how you're thinking has evolved in terms of the optimal store size as you continue to grow both in existing and new markets. Have you thought any differently about what is the right size for any given store, considering that you've been able to take a lot of inventory out of the stores over the last couple of years?
Gary Cribb:
Sure, Paul, I'll take that. This is Gary. We have looked at our store prototype, and we have a very flexible model that allows us to take advantage of real estate opportunities as well as right sizes in any particular location.
Operator:
Your next question comes from the line of Laura Champine of Canaccord.
Laura Champine:
I'm just wondering if you can let us know how you assess that the promotional environment will be more competitive this Q4 than it was a year ago. Is it just the pace of the promotions? Or how do you look at your competitive set?
Barbara Rentler:
We are anticipating that the promotional environment will be much more aggressive. And we look at 2 things
Operator:
Your next question comes from the line of Daniel Hofkin of William Blair & Company.
Daniel Hofkin:
I guess, one question I would have would be, I know it's still somewhat early in this, but with gas prices coming down, how big a benefit do you think it was in the tail end of the quarter? And is that something that you think could be a potential source of upside in the fourth quarter if things kind of hold where they are right now, not assuming they continue to go down, but...
Michael O'Sullivan:
Yes. Daniel, I guess, conceptually, lower gas prices, in fact, anything that puts more money in the customers' pockets is a good thing. But it's very difficult for us to isolate a single variable like that, like gas prices. There are so many other factors, some good, like the decline in unemployment rates or the anniversary-ing of cuts in government programs; but some bad factors as well, like the increase in part-time work or the lack of wage growth for low-income workers. So we're not economists, so it's hard for us to sort of calibrate those things and trade them off against each other. So we really don't know to what degree gas prices helped or to what degree they'll help going forward.
Daniel Hofkin:
Okay. And then, can you talk about maybe some of the other regional performance? You talked about the best regions, what were -- if there were any regions that were below the chain materially. And same thing on the merchandise side in terms of the other categories that maybe performed not as well or better than average.
Michael O'Sullivan:
Sure. On the regions, as Barbara said in her remarks, the top-performing regions were the Midwest and Texas. Other than that, there were no other areas of regional performance that are worth calling out. And then on the -- in terms of businesses, our top-performing businesses were Juniors and Home.
Daniel Hofkin:
Okay. And then kind of by the same token, nothing else was materially different on the other direction?
Michael O'Sullivan:
That's right.
Daniel Hofkin:
Okay. And then would you -- I missed a little bit of the part where you discussed the gross margin, the components of the gross margin. Would you mind just repeating those quickly?
Michael Hartshorn:
Sure, Daniel. It's Michael. So for the quarter, merchandise margin was up 55 basis points, and that was offset by freight and buying, which is about 10 basis points each. And then distribution was slightly better due to the timing of the packaway.
Operator:
Your next question comes from the line of Randy Konik of Jefferies.
Randal Konik:
I guess my question is regarding the infrastructure and process improvements or investments you're making. You talked about some of the near-term expense headwinds. When do those headwinds lift? And what are some of the measurable benefits you expect to see from these investments? Is it things like stronger inventory turns? Or what should we expect in terms of the penetrated payout long term on those investments?
Michael Hartshorn:
So Randy, it's Michael Hartshorn. So the infrastructure investment, as we mentioned, there are really about 3 things
Randal Konik:
And can I ask you a follow-up then on the buying office?
Michael O'Sullivan:
Sure.
Michael Hartshorn:
Sure.
Randal Konik:
So do you expect to see any measurable change in the number of vendor partners you're using over the next 5 years? Or kind of how should we think about the sourcing side of the business over the next 5 years and how that may change or not change?
Barbara Rentler:
We're always looking to increase our vendor base, and so that's why we continue to invest in the merchant organization, so that they can go out and build relationships to get better access to closeout and to add additional resources. So we expect it to grow.
Operator:
Your next question comes from the line of Kimberly Greenberger of Morgan Stanley.
Kimberly Greenberger:
Michael, just a couple of questions for you. Did you receive any benefit in the third quarter from your physical inventory in margin? Also, you mentioned that traffic was up slightly in the quarter. It sounds like you saw a bigger increase in the average basket. Is that coming from the average unit retail price or units per transaction? And then for Barbara, I'm wondering if your buying team is starting to see any inventory dislocation from the disruption of goods flowing through the port? And if not yet, do you think that might be an opportunity for inventory acquisition in the future?
Michael Hartshorn:
Kimberly, on shortage, so like last year, our physical inventory results were very similar to our ongoing shortage accrual, so there was no impact of a true-up during the quarter when we took the physical inventory. Our results, again, improved on top of historically low levels, so we're very happy with the progress we've made there. In terms of the composition of comp, as we mentioned in the remarks, our comp was up 4%, driven by a slight increase in transactions and a higher basket. The basket increase was entirely driven by higher units per transaction as AUR was flat to last year.
Barbara Rentler:
And as it pertains to inventory from the port, it's hard to tell. There is -- it's a buyers' market. There's a lot of merchandise in the market right now to buy. It's hard to differentiate if it's from the port or not. But what I would say is that whenever there's a disruption like that in the marketplace, it definitely leads to supply. So you would expect that we would see supply sometime at the end of this year and into the beginning of next year.
Operator:
Your next question comes from the line of Jeff Stein of Northcoast Research.
Jeffrey Stein:
A question on dd's. So I'm wondering, are the same factors that are driving your performance at Ross also driving dd's with respect to traffic transaction? And also maybe you can just talk a little bit about some of the category performance there.
Michael O'Sullivan:
Sure. Jeff, as you know, we don't disclose dd's financials separately. It's just not material to the overall corporation. But in broad terms, as Barbara mentioned in her remarks, dd's comp performance was strong in the third quarter, so we're very happy.
Jeffrey Stein:
Any comment -- can you comment at all, Michael, on category, just category performance at dd's?
Michael O'Sullivan:
No. We typically don't break that out separately for the dd's business.
Jeffrey Stein:
I see. And then finally, can you just talk a little bit about your trend, your business trend during the third quarter? Was it fairly even throughout the quarter? Or did it get better or worse towards the end of the quarter?
Michael Hartshorn:
Sure. This is Michael again. Sales ran ahead of plan for us throughout the quarter. The strongest months were August and September when we -- when the back-to-school customer was motivated to shop. The trend slowed a bit in October with warmer weather.
Jeffrey Stein:
Great. And Michael, CapEx for next year, do you have any thoughts?
Michael Hartshorn:
At this point, we wouldn't talk about next year. It will come down, though, based on the infrastructure investments we made this year.
Operator:
Your next question comes from the line of David Mann from Johnson Rice.
David Mann:
A question about the SG&A line. I'm just curious, with the 4% comp, anything that held you back about leveraging that operating expense number a little bit more, which might have been expected on such a good comp?
Michael Hartshorn:
David, it's Michael, again. So I think what we said longer term is that we usually lever around a 3% comp. So with the 4% comp and 15-basis-point improvement, it's about in line with that longer-term model. It is a bit worse than the second quarter. But as a reminder, we had about a 20-basis-point benefit from a legal matter in the second quarter.
David Mann:
And then in terms of inventories at the store level, what's your latest thought process about any ability to take those inventories down further?
Michael O'Sullivan:
Yes. David, as you're aware, we've taken inventories down very aggressively over the last several years, something in the order of 40%. We continue to shave inventories and trim them where we can. At the end of the third quarter, inventories were down 2%. We're expecting them to be down another point or 2 at the end of the fourth quarter. And then we're putting our plans together for next year.
Operator:
Your next question comes from the line of Ike Boruchow of Sterne Agee.
Irwin Boruchow:
Two quick ones, I guess. I know you've already talked about this, but the merchandise margin increased 55 basis points, so sequentially better than Q2. I'm just curious, I guess, Michael, if you could just dig in what exactly helped drive the sequential improvement in the year-over-year margin gain. And also, it doesn't look like you bought back any stock in Q3. I can't remember the last time you guys didn't buy back stock in the quarter. Was there a reason for that or just a timing thing? Just curious there.
Michael Hartshorn:
So first on the stock, we did buy back stock during the quarter. We bought it back sequentially, pretty similar to what we bought back in the first half of the year by quarter. So -- and then on margin gains, the improvement during the quarter was a combination of faster turns and lower inventory, and also our ability to take advantage of the buying opportunities in the marketplace, which customers responded favorably to. So a little bit of markdowns and a little bit of markup drove the margin performance.
Operator:
Your next question comes from the line of Dana Telsey of Telsey Advisory Group.
Dana Telsey:
Can you give an update on the planning and allocation at the more local level and what you're seeing there? How is that going? And then as you think broadly about improving sales productivity over the next few years at dd's and at core Ross, where should it come from? And how do you think of the size of the box?
Michael O'Sullivan:
Okay, Dana. It's Michael O'Sullivan. I'll take the first part of your question about more local planning and allocation. As you know, we've rolled out a fairly major program, micro-merchandising, about 3 years ago. And the idea of that, the intent was that we would be able to plan and trend our business at a more detailed level, a more local level. It's impossible for us to isolate the impact just of micro-merchandising, but certainly, it's been a major enabler of our ability to reduce inventories over the last several years by making sure that we have the right product in the right place at the right time.
Dana Telsey:
Okay. And then sales productivity?
Michael O'Sullivan:
Sorry, what was the second part of your question, Dana?
Dana Telsey:
On the sales productivity, where do you think -- what is an optimal sales per foot for dd's and for Ross? And what drives it there? Is it new categories? Is it tickets?
Michael O'Sullivan:
At a high level, I think what really drives our sales productivity is having the best values we can in the store. And we -- all the time, we're looking at across different categories, different areas of merchandise, even new categories to see whether we can drive additional productivity. That's kind of the ongoing program.
Operator:
Your next question comes from the line of Mike Baker from Deutsche Bank.
Michael Baker:
So my question is, how do you guys think about what's going on with department stores and how that impacts your business? One thing we've seen this quarter, and even last quarter, is that department store inventories are in much better shape and their gross margins look better. Does that raise the pricing umbrella for you guys, making it easier for you to operate and not have to discount as much? Conversely, I guess, one risk might be that there's less product available. Although I think if you're getting less from department stores, you're getting more from vendors. How do those dynamics play out?
Barbara Rentler:
Well, I would say there's a few things, Mike. One, first of all, in terms of availability, there is a lot of products in the marketplace. In terms of department stores versus how they price, we really look at the value. So we look at where they are in pricing versus where we need to be in pricing so that we offer the customer great branded bargains. And so that's really how we kind of -- how we look at it. Their level of inventory...
Michael Baker:
Right. And so...
Barbara Rentler:
I'm sorry, their level of inventory and how they promote usually increases with their level of inventory, traditionally.
Michael Baker:
Right. So I guess that's the question. Their inventories have actually -- the year-over-year growth inventory is as low as it has been in 5 or 6 quarters, so I would suspect that they're not promoting as much. And then because of what you just said and because of that, I would think that you wouldn't have to promote as much. Has that had any impact in your business this quarter or do you think it might going forward?
Barbara Rentler:
So actually, Mike, they have promoted significantly this quarter, both in -- most department stores, particularly the mid-tier. And so there's been heavy promotions that have gone on this quarter, and we're expecting that to have -- to continue into the fourth quarter. Actually, we're expecting that to get even more promotional. We don't promote, so we're in an everyday-value business, so we have to anticipate where we think they're going to be, and then set our values based off of where we think they're going to bench their promotions. But in Q3, they absolutely promoted, and we are anticipating them to be even more aggressive in Q4.
Operator:
Your next question comes from the line of Roxanne Meyer from UBS.
Roxanne Meyer:
My question is about Home. I'm just wondering how far above the chain did Home perform? And can you talk to the areas of Home maybe that led in performance and whether there's still opportunity for some niches within Home to still ramp up?
Barbara Rentler:
We were very pleased with our performance in Home. It was a better-than-expected performance. We feel the merchants really did a fine job of delivering exciting, great products at great values. In terms of what areas performed in Q3, I really -- don't really think it's appropriate for me to talk through that. What I can tell you is that in Q4, we're very focused on gifts and home. And I would say our Home performance was better than the chain in terms of measurement.
Operator:
Your next question comes from the line of Richard Jaffe of Stifel.
Richard Jaffe:
And I know you've talked about the opportunities out in the marketplace, and I'm wondering if you could just comment further on that. The port strike seems to have -- or the slowdown in the Port of Los Angeles seems to have provided some opportunities, particularly not only for this season, but for packaway. I'm wondering how you're thinking about those opportunities and if you might get more aggressive, given what might be the unique nature of some of the opportunities this year.
Barbara Rentler:
Well, Richard, the way we look at that is, packaway is really -- it is opportunity. So we look at each deal on a deal-by-deal basis. So we don't go out and say we want to raise our packaway levels or contract our packaway levels. The merchants are really out in the market, constantly shopping to see what becomes available. And if the port could become available a little bit sooner than later, some we would slow this quarter, some we would move into '15, depends when we get them. But really, the science to it is it has to be a terrific brand to great value to put it into packaway so that the customer really feels good about it when it comes out the following season.
Richard Jaffe:
So even though you've operated in a pretty tight parameter of packaway, sort of 38% to 42% roughly, you wouldn't, given the circumstances, allow that to increase should circumstances, as you describe them, prevail?
Barbara Rentler:
There's no target number up or down. Packaway is really the result of what's available and how great the bargain is. So if we found packaway that was terrific, that we could -- and the number would go above 42%, that would be fine. And when it drops, sometimes that's based on the quality of products that we see. It moves -- it's kind of a moving target. It really becomes -- it really goes to the value of the product and what we see, and when we bring it back out to the customer, will she appreciate that.
Operator:
Your next question comes from the line of Bob Drbul from Nomura.
Robert Drbul:
I guess the 2 questions that I have, can you just give us an update on your thoughts around the Internet and e-commerce? And any potential interest internationally?
Michael O'Sullivan:
So Bob, so on e-commerce, we've looked at e-commerce a number of times. We continue to monitor what's happening in terms of e-commerce, but we don't have any plans to launch an e-commerce business at this point. We operate a $10 average unit retail business, and we just -- every which way we've looked at it, we just don't see how there's an economically sustainable model at that kind of price point. There may be at a much higher price point, but then you're no longer in the moderate off-price business. So we don't plan to pursue e-commerce at this point. And in terms of international, no, no plans at this point to launch an international business.
Robert Drbul:
Got it. And on a category basis, can you talk a little bit about how you're positioned on outerwear heading into the fourth quarter?
Barbara Rentler:
Sure. Our outerwear business, we plan outerwear and seasonally sensitive products in Q3 pretty conservatively. As we get into Q4, we plan it specifically by region. So from what we gather from micro-merchandising, which tells us which regions and what types of products, we take that along with the merchant instinct and what we see in the market. But overall, we feel that outerwear is an opportunity for us as we go forward.
Operator:
Your next question comes from the line of Mark Montagna of Avondale Partners.
Mark Montagna:
A question about gift giving versus last year. I'm wondering, did you place a bigger emphasis on gift giving this year? I think that's what you had mentioned on the last call. Is that across all categories? Or is it primarily in the Home category?
Barbara Rentler:
Yes, we have increased gift giving this year. It is primarily in Home, but it does go across Apparel also and other categories, whether it's in sweaters or tops or men's fleece or across the board.
Mark Montagna:
Okay. And then just back to the outerwear question. Did you bring it in earlier this year versus last year? Or -- I'm just curious how it anniversaries versus last year.
Barbara Rentler:
Seasonally sensitive products in Q3, we traditionally plan conservatively. And if it sells -- since October is kind of a dicey month, if it sells, we go out and we chase it, or we pull up packway if we have packaway goods available. So -- I'm sorry?
Mark Montagna:
Yes, I'm referring more to Q4.
Barbara Rentler:
Oh, to Q4?
Mark Montagna:
Yes.
Barbara Rentler:
We feel pretty good about outerwear. We have -- listen, outerwear is one of the areas where we are finding our way and learning as a company, especially as we move into these colder regions. So our strategy for outerwear this year was really to expand the assortment and to try to really get the regionality correct of heavyweight versus mid-weight. So we feel pretty good about it.
Operator:
Your next question comes from the line of Patrick McKeever from MKM Partners.
Patrick McKeever:
Question on new store productivity and just new stores in general, since you continued to open 80 to 90 stores. So the question is -- and maybe you could just provide some general commentary around your new store performance. The way I look at it, the new stores are doing about 70% or so of a mature store volume in their first year. So just wondering if that's accurate, and what you're seeing on the real estate front, those kinds of things.
Michael Hartshorn:
So in terms of new store productivity, as we've entered the new markets, they have fallen a bit as expected based on customer recognition in those markets. In terms of how they're performing versus our plans, we're pleased with the performance as they've actually run ahead of our initial plans.
John Call:
Say, Patrick, your calculations are about right.
Patrick McKeever:
Okay. And then on real estate, any changes in terms of what's out there? I mean, I've heard from a few retailers that the commercial real estate market is tightening up a little bit here as the economy continues to improve. Are you seeing that in the locations that you're targeting as well?
Michael O'Sullivan:
Well, I would say, Patrick, we're happy with the availability of real estate locations that we're looking at. We have a very strong real estate team, and they're pretty well networked. So we don't see any major issues in terms of real estate availability at this point.
Operator:
Your next question comes from the line of Stephen Grambling of Goldman Sachs.
Stephen Grambling:
So just a follow-up on one of the questions that was asked earlier on CapEx next year. Can you just remind us of some of the buckets of incremental spending that you had over the past couple of years? And then, I guess, as a follow-up to that, what's the capacity that you have for packaway at this point?
Michael Hartshorn:
In terms of CapEx, Stephen, so a base level without the infrastructure investment is somewhere around $400 million to $450 million. This year, we're projecting it to end about $700 million, and that includes the New York buying office for about $222 million and $150 million of DC infrastructure. And Stephen, if you go back to 2012, you can look at base levels there. We added -- '13, '14, we started building DCs. They'll complete in '15.
Michael O'Sullivan:
And on the last part of your question, Stephen, on packaway capacity, we operate a pretty flexible distribution infrastructure in terms of storage. So packaway capacity is really not a gating factor in terms of how many -- what the packaway balance can go to.
Stephen Grambling:
Great. And one other follow-up, if I may. Your plans for, I mean, not necessarily e-commerce, but just digital as a strategy into the holiday or any other things that you're doing differently as you've described a more -- as you're anticipating a more promotional environment.
Michael O'Sullivan:
Yes. Not a lot of new news in terms of marketing. We have over the last several years devoted more and more of our marketing budget to digital. We see digital as a good sort of proxy for word-of-mouth, which is kind of something we've always relied on very heavily, that the customer will spread sort of the -- will talk about the great deals they've gotten at Ross with their friends. And we see digital as a way of doing that. So we're doing more of that this year, but other than that, nothing else significant to call out.
Operator:
There are no further questions in the phone lines at this time. I would now turn the call back to Barbara Rentler.
Barbara Rentler:
Thank you for joining us today and for your interest in Ross Stores. Have a great day.
Operator:
This concludes today's conference call. You may now disconnect.
Operator:
Good afternoon, and welcome to the Ross Stores Second Quarter 2014 Earnings Release Conference Call. [Operator Instructions]
Before we get started, on behalf of Ross Stores, I would like to note that the comments made on this call will contain forward-looking statements regarding expectations about future growth and financial results, including sales and earnings forecasts and other matters that are based on the company's current forecast of aspects of its future business. These forward-looking statements are subject to 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 2013 Form 10-K and fiscal 2014 Form 10-Q and 8-Ks on file with the SEC. Now I'd like to turn the call over to Barbara Rentler, the company's Chief Executive Officer.
Barbara Rentler:
Good afternoon. Joining me on the call today are Michael Balmuth, Executive Chairman; Michael O'Sullivan, President and Chief Operating Officer; Gary Cribb, Executive Vice President, Stores and Loss Prevention; John Call, Executive Vice President, Finance and Legal; Michael Hartshorn, Senior VP and Chief Financial Officer; and Connie Wong, Director of Investor Relations.
We'll begin with a brief review of our second quarter and year-to-date performance, followed by our outlook for the second half of fiscal year. Afterwards, we'll be happy to respond to any questions you have. As noted in today's press release, second quarter sales performed at the high end of our expectations, as today's value-focused consumers continue to respond to our wide assortment of competitive name-brand bargains. Merchandise gross margin was above plan, which, coupled with strong expense control, enabled us to deliver quarterly earnings per share that were above the high end of our guidance. Earnings per share for the 13 weeks ended August 2, 2014, increased 16% to $1.14, up from $0.98 in last year's second quarter. Net earnings for the period grew 12% to $239.6 million. Second quarter 2014 sales rose 7% to $2.730 billion, with comparable store sales up 2% on top of a 4% gain in the prior year. For the 6 months ended August 2, 2014, earnings per share grew 12% to $2.30, up from $2.06 last year. Net earnings year-to-date rose 8% to $483.5 million, up from $447.7 million last year. Both the quarter and first 6 months results include a onetime benefit to earnings equivalent to approximately $0.02 per share from the favorable resolution of an outstanding legal matter. Sales for the first 6 months of 2014 increased 6% to $5.410 billion with comparable store sales up 2% on a consolidated basis versus a 3% gain in the same period last year. Same-store sales at dd's DISCOUNTS also increased for the quarter and year-to-date periods, driving solid gains in its profits. The strongest merchandise category for the quarter at Ross was Juniors, while the Midwest and Mid-Atlantic were the top-performing regions. For the second quarter, earnings before interest and taxes grew to a record 14.3% of sales, up from 13.6% last year. This increased level of profitability was driven by a 25 basis point improvement in cost of goods sold, mainly due to a higher merchandise gross margin and a 45 basis point decline in selling, general and administrative expenses, which benefited from tight expense control and the resolution of the aforementioned legal matter. As we ended the second quarter, total consolidated inventories declined about 5% compared to the prior year, with average in-store inventories down about 2%. Packaway was 43% of total inventory compared to 46% for the same period last year. Our expansion program remained on track in the first half with the opening of 53 new Ross and 14 dd's DISCOUNTS. We continue to target about 95 new locations for the full year in 2014, comprised of approximately 75 Ross and 20 dd's DISCOUNTS. Now Michael Hartshorn will provide further color on our second quarter results and details on our second half guidance.
Michael Hartshorn:
Thank you, Barbara. The 2% comparable store sales gain in the second quarter was mainly driven by the growth in the size of the average basket, with the number of transactions flat to last year.
As mentioned earlier, operating margin grew by about 70 basis points in the quarter to a record 14.3%. A 25 basis point improvement in cost of goods sold was mainly driven by higher merchandise margin, which grew by about 35 basis points over last year. In addition, freight and buying costs improved by about 10 and 5 basis points, respectively. These favorable results were partially offset by a 15 basis point increase in distribution costs and about 10 basis points of deleveraging on occupancy. Selling, general and administrative costs improved by about 45 basis points due to tight expense control and an approximate 20 basis point benefit from resolution of the aforementioned legal matter. During the second quarter, we repurchased 2.1 million shares of common stock for a total purchase price of $139 million. Year-to-date, we have bought back a total of 4.1 million shares for an aggregate price of $277 million. We remain on track in 2014 to buy back about $550 million in common stock, which would complete the 2-year $1.1 billion authorization approved at the beginning of 2013. Let's now turn to our second half guidance. For the 13 weeks ending November 1, 2014, we continue to project same-store sales to increase 1% to 2% and are forecasting earnings per share to be in the range of $0.83 to $0.87, up from $0.80 in last year's third quarter. For the 13 weeks ending January 31, 2015, we are also planning same-store sales to be up 1% to 2%, with earnings per share projected to be $1.05 to $1.09, up from $1.02 for the 13 weeks ended February 1, 2014. As a reminder, our second half guidance incorporates interest and occupancy costs associated with the acquisition of our New York buying office and the opening of our new distribution center in Rock Hill, South Carolina. Now I'll provide some additional operating statement assumptions for our third quarter EPS targets. Total sales are expected to grow about 5% to 6%, driven by a combination of new store growth, and as previously mentioned, same-store sales that are forecasted to be up 1% to 2%. We plan to open 28 new stores during the period, including 20 Ross Dress for Less and 8 dd's DISCOUNTS. We are targeting operating margin to decline 10 to 30 basis points versus last year. Net interest expense for the third quarter is planned to be about $2 million. Our tax rate is expected to be 36% to 37% and weighted average diluted shares outstanding are estimated to be about 208 million. Moving to our outlook for the full year. We are now projecting earnings per share for the 52 weeks ending January 31, 2015, to be in the range of $4.18 to $4.26, up from $3.88 in fiscal 2013. Now I'll turn the call back to Barbara for closing comments.
Barbara Rentler:
Thank you, Michael. To sum up, our ongoing focus on delivering compelling values on name-brand fashions for the family and the home throughout our stores drove respectable sales increases and solid earnings per share growth in the first half of the year.
We also achieved these gains in a very challenging climate for apparel retail, especially given the ongoing difficult macroeconomic backdrop that continues to pressure our customers' discretionary spending. Looking ahead to the second half, we will continue to offer our customers competitive discounts on wide assortment of desirable merchandise, while also running our business with lean selling store inventories. As an off-price retailer, we have the flexibility to buy closer to need and will continue to stay very liquid with plenty of open-to-buy to take advantage of the great opportunities we expect to see in the marketplace over the balance of the year. We remain confident in the resilience of our off-price business model and our ability over time to successfully execute the proven strategies that have enabled us to deliver solid financial results even in challenging climates. To provide the foundation we need to maximize our growth over the longer term, we will continue to invest in important infrastructure assets, such as new distribution centers and the purchase of our New York buying office. Our most important focus is, and always will be, our unwavering commitment to offering shoppers the best bargains possible. We are confident that the ongoing investments we are making and our merchandise organizations, people and processes will further strengthen our ability to deliver the value our customers expect. Consistently delivering on this mission will always be the key to optimizing our potential for future sales and earnings growth. At this point, we would like to open up the call and respond to any questions you might have.
Operator:
[Operator Instructions] Your first question is from Brian Tunick with JPMorgan.
Brian Tunick:
I guess, Barbara, curious on your comments about the Juniors category. I know it's been a standout now for at least a year or 2. But wondering what other categories you also are excited about and you see as an opportunity to drive comps in the back half. And then on the flat traffic result -- and I know, obviously, also coming off a couple of years of strong results. But can you maybe highlight in addition to marketing maybe what are some other things that you and the organization are looking at in order to improve on the flat traffic numbers?
Barbara Rentler:
First, let me start with the comments on Juniors. Yes, our Juniors has been one of our strongest business for years. I would also say that we feel pretty strongly that we're making great progress on our home business. We have, really, in the second quarter progressed in our assortments, and we -- excuse me, just a second. We're moving in the right direction. We stabilized our leadership, and we've identified some ideas to attack the business. So in the second quarter, home ended in line with the chain, but the sales progressed as the quarter progressed. We're actually feeling pretty positive about home for the back half and for gift-giving, and we feel that there's really more to come in that business.
Michael O'Sullivan:
And then Brian, on the second question about traffic, as Barbara mentioned in her remarks traffic levels were flat in the second quarter versus last year. In terms of what we're doing to stimulate traffic -- mainly, our focus is always to improve the assortments. We find that's always the most effective way to drive traffic [ph]. So basically, the things that Barbara just highlighted, Juniors, home, et cetera, those are really going to be the things that stimulate traffic in our stores.
Operator:
The next question is from Bob Drbul with Nomura Securities.
Robert Drbul:
I guess, the question that I have is with the Midwest performing at the top of the chain right now, does that impact your geographic plans for the region? And can you comment a little bit more about the -- some new store opening and how the new store productivity are tracking?
Michael O'Sullivan:
So Bob, yes, as Barbara has said in her remarks, we're very happy with how the Midwest performed in the second quarter. It's actually the second quarter in a row where the comp performance has been pretty good. Now I would caution you, in 2013, we were not happy with the trend in the Midwest, and we made some changes to the assortments. So those changes have started to pay off, and that's why we are seeing the performance we are seeing. However, we are now going into the back half of the year. The weather obviously gets cooler, and cold weather assortments are very important in that region. So we're going to need to get that right, and we're focused on that. In terms of new stores more generally, we're pretty happy with how new stores are opening. And I would say that's been true for the last couple of years. Our new store productivity has been very good. We've been very happy with it.
Operator:
The next question is from Ike Boruchow with Sterne Agee.
Irwin Boruchow:
Question about the inventory packaway about 3 points lower year-over-year. Is there anything more to that in terms of the buying that you -- that transpired during the quarter, the buying environment? Anything you could share?
Barbara Rentler:
Well, what I would say is that in the second quarter, we really kept ourselves liquid, and we were able to flow a lot of the great deals that we got and pass along the bargains to the customer.
Operator:
The next question is from Daniel Hofkin with William Blair & Company.
Daniel Hofkin:
Question, I guess, just about the second half guidance a little bit, and not so much on the comps, but the margins that you're expecting. You just had a quarter where, obviously, some of it was the legal settlement but still a nice improvement in the -- both the gross margin and SG&A. So just wondering, aside from the 1 to 2 comp versus the 2 that you just reported, what would make the operating margin decline 10 to 30 in the third quarter? Is that just conservatism? Or are there some other factors there related to some of the investments that you're making?
Michael Hartshorn:
Dan, in terms of the back half guidance, what we said in the comments is the infrastructure investments, we're making the opening of a new [indiscernible] purchase of the New York buying office. Those, along with the legal settlement in the second quarter, that obviously won't repeat in the second half. These represent the difference between the first half EPS growth and the high end of the second half guidance. In terms of EBIT margin impact, the infrastructure investments represent roughly 30 basis points of EBIT margin, along with the additional interest costs to finance the New York buying office.
Daniel Hofkin:
Okay. And can you just remind us again kind of how that infrastructure -- okay, so 30 basis points, that's within the third quarter alone?
Michael Hartshorn:
Third and fourth quarter.
Daniel Hofkin:
Okay, pretty similar over the back half overall.
Michael Hartshorn:
Yes. A little bit more in the fourth quarter because we open the DC in mid-quarter and finance the New York buying office mid-third quarter.
Daniel Hofkin:
Okay. And then could I ask you to just provide a little more color on other categories and the regional performance?
Michael Hartshorn:
Sure. During the quarter, Juniors was the strongest performer. Accessories trailed the chain for us in terms of merchandise categories. Geographically, the Midwest and Mid-Atlantic were the strongest, and Pacific Northwest trailed the chain, due in part to the strong comps in 2013, when they were one of the strongest performing regions.
Operator:
The next question is from Stephen Grambling with Goldman Sachs.
Stephen Grambling:
Just a follow-up on the guidance question. It looks like you are anticipating a bit of a slowdown, it looks like on a 2-year stack basis as it relates to the comp. Is there anything that's underscoring that? Is there anything you can talk to in terms of the comp and traffic trends throughout the quarter and back-to-school?
Michael Hartshorn:
In terms of the comp trends during the quarter, sequentially, the comps improved as we progressed through the quarter, and July was the strongest month for us, Stephen.
Michael O'Sullivan:
And then in terms of the outlook, Stephen, the comp guidance kind of reflects how we feel. We think the moderate customer continues to be under pressure. We don't see a lot of evidence that, that's going to change in the back half. We could be wrong, but we don't see a lot of evidence of that. And we expect the environment to remain pretty promotional.
Stephen Grambling:
And then if I can sneak one follow-up in, just to change gears a little bit. You do have some lumpy CapEx coming up. Is that -- is there any reason, with the interest rate environment where it is, why you wouldn't take on some leverage to fund the distributions, for example?
Michael Hartshorn:
Yes. So, Steve, we do -- as Michael mentioned, we do plan to take on a little bit of leverage to finance the New York buying office. And overall, as we look at our capital structure, we've looked at various different scenarios, different risk-return profiles. We actually like the flexibility of our current capital structure. It gives us the ability to grow, take advantage of opportunities as we see them. As you know, our first priority has always been investing in the business, investing in the growth of the business and then returning cash to shareholders. And our preference is to return cash to shareholders in more of a planned and deliberate way as opposed to kind of a onetime recap. So that's our view of our current capital structure and taking a little bit more leverage.
Operator:
The next question is from Lorraine Hutchinson with Bank of America.
Lorraine Maikis:
I wanted to follow up on the drivers of the higher basket size. Was that a higher ticket or units? And are there any strategies in place to try to continue to drive that basket size higher in the back half?
Michael Hartshorn:
Lorraine, as we mentioned, the 2% comp was driven by the basket, as transactions were flat. The increase in the basket was mainly driven by units per transaction. AUR was just up slightly.
Michael O'Sullivan:
And in terms of the strategy to continue to grow the basket size, it's really more of the same in terms of improving the assortment, making sure we have great selection of bargains for the customer to take home.
Operator:
The next question is from Jeff Stein with Northcoast.
Jeffrey Stein:
Can you tell me how you're planning to finance the buying office and how you arrived at that $2 million interest expense assumption for Q3? And I presume we should just kind of annualize that going forward?
Michael Hartshorn:
Jeff, yes, you would annualize it, and we haven't discussed how we're going to finance it yet. But it will happen mid-third quarter.
Jeffrey Stein:
Okay. Can you tell us -- just kind of curious what the average basket size is right now at Ross compared to dd's.
Michael Hartshorn:
Ross is about 30 and dd's is slightly below that.
Operator:
The next question is from Oliver Chen with Citigroup.
Oliver Chen:
I had a question about the merchandise margin. It was attractively up. What were the main categories or dynamics driving that? And is your expectation that, that will be flattish for the back half? And just to follow up, if you could talk to us a little bit about how you're thinking about online over the next 3 to 5 years as part of the strategy, that would be great.
Michael O'Sullivan:
Sure. So Oliver, our merchandise margins, the improvement was basically split between higher markup and lower markdown. Now average unit retail, our pricing was flat in the quarter. So that higher markup was really from better buying. That's what drove better markup. And then, obviously, the improved markdowns were from tight inventory control. So those were really the components of it. In terms of online, we actually have quite active program with online marketing, and we don't have [indiscernible] there. We're planning to experiment more with those types of vehicles. In terms of e-commerce, we don't have any plans to get into e-commerce at this point.
Oliver Chen:
Okay. Just the better buying, was that specific to any category? Or was it as a whole in terms of your tight inventory management?
Michael O'Sullivan:
It was broad based.
Operator:
The next question is from Laura Champine with Canaccord.
Laura Champine:
When you look at the back half, what's your expectation for freight? Is that pressuring gross margin in the back half? And if so, how much?
Michael Hartshorn:
So Laura, as [indiscernible] tighten up, [indiscernible], et cetera, we're always seeing some pressure on freight. It's all dialed into the guidance I gave in the back half.
Operator:
The next question is from Roxanne Meyer with UBS.
Roxanne Meyer:
I'm just wondering if you can give us an update on just how you feel about your consumer and any changes in behavior between 1Q and 2Q. I mean, it sounds like it's still a tough environment out there, and your consumer is still struggling a bit. But you obviously posted a nice improvement to the comp, but I'm just wondering if you've noticed any patterns in consumer behavior. And secondly, just wondering if you could share any operational initiatives going on in-store that could help drive comps in the back half of the year.
Michael O'Sullivan:
Sure. So Roxanne, I'll take the consumer question and then maybe Gary will answer the operational question. On the consumer piece, we haven't really seen any major shifts from Q1 to Q2. But I think it's pretty apparent that the low- to moderate-income customer is struggling. I think you're seeing that in the -- in some of the results that are being posted by the moderate power [ph] retailers. So I don't think we have anything to add to that other than I think that customer is challenged economically and finding this environment difficult.
Gary Cribb:
So clearly, to drive comps, we need to have great merchandise. So what we do in the stores is make sure that we're efficient, that we're providing the right experience for the customer when she comes in. And some examples of that, we are in the midst of rolling out a workforce management system that should enable us to better schedule at the times that our customer's in the building.
Operator:
The next question is from Dana Telsey with Telsey Advisory Group.
Dana Telsey:
Can you just -- a brief catch up on some of the components in terms of shrinkage, distribution costs and an update on dd's in terms of what you're seeing there? And lastly, as you think about pricing going into the back half of the year, amount of clearance that you have left over versus last year.
Michael O'Sullivan:
So Dana, why don't I take those out of order. I'll start on your question about dd's. So yes, we were very happy with dd's in the second quarter. dd's posted positive comps and pretty solid profit improvement. I would say, actually, over a longer period of time, that's kind of in the pattern at dd's, that we have good growth. We're seeing good comps and improvement in profitability. I would say that the main reasons for those improvements in profitability have been that dd's is pursuing many of the same strategies that we pursued at Ross in terms of tight inventory control, tight expense, et cetera. So that's kind of the update on dd's.
Michael Hartshorn:
In terms of distribution, Dana, the -- during the quarter, the DCs delevered a bit as a result. It was mainly related to packaway-related costs. For us, packaway prices and cost are charged the cost of goods sold when packaway is sold. So a decline in packaway levels results in a larger charge to [indiscernible]. In terms of the back half of the year, with the opening of the new DC, you're going to have some deleverage in the distribution centers.
Operator:
The next question is from John Kernan with Cowen.
John Kernan:
Just the off-price leaders, yourselves, TJX and Burlington are opening a lot of doors. How are you viewing the availability of inventory? And just as you become co-located in the same market, there's more and more Maxx stores, how are you viewing this traffic levels in those stores and the productivity levels in those stores?
Michael O'Sullivan:
In terms of store productivity and traffic, actually fine. We -- I should say that in the 33 states that we're in, Marmaxx is in those states, too. So we already compete very successfully with a broad range of retailers. So as we move into new states, there really aren't any additional retailers that we don't compete with today that we'll be up against. It's the same cast of characters.
Barbara Rentler:
And in terms of the supply, we're seeing some plentiful [ph] supply, the amount of merchandise in the market.
Operator:
The next question is from Mike Baker with Deutsche Bank.
Michael Baker:
All right. So I wanted to ask about the promotional environment. I mean, every retailer who has reported here recently has talked about it being promotional, and I think it is. But I wanted to ask specifically what you're seeing from department stores. And if it is promotional, then it's intriguing that your merchandise margins did so well relative to last quarter. So if you could sort of connect those dots. And then as a follow-up, I think the previous person asked about your expectations for merchandise margins within your guidance for the third quarter. If you could review that, that would be helpful.
Barbara Rentler:
As it pertains to promotions in the market, Q2 was a highly promotional quarter, particularly in the mid-tier. And we really don't see any reason for that to change in the back half of the year. In terms of how we got our margins, really, what we do is plan very conservatively, left ourselves liquid, had plenty of open-to-buy, and we chased most of our business. We also had very tight inventory control in this promotional environment, which is key, so that you're always liquid and fluid and you have constant open-to-buy.
Michael Hartshorn:
In terms of absolute levels, Mike, we didn't break out absolute margins in the back half other than to say it's [indiscernible] the guidance does not show the improvement we saw in the second quarter.
Operator:
The next question is from Patrick McKeever with MKM Partners.
Patrick McKeever:
Question on systems. And just wondering where things stand from a systems standpoint as you prepare to open a couple new distribution centers. Will there be any big changes from a system standpoint? And how -- where are we with micro-merchandising in terms of just the whole benefit cycle?
Michael O'Sullivan:
Sure. So Patrick, on systems with regards to the DCs, there are major new systems that we'll be implementing as we open new DCs. The new DCs will run very similar systems to the systems that are already being used in our current DCs and already fairly mature. So no systems work, I think, with the new DCs. On micro-merchandising, as you know, we've had micro-merchandising in place for 2 or 3 years now. But at the outset, we had said that over time, as the system matures, it will sort of learn from itself and sort of learn from the historical data. And we think we're seeing that. So we think some of the improvements we've seen in certain regions are at least partly due to the micro-merchandising systems and processes that have been implemented.
Patrick McKeever:
And then just a quick one on dd's. I mean, it sounds like it's comping pretty well, fairly similarly to the Ross Stores. How about the -- just the bottom line at dd's? Where do things stand from a profitability and return standpoint? Is it still kind of a similar dynamic where dd's is just maybe slightly less profitable than Ross on a four-wall basis?
Michael Hartshorn:
Well, on a four-wall basis, they're fairly similar. They get there in different ways, but the difference at this point is the leverage of the business and is based on the size of the business and the overhead in the DCs and the other corporate overhead.
Michael O'Sullivan:
The dd's is -- as we said before, Patrick, dd's is accretive to the business, but it's very small, so it really has a minimal impact.
Patrick McKeever:
But at some point down the road, it sounds like the concept could be as powerful as the Ross Stores concept, and you could open either one and still have a similar P&L.
Michael O'Sullivan:
Yes, we're very positive about dd's long-term potential.
Operator:
[Operator Instructions] The next question is from David Glick with Buckingham Research.
David Glick:
Just a question about marketing. As the environment gets more challenging to generate positive traffic, I'm wondering, as you become more national in scope, you're not quite there, but as you become -- have a greater footprint, do you think over time you might make a bigger push in terms of TV advertising or marketing spend in general? Your thoughts on that would be appreciated.
Michael O'Sullivan:
I think our marketing will expand as we geographically, but I don't think it will change radically in terms of its role in our overall business. I mean, our most important priority is to have the best assortments in the stores. And what we find is if we do that, we do business and we actually achieve word-of-mouth marketing from our customer, and that's really the core of the strategy, paid marketing in terms of TV is helpful, but it's not the critical thing.
Operator:
There are no further questions. I will turn the call back over to Barbara Rentler.
Barbara Rentler:
Thank you for joining us today and for your interest in Ross Stores. Have a great day.
Operator:
This concludes today's conference call. You may now disconnect.
Operator:
Good afternoon, and welcome to the Ross Stores First Quarter 2014 Earnings Release Conference Call. [Operator Instructions] Before we get started, on behalf of Ross Stores, I would like to note that the comments made on this call will contain forward-looking statements regarding expectations about future growth and financial results, including sales and earnings forecasts and other matters that are based on the company's current forecast of aspects of its future business.
These forward-looking statements are subject to 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 2013 Form 10-K and fiscal 2014 Form 8-Ks on file with the SEC. Now I'd like to turn the call over to Michael Balmuth, Vice Chairman and Chief Executive Officer.
Michael Balmuth:
Good afternoon. Joining me on our call today are Norman Ferber, Chairman of Board; Michael O'Sullivan, President and Chief Operating Officer; Gary Cribb, Executive Vice President, Stores and Loss Prevention; John Call, Executive Vice President, Finance and Legal; Michael Hartshorn, Senior Vice President and Chief Financial Officer and Connie Wong, Director, Investor Relations. Also joining us today is Barbara Rentler, President and Chief Merchandising Officer of Ross Dress for Less.
As announced earlier this month, Barbara will become our new Chief Executive Officer and a member of the Board of Directors effective June 1. She will continue to work closely with Michael O'Sullivan, who will continue as President and Chief Operating Officer, and also join the Board of Directors. Barbara and Michael are talented executives with complementary skills and each has made extraordinary contributions to our company over the course of their long careers here. The board and I are confident their successful partnership will enhance our prospects for continued increases in profitability and stockholder returns in the years to come. As previously announced, I will become Executive Chairman on June 1. In my new role, I plan to stay very involved and continue to work closely with the entire senior management team. Now let's turn to today's financial results. We'll begin with a brief review of our first quarter performance followed by our outlook for the second quarter and fiscal year. Afterwards, we'll be happy to respond to any questions you may have. Earnings per share for the 13 weeks ended May 3, 2014 were $1.15, up from $1.07 in the prior year. These results represent 7% growth on top of 15% and 26% gains in the first quarters of 2013 and 2012, respectively. Net earnings for the 2014 first quarter grew to $243.9 million, up from $234.6 million in the prior year period. First quarter sales rose 6% to $2,681,000,000. Comparable store sales grew 1% on top of 3% and 9% increases in the first quarters of 2013 and 2012, respectively. First quarter earnings per share performed at the high end of our guidance as strict inventory and expense controls offset the impact from unfavorable weather and a more challenging retail environment. Sales trends improved in April with more seasonal spring weather that coincided with the late Easter shopping period. Merchandise and geographic trends were relatively broad-based during the quarter, with the Midwest, the top-performing region. Operating margin for the quarter was better than forecasted, declining 25 basis points to 14.6% of sales. A 35-basis-point increase in cost of goods sold was partially offset by a 10-basis-point improvement in selling, general and administrative costs. As we ended the first quarter, total consolidated inventories increased about 2% compared to the prior year, with average in-store inventories down about 4%. Packaways as a percentage of total inventories was 45%, even with last year. Comparable store sales at dd's DISCOUNTS increased in the first quarter, driving solid gains and profits. These results reflect that customers continue to respond favorably to dd's merchandise assortments. Our overall expansion program remains on track with 26 net new Ross and 7 dd's DISCOUNTS opening in the first quarter. We expect to add a total of 95 new locations in 2014 comprised of approximately 75 Ross and 20 dd's DISCOUNTS. As usual, these opening numbers are before the planned closure or relocation of about 10 existing stores. Michael Hartshorn will now provide further color on our first quarter results and details on our second quarter guidance.
Michael Hartshorn:
Thank you, Michael. Our 1% comparable store sales gain in the first quarter was mainly driven by a low single-digit percentage increase in the size of the average basket, with the number of transactions down slightly to last year.
Operating margin for the quarter declined by about 25 basis points to 14.6%, which was at the high-end of our guidance. The 35 basis point increase in cost of goods sold was mainly driven by deleveraging on occupancy and buying costs, which increased 20 and 10 basis points, respectively. Merchandise gross margin declined 10 basis points versus last year, while distribution costs improved by 5 basis points. Selling, general and administrative expenses improved by 10 basis points mainly due to strong cost controls. During the period, we repurchased 2 million shares for a total purchase price of $139 million. We expect to buy back a total of $550 million in stock for the year, which will complete the 2-year, $1.1 billion program authorized by our Board in early 2013. Let's turn now to our second quarter guidance. For the 13 weeks ending August 2, 2014, we are targeting same-store sales to increase 1% to 2% on top of 4% and 7% growth in the second quarters of 2013 and 2012, respectively. Earnings per share for the second quarter of 2014 are projected to be in the range of $1.05 to $1.09, up from $0.98 last year. Our EPS target for this year's second quarter are based on the following assumptions. Total sales are expected to grow 5% to 6%, driven by a combination of new store growth and, as previously mentioned, same-store sales that are forecasted to be up 1% to 2%. We plan to open 29 net new stores during the period, including 22 Ross Dress for Less and 7 dd's DISCOUNTS. We are targeting operating margin to be flat to up 20 basis points on top of a strong 80 basis point increase in the prior year for a projected range of 13.6% to 13.8%. We are planning net interest expense to be negligible and our tax rate is expected to be about 39%. We also estimated weighted average diluted shares outstanding of about 210 million. Moving to our outlook for the year. As noted in today's press release and based on our first quarter results and second quarter guidance, we now project earnings per share for the 52 weeks ending January 31, 2015 to be in the range of $4.09 to $4.21 compared to earnings per share of $3.88 in fiscal 2013. Now I'll turn the call back to Michael Balmuth for closing comments.
Michael Balmuth:
Thank you, Michael. As mentioned earlier, we were able to maximize earnings during the first quarter despite a modest 1% increase in same-store sales, which were impacted by unfavorable weather and a more challenging retail environment.
Looking ahead, we remain confident in the resilience of our off-price business model and our ability over time to successfully execute the proven strategies that have enabled us to deliver solid financial results in both favorable and more difficult climates. By far, our most important priority is our unwavering focus on offering customers the best bargains possible. Consistently delivering on this mission will always be the key to optimizing our opportunities for future sales and earnings growth. At this point, we'd like to open up the call and respond to any questions you might have.
Operator:
[Operator Instructions] Your first question is from Brian Tunick with JPMorgan.
Brian Tunick:
Michael, best of luck as well to you. I guess, are -- 2 questions. Number one, you called out the Midwest as your best performing region. So I know the weather had been an impact the last couple of quarters. Can you just maybe talk about what changed there? Are you happier now with how your new stores are performing? And anything else you could add about the micro merchandising that might be applying? And then the second question, just sort of on this potentially new trend of the business, this more low-single-digit comp run rate. Can you maybe talk about what kind of either marketing initiatives or things are going to be doing from a category perspective that could potentially reaccelerate the business back to a more mid-single-digit comp trend, or do you think we've seen, maybe the easy market share gains behind us?
Michael O'Sullivan:
Okay, Brian. This is Michael O'Sullivan. I'll take the first part of your question about Midwest. Yes, we were pleased with how the Midwest performed in the first quarter. As Michael said in his remarks, it had the highest comp performance of our regions, which is great, especially given the weather. But -- and we made some assortment changes to the Midwest, which I would say we're pleased about. But I caution you, it's really just a single quarter and we still think we have plenty of opportunity left to improve that region. Let me take a step back though. When we entered the Midwest 2 years ago, we said we expected to build a very successful business there, but it would take time. So we're certainly very pleased with the progress we've made so far, but I would say the recent performance just reinforces our confidence in the longer term.
Michael Balmuth:
On the second part of the question, in terms of changes to our marketing program, there'll be no radical changes, okay? We have a marketing program we've been running with for a long time. We think it's effective. We're experimenting with a little more social marketing, but that's the extent of it. Relative to a new run rate, I think -- first of all, I think we've adjusted well. We adjusted well in the quarter to the business trends. We're able to preserve our margins and run our business quite effectively at this level. When our business gets tougher than we'd like it to be, we use this as a very good time for really tearing apart all our businesses, whether they're performing at a reasonable level, but especially the ones that are underperforming. So if we do our work carefully during this timeframe, when the customer is ready to shop, we'll be in a better position than we are today.
Operator:
Your next question is from Mike Baker with Deutsche Bank.
Michael Baker:
I wonder if in general you just -- throughout the country, you could quantify for us a very good sense as to how much you think weather impacted, and maybe one way you can do that is just talk about the trends. You say April was better, but any color on what February or March or even into early May, may have looked like as the weather's gotten better?
Michael Hartshorn:
Sure. So like other retailers, the unfavorable weather impacted our business early in the quarter. As we mentioned in our release, sales improved in April as the weather improved and also with the Easter shift. It's difficult to quantify the precise impact of weather, but we're not immune to it based on our regional breakouts. Regionally, the Midwest and Florida were the strongest markets while the Mid-Atlantic and Pacific Northwest trailed the chain. California, last week, was in line with the chain.
Michael Baker:
Okay. And if I could follow up with one more. What are you seeing out of some of the department stores. In particular, I guess, I'll just simply ask about J.C. Penney, they've gone from comping down 30% to comping up -- now comping up 6%. It's got to have some impact in your business. How do you think about that? Is there any way to quantify or measure that?
Michael Balmuth:
Look, it's certainly not a plus, it's not -- we try to quantify it when they weren't doing as well and we had difficulty quantifying it, but we knew it was helping. So really, the answer to your question is, we really don't have a precise answer.
Michael Baker:
Okay. But probably to the previous question, maybe makes it hard to pick up market share, is that fair to say?
Michael Balmuth:
It's hard to tell until we get to a more stable weather quarter, okay? It was such a radically unusual weather quarter, I would rather answer at on our next call.
Operator:
The next question is from David Mann with Johnson Rice.
David Mann:
Let me add my congratulations to Michael and well-deserved promotions to Barbara and Michael, as well. A question about gross margin. Can you talk about the components of gross margin? How we should think about them going forward, especially given that you -- it looks like your inventory to sales ratio is the best it's been in, like, 5 quarters.
Michael Hartshorn:
Sure, David. So as we got into this quarter, we ended last quarter, remember, January was the slowest month of that quarter, so we underperformed a bit it. We are carrying a bit more clearance into this quarter so we took a few more markdowns to clear that inventory this quarter. Having said that, in the first quarter, April was our strongest month so we're in a different position going into the second quarter. I would comment that with inventories down, we should be able to pick up a slight amount in markdown lines similar to what we've done with the past several years.
David Mann:
And specifically, any comments you'd give us about the direction of March margin over the course of the year and the other components of gross margin?
Michael Hartshorn:
Yes. I said for the year, I think the guidance was slightly up from a merchandise standpoint given the 1% to 2% comp guidance, we'd expect a little bit of deleverage on the expense line. Having said that, during the first quarter, we're able to manage expenses pretty aggressively and we'll look to do the same throughout the back half of the year in the second quarter as well.
David Mann:
And on that issue, the 1% comp growth. You were able to do that on 1% comp, you haven't really been able to do that in the past. Should that -- is that sort of a guide now going forward, that you might be able to delever or to lever on a 1% type of comp?
Michael Hartshorn:
No. On the expense side, David, long term, we think that number is still around 3%. So although we were aggressive during the quarter and as we look out, at least in the near term, we're optimistic about where expenses will be. But I think for your long-term modeling, I think it's just better to use a 3% leverage point.
Operator:
Your next question is from Daniel Hofkin with William Blair.
Daniel Hofkin:
So if I could just kind of following up on an earlier question, specifically about J.C. Penney, maybe just more broadly. Can you talk about -- I know, going into the quarter, you were talking about seeing higher promotional levels, broadly, than the same time last year. How did things play out compared to what you thought? And what are you seeing kind of going into this part of the year? That's my first question.
Barbara Rentler:
Well, Penney's promoted through the entire quarter and, obviously, a very [ph] increased promotional activities for us. Not a positive for us from a competitive point of view.
Michael Balmuth:
I would just add also, when Penney's is taking this kind of action on their promotional positioning, okay, it's affecting other moderate retailers who are also becoming more aggressive. So that's really the domino that we look at within what off-price space is. And so, for us to get a handle on how people will be promoting in the future, we're usually pretty good at that. And then we'll be able to adjust our prices into its own that keeps the value differential between the 2, between mainstream and us. So I think Penney's is really more rattling other mainstream retailers and then we'll figure it out.
Michael O'Sullivan:
The other point to make on that, Daniel, is we've lived through promotional and competitive areas before. We have -- we feel very confident, we have a value model and we have an expense structure that allows us to succeed in those environments and, frankly, to compete fairly sustainably. When other moderate retailers promote, it's not necessarily sustainable but for them to keep doing that.
Daniel Hofkin:
And if that's the main factor kind of affecting the near-term merch margin for you, kind of the pricing umbrella.
Michael Balmuth:
Well, I think availability of merchandise has a lot to do with the merch margin. We think it's very good right now. We think that with our inventory controls in place, we'll be able to turn at the same level for faster stocking. We feel pretty good about merch margin as long as we can deliver top line comp.
Michael O'Sullivan:
Yes. I think, Daniel, the impact of promotion it's more on the top line rather than on our margins, which is what you see in Q1, that the margins were actually pretty healthy, it was the top line.
Daniel Hofkin:
Okay. That actually was my follow-up question on the availability side. So it sounds like that remains quite positive. Good to hear.
Operator:
The next question is from Stephen Grambling with Goldman Sachs.
Stephen Grambling:
This is really just kind of a quick follow-up to that line of questions which is, on the merchandise versus competition, was it just harder to keep the pricing gap? And as you think about weather playing an impact on gross margin, can you just elaborate on any impact that you saw, whether it's related to transportation or even just promotions by geographies?
Michael Balmuth:
So Stephen, back to gross margins, specifically in the first quarter. We came into the quarter carrying more clearance balances than we typically would base on a below plan January, so that put pressure on the merchandise margins during the first quarter. Markups were in line, but we have to take a little bit more markdown during the first quarter. So I would not attribute that to a trend or for the rest of year.
Stephen Grambling:
That's helpful. And then just longer-term as you think about the operating margin, I think that last year, actually, in this quarter, there was kind of a 3-prong commentary about the drivers over the past couple of years. And as you look forward, maybe you can talk about how you think of op margins and where they can go.
Michael O'Sullivan:
Yes. Yes, let me comment on that, Steven. When you look at what's driven our operating margin over the last few years, it really has been the 3 things that you've referenced. It's been lower markdowns driven by tighter inventories. And we don't think that's going away. We're not going to loosen up inventories anytime soon until we think we're going to hold those gains. It's been, secondly, lower shrink based upon our shortest initiatives. And again, we're not planning on taking our eye off the ball there. And then, thirdly, it's been margin and expense leverage based upon ahead-of-plan sales. Now if I look at which of those we still have more opportunity on, it's really the third. It all depends on sales. If we're able to get ahead-of-plan sales, we'll get margin leverage. I think there's probably limited opportunity left in markdowns and in shrink. Some, but limited. So going forward, it's really about the top line.
Operator:
The next question is coming from Paul Lejuez with Wells Fargo.
Paul Lejuez:
Sorry, if I missed it, but did you talk about the Home category versus apparel? And within Home, I'm just wondering what's working and what's not? And then also second, where is your AUR and your average ticket these days in both Ross and dd's? Do you see an opportunity there and what will be the driver?
Michael Hartshorn:
So Paul, this is Michael, I'll take the transaction piece. As we mentioned in the comments, comp was driven by an increase in the basket, with transactions down slightly. The increase in the basket was mainly driven by increase in units per transaction. But to your question on AUR, that was up slightly during the quarter. Going forward, currently, Ross is about 20% to 25% higher in terms of average AUR. And I think our focus is really on the price differentiation between department stores versus absolute prices.
Michael Balmuth:
On the Home aspect, okay. For the first quarter, our Home performance was well ahead of the chain, we're making progress there and we're making faster progress, I would say, on the parts of Home that are really the more gift and functional end versus domestics. Domestics is -- looks like it will be the section of the business that will come on last in terms of where we were trying to improve it. So that's how I would divide it out to how it's going.
Paul Lejuez:
What's included in domestics?
Michael Balmuth:
Sheets, towels, pillows.
Operator:
The next question is from Bridget Weishaar with Morningstar.
Bridget Weishaar:
Just a question on SG&A, it seems a little bit better than expected. Could you identify where the savings came from? Did you pull back from any marketing given the weather overhang and shifting it into a different quarter, or was there something else in that line item?
Michael O'Sullivan:
Bridget, on the -- specific on marketing, no we didn't put anything back. We were more productive in stores in terms of some productivity issues that we had in place. Michael, was there anything else?
Michael Hartshorn:
No, I would say it was broad-based. I would say in this competitive environment, you should expect us to see very vigilant about controlling expenses throughout the year.
Bridget Weishaar:
And do you see more room in there that you could cut back from or are you pretty close to running as lean as you can?
Michael Hartshorn:
I would say, John mentioned that our long-term model is really to lever SG&A at about 3%. I think there's a good opportunity for us to lever below that this year.
Operator:
The next question is from Lorraine Hutchinson with Bank of America.
Lorraine Maikis:
Given the strength of some your new store openings throughout the Midwest, does this give you more confidence to look at other geographies that are perhaps underpenetrated?
Michael O'Sullivan:
Yes. Lorraine, our geographic expansion strategy going back way back when, has always been to -- when we move into a new market, to try and build on our presence in that market before we move to another market so to speak. We've thought this worked well for us because there are numerous benefits and synergies that come with that in terms of building awareness, building out our operating team, et cetera. So I think you should expect that most of our activities for the next 2 years with regards to new markets will be in that Midwest region. Even though we're happy with the results, I don't see us jumping out of that region into other regions prematurely.
Operator:
The next question is from Oliver Chen with Citi.
Oliver Chen:
We just had a question regarding the planning and allocation side of the business, you've been great pioneers in micro merchandising. What are your thoughts about what inning you're there and if that's a potential driver? Also, just from a strategy perspective, we understand that the shipping costs are prohibitive from an online basis, but would there be a scenario in which a bigger online presence would make sense for you down the road?
Michael Balmuth:
Sure. So Oliver, can you just repeat your specific question on micro merchandising? I think I didn't get...
Oliver Chen:
If there's a lot of opportunity in that vein going forward in terms of further tailoring the assortments on a local basis.
Michael O'Sullivan:
Sure. So on that piece, on micro merchandising, we've had the micro merchandising processes and tools in place for about 2.5, 3 years at this point, and we're very happy with how they've been working for us, how they've been helping us. I think we believe they've been a key enabler, for us to turn faster in particular and therefore, many of the inventory reductions that we've achieved and we've spoken about, I think you can tie it back to micro merchandising. Now one of the things that we described earlier on was that the micro merchandising system we have sort of learned from experience. So the more years you have, the more years of accumulated data, the better it gets at projecting what sales and inventory levels we should plan to. So yes, I think there is some incremental opportunity as we move forward. Secondly, e-commerce. So we continue to look at e-commerce. We run a business that has a $10 average unit retail. And when we put together the economics, currently, we think it's very hard for people to make money, not just shipping cost, or return cost or processing cost, marketing cost, et cetera. Now maybe things will change, maybe someone will elevate in some way that leads us to change our mind. But at least as we look at the data right now, we don't -- it doesn't seem very compelling to us. So our focus is really to put our resources against our bricks-and-mortar business, where we know we can be very successful, we know we can make money and we have plenty of opportunity ahead of us.
Oliver Chen:
Okay. And would you mind just updating us on your thoughts on the health of the consumer in terms of pressures you're seeing? Do you feel like there's still a lot of volatility or do you think housing has been a help for other [ph] wealth effect? Just your thoughts on where do you think sentiment is with your customer base.
Michael Balmuth:
So we're not economists, but what we know is the customer who is the moderate base customer appears to have some difficulties right now. And so, if you're -- the word is health, they seem to have a little bit of a health problem right now.
Operator:
The next question is from Ike Boruchow from Sterne Agee.
Tom Nikic:
This is actually Tom Nikic, on for Ike. I was just wondering about the packaway inventory. I guess we would have thought that with the disruption that sort of happened in the retail space that maybe the packaways' percent of inventory would tick up, but it's been sort of flat for a couple of years in a row now. I was wondering if you could just discuss the packaway situation.
Michael O'Sullivan:
So we've been pretty happy with our packaway availability, Tom. It does fluctuate, it can move around. And typically, we see more packaway opportunities in the second half of the season rather than the first half of the season, but I would say that availability has been reasonably strong and we're pretty happy with what we're seeing and we're packing away.
Michael O'Sullivan:
And what we're seeing, we're happy. We're happy in what we're seeing both in quantity and just the actual quality of what's out there these days, okay, as you would expect as mainstream retail is suffering a bit.
Operator:
The next question is from Kimberly Greenberger with Morgan Stanley.
Kimberly Greenberger:
Michael, I'm trying to just understand a little bit more your weather comments. Maybe you could help us by dimensionalizing perhaps the differential between Mid-Atlantic comps and some of your warmer weather markets, not necessarily Florida, because that's been a standout for a while, but just so we can understand the magnitude of the difference. And then did you say California [indiscernible] ? I was just wasn't sure if I heard that correctly.
Michael Hartshorn:
Kimberly, we wouldn't talk about specifics on regionals other than to say they are higher and lower than the chain. It's like -- on your California question, it was in line with the chain.
Kimberly Greenberger:
Okay, California is in line with the chain. Was the Mid-Atlantic and the Northwest areas the only areas where you feel like you had some weather impact or there are other things going on in the Rocky Mountain region or other places that you felt also hurt your business?
Michael Hartshorn:
I would say we had weather impact throughout many of our regions. And the Pacific Northwest was up against very strong comps, it was the strongest performing region last year.
Kimberly Greenberger:
I'm just trying to figure out how it was that the Midwest, which had really terrible weather, was one of your best-performing regions. And is it just sort of more experience in the markets, better execution on your part that was able to overcome the weather headwind or is there something else that would explain why the Midwest was quite good, where the rest of the chain was hit by weather?
Michael O'Sullivan:
Kimberly, I think the Midwest is a good case example of why retailers should never blame the weather. We mentioned the weather because, obviously, it was relevant in Q1. But when we look at the Midwest, there are a lot of other things that can drive your top line over -- certainly, over the third quarter that could trump weather. And I think as some the of the changes that we were able to make in terms of assortment, certainly, had that impact in the first quarter. So I know you're trying to quantify the impact of weather, but I think it's very hard over the period of a quarter. So in an event like a single-weather event like a hurricane where a dozen stores close down, you can quantify the number. But over the whole of a quarter, the changes you can make in assortments and values you can offer in the store can trump the weather impact. That's what we think happened in the Midwest.
Kimberly Greenberger:
Okay, understood. And then just looking out to your second quarter guidance, you're talking about a 1% to 2% comp, that's in line with the guidance you gave for the first quarter. Does that feel conservative to you? Does that feel appropriate? I'm just looking out to the second quarter, and it doesn't feel like there should be much in a way of weather impact, and I just wanted to get your feel for how you assess that view.
Michael Balmuth:
Kimberly, I think it feels appropriate right now in this environment. As Michael said, the modern consumers have a tough time as you look out and around and hear other people report, I think it's a pretty tough business out there. So we feel that it's appropriately set.
Michael Hartshorn:
Additionally, it's to be determined how the promotional environment will be both in this quarter coming up and the rest of the year.
Operator:
Your next question is from Laura Champine with Canaccord.
Laura Champine:
Could you just comment on your sell-through of seasonal women's apparel this spring versus last spring this time of year?
Michael Balmuth:
Well, I don't think we'd be comfortable going down to that level, kind of a category level with women's apparel. I think what we would be comfortable to say is non-apparel has performed better given the weather conditions. And so, our sell-throughs would be better in non-apparel areas than apparel areas season-to-date.
Laura Champine:
I guess the point of the question is you mentioned that merchandise margin, you should get a little bit of a lift as we move through the year. Should we expect most of that in the back half or do we start to see it this quarter?
Michael Balmuth:
I'd think you'd expect to see it even throughout from this period going forward. Again, we're not -- the point of the first quarter is we're carrying more clearance for that period, so our markdowns were higher than we had targeted.
Operator:
The next question is from Neely Tamminga with Piper Jaffray.
Neely Tamminga:
Just a quick clarification on Q2 guidance. Michael, are you saying that you're looking for the underlying metrics to be comparable for Q2 in terms of the number of transactions and average transaction size value, or is there a shift that we should be looking for?
Michael Hartshorn:
We don't -- typically, Neely, we don't plan the business based on the transaction size, really the overall comp. So based on the 1% to 2%, we'd say, it's going to be somewhat consistent with what's going on with Q1, absent the weather.
Neely Tamminga:
Okay. And then just a follow-up question to Laura's question, I guess, not necessarily, I want you to give us give us -- give all the competitors' script away, but are you feeling good about the balance that you have in your apparel right now around active versus denim-anchored fashion looks?
Michael Hartshorn:
You know something? I think we feel relatively okay. There are some mix issues underneath the lines, but our balance of how we're mixed across categories, we feel okay about.
Operator:
The next question is from John Kernan with Cowen.
John Kernan:
Just -- a lot of good questions so far. I just wanted to -- actually, on your real estate availabilities, you pushed out of the core markets in California, Texas and Florida, what are you seeing in terms of availability and quality of site?
Michael O'Sullivan:
We're pretty happy. We're one of the few retailers that's opening 80, 90 stores a year. So we're out there, we're looking for locations. We have a very, very strong real estate team that have got a lot of experience, and they've been able to find us some great locations over the last several years. And we think availability continues to be good. And obviously, part of that is being driven by other retailers who've either gone bankrupt in that line of business or retailers that have closed down a lot of locations, so that's continuing to help us.
John Kernan:
Are you noticing any pressure -- you're obviously co-located with a lot of retailers that have been complaining about more meaningful declines in traffic than you're seeing. So are you worried that some of the co-locations with some other stores and the lack of traffic there might be pressuring you as well?
Michael O'Sullivan:
It's -- who knows? The key implication for us is in those locations to make sure that we're offering the shop and value that we can and, therefore, whatever traffic is coming to that center, that we get more than our fair share of it. So if [ph] there's something macroeconomic that's going on that's affecting our center or more global that we can't control, there's not much we can do about that. But we can focus on what we can control, which is the value in the store.
Operator:
Your next question is from Roxanne Meyer with UBS.
Roxanne Meyer:
My question is, I'm wondering if you could comment on new store performance and how that has trended. And then comment on the ramp to maturity of new stores, how long it takes and have you seen any changes to that ramp? And also, just comment on new store performance by classes over the last few years.
Michael O'Sullivan:
So Roxanne, yes, we're pretty happy with how the stores have been performing, not just in the last quarter, but over the last couple of years. In terms of new store ramp, we don't disclose the ramp, but it's been plenty consistent over time. Obviously, when a store press opens up, it's sort of a period where it builds awareness. And for us, building awareness is mostly through word-of-mouth and that just takes a little bit of time. So after 3 or 4 years, typically, the store would ramp up, but -- yes, that's how I would describe it.
Operator:
Your next question is from Richard Jaffe with Stifel.
Richard Jaffe:
Given your comments earlier about the tighter inventory resulting in fewer markdowns, that's been a real success story for you guys. I'm wondering if, as you mentioned, there's less opportunity there. Should we assume inventory levels will proceed at essentially a flat level year-over-year on a per square foot basis, that there's no further pursuit to make your inventories leaner or churn more quickly?
John Call:
I think -- Richard, this is John. We have, obviously, taken big chunks of inventory out over past 3 or 4 years. We are still working at it. We think there is some marginal benefit. We think inventories will be down, probably 1 to 2 points this year. So I think there's still some opportunities.
Operator:
There are no further questions at this time. I will turn the call back over to the presenters.
Michael Balmuth:
Thank you for joining us today and for your interest in Ross Stores. Have a great day.
Operator:
This concludes today's conference call. You may now disconnect.
Operator:
Good afternoon, and welcome to the Ross Stores Fourth Quarter and Fiscal Year 2013 Earnings Release Conference Call. [Operator Instructions]
Before we get started, on behalf of Ross Stores, I would like to note that comments made on this call will contain forward-looking statements regarding expectations about future growth and financial results, including sales and earnings forecasts and other matters that are based on the company's current forecast of aspects of its future business. These forward-looking statements are subject to 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 2012 Form 10-K and fiscal 2013 Form 10-Q and Form 8-K on file with the SEC. Now I'd like to turn the call over to Mr. Michael Balmuth, Vice Chairman and Chief Executive Officer.
Michael Balmuth:
Good afternoon. Joining me on our call today are Norman Ferber, Chairman of Board; Michael O'Sullivan, President and Chief Operating Officer; Gary Cribb, Executive Vice President, Stores and Loss Prevention; John Call, Group Senior Vice President, Finance and Legal; Michael Hartshorn, Senior Vice President and Chief Financial Officer; and Connie Wong, Director of Investor Relations.
We will begin our call today with a review of our fourth quarter and 2013 performance, followed by our outlook for 2014. Afterwards, we'll be happy to respond to any questions you may have. Let me preface our discussion of today financial results by noting that our 2012 fourth quarter and fiscal year were 14- and 53-week periods, respectively, while our 2013 fourth quarter and fiscal year were 13- and 52-week periods. As a reminder, the 53rd week in fiscal 2012 added approximately $149 million in sales and $0.10 in earnings per share to both last year's fourth quarter and fiscal year. Now let's turn to today's results. As noted in our press release, fourth quarter 2013 earnings per share were $1.02 on net earnings of $218 million. Sales for the quarter were $2,741,000,000, with comparable store sales up 2% on top of a 5% increase in last year's fourth quarter. Sales for the quarter performed in line with our guidance and earnings were slightly better than expected, mainly due to above-planned merchandise gross margin. Despite a very promotional and competitive holiday season, customers responded favorably to the compelling bargains we offered on a wide assortment of fresh and exciting name-brand fashions and gifts. For the fiscal year 2013, earnings per share were $3.88, up a solid 13% on a 52- versus 52-week basis over last year. This growth is especially noteworthy, considering it was on top of robust multiyear earnings per share increases of 20%, 24% and 31% in 2012, 2011 and 2010, respectively. In addition, fiscal 2013 operating margin remained at a record 13.1% despite the estimated 20-basis-point benefit from the 53rd week in 2012. Net earnings in fiscal 2013 grew to $837.3 million on sales of $10,230,000,000. Same-store sales in 2013 rose 3% on top of a 6% gain last year. For the quarter and the full year, Juniors was the best-performing merchandise category, while geographically, Texas was the strongest region. Michael Hartshorn will provide some additional color on our financial results in a few minutes. As we ended 2013, total consolidated inventories were up 4% compared to the prior year, while packaway levels were about 49% of total inventories compared to 47% last year. Average in-store inventories were down approximately 4% at the end of 2013. Like Ross, dd's continues to benefit from our ability to offer a wide assortment of terrific bargains, while also operating the business on reduced inventory levels. As a result, dd's DISCOUNTS was able to deliver another year of solid gains in sales and operating profits in 2013. Now let's turn to our financial condition. Operating cash flows provided the resources to make capital investments to support our growth and fund our ongoing stock repurchase and dividend program. During the fourth quarter, we repurchased 1.8 million shares of common stock for a total price of $129 million. For the full year, we bought back 8.2 million shares for an aggregate price of $550 million. We expect to complete the $550 million remaining under our current 2-year $1.1 billion program by the end of 2014. The board also recently approved an increase in our quarterly cash dividend to $0.20 per share, up 18% on top of a 21% increase last year. The growth of our stock repurchase and dividend programs has been driven by the significant amount of cash our business generates after self-funding store growth and other capital needs. We have repurchased stock as planned every year since 1993 and this is the 20th consecutive annual increase in our quarterly cash dividend. This consistent record reflects our unwavering commitment to enhancing stockholder value and returns. Now Michael Hartshorn will provide further color on our 2013 results and details on our first quarter and fiscal year 2014 guidance.
Michael Hartshorn:
Thank you, Michael. Let's start with our fourth quarter results. Our 2% comparable store sales gain was driven by an increase in the size of the average transaction. Operating margin declined by about 95 basis points to 12.7%, mainly due to the estimated 65-basis-point benefit to last year's fourth quarter from the 53rd week. In addition, we also experienced some deleveraging on occupancy, distribution, freight and selling, general and administrative costs, which was partially offset by higher merchandise gross margin.
Again, we were able to maintain fiscal 2013 operating margin at a record 13.1% despite the estimated 20-basis-point benefit from the 53rd week in 2012. For 2013, a 15-basis-point improvement in cost of goods sold was offset by a similar increase in selling, general and administrative costs. For the year, cost of goods sold benefited from a 45-basis-point gain in merchandise gross margin, partially offset by occupancy costs that rose about 20 basis points and distribution and buying expenses had increased about 5 basis points each. Selling, general and administrative cost delevered by 15 basis points, mainly due to higher costs related to the relocation of our data center. Let's now turn to the underlying assumptions that support the 2014 earnings targets we communicated in today's press release. Our fiscal 2014 earnings per share forecast of $4.05 to $4.21 represents growth of 4% to 9% over 2013 on a comparable store sales gain of 1% to 2%. This guidance incorporates some pressure on earnings from the infrastructure investments we have been making to support our longer-term growth plans. We are also projecting a higher effective tax rate due to the expiration of federal and state hiring credits. The operating statement assumptions for the full year in 2014 are as follows. Again, comparable store sales are forecast to increase 1% to 2%; total sales are projected to grow 5% to 6%; we are planning to add approximately 75 new Ross and 20 new dd's DISCOUNTS locations. As usual, these numbers do not reflect our plans to close or relocate about 10 older stores. If same-store sales are up 1% to 2%, we would expect some deleveraging of expenses with merchandise gross margin projected to be up slightly from 2013. As a result, EBIT is estimated to be 12.9% to 13.1% in 2014. Net interest expense is expected to be about $7 million as we expect to finance the purchase of our New York buying office. Our tax rate is planned at approximately 38% and we expect average diluted shares outstanding to be about 210 million. Capital expenditures in 2014 are forecast to increase to approximately $800 million, up from $550 million in 2013. This higher spending is primarily driven by the purchase of our New York buying office. Depreciation and amortization expense, inclusive of stock-based amortization, is forecast to be approximately $290 million to $300 million, up from $250 million in 2013. For the 2014 first quarter, earnings per share are projected to be in the range of $1.11 to $1.15, up from $1.07 in the first quarter of 2013 based on the following assumptions. Total sales are forecast to increase about 5% to 6% over the prior year. Comparable store sales are projected to be up 1% to 2%. We plan to add 26 net new Ross and 7 net new dd's DISCOUNTS during the quarter. Operating margin is projected to be in the range of 14.4% to 14.6% or down about 30 to 50 basis points from the record 14.9% we reported in 2013. The forecasted decline is due in part to some deleveraging as same-store sales performed in line with our guidance for 1% to 2% increase. We are planning relatively no net interest expense in the quarter. The tax rate is projected to be 38% to 39% and diluted shares are forecast to decline to about 212 million. Now I'll turn the call back to Michael for closing comments.
Michael Balmuth:
Thank you, Michael. As we enter 2014, in addition to our own challenging multiyear sales and earnings comparisons, we continue to face an uncertain macroeconomic and retail climate. While we are well-positioned as an off-price retailer, these likely headwinds have prompted us to stay somewhat cautious in our outlook. That said, the strength of our business model lies in the flexibility of our off-price strategies. To maximize sales, we are staying liquid in our Open-to-Buy, which enables our merchants to capitalize on the best opportunities in a marketplace that is currently flushed with terrific bargains.
Further, operating our business with lean inventories has enabled us to increase the amount of fresh and exciting merchandise customers see when they shop our stores. This has helped in maximizing sales, while also driving faster inventory turns and the resulting higher merchandise margins we saw throughout 2013 and over the last several years. Looking ahead, we still see significant growth opportunities for our company. As we've mentioned before, we believe that Ross can ultimately operate 2,000 locations across the United States and that dd's DISCOUNTS can eventually become a chain of 500 stores. As previously noted, we are in the process of making the necessary infrastructure investments to support this long term expansion that will ultimately double our store base. Our plans include the addition of 2 new distribution centers, one that will open in 2014 and another in 2015. In addition, as mentioned earlier, we entered into an agreement last year to acquire a New York buying office building. This is a unique onetime opportunity that will enable us to continue to house all of our New York merchants together, which maximizes their cohesiveness and effectiveness of this critical organization. We continue to believe that keeping our primary buying office in the heart of the Manhattan garment district is a competitive advantage as this location makes it easier for our buying group to strengthen relationships with our large network of suppliers. That said, over the near term, higher costs related to these investments are expected to put some pressure on earnings. For the longer term, we are targeting average annual earnings per share growth of 10% to 13%. The formula is based on a combination of unit growth, comparable store sales gains, flat to slight improvement in operating margin and our ongoing stock repurchase program. In order to achieve our financial goals, we must, most importantly, continue to invest in our merchandise organization. This is the only way to ensure that we can maximize our ability to deliver the best bargains possible to the consumer. In addition, we must also stay focused on strictly controlling both inventories and expenses, fine-tuning and upgrading our planning and allocation systems and developing and implementing further productivity enhancements and efficiencies throughout the business. These are the strategies that have enabled us to reach our current record levels of sales productivity and profitability and also remain the key drivers of our future results. In closing, I want to reiterate that we are favorably positioned in the current retail landscape. We believe off-price will continue to be a strong performing sector and are optimistic about the long term growth prospects for our business. At this point, we would like to open up the call and respond to any questions you might have.
Operator:
[Operator Instructions] And your first question comes from Stephen Grambling with Goldman Sachs.
Stephen Grambling:
I guess, the first. As we think about in-store inventory going forward, you've had several years of really pulling inventory out. Can you just provide some details on how we should think about this going forward? If there's any category or any place else where you plan on maybe even building back?
Michael Hartshorn:
So as it relates to inventories into 2014 going forward, we think there's a bit room to take them down, maybe in the 1% to 2%, right?
Michael Balmuth:
But as far as building back inventories, I don't think we'll ever get there. I don't think -- we'll certainly -- we're always listening to our customer and how they're reacting to our assortments. By my instinct says, we're comfortable at roughly the levels we've set out with some minor tweaks going forward.
Stephen Grambling:
And I guess, as a follow-up to that. Home has been an area of focus. Is there anything that you can provide in terms of details on that category in particular?
Michael Balmuth:
Well, we continue to make progress in Home. In the fourth quarter, our progress is a little slower than we like, although they comped slightly ahead of the company. I think we have to execute better on what we know our strategies need to be there. And I think we'll get there. It's just been a little slower than we'd like.
Operator:
And your next question comes from Brian Tunick with JPMorgan.
Brian Tunick:
I guess, 2 questions. One on the positive comments on merchandise margins for last year and, I guess, your outlook for this year. Can you maybe just talk about, is the coming from the buy side of the picture, or is that coming from, again, better sell-throughs and lean inventories? And then maybe update us on sort of new market performance in 2013. And maybe just want to throw in dd's as well. Sort of where are we in that business sort of ramping up to get closer to a contribution margin similar to the Ross stores?
Michael O'Sullivan:
Okay, Brian. On your 3 questions, merchandise margin improved actually through a combination of higher markup and lower markdowns. So it's both. Secondly, in terms of new markets, I think as we've said before, we've been happy with what we've been able to achieve in new markets over the past couple of years, particularly with the open volumes. But in the fourth quarter, we were disappointed with the comp performance in the new markets in the Midwest. Part of that was the weather, but also, I think, we believe there are some assortment improvements we can make in that region as well. And then on -- I think, the third question was about dd's. And dd's had another solid performance last year and in the fourth quarter. And what was particularly notable was dd's continue to improve its profitability.
Operator:
Your next question comes from Neely Tamminga with Piper Jaffray.
Neely Tamminga:
Just wondering if you guys had an evolution in your thought process around mobile engagement as you head into 2014? We've noticed -- actually seen sponsored links in Facebook just like in dd's and what have you. But just wondering -- obviously, on the commerce side won't be there. But how are you evolving this level in terms of engagement on the other side of holiday?
Michael O'Sullivan:
So Neely, we -- I think as we mentioned before, we are experimenting with social marketing, with mobile marketing. We actually think that those are -- those avenues are actually very interesting for us. We -- historically, word-of-mouth has always been an important form of marketing, unpaid marketing for us. And we think that sort of social networking, social marketing and the link to mobile actually has some promise for us going forward. So we're experimenting in those areas and I think you should expect that we'll continue to grow those aspects on our marketing mix.
Operator:
Your next question comes from Bridget Weishaar with Morningstar.
Bridget Weishaar:
I'm wondering -- I know comp sales you are guiding to decelerate a little bit to the 1% to 2% range and that makes sense in this promotional environment. But I'm wondering what you thought is, overall, on the trade-off between keeping the merchandise margins high and being a bit more promotional to be competitive and gaining higher volume?
Michael Balmuth:
Really, if we do our job well as an off-pricer, we should be able to balance it, okay? As we assess market conditions, sometimes we pull back our spend, then we're able to give an edge of opportunities in the marketplace that should be able to provide us both well priced product, as well as margin, good solid margins. So it's a balance that off-price executed effectively, giving us an edge on versus other areas of retailing, I think.
Operator:
Your next question comes from David Mann with Johnson Rice.
David Mann:
The guidance percentage increase that you're giving for this year is a little more conservative than in past years. Can you just parse through the difference of that 4% to 9% from the 10% to 13%? I think Michael talked about some extra costs with the infrastructure rollout, but can you just compare to your paradigm for future growth against what you gave for this year?
Michael Hartshorn:
Sure, David. I think the premise is we are projecting the 1% to 2% comp. Obviously, we did the 3% last year, but we're up against 5% comp over the last 5 years on a compound basis. So that presents a challenge. Also, Michael referred to the infrastructure costs that we're incurring. We will have a bit more interest, $7 million on interest this year that we wouldn't have last year. Also, our tax rate is going up in the absence of hiring tax credits that we have received in the past. So if you neutralize for those 2 items, you get back to a 6% to 11% growth rate, similar to where we were last year at this time.
David Mann:
Okay. That's helpful. And then for a quick follow-up. The packaway level going into '14 is a little higher than it's been for the last couple of years. I'm just curious, what would that infer about the quality of the market in terms of goods for availability and for pricing? Can you just comment on that?
Michael Balmuth:
Well, when our packaway creeps up, it's because we were able to take advantage of some very good opportunities. And if business still remains volatile as it's been through the last bit of time, I would expect that we'd be taking even further advantage. So it's essentially a good thing for us.
Operator:
Your next question comes from John Kernan with Cowen.
John Kernan:
I wanted to get your thoughts on how do you see competitive environment evolving within off-price? I know you guys have been opening a lot of doors, more mass continues to open a lot of doors. In Burlington, certainly sees a lot of opportunity for additional doors. So how do you see the competitive environment evolving within off-price as a lot of the department stores get more promotional as well?
Michael O'Sullivan:
Sure. So John, I guess, I would say that our -- we kind of regard our competitive environment as actually much larger than just the off-price space, that we operate in a very competitive, very fragmented apparel and home merchandise market. And as a result, we are able to grow share and actually, I think other off-price competitors are able to grow share, as long as we continue to offer great value. So we think that's at least the outlook just to us. And that's going to continue for some time.
John Kernan:
Okay. And then just in terms of CapEx, there's been a multiyear ramp in CapEx due to some onetime items. What do you think CapEx looks like going forward after this year? Because I think, obviously, the share buyback has got to come down a little bit because of a ramp in CapEx. What does it look like next year and beyond?
Michael Hartshorn:
So John, the share buyback is not going to come down because of CapEx spend. We plan to spend $550 million this year, similar to what we did last year. This should be the peak in CapEx spending. Once we get the distribution centers open in '15 going forward, it will come back down as we take that step-up in CapEx.
Michael O'Sullivan:
I think we'd also -- a piece of that. As we've previously announced, the plan is to finance the purchase of our New York buying office building [indiscernible] to bring it up to grow the buyback and the dividend.
Operator:
Your next question comes from Marni Shapiro with Retail Tracker.
Marni Shapiro:
So I guess, Michael or Michaels, if you can talk just a little bit more about dd's. Can you bring us up to speed like as far as your buying staff? At what level is it? Do you have any -- are you looking for anybody to hire within dd's? And are you guys running this fast out of New York and California the way you do Ross Stores? Just a little bit of color behind how dd's is working these days.
Michael Balmuth:
Dd's has its own separate buying organization. We are essentially full, okay? We have no key openings. Our key positions are filled. We have -- as Ross does, we have a much bigger organization in New York than we do in Los Angeles. And dd's has the same complement of a New York and Los Angeles buying office. And what is the another piece, Marni, that you wanted?
Marni Shapiro:
No. Just curious. Things are pretty much fully staffed and running, just more a matter of opening stores and getting things at and getting the sales up to start leveraging all the expenses that are there?
Michael Balmuth:
I think that's accurate and well-put.
Michael O'Sullivan:
And just on the operating side, Marni. We have dd's and we have distribution capacity for dd's. We have a dedicated field staff for dd's. So really, it's just a question of over time expanding the business.
Operator:
Your next question comes from Kimberly Greenberger with Morgan Stanley.
Kimberly Greenberger:
I'm wondering if you can just refer back to the infrastructure investments you talked about as presenting a little bit of a headwind for earnings growth this year. We've got the 2 distribution centers that you're adding, one this year and one next year. The acquisition of your New York City office. Are there any other infrastructure investments that you're making beyond those? And then if you could just talk about the state of your IT systems, do you feel like there's any investment over the next couple of years that you'd like to make there as well?
Michael O'Sullivan:
Okay, Kimberly. The 2 major investments that are worth calling out are the new distribution centers, 2 of them, and one this year and one in 2015. And then the purchase of the New York buying office. The nature of those types of investments is that, number one, they're lumpy. So you don't make those kinds of investments very often. And so there are some start-up costs associated with those investments, particularly ramping up the DCs. And that's really what's causing -- why we thought we would call out and there's a little bit of a headwind in earnings from those investments. I should say that as we grow into that capacity over the next 2 to 3 years, that capacity leverage will become immaterial over time. In terms of the second part of your question about IT, we are always making investments in our IT systems in different parts of the company. But nothing significant in terms of major projects that are worth calling out.
Kimberly Greenberger:
Great. And just one follow-up question for Michael. I'm curious if you saw any impact in your business after the November 1 discontinuation of the SNAP benefit. I know clearly, obviously, Ross does not sell food, but theoretically some of those customers also shopped at Ross for their apparel wardrobe with less support on the food side, maybe they might want to cut back. I'm just wondering if you saw any sort of impact on your business at all?
Michael O'Sullivan:
Kimberly, we really didn't. My understanding is that the food stamp program was worth about $5 billion a year. And you just put that in order of magnitude. I think the payroll tax increase was like $100 billion last year. So although as the food stamp has always been very important to the people who receive them, as a whole, they really don't make a significant difference. And we didn't notice any trend current change after that point.
Operator:
Your next question comes from Ike Boruchow with Sterne Agee.
Irwin Boruchow:
I guess, Michael, just a quick question. I think you commented on the gross margin line in Q4 that your merchandise margins were positive. Because you're -- maybe I missed -- I didn't hear it, what was the basis point change year-over-year in Q4? And then could you just walk us through -- obviously, it's a volatile Q4 for most everyone in retail. How you kind of played with the pricing architecture within the store during Q4?
Michael Hartshorn:
Ike, this is Michael. As mentioned in the comments, overall, operating margins were down about 95 basis points. 65 basis points of that deleverage was due to the 53rd week comparison and that's mainly operating expenses. For gross margin, merchant margin was up about 30 basis points. Occupancy freight, buying and distribution costs combined, delevered by 75 basis points, leaving gross margin to down 45 basis points. And then SG&A was down 50 basis points, which gets you to the total of 95 for the quarter.
Irwin Boruchow:
Okay. And then can you comment on how your pricing might have evolved as Q4 kind of played out just in terms of how holiday in January? Just kind of curious if you could give us any more color.
Michael Balmuth:
Well, the color I give you is, we went into the fourth quarter with lot of Open-to-Buy availability and it gave us the ability to take advantage of a lot of opportunities in the market that helped balance pricing in our store at a very good margin product.
Operator:
Your next question comes from Oliver Chen with Citigroup.
Maryana Pleskanka:
This is Maryana filling in for Oliver Chen. Could you please provide us with some color regarding traffic and ticket size for the quarter? As well as what categories you see the most opportunity in?
Michael Hartshorn:
In terms of the composition of the comp, as we mentioned, the 2% comp for the quarter was driven by a larger basket. This was mainly driven by more units per transaction, but also a slightly AUR. And then transactions were down a bit for the quarter.
Michael Balmuth:
And your point 3 was what?
Maryana Pleskanka:
What categories are you seeing the most opportunity in?
Michael Balmuth:
I think we would really more, in this forum, speak to where we had the most opportunity in fourth quarter. Forward, we wouldn't talk about in this forum.
Operator:
Your next question comes from Mike Baker with Deutsche Bank.
Michael Baker:
So 2 questions. First, in terms of the sales, if you look at the last 4-, 5-year comps this year, decelerated a little bit. Do you think that is more a function of just the economy and the marketplace, or do you think that's a function of the share loss with maybe some of the department stores being aggressive, some of the things that you talked about in the Midwest? And it sounds like one of your off-price competitors got some aggressive pricing this fourth quarter as well. So is that more just the market or the share loss?
Michael Hartshorn:
I think, Mike, it's important to put it in context that we achieved a 3% comp last year that was on top of a 6% the year before. And before that, 5%; and before that, 5%; and before that 6%. So over 5 years, we've averaged to 5% comp. I don't think it's realistic to expect that we can sustain that kind of comp level. So we were pretty happy with our 3% on -- given those last year comparisons. Now the other points that you mentioned such as the economy, unemployment, cuts in government benefits, some of the struggles and other competitors. Those all play a part, of course, in how we do as a business. But I think put in context, we feel pretty happy with that 3%.
Michael Baker:
Okay. Fair enough. Second question. Just so I'm clear on it so -- and I guess, this plays into that guidance of 4% to 9% instead of the usual guidance you've given of 6% to 11% growth. So to be clear, the difference is the higher tax rate, which is a slight difference. And then if the infrastructure investment and that's primarily start-up costs and also the D&A, which will be higher by somewhere around $25 million, maybe $50 million, that's the biggest impact in that guidance differential?
Michael Hartshorn:
Yes, Mike. So operating margin, we mentioned, would be flat to slightly down 20 basis points based on the 1% to 2% comp. And so the differences are below the EBIT line, which is interest, which is about $7 million or 7 basis points and tax rate, which would be slightly higher.
Michael Baker:
So that -- but within that margin guidance, that includes a pretty significantly high depreciation number. Is that right?
Michael Hartshorn:
That's correct, Mike.
Operator:
And your next question comes from Daniel Hofkin with William Blair & Company.
Daniel Hofkin:
Just going back maybe a little bit to the outlook in 1% to 2% comp for the first quarter and the full year. What's your general expectation for traffic and ticket? And I guess, within ticket, what, if anything, are you expecting from benefits, if there is apparel costs, inflation, for example, as some expect? In the past, I think that's been a benefit for in terms enabling you guys to offer even more attractive relative values. What's your thought on that going forward?
Michael Hartshorn:
I would say the factor guiding 1% to 2% for the first quarter and for the year is a combination of we're up against pretty tough performance, we're in a tough environment. We've been able to sell goods at full margin prices, so we're happy with the finance results. And to dissect it more that you'd into what the composition is as to traffic versus ticket, et cetera, we really run our business to provide the best bargain as possible with customers and it's kind of self-revealed. In other words, they come and buy the bargain. So I don't think we're expecting inflation in terms of apparel. We haven't seen that lately. So that won't be our expectation for the first quarter.
Daniel Hofkin:
Okay. And then just back to, obviously, there's some regional differences in terms of percent of store base between you and some other players. If you just look at -- obviously, you mentioned Texas. Can you talk about the -- your performance on the West Coast specifically?
Michael Hartshorn:
Yes. So in terms of for the quarter, we mentioned Texas was the strongest. Florida was also strong. California performed in line with the chain and our weakest markets are where the weather was, the worst including Mid-Atlantic and Midwest.
Daniel Hofkin:
And with that, would you say that, that was kind of most pronounced by far in January, as we're seeing with a lot of other companies?
Michael Hartshorn:
I think that's true.
Operator:
Your next question comes from Lorraine Hutchinson with Bank of America.
Heather Balsky:
This is Heather Balsky calling for Lorraine. I just had a question with regard to your vendor base. You guys have been able to grow your vendor base every year, the past few years. I'm just wondering, looking ahead, where do you see opportunities to add new vendors? And how do changes in your merchandising organization allow you to also grow your vendor base?
Michael O'Sullivan:
I heard the first part of it, how do we see -- could you repeat the second part of your question?
Heather Balsky:
Yes, sorry. The changes in your merchandising organization, how does that also help you access additional brands and grow your vendor base?
Michael Balmuth:
Okay. The more merchants you have, the more market coverage you can get, the more vendors you can see, the more doors you can open. And that leads to more vendors. We've grown our organization dramatically over the last 4 years and it's helped us grow our base of vendors. We expect it to grow significantly. Probably, it would grow across the company, probably more significantly in home and center core-type businesses and as apparel has become more centralized in fewer and fewer players.
Operator:
And your next question comes from Laura Champine with Canaccord.
Laura Champine:
On the CapEx front, after we see this ramp to $800 million this year, when we move into next year, you've got an another DC opening. Should CapEx stay at that elevated rate? And where do you think it settles out long-term as a percentage of sales?
Michael Hartshorn:
This is -- Laura, this is Michael. It is -- this is our peak. As we mentioned, part of the spend this year was dealing IBO. But after we open that distribution center next year, I think it settles more similar to the 2012 levels.
Operator:
Your next question comes from Mark Montagna with Avondale Partners.
Mark Montagna:
Michael, back last year in the second quarter, you were able to react to an expected rise in department store promotions for the fourth quarter. Wondering what your expectations for the department store promo levels are for this first half.
Michael Balmuth:
I would say, based on how business conditions have been, I would expect it to be fairly promotional.
Mark Montagna:
So would you say higher promotions year-over-year versus last year or and...
Michael Balmuth:
I would expect it to be somewhat more promotional than a year ago. Yes.
Mark Montagna:
Okay. And then can you give us a tally of maybe how many selling days might have been lost in the fourth quarter due to weather?
Michael O'Sullivan:
It would be very hard to quantify that, Mark, just given we had, obviously, different weather in different regions. So I'm not sure how to give you a number that will answer your question now.
Mark Montagna:
Okay. And then just last question. I think, Michael, you were expecting strength in the fourth quarter on gift items. And was that just -- I think it was for the home category or was it also across other categories? And how do you feel that, that -- those gift items did during the fourth quarter?
Michael Balmuth:
It was really across all the categories as well, as out of home. And I think it did pretty well. We were pleased with it, but we see room for improvement.
Operator:
Your next question comes from Roxanne Meyer with UBS.
Roxanne Meyer:
I was just wondering if you were able to provide us with some additional hindsighting as it relates to your third quarter performance. And looking back, what may have led to a slight miss hit to your expectations there? And have there been any adjustments made as a result of that?
Michael O'Sullivan:
I don't think we have any additional intelligence, Roxanne, on the third quarter. Obviously, we're always looking at our business in terms of improvements we can make. And certainly, to the extent that there were merchandise categories that we thought weren't performing well in the third quarter, we have made attempts to improve those merchandise categories. But nothing other than that. That's kind of business as usual for us, but nothing under that now.
Roxanne Meyer:
Okay. And then I just had one quick follow-up. In terms of your new store growth for this year, what percentage of your new stores are going to be in newer markets? And are there any additional -- are there any new markets aside from those that you're currently in, in the Midwest?
Michael Hartshorn:
So it's about 1/3 of our Ross stores will be in new markets. And they'll be the same markets we've been in over the last couple of years.
Operator:
Your next question comes from Bob Drbul with Nomura Securities.
Robert Drbul:
Here's the question that I have, is much more on the succession plan unfolding. Is there any update to the time line of when we might be able to expect more definitive plans around your departure or retirement, Michael?
Michael Balmuth:
Sounds like you want me out. But we announced in, I think it was May of '12, that I'd be stepping down, moving into Executive Chairman position as of June 1, '14. We'll be making that announcement in spring here, okay, over the next few months.
Robert Drbul:
Okay. I don't you want out. I was just serious in terms if there's any update.
Michael Balmuth:
No update yet.
Operator:
Your next question comes from Jeff Stein with Northcoast Research.
Jeffrey Stein:
A question on your packaway business. I'm just kind of curious, what kind of mix you currently have? And perhaps, what kind of AUR might be embedded in that packaway? Given that it's such a high percentage of your inventory, would it yield a higher AUR compared to last year, the same or lower?
Michael O'Sullivan:
It's fairly similar for last year, Jeff. And the mix is very similar for last year. We're very happy with what we have in packaway. We were happy with last year, too. So I don't think there's any major differences to call out on packaway.
Jeffrey Stein:
Okay. Have you guys disclosed how you're planning to finance the New York buying office? And how much of the purchase price will be financed?
Michael Hartshorn:
No. We haven't announced how we're going to do that. That's probably a third quarter event. We're working on that currently. And we'd love to have financed the whole thing.
Jeffrey Stein:
Okay. And when is the new distribution facility open in 2014?
Michael O'Sullivan:
Right about the middle of the year. We'll ramp it up over a couple of months and it will be fully operational by the end of the third quarter.
Jeffrey Stein:
So the heaviest start-up expenses from that facility will show up when? Will it show up in Q3? Or is it already beginning to show up?
Michael O'Sullivan:
I think the biggest piece of the expense will start showing up when it opens in Q3.
Operator:
Your next question comes from Richard Jaffe with Stifle.
Richard Jaffe:
Michael, just a question. Given this broad array of merchandise, a high-quality of merchandise that's available in the marketplace, are there any, I guess, opportunities to take advantage of this and then broaden array of product in stores with new categories, with new brands? And also, to experiment with price points, to try higher retails, higher-quality brands. Anything like that?
Michael Balmuth:
A lot of that I wouldn't talk about here. But it's the various price points, the opportunities, it's really all over the place. So there are things that we will be experimenting with out of it, things that we might not have been in to quite as fast.
Operator:
And your next question comes from Patrick McKeever with MKM Partners.
Patrick McKeever:
Just wondering if you might give us some updated thoughts on e-commerce. I mean, I guess, intuitively, one can see why that would not be as much of a threat to you as other retailers. But the largest player in the off-price space is moving forward there and talking very positively about the opportunity to reach more customers. So is there a chance that you might be missing an opportunity? And does the e-commerce factor at all into some of the distribution infrastructure investments that you're making?
Michael O'Sullivan:
So Patrick, it's certainly an area that we've looked at very closely. Our assessment is that it's very hard for an off-price business to make money in e-commerce at the price points that we operate at. And most of the activity in the last few years seems to have been at relatively high price points in merchandise where we really don't compete. So to our focus, it's really on our bricks-and-mortar business. We know that we can achieve strong returns in that business. We know we have a lot of potential. Many, many more markets that we can expand into. But having said that, we'll continue to monitor e-commerce. And if things develop and we think it looks like a possible opportunity, we'll take another look.
Patrick McKeever:
And then another -- a quick one on the new distribution centers. Will that change your basic distribution model, which, I think, is to distribute merchandise from all DCs to all stores? Will you move more toward a regional distribution model?
Michael O'Sullivan:
It won't dramatically change our distribution model. We are -- our distribution network, at this point, is fairly mature and operates pretty effectively and supports our business very well. And the new DCs are intended to be integrated into that same model. So no radical change, no.
Operator:
And your next question comes from Dana Telsey with Telsey Advisory Group.
Dana Telsey:
As you think about the customer, both for dd's and for Ross, what opportunities do you see to expand the existing customer base to get more of the wallet share -- to expand the existing and get more wallet share from new and existing customers, how do you see the opportunity to grow that? And the pressures on them, whether it's food stamps, whether it's health care costs, how is it different now than it's been last year? Do you see anything different? And how much of your customer is impacted by any of those external pressures?
Michael Balmuth:
Really, it goes back -- in getting more of their wallet, it goes back to the same thing that we've probably said numerous times is, if we execute and provide more bargains in front of customers, they'll come back more. And that -- I don't think that's changed in a while. I don't it changes as we go forward and it applies to these as well for us.
Michael O'Sullivan:
And then on the second part of your question, Dana, about what impact economic trends, the factors, there's unemployment, the cuts in government benefits, what impact that might have on us. I think certainly, anything that takes money out of customers' pocket is not a good thing for retail and not a good thing for off-price. But having said that, logically, you would think that the greater extent that people need bargains, the better off we might be. So you could play it either way.
Operator:
And we have no further questions at this time. I'll turn the call back to Mr. Balmuth for closing remarks.
Michael Balmuth:
Thank you for joining us today and for your interest in Ross Stores. Have a great day. Thank you.
Operator:
And this concludes today's conference call. You may now disconnect.
Operator:
Good afternoon, and welcome to the Ross Stores Third Quarter 2013 Earnings Release Conference Call. [Operator Instructions]
Before we get started, on behalf of Ross Stores, I would like to note that the comments made on this call will contain forward-looking statements regarding expectations about future growth and financial results, including sales and earnings forecasts and other matters that are based on the company's current forecast of aspects of its future business. These forward-looking statements are subject to 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 2012 Form 10-K and fiscal 2013 Form 10-Qs and 8-Ks on file with the SEC. Now I would like to turn the call over to Michael Balmuth, Vice Chairman and Chief Executive Officer.
Michael Balmuth:
Good afternoon. Joining me on our call today are Norman Ferber, Chairman of Board; Michael O'Sullivan, President and Chief Operating Officer; Gary Cribb, Executive Vice President, Stores and Loss Prevention; John Call, Group Senior Vice President and Chief Financial Officer; Michael Hartshorn, Senior Vice President and Deputy Chief Financial Officer and Connie Wong, Director of Investor Relations.
We'll begin with a review of our third quarter performance followed by our outlook for the upcoming holiday season. Afterwards, we'll be happy to respond to any questions you may have. As noted in today's press release, third quarter sales were in line with our guidance, while earnings were better than expected, mainly due to an above-planned merchandise gross margin. Earnings per share for the third quarter of 2013 increased 11% to $0.80, up from $0.72. These results are on top of a 14% gain in the prior year. Net earnings for the quarter were $171.6 million, up from $159.5 million last year. Sales rose 6% to $2,398,000,000 with comparable store sales up 2% on top of a 6% gain in the prior year. For the first 9 months of 2013, earnings per share were $2.86, up from $2.46. These results represent a 16% increase versus 22% for the same year-to-date period in 2012. Net earnings grew to $619.4 million, up from $550.2 million for the first 9 months of 2012. Sales increased 8% to $7,489,000,000 with comparable store sales up 3% on top of a 7% gain for the same period in 2012. Juniors and Missy sportswear were the strongest businesses during quarter, while Florida was the top-performing region. Operating margin of 11.3% was relatively flat to last year. As a percent of sales, an improvement in cost of goods sold was offset by an increase in selling, general and administrative expenses. John will provide additional color on these operating margin trends in a few minutes. As we ended the third quarter, total consolidated inventories were up 7% over last year, while packaway levels were 45% of total inventories compared to 46% at this time in 2012. Average in-store inventories were down 2% at the end of the quarter, and we continue to target slightly lower selling store inventories for the balance of the year. dd's DISCOUNTS had solid sales and improved profitability for the quarter, benefiting from our ongoing ability to operate the business on leaner inventory levels, while also flowing a larger percentage of fresh and exciting product to our stores. We also completed our store expansion program during the period with the addition of 88 Ross and dd’s DISCOUNTS locations combined year-to-date. As usual, these numbers do not include about 10 older stores that will have been closed or relocated by the end of the year. Now John will provide further color on our third quarter results and details on our updated guidance for the fourth quarter and the year.
John Call:
Thank you, Michael. Our 2% comparable store sales gain in the third quarter was mainly driven by an increase in the size of the average basket. As Michael noted, third quarter operating margin was 11.3%. Although flat to last year, this was above planned, mainly due to 55 basis points in higher merchandise margin. This increase was partially offset as expected by about 35 basis points related to a lower shortage benefit. These results compare to last year when our physical inventory was better than expected and added about $0.02 of third quarter earnings per share. This year's fiscal inventories also reflect our ability to maintain record low shrink expense in line with reduced reserves and on top of significant improvements over the past several years.
Occupancy costs during the quarter increased about 15 basis points while selling, general and administrative expenses delevered by about 10 basis points. Our stock repurchase program remains on track as we bought back 2 million shares in the quarter for a total purchase price of $145 million. As a result, year-to-date, we have repurchased 6.4 million shares for a total price of $421 million. We expect to buy an additional $129 million during the fourth quarter, keeping us on track to complete about $550 million of the 2-year, $1.1 billion program announced at the beginning of 2013. Let's turn now to our guidance for the fourth quarter. As a reminder, the 53rd week last year added about $149 million in sales and $0.10 in earnings per share to the 2012 fourth quarter and fiscal year. The extra week in 2012 also resulted in all fiscal quarters being 1 week later in 2013 versus the prior year. While this shift is relatively neutral for the full year, it added about 1% to fiscal sales growth in the first half. This benefit is reversing and reducing sales growth on a fiscal comparison and the comparison in the second half by about 1%. This impact is reflected in our third quarter results and is also embedded in the following fourth quarter guidance. As noted in today's press release, for the 13 weeks ending February 1, 2013, we are now projecting same-store sales to increase 1% to 2% and earnings per share to be in the range of $0.97 to $1.01. This compares to $1.07 for the 14 weeks ended February 2, 2013, which includes the aforementioned $0.10 benefit from last year's 53rd week. For the fourth quarter of 2013, operating statement assumptions include the following. As I just mentioned, we are now forecasting a 1% to 2% increase in same-store sales. This projected growth is on top of challenging multiyear gains of 5% and 7% in the fourth quarters of 2012 and 2011, respectively. Factoring in new store growth along with 1 less week of sales versus last year, total sales for this year's 13-week quarter are projected to be down 1% to 2% from last year's 14-week period. We are targeting fourth quarter operating margin to be down about 120 to 140 basis points to 12.3% to 12.5% as a percent of sales. About half of this decline is related to the estimated 65 basis point benefit from last year's fourth quarter from the 53rd week. The balance of the lower forecasted operating margin is mainly due to more conservative merchandise gross margin assumptions compared to the first 9 months of 2013. We would also expect some deleveraging on expenses as same-store sales only performed in line with our guidance for a 1% to 2% increase. We are planning no net interest expense in the quarter, and our tax rate is expected to be about 37%, and weighted average diluted shares outstanding are estimated to be about 214 million. Moving to our outlook for the full year. We are now projecting earnings per share for the 52 weeks ending February 1, 2014, to be in the range of $3.83 to $3.87. Now I'll turn the call back to Michael.
Michael Balmuth:
Thank you, John. Our solid year-to-date financial results, especially on top of robust multiyear gains, reflect our ongoing ability to deliver compelling bargains to today's value-conscious customers. As we enter the fourth quarter, we face our own challenging comparisons along with ongoing uncertainty in the macroeconomic and political climates. In addition, more retailers are planning to open earlier than prior years on Thanksgiving Day, and there are 6 fewer shopping days in 2013 between Thanksgiving and Christmas. More importantly, a number of retailers have reported disappointing results over the past few quarters. We believe all of these factors combined will create the most intensely competitive and promotional holiday selling period in recent years.
To compete in this tougher climate, our merchants have acquired a wide array of exciting and sharply priced name-brand fashions and gifts to appeal to today's value-focused holiday shoppers. However, it is difficult to know if the compelling bargains we offer will be able to fully offset the impact of a more difficult external environment. As a result, while we hope to do better, we feel it is prudent to adopt a more cautious outlook for the fourth quarter. I want to emphasize that despite these near-term headwinds the strategies that have driven our success over the longer term remain unchanged. Looking ahead, we will stay intently focused on the same key initiatives that have allowed our flexible off-price model to perform well in both healthy and more challenging retail landscapes. #1 is our ongoing commitment to strengthening our merchandising organization with investments in people, processes and technology. To maximize profitability, we will also continue to strictly control both inventories and expenses, fine-tune and upgrade our planning and allocation system and develop and implement further productivity enhancements and efficiencies throughout the company. We firmly believe that carefully and diligently executing these proven strategies will remain the key to maximizing our prospects for earnings and revenue growth over both the near and long term. At this point, we'd like to open up the call and respond to any questions you may have.
Operator:
[Operator Instructions] The first question comes from Paul Lejuez with Wells Fargo.
Paul Lejuez:
Just wondering if -- just looking at sales of packaway, just wondering how your packaway merchandise is performing. Does the promotional environment create any risk to the margins you would normally see on your packaway merchandise. And also just wondering from a category perspective if there was anything specifically that's kind of been a driver of comps that has now slowed down for you guys.
Michael Balmuth:
Our packaway is performing at our expected levels. In looking and went [ph] through this in detail going into every selling period, we are not looking at any real risk in our packaway at all, okay? We feel very good about what we have coming out in packaway in fourth quarter and in early spring. And are we looking at any piece of our business that -- if I remember the third part of the question was are we looking at any piece of our business we're lacking confidence in? And I'd say no. I think -- we think we're fairly well prepared.
Paul Lejuez:
Not so much lack in confidence. I'm just wondering if there's any category specifically that were a driver for you that have now really slowed down, and that's something that you could look at and say, "That would be 1 of the reasons for the slower comps."
Michael Balmuth:
No, no, nothing as you've described has happened.
Operator:
The next question comes from Omar Saad with ISI Group.
Omar Saad:
Can you talk about -- I thought you have some interesting comments about the environment. Stepping back, big picture, where do you see -- what do you see as the source of a lot of the views that this is going to be such an increasingly promotional holiday season compared to years past? Is it that shortened window where people are going to be in more of a timeframe? It doesn't seem like inventories are significantly overbought kind of across the industry. So any color you have on that kind of looking at the overall environment and what that does to your pricing umbrella as you guys create relative value to some of the other channels would be helpful.
Michael Balmuth:
Where we look at is, as you said, there's a shorter calendar, also business toughened up for department stores and discount stores in the second quarter, giving them ample time to get very well prepared for a promotional fourth quarter with, again, no shortened days between Thanksgiving and Christmas. So I think that those 2 aspects -- and it really hasn't improved on an overall basis as people move from the second quarter to the third quarter. So there is no reason at all for them to soften their position which was developing in the second quarter. What -- the other part of your question was?
Omar Saad:
I guess my follow-up would be, as you look at the flexibility in your buying process and platform does that allow you to manage through this and maybe recapture or fight against some of the tougher macro kind of bigger picture issues?
Michael Balmuth:
Usually it does. It certainly -- what it does is, one, we end up in strong buying position. Okay. And some of that buying position will be utilized to flow in this season, some will be utilized to flow in 2014. So it all depends how severe and bloody it gets. Okay. Remember, once -- it's a very short selling season this year between Thanksgiving and Christmas. So once the games begin, there's not a lot any of us can really do, and we run an every-day low-price business. We think we've anticipated what prices are going, but you never can be quite sure.
Operator:
The next question comes from Neely Tamminga with Piper Jaffray.
Neely Tamminga:
Just wondering if you guys could enlighten us on 2 issues. One would just be in terms of the pattern of the quarter. I apologize if I missed this earlier, but did -- was there a particular month within the quarter that underperformed your expectations? We've been broadly hearing about October and August being better and September being a little bit weaker. Just wondering how that lined up with your expectations. And then secondly, on the holiday hours, are you guys chain-wide not going to be opening up at all early on Thanksgiving? Or are you leaving that decision to regions and locations? Just curious.
John Call:
So, Neely, for the quarter, we don't comment specifically. But actually the first part of the quarter was a little more healthy than the second part of the quarter is what I'd say.
Michael O'Sullivan:
And Neely, on your second question, over the last several years, we've actually been pretty flexible our store opening hours in general. And within reason, we've sort of looked at sort of local circumstances on decisions about what time stores open. The same is true of Thanksgiving. As a chain, we're not opening early for Thanksgiving, but there are some stores that will be operating extended hours based upon the local circumstances that they're in.
Operator:
The next question comes from Ike Boruchow with Sterne Agee.
Irwin Boruchow:
I guess you guys alluded to the back half of the quarter was weaker than the front half. I guess the high-level question I'd ask is do you think that's more a function of your customer demographic being under a little bit more pressure? Or do you think it's more a function of your competition and some of the moderate income big boxes just being a little bit more promotional? And your thoughts there.
John Call:
Yes, I think it has to do with back-to-school season in the first part of the quarter, where people really have a reason to buy. With a back half of the quarter, there wasn't that compelling reason.
Irwin Boruchow:
But anything with how your customer demographic is feeling? They started -- there is some pressure to start the year in February. Are you seeing any of the same signs that you kind of saw to start the year in terms of how that demographic is feeling about themselves and their shopping patterns?
John Call:
I don't think so. I think they've been under pressure for a number of years now.
Michael Balmuth:
Certainly, you had the -- you had what happened nationally with the shutdown. So how much that played into that, I don't know.
Operator:
The next question comes from Kimberly Greenberger with Morgan Stanley.
Kimberly Greenberger:
Michael, this year you've been anniversarying really to comparisons all year. And the third quarter seems to be the first quarter where they presented more of a challenge I think in the company's ability to anniversary them. Is there something that changed here in Q3? And then as you look at your geographic footprint, were there areas that performed particularly well for Ross and other areas that might have lagged the chain?
Michael O'Sullivan:
Kimberly, you're right. Certainly, we were up against some pretty tough comps in the third quarter. So they're [ph] about 2% that we reported was on top of the 6% last year, and that itself was on top of a 5% the year before. So that's why we guided the way we did for the third quarter. In terms of how the quarter played out, as John said, there were more reasons for the customer to shop around back-to-school, but the third quarter is tricky. As the quarter goes on, there are few reasons for the customer to shop until the weather turns cold. On your point about -- or your question about geographically, yes, Florida was strong for us again this quarter.
Operator:
The next question comes from Lorraine Hutchinson with Bank of America.
Lorraine Maikis:
Just following up on the fourth quarter guidance. I know a lot of the calendar shift has been well known when you gave your initial 4Q guidance. What were the key 1 or 2 things that you saw out there in the third quarter that made you tweak that fourth quarter number down?
John Call:
Yes. So, obviously, as we tracked through the third quarter that changed our perspective on the fourth quarter. Going into the fourth quarter, we want to be priced appropriately with what we anticipate is a very promotional calendar. And with that, if we only do the 1% to 2% comp, there'd be a little falloff in leverage.
Operator:
The next question comes from Brian Tunick with JPMorgan.
Brian Tunick:
First question, I didn't hear -- at least I didn't think I heard anything on the home business. Just wondering if you could talk a little about sort of how home performed in the quarter and sort of what are your objectives either as a percentage of sales or how you think you can continue to benefit from the housing cycle. And then the second question is on some of the new market conversations and how micro-merchandising is supposed to be helping you. Can you just maybe give us some view of how some of the middle of the country markets are working and your confidence that you'll be able to move towards the East Coast, I guess, over the next couple of years.
Michael Balmuth:
The home performance, as you might remember, we went through some difficulty in home a while back, and we've been progressing on a plan to improve the business. And in the third quarter, it ran at the same rate as the company, and we see it continuing to make progress in Q4. We have it very well positioned for a gift business. It becomes -- it's an important part of our store all year round, but it gets a little more important in Q4. And we think we're continuing along, and we're satisfied with the progress we're making there.
Michael O'Sullivan:
And Brian, on your second question about new markets. Overall, the performance of our new markets was in line with that for the quarter and for the year. And we've only been in new markets for just over 2 years, but we're very happy with what we've been able to accomplish, and we remain very confident we're going to be able to build a strong business there over the long term. You mentioned micro-merchandising. That's certainly been one of the things that's helped us respond -- adjust assortments and respond to customer trends in that region.
Operator:
The next question comes from Roxanne Meyer with UBS.
Roxanne Meyer:
I'm wondering if your -- just to follow up on guidance -- if it's also based on anything that you're specifically seeing in November that we can extrapolate. And also what I guess -- it was great to see your merchandise margin up nicely. Aside from the management of inventories, what else contributed to your increase in merchandise margin?
John Call:
So to that question, Roxanne, clearly the lower inventories we've done consider [ph] this with lower markdowns throughout the period and we had a little stronger price in the quarter as well. So those came together nicely for us during the quarter. As to any indications in February and what that might mean for the fourth quarter, we just don't comment -- excuse me, November, I'm sorry. We just don't comment on that.
Operator:
The next question comes from Bridget Weishaar with Morningstar.
Bridget Weishaar:
As you mentioned, your competition has kind of ramped up its act and put together a planned promotional season complete with marketing campaigns. Has this increased level of competition at all influenced your marketing campaign and the spend in that area? And also if you could comment on social versus traditional media spend.
Michael O'Sullivan:
So, Bridget, our marketing strategy and our marketing message has been very consistent over the years. The message is really that we offer the best value in apparel and home fashions all the time. There's no gimmicks, no spin, just a straightforward message. And we found that, that works pretty well with our customers. They understand the message. And when they come to the store, we kind of deliver on that message. So no real change in terms of the -- just the every day value message that we're providing for the customer. Now you mentioned social media. We have been experimenting and investing in social media over the last couple of years. We found historically that word of mouth is actually the best marketing that we have, and we found social media is a good vehicle to sort of promote word of mouth. So we've been doing a number of things in that space.
Operator:
The next question comes from Jeff Stein with Northcoast Research.
Jeffrey Stein:
I'm wondering if you could talk about the performance of dd’s versus Ross? Which showed a stronger comp increase for the quarter? And did they both report comp increases for the quarter?
Michael O'Sullivan:
Yes, Jeff. dd’s had very solid sales growth during the quarter as Michael mentioned. We don't break out dd’s separately. It's not big enough, not material to the overall corporation. So we're very happy with dd’s performance.
Jeffrey Stein:
But can you just say whether or not they comped positively or not?
Michael O'Sullivan:
Yes, they did.
Jeffrey Stein:
They did. Okay, good. And I didn't hear anything in terms of the -- when you were discussing the comp, you talked about the size of the basket. Did you see an increase in traffic, which has been part of the driver up through the first 6 months of the year?
Michael O'Sullivan:
Traffic was pretty flat to last year.
Jeffrey Stein:
Okay, all right. And just a question for John. Wondering if you could just run through the economics of buying -- purchasing your buying office and what -- just kind of the thought process behind that as opposed to either renewing the lease or doing something else.
John Call:
Sure. So we had a unique opportunity, we think, that gives us long-term control over that space in order to house what we believe is our most strategic asset, and that's our merchandise organization. We think it gives an opportunity to keep that group together in 1 centralized location in the heart of the garment district, which we think is incredibly important to us. We are currently working through the CapEx and financing going into 2014. We'll have more to say on that when we report our fourth quarter results. And the purchase actually, as indicated I think in the disclosures we made, will not be consummated until later on in 2014.
Operator:
The next question comes from Stephen Grambling with Goldman Sachs.
Stephen Grambling:
When you look back at prior periods when the holiday has been particularly aggressive, are there any learnings to extrapolate to this period? And I guess what I'm trying to get at is as you look at these types of promotional periods do you historically end up with better product and better positioning coming out?
Michael Balmuth:
I think basically what we've learned is go into these periods planned very conservatively, have a lot of open to buy. And typically there are buying opportunities within it, some of which we'll be able to use in that season, some of which or a considerable amount is able to be used for the following year. But it usually turns into a buying opportunity.
Operator:
The next question comes from Daniel Hofkin with William Blair.
Daniel Hofkin:
Just a little follow-up. I know we've kind of beaten the comp progression to death a little bit. But in terms of comparing you guys with the demographic of some of your competitors in off-price, do you feel like just the macro is a greater factor for you, either macro alone or who you're competing against versus who some of your channel competitors are competing against? Is that a greater factor and something that is contributing to the downshift here in the second half, in your opinion?
Michael O'Sullivan:
Daniel, I don't think we think that. That sounds a bit more fine-tuned than I think we're capable of. But I think that -- what we look at is we look at our multiyear comparisons over the last 3 third quarters, 5% in 2011, 6% in 2012 and then 2% this year. So on a stacks basis, we think that lines up pretty well versus our competitors. And also just on a year-to-date basis I would say that we look pretty good versus our competitors.
Daniel Hofkin:
Okay. And the -- as it relates to margin, was there any trade-off between merch margin or, let's say, pricing and traffic or maybe a little bit of firmer pricing, a little better margin partly at the expense of less traffic? Was that a factor at all in the complexion?
Michael O'Sullivan:
No.
Daniel Hofkin:
Okay. And I guess beyond the sort of some of the -- a couple of the categories and regional info that you've given, is there any -- can you provide any -- fill out the rest a little bit for us in terms of what else was better or worse or -- than the chain average?
Michael Balmuth:
Yes. Ladies was the strongest business in the store. And home, as I said, progressed nicely and ran with the company. And we saw some improvements in our shoe business.
Daniel Hofkin:
Shoe business, you said?
Michael Balmuth:
Yes.
Daniel Hofkin:
Got it. Okay. And then regionally, you said Florida was the best. Did you say anything specifically about West Coast or other markets?
Michael O'Sullivan:
West Coast was pretty much in line with the chain.
Daniel Hofkin:
Which I guess you would expect.
Operator:
The next question comes from John Kernan with Cowen.
John Kernan:
So as we look out longer term, and your operating margin's come a long way, you're at kind of a peak level here. What gives you confidence that you can move it higher? Is it something in the merchandise margin? Is it SG&A leverage? As we look out next year and longer term, what do you view as the margin driver to get you past this kind of peak level?
Michael O'Sullivan:
So, John, there are really 3 things that have driven our operating margin over the last 2 years, lower markdowns from managing inventories more tightly, lower shrink from a bunch of initiatives we put in place and expense leverage on -- ahead of planned sales. I think that in each of those areas there might be some incremental upside. At this point, I think it'll be fairly small, but there'll be some incremental upside. So really most of the benefit from here on is from sales leverage. So our focus is really making sure we have the best merchandise and the best bargains in the stores with regards to that.
Operator:
The next question comes from David Mann with the Johnson Rice.
David Mann:
John, can you just talk a little more detail about the components of gross margin, how you think that may play out in the fourth quarter?
John Call:
Yes. So as we roll into the fourth quarter, we've mentioned that gross margin may be a little tougher than it's been year-to-date. We think we're going to be priced aggressively going into that quarter. We also have some deleverage of some of the other components of gross margin in buying staff, distribution expenses, et cetera. We just did want [ph] it to comp.
David Mann:
Okay. And Michael, you mentioned a little earlier about the potential of a buying opportunity for goods. I'm just curious given that the department stores, as you said, signaled that things were weaker starting back at the end of the second quarter. How was the buying opportunity from a pricing standpoint for goods in the third quarter?
Michael Balmuth:
How was it?
David Mann:
Yes.
Michael Balmuth:
It was pretty good.
David Mann:
So given that, how -- it would suggest that you're fairly well positioned coming into the fourth quarter from an IMU standpoint to at least have some cushion, no?
Michael Balmuth:
Yes, yes.
David Mann:
Okay. And then one last question on the inventory per store. Obviously, you guys have taken significant amounts of inventory out of the store on a per-store basis. I'm just curious, do you expect that to continue next year at all? And any thoughts about any need on a certain store basis to start putting more inventory back in the store?
Michael O'Sullivan:
We're in the process of putting together our plans for next year, David. I think it's likely, but we haven't finalized the plans yet. I think it's likely that we'll trim inventories a little bit more. We think that's worked well for us. It's increased the freshness of the products in front of the customer. It's helped to drive sales and to drive margins. So I think we still think there's some opportunity there. But yes, it's smaller than the -- obviously, we've taken out close to 40% of inventory per store. So it'll be pretty small compared with that, but still some incremental opportunities.
Michael Balmuth:
And on the other part of the question, we're not looking at putting more of that back. We're very happy with the way this has worked, and it's all about flow of product to the stores.
Operator:
The next question comes from Laura Champine with Canaccord.
Laura Champine:
Now that you've had some more time operating in the Midwest, could you update us on your thoughts for future growth in the Midwest and also just give us a sense for how California, your most important market, is doing?
Michael O'Sullivan:
Yes. Having been in the Midwest for about 2 years now, we're continuing to open stores. And I think you can expect for the next several years we'll continue to build out our presence in the Midwest, adding more markets in the Midwest over time. And in terms of California, California has been tracking pretty close to the chain for the year.
Operator:
The next question comes from Marni Shapiro with The Retail Tracker.
Marni Shapiro:
Could you -- Michael, you mentioned, or I can't remember who mentioned it, that the size of the basket had increased just a little bit. Can you give us any color around that? And then any indications about traffic? Has your traffic been consistently good and up this year versus last year and in particular in the third quarter.
John Call:
So on the basket size, Marni, that was slightly -- -- could be mix issues. Obviously, we have lower markdowns. Retails are up slightly. So that drove a bit of the basket up. As to traffic counts, I think Michael alluded to the fact that traffic was flattish for the period.
Marni Shapiro:
But looking at the whole year in the aggregate, was it -- has it been trending up for the year in general?
Michael O'Sullivan:
I think slightly up for the year-to-date.
Operator:
The next question comes from Mark Montagna with Avondale Partners.
Mark Montagna:
Two questions. Do you think that it's possible you may be overanticipating the difficulty between Thanksgiving and Christmas considering so many of the retailers have already implemented -- they've been basically trying to do Black Friday week ever since the beginning of November.
Michael Balmuth:
I would say, hopefully.
Michael O'Sullivan:
I think what we found, Mark, is as Michael said earlier,when we position ourselves relatively cautiously, when we keep our inventories tight, our expenses tight that actually if it's a promotional environment we can do okay, and we can hit our guidance. And actually if it turns out we're wrong, we've shown that we're pretty good at chasing business. And we hope the sales trend is stronger.
Mark Montagna:
Okay. And then the next question is it seems like all year you guys have had some pricing power and been able to operate at a greater price spread versus the department stores when they have to react to promotions. Is it -- sounds as though you're expecting to maybe give back some of that pricing power in the third quarter. If you don't have to give it back, would it be fair to say that your comps should be above the guidance that you're giving?
Michael Balmuth:
I'm not sure. I would need you to elaborate on the question. I'm not sure of the pricing power point.
Mark Montagna:
Yes. It seems as though this year your -- the price gap between Ross and the traditional retailers is not as great as -- I mean is -- you've been able to maintain it if not maybe increase it a little bit versus traditionally. And I'm just wondering if you're anticipating shrinking that. It sounds like you're anticipating shrinking that during this current fourth quarter. If that doesn't happen, I guess, would it be fair to say that then your comp would be stronger than what you're guiding to.
Michael Balmuth:
I'll put it another way. If it's not as promotional an environment, we should do better, okay, which is really what you're -- I think what you're asking.
Mark Montagna:
Right, okay. And then just last question, do you see any white space out there for you, perhaps, plus or petite sizes?
Michael Balmuth:
Can you phrase that differently?
Mark Montagna:
Like merchandise in terms of white space, in terms of...
Michael Balmuth:
What's the opportunity...
Mark Montagna:
Yes, merchandise opportunities.
Michael Balmuth:
Yes. I think the special size business is an important business. And certainly nationally the large size business is growing very rapidly. And so I probably would say that has a bigger opportunity for most people -- most retailers.
Operator:
Your next question comes from Mike Baker with Deutsche Bank.
Michael Baker:
So a couple of things. First on the third quarter. Comps did slow, and I appreciate the tough comparison. But if you look at it versus -- on a 2-year stack or 3-year stack, it's pretty -- it's as low as it's been in years, frankly. So what happened in your mind? Was it more of a macro thing? Or do you think it is much more just a competitive situation where some of the department stores, maybe even JCPenney, have gotten a little bit more aggressive?
Michael Balmuth:
We don't know for sure. But our opinion is it's more macro, okay, in Q3. There really -- Q3 doesn't represent -- after you get through back-to-school, our quiet shopping period, it's very weather dependent or kick off the fall season for whatever reason dependent. And so it's usually -- it can be a slower startup. And it was up for us. Plus, things just don't look that rosy out there.
Michael Baker:
Yes. Okay. So then I guess the next question, what do you do to get back -- I appreciate your guide to somewhere in the 1% to 2% range. But every quarter for the last 4 or 5 years, you've been able to beat that. What do you do to get back to being able to beat? I mean if it's the tough environment, as you described, do you expect traffic to get better? Is it a trade-down? Or you just sort of wait for the economy to get better?
Michael Balmuth:
Not a trade-down. We do our trade better. We sharpen our prices. Okay. And we execute -- we should execute more effectively, and we run our inventories tighter. That's what we do in off pricing.
Operator:
The next question comes from Oliver Chen with Citigroup.
Oliver Chen:
Regarding the recent trends you've been seeing, what are your thoughts about the seasonal weather categories within the quarter? Other full-price retailers have been quite enthusiastic on this category. Secondly, on your comp forecast of 1% to 2%, is that going to be primarily driven by continuation of the retails up slightly? If you could just help us with some color there, that'll be great.
Michael Balmuth:
Our seasonal business performed as we planned it, okay, slightly better in some categories, a little -- not as good in others. But overall about how we planned it.
John Call:
Oliver, as it relates to the guidance on the 1% to 2% comp, difficult for us to parse out whether it's traffic or it's ticket. What we try to do is make sure that we put the best offerings and the best bargains in the stores as possible and believe the customers will react to that. Difficult for us to try to predict what will happen between those 2 levers.
Oliver Chen:
And the promotional environment, it feels to me like you guys would be better positioned than other retailers to benefit from a better comp. But I guess you're taking the view that it's more prudent to be cautious. Could you just try to help me understand that?
Michael Balmuth:
I don't know if I can help you understand it. I can tell you this is what we've done whenever we have felt the environment would be tricky, tricky being more promotional. We've tighten things up and got more conservative, and it's just served us very well.
Operator:
Your next question comes from Richard Jaffe with Stifel.
Richard Jaffe:
And just a question on dd’s. Have you found that given the need for more traffic, the need to sell more units, have you taken a different real estate approach than Ross stores? Or is it really a similar approach to demographics and store location?
Michael O'Sullivan:
Richard, dd's has quite a distinct customer, target customer. So when we look to real estate locations, we are looking for quite a different demographic. And therefore, dd’s in most cases ends up being in a different center. There are some exceptions to that, where there's enough of the demographic to support it. But I would say in most cases dd's in a different location.
Richard Jaffe:
And the occupancy cost similar? Or the demographics play out favorably to a lower rent for dd’s DISCOUNT?
John Call:
It should be lower rent, Richard. And the centers we're looking at tend to be more urban areas. And maybe in their second or third generation of occupants tends to be at lower rent.
Operator:
Your next question comes from Michael Exstein with Crédit Suisse.
Michael Exstein:
Can you just give us some updates on what's going on in the new distribution centers and any pressure that could be putting on your SG&A going forward?
John Call:
Sure. Michael, the new distribution center is 1 will come on in kind of mid part of 2014. The other 1 in 2015. So although they might put a little pressure on 2014 distribution costs, they won't be that meaningful, and we'll have more to say about that when we issue guidance for 2014.
Michael Exstein:
How about the home office move? Is that hitting this year or next year?
John Call:
It will hit next year.
Operator:
The next question comes from Patrick McKeever with MKM Partners.
Patrick McKeever:
I'm wondering if you could talk about your holiday merchandise and marketing strategy. Are you going after the gifting business aggressively this year? Is that an area that you've I guess distorted your inventory? And what is the plan from a marketing standpoint?
Michael Balmuth:
I would say our marketing is slightly more aggressive than a year ago, and our inventories are more skewed towards gifting than a year ago, and that's across categories.
Patrick McKeever:
And then just I guess general question on the marketplace, the buying opportunities that you've talked about a little bit. But your competitor -- big competitor did characterize the environment as being better than last year and that sort of thing. Would you agree with that assessment?
Michael Balmuth:
Yes, I would.
Patrick McKeever:
Okay. Can you elaborate a little bit?
Michael Balmuth:
It's a very good buying market. Okay. And yes, there's a lot of opportunities. We're being very selective. Some of these opportunities we'll be using this season. Some of them we'll be using in 2014. But as business slows down, okay -- and you all see more than I do what's happened around us -- the supply lines obviously were not geared for that slowdown. So there was excess supply.
Operator:
[Operator Instructions] The next question comes from Rick Snyder with Maxim Group.
Rick Snyder:
I noticed that accounts payable the inventory is down and packaway is down. Can you give us some color on maybe the age of the inventory? Is that a reason that you're looking for gross margin down?
John Call:
No, not at all. I think the payables leverage that indicator has to do with timing. I think we're up 2 points from where we were last year. And packaway, it has to do when packaway come in, et cetera. So I won't read anything into that as to implication on gross [ph] in the fourth quarter.
Operator:
The next question comes from Dana Telsey with Telsey Advisory Group.
Dana Telsey:
As you think about the buckets of gross margin, merchandise, buying staff, distribution expenses, where was the most differences in the third quarter and how you're looking at it for fourth quarter and beyond?
John Call:
Thanks, Dana. I'll take that. As we mentioned, merchandise margin was up 55 basis points. And we had shrink was negative to the tune of 35 basis points. We talked about that in the written comments or the prepared comments. And occupancy was slightly down given the 2 comp. Everything else came in flattish to those numbers. For the fourth quarter, we're looking for merchandise margin to be more flattish as opposed to up where they have been. We also believe that there'll be pressure on occupancy and buying that we indicated. And if we only do the 1% to 2% comp, we should have some pressure on G&A as well. As we did mention in the prepared comments, we're looking for EBIT to delever 120 to 140 basis points, about half of that is due to this 53rd week issue we had in 2012.
Operator:
And there are no further questions in the queue at this time. I'd like to hand the call back to that leaders.
Michael Balmuth:
Well, thank you all for joining us today and for your interest in Ross Stores, and have a great holiday.
Operator:
This concludes today's conference call. You may now disconnect.
Operator:
Good afternoon, and welcome to the Ross Stores Second Quarter 2013 Earnings Release Conference Call. [Operator Instructions] Before we get started, on behalf of Ross Stores, I would like to note that the comments made on this call will contain forward-looking statements regarding expectations about future growth and financial results, including sales and earnings forecasts and other matters that are based on the company's current forecast as 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 2012 Form 10-K and fiscal 2013 Form 10-Q and 8-Ks on file with the SEC. Now I'd like to turn the call over to Michael Balmuth, Vice Chairman and Chief Executive Officer.
Michael Balmuth:
Good afternoon. Joining me on our call today are Norman Ferber, Chairman of the Board; Michael O'Sullivan, President and Chief Operating Officer; Gary Cribb, Executive Vice President, Stores and Loss Prevention; John Call, our Group Senior Vice President and Chief Financial Officer; Michael Hartshorn, Senior Vice President and Deputy CFO; and Connie Wong, Director of Investor Relations.
We'll begin with a brief review of our second quarter and year-to-date performance, followed by our outlook for the second half and fiscal year. Afterwards, we'll be happy to respond to any questions you may have. As noted in today's press release, we are pleased with our better-than-expected results for the second quarter and first half of the year, which were mainly driven by above-plan sales and merchandise gross margin. Our performance for both the quarter and year-to-date periods continues to benefit from the solid execution of our core off-price strategy of delivering compelling name-brand bargains to today's value-focused consumers. Earnings per share for the 13 weeks ended August 3, 2013, were $0.98, up 21% on top of a 27% gain in the prior year. Net earnings for the 2013 second quarter grew 17% to $213.1 million. Second quarter sales rose 9% to $2,551,000,000, up from $2,341,000,000 in the second quarter of 2012. Comparable-store sales for the 13 weeks ended August 3, 2013, rose 4% over the 13 weeks ended August 4, 2012. This compared to a strong same-store sales gain of 7% for the 13 weeks ended July 28, 2012. For the 6 months ended August 3, 2013, earnings per share were $2.06, up from $1.74 last year. These results represented 18% increase on top of a 26% gain in the first half of 2012. Net earnings for the period rose 15% to $447.7 million, up from $390.6 million last year. Sales for the first 6 months of 2013 increased 8% to $5,091,000,000, with comparable store sales up 3%, which was on top of a robust 8% gain in the prior-year period. The strongest merchandise categories for the quarter were Juniors and Accessories, while Texas and Florida were the top-performing regions. For the second quarter, earnings before interest and taxes grew to a record 13.6% of sales, up from 12.8% last year. This increased level of profitability was driven by a 70-basis-point improvement in cost of goods sold, mainly due to higher merchandise gross margin and a 10-basis-point decline in selling, general and administrative expenses. John will provide some additional color on these operating margin trends in a few minutes. As we ended the second quarter, total consolidated inventories increased about 9% compared to the prior year, with average in-store inventories down about 4%. Packaway as a percentage of total was 46% compared to 48% for the same period last year. Like Ross, dd's sales and profitability also improved in the second quarter as both change continued to benefit from our ability to flow a larger percentage of fresh and exciting product to our stores. With respect to our expansion program, we now expect to open 88 Ross and dd's DISCOUNTS locations combined in 2013. As usual, this growth does not include our plan to close or relocate about 10 older stores by the end of the year. Now John will provide further color on our second quarter results and details on our second half guidance.
John Call:
Thank you, Michael. While we realized a slight increase in the number of transactions during the quarter, the 4% comparable store sales gain was mainly driven by growth in the size of the average basket. Operating margin grew about 80 basis points in the quarter to a record 13.6%.
A 70-basis-point improvement in cost of goods sold was mainly driven by higher merchandise margin, which grew by about 80 basis points over last year, including approximately 5 basis points from a lower shrink accrual. This improvement was partially offset by higher distribution costs that were up approximately 10 basis points, mainly due to the timing of packaway-related expenses. Freight, occupancy and the buying costs were all the relatively even with last year as a percent of sales. Selling, general and administrative costs improved by about 10 basis points as result of leverage on the 4% increase in same-store sales. During the second quarter, we repurchased 2.1 million shares for a total purchase price of $138 million. Year-to-date, we have bought back a total of 4.4 million shares for $277 million. We remain on track in 2013 to buy back about $550 million in common stock or about half of the 2-year $1.1 billion authorization approved at the beginning of 2013. Let's turn now to our second half guidance. As a reminder, due to the 53rd week in 2012, all fiscal quarters are one week later in 2013 versus the prior year. While this shift is relatively neutral for the full year, it added about 1% to total sales growth in the first half. This benefit is expected to reverse and reduce fiscal sales growth by a similar amount in the second half, which is embedded in the following guidance. For the 13 weeks ending November 2, 2013, we are projecting a same-store sales increase of 2% to 3% on top of a 6% increase in the third quarter of 2012. Third quarter 2013 earnings per share are forecast to be in the range of $0.75 to $0.78, up from $0.72 in last year's third quarter. For the 13 weeks ending February 1, 2014, we are also planning same-store sales to be up 2% to 3%, on top of a 5% gain last year. Earnings per share are projected to be in the range of $0.99 to $1.03 compared to $1.07 for the 14 weeks ended February 2, 2013. As a reminder, the 53rd week last year added about $149 million in sales and $0.10 in earnings per share to the 2012 fourth quarter and fiscal year. Now I'll provide some additional operating statement assumptions for our third quarter EPS targets. Total sales are expected to grow about 5% to 6%, driven by a combination of new store growth, and as previously mentioned, same-store sales that are forecast to be up 2% to 3% versus the same 13-week period last year that ended November 3, 2012. We plan to open 33 new stores during the period, including 24 Ross Dress for Less and 9 dd's DISCOUNTS. We are targeting operating margin to decline 50 to 70 basis points versus last year for a projected range of 10.6% to 10.8%. About 40 basis points of the planned decline is due to the shortage comparison versus last year when our physical inventory results were better than expected and added about $0.02 to third quarter 2012 EPS. The remainder reflects some de-leveraging on expenses. The same-store sales are in line with our guidance for a 2% to 3% increase. We are planning no net interest expense in the quarter. Our tax rate is expected to be about 36%, and weighted average diluted shares outstanding are estimated to be about 215 million. Moving to our outlook for the full year. We are now projecting earnings per share for the 52 weeks ending February 1, 2014, to be in the range of $3.80 to $3.87. So again, as sales performed in line with our guidance for the second half, our updated forecast for fiscal 2013 would represent estimated EPS growth of 11% to 13% on a 52-week basis. This compares to strong prior year gains of 20% and 24%, respectively, in 2012 and 2011. Now I'll turn the call back to Michael for closing comments.
Michael Balmuth:
Thank you, John. While we are pleased with our better-than-expected year-to-date results, we believe it is prudent to maintain a somewhat cautious outlook for the remainder of the year for a number of reasons. These include the ongoing uncertainty in the macroeconomic environment, our own challenging multi-year comparisons and the potential for a more promotional and competitive retail climate.
This is especially true for the fourth quarter, which has a compressed holiday selling period due to 6 fewer shopping days between Thanksgiving and Christmas this year. Throughout the second half, we will continue to run our business with selling store inventories down in the low single-digit range. As an off-price retailer, we have the flexibility to buy closer to need, and at this point, have plenty of Open to Buy [ph] to take advantage of potential dislocations and opportunities in the marketplace over the balance of the year. We are also staying intently focused on the key areas of our business that have allowed us to perform well for the past several years. Merchandising remains our top priority, and we plan to further strengthen the organization through investments in people, processes and technology. In addition, we continue to fine tune and upgrade our planning and allocation systems and implement productivity enhancements and efficiencies throughout the company. Going forward, we plan to carefully execute these proven strategies, as they are the key to maximizing our prospects for earnings and revenue growth for both the near and long term. At this point, we would like to open up the call and respond to any questions you may have.
Operator:
[Operator Instructions] Your first question comes from line of Daniel Hofkin from William Blair.
Daniel Hofkin:
Just wanted to follow up a little bit on some of the category trends. And can you discuss -- I know the home department has been a particular area of focus since last fall. Can you update us on how that's been performing relative to your expectations, relative to the overall comp, for example? That would be my first question.
Michael Balmuth:
Home, we're pleased with the progress we've made. And Home performed in line with the total store for the quarter. So we're happy with the progress we've made. We're right on track.
Daniel Hofkin:
Okay, great. And in terms of the regional detail, can you just discuss quickly how -- obviously, the West Coast is a particularly important region for you, but how was that relative to your overall comp?
Michael O'Sullivan:
The West Coast was pretty much in line with the chain comp. Actually, regionally, our comp performance was pretty broad based. I think in Michael's comments, he mentioned Florida and Texas as particularly strong. But frankly, other regions were -- did pretty well, too.
Daniel Hofkin:
Okay. And then can you just, I guess, update us, where -- in terms of the systems -- kind of ongoing systems enhancements that you touched on, where do you feel like you are in that progression relative to -- I mean, is this just something that kind of you see being -- having a long runway ahead? Or do you think -- where do you stand in that?
Michael Balmuth:
Charles [ph]?
Michael O'Sullivan:
Well, Daniel, I think we're pretty far along in terms of the planning and allocation systems that we have in place. As you know, we rolled out micro-merchandising across the chain about 3 years ago. But part of the benefit of planning and allocating at a more detailed level is that that allows you to go for opportunities that you wouldn't otherwise see. So I think there are -- I think we expect that over the next few years, there are going to be opportunities down at individual classification levels or down at individual store or regional levels or even, frankly, looking at different clusters of stores, different segments of stores and spotting opportunities to turn faster and to guide margin and guide sales. So I think we feel pretty good about where we are from a systems point of view. But I think we can get quite a lot of opportunity to use other systems to really drive the business.
Operator:
Your next question comes from the line of David Mann from Johnson Rice.
David Mann:
Question about the promotional environment. Most of the other major apparel retailers are talking about the fact that there was promotional pressure in the second quarter. Just curious if how you feel like -- there was any impact on you in the quarter? And whether you think that what you're looking at, going into the rest of the year?
Michael Balmuth:
We thought it was typically promotional, okay, not unusually rugged, okay, but fairly typical. I think coming out of the second quarter, where all the major department stores and discounters struggled in the second quarter, they have plenty of time to be preparing, ramping up for a more promotional fourth quarter than they did -- than they were able to for the second quarter, which kind of -- I think quite a lot of people caught off guard.
David Mann:
Okay. And then in terms of the merchandise margin, there was -- it looks like a little bit of an acceleration there. It was a nice gain relative to the last few quarters. Perhaps, John, you can talk a little bit about, was that just better buying in IMU or better sell-through and less markdowns?
John Call:
I think it was a bit of both, David. We saw a bit of both increase in the second quarter.
David Mann:
Okay. And then last question, on the ticket gain, the gain in average ticket driving same-store sales, are you seeing more units per transaction or just some average increase in price? How should we think about that, and that going forward as well?
Michael Balmuth:
Yes. So with that, that was mixed as well, so we had a slightly more SKUs being purchased per basket. And also the AURs are up a little bit as well. And we were happy to see that, actually, traffic was positive as well.
Operator:
Your next question comes from line of Jeff Stein from Northcoast Research.
Jeffrey Stein:
A couple of questions. First of all, I want to make sure I heard this correctly. Because of the calendar shift, is there going to be a narrowing of the spread between comp in total because of that shift in the back half of the year?
John Call:
Narrowing -- so explain that? What are you trying to get at, Jeff?
Jeffrey Stein:
I think you mentioned -- somebody mentioned that there was -- you're going to get penalized by 1 percentage point in sales because of the calendar shift. Is that because you're giving up 1 week of higher volume in August and picking up 1 week of lower volume in November? I just wanted to make sure I'm understanding that correctly.
John Call:
That's exactly right, Jeff. There were 2 counters which is off those weeks.
Jeffrey Stein:
Okay. So -- okay. And my second question would be on the SG&A line. Why only 10 basis points of leverage on a 4% comp? I guess, what's embedded in your SG&A that is preventing you from seeing more leverage?
John Call:
So on that, we think we lever typically around a 3%, so we did get some leverage on the 4% in the quarter. I wouldn't say there's anything unusual in the quarter that would either promote that or bring that down, so we actually felt pretty good about the leverage we got.
Jeffrey Stein:
Okay, okay. Final question, and that is on the subject of outerwear. Now the industry has had 2 consecutive years of warmer-than-expected weather, and I'm just kind of wondering what the close-out environment is for outerwear this year? Are the vendors producing less, and therefore, you have less? Or do you have more in packaway from last year? How do you kind of see these seasonal apparel business shaping up for you this year?
Michael Balmuth:
We're a little better -- we're better positioned than a year ago in packaway based on last year's performance globally. And this year's situation flows out, it's premature. Nobody's closing out outerwear this early. So it's a wait-and-see. It -- actually, the seasonal businesses happens later and later in the year. It makes it more difficult to secure close out in season. More is done in packaway. So we'll just have to wait and see.
Operator:
Your next question comes from the line of Mike Baker from Deutsche Bank.
Michael Baker:
Mike Baker, so 2 or 3 questions. One, you ticked up your store count a little bit. You're going to open to 88 from 80, I believe. Can you discuss that? And secondly, maybe more importantly, can you talk about how your stores performed in the Midwest? You can calculate new store productivity. But at some of these stores, I think, in Chicago, we're starting to enter the comp base. Are you seeing outsized comps, because it matured [ph] -- I think last quarter, you said that they were -- I think you said slightly above plan? Can you update us on how those Chicago Midwest stores are doing?
Michael O'Sullivan:
So Mike, you're right, we took our new store count up to 88, that's just a few more than we had planned at the beginning of the year. That's really just driven by real estate opportunities. In terms of your broader question about the Midwest, as you know, we entered the Midwest in the fall of 2011, so a little over 1.5 years ago. So this really just a handful of stores that are now in the comp base. So rather than commenting on those, I think what I'd say is we've been very happy with the performance, in general, of the stores that we've opened in that region over the past 1.5 years, both in terms of how they've done against their sales and earnings plans but also in terms of the customer feedback we've had in those markets. So we're feeling pretty good about our ability to build a strong business in that region over time.
Operator:
Your next question comes from line of Kimberly Greenberger from Morgan Stanley.
Kimberly Greenberger:
Michael, I'm wondering if you can talk about the Juniors business. It seems like Ross and TJX are the only 2 businesses out there that have a really strong Juniors business. And I'm just wondering, is there some sort of a focus on the category in particular inside the organization? Or are you seeing just better product available for this customer that's allowing you to drive this business? And then just stepping back, I think you've been doing a great job at cutting in-store inventory. And I want to say that I think you've started it back in the second half of 2007, and you've just been managing sort of at ever more conservative levels on in-store inventory. Do you still see an opportunity to cut inventory levels further? Is that helping your -- is that helping you guys to reduce clearance markdowns? And will the distribution centers that you have coming online over the next 1 to 2 years, do they actually help you manage even more conservative inventory levels?
Michael Balmuth:
Okay. First, on the Junior question, I really can't speak for what other people are doing differently in juniors. The way we've approached it, we saw an opportunity a few years ago. We felt the Junior business was an opportunity for at least us. We organized our staffing that way. We positioned ourselves so we could take advantage of market opportunities. And that's really how we've done it. And we funded it appropriately in addition. So we run much more of a pure classification Junior business than maybe other people do, who maybe run more of a collections Junior business, and that has served us well.
Michael O'Sullivan:
On your second question, Kimberly, about inventories, you're right, we've reduced inventories by about, actually, a little bit over 40% since the back half of 2007. And actually this year, we're planning to reduce inventories further, sort of in the low single-digit range. Longer term, we haven't put together our plans for next year. But I think we're absolutely going to look at whether there's additional opportunity there may be. And I think we feel good about our ability to sort of flow fresh merchandise to the stores, and that's really helped drive our sales over the last few years. Now in terms of what will be the driver of being able to reduce inventories further, the DCs may help, but I also think that just improved merchandising in terms of making sure we have the right product in the right store will also be a key enabler as well.
Kimberly Greenberger:
That's really helpful. And I'm wondering if I can just ask one follow-up on the general environment. I know that there's a lot of volatility in general out in the retail environment, and in particular, it seems like in the department store space. So I know there's always plenty of inventory for you guys to buy, and there's substantially more available out there in any given season than you could possibly buy for your own stores. But are you seeing any kind of incremental dislocation, just given the volatility we're seeing in the environment? Or does it feel very much the same as 1 or 2 years ago?
Michael Balmuth:
It's hard to answer. What I would say is that the dislocation that was really just reported in the time I've been in the off price for a while leads to a lot of opportunities. And since a lot of people were not forecasting this kind of performance, it invariably leads to a lot of products for the off price sector. We've been comfortable at the level of product we've seen so far this year. I only expect that it should be a little more advantageous than it's been even.
Operator:
Your next question comes from line of Ike Boruchow from Sterne Agee.
Irwin Boruchow:
I guess, question on your comp guidance. You're guiding a 2% to 3% comp for next year. The last 3 quarters, you guys have been guiding 1% to 2%. Just curious, are you feeling a little bit better right now about your end market demographic? Or has anything changed with how you view the world right now?
John Call:
So I don't think anything's changed with how we viewed the world. Actually, as we laid out the year, it was pretty consistent. I mean, we did a 3% in the first quarter, 4% in the second quarter, and we just think a 2% to 3% is probably more appropriate place busy [ph] in the company.
Irwin Boruchow:
Okay. And then, real quick follow-up. It looks like new store productivity was pretty strong in the quarter. Can you talk about the new store openings that you've seen in new markets and existing markets and how the stores are performing relative to plan?
Michael O'Sullivan:
Sure. So yes, I would say actually, over the last couple of years, we've been pretty happy with how new stores have performed, both in existing markets and in new markets. And part of it is the same trends that are driving our comp store performance have helped our new stores as well, the fact that we have great merchandising, great value. And I also think with new stores, I think, we've done a better job of the planning and, operationally, opening those stores. So I think those things have contributed to a pretty satisfactory new store performance.
Operator:
Your next question comes from line of Brian Tunick from JPMorgan.
Brian Tunick:
Curious, it sounds like in the comments that you're saying the traffic, I think, has been moderating. I think this is a quarter or 2 now. So wondering why you think that traffic might be moderating? And any comments on your marketing spend plans for the second half, vis-à-vis trying to bring in a new customer, et cetera? I know you talked about the Junior side. And then on the second one is maybe just talk about on the 2,500 store target that you recently updated, what exactly is preventing you guys from accelerating even faster from a square footage growth perspective? Is it site availability, district managers, waiting for the distribution center, just maybe talk about what's prohibiting a faster rollout?
Michael O'Sullivan:
All right, Brian. I'll try and answer your questions on traffic and marketing, and then I'll hand it over to John on the store's potential. On traffic, we've had -- over the last few years, we've had pretty significant traffic growth. And if you look at our annual comp growth, just over the last 4 years, what you see is 6% to 5%, 5%, 6%. So pretty strong comp performance, and traffic has been the major driver of that comp growth. So clearly, that would never going to on forever. At some point, traffic was going to moderate, and that's kind of how we viewed the last couple of quarters. And, obviously, as a retailer, we'd like to drive traffic higher, so the best way we can do that is to make sure that we have great bargains in the stores. And that's what we're focused on doing. I should say on the flip side, we're pretty happy that we're seeing increases in the average basket, which suggests that when customers are coming to the store, they are finding opportunities to spend more. On your point about marketing, I think we've said in the past that we think paid marketing can be very helpful in a way of reminding customers to come to our store, remind them that we have great value, great merchandise. But, frankly, we've always thought the best marketing for us is sort of unpaid marketing, word of mouth. And that really comes from making sure we have great value in the stores, the customer buys the goods, they go and tell their friends, et cetera. But that really remains our focus from a marketing point of view. Our paid marketing really hasn't changed in the last few years, so nothing new or radical in terms of marketing campaign.
Michael Balmuth:
So as to the growth question, Brian, so we say we can basically double the size of the chain. That gives us, obviously, plenty of room to grow. The way we like to grow is not a tack 20 [ph] market at 1 specific time to not get too distracted by multiple fronts. And our growth pattern in the past has been growing to contiguous markets, and that's worked well for us. We have the ability and the systems and the people in place to sustain a 6% to 7% growth rate and do that well. And that's what we're going around. So we'll be steady and consistent with that growth pattern. So we're pretty comfortable with where we are today.
Operator:
Your next question comes from line of Lorraine Hutchinson from Bank of America.
Lorraine Maikis:
I just wanted to follow up on your somewhat cautious back half outlook. Is that based on what you're seeing today in the macro environment? Or is that just anticipation of what could be a very heated promotional holiday season?
Michael O'Sullivan:
Lorraine, it's a combination of things. I think, Michael, in his remarks, mentioned there is sort of continuing economic uncertainty. We are going to be anniversary-ing some big comp numbers over the last 3 or 4 years. There is a more compressed holiday shopping calendar. And then we are anticipating that there's at least a risk that the retail and competitive environment could be more promotional. So we've taken all those factors and tried to wave them into our guidance. Now we -- we always hope to do better, and I think over the last few years, we've demonstrated that when we plan conservatively, we're still able to chase the business if the sales are there. That approach has certainly helped us drive margins when the sales trend is running ahead of our plan.
Operator:
Your next question comes from line of John Kernan from Cowen.
John Kernan:
I just wanted to get your thoughts on what you thought the long-term potential for merch margin and continued advances in that rate? It's been on an -- obviously, been on a upward trajectory since 2006. And how much more room is there to take that merch margin higher over time?
John Call:
So John, we're happy with where it is. We believe it's sustainable. You're right, it has grown significantly over the past several years. It's really a function of what the top line can drive that. So if we can accelerate comps at a more meaningful level, then we'll get the fall through. But at the comps we have planned out today, we think that the margin is somewhat sustainable at those levels.
John Kernan:
And then, I guess, one follow-up would be any update on dd's and the sales trajectory within that chain and margin trajectory there as well?
Michael O'Sullivan:
Sure. Well, John, as you know, we don't disclose dd's financials separately just because, at this point, it's not really material to the corporation. But, overall, I'd say, we continue to be happy with dd's performance. And this year, it's continued to exceed our sales and profit plans for the business. And, actually, one other notable point here is that like Ross, over the last 2 years, dd's has benefited from lower inventories and therefore, fresher merchandise, and that certainly helped it from a margin perspective. So I think, overall, we're very happy with dd's, as we have been in the last few years.
Operator:
Your next question comes from line of Jessica Schoen from Barclays.
Jessica Schoen:
I'd have a follow-up question on the inventory levels in the quarter. In store, I believe, you said they were down about 4%. I was wondering if you could tell us if that was in line with your expectations? And if there's any further reduction that you're expecting as you continue to control your inventory level?
John Call:
So the inventory levels were in line with our expectation for the quarter, and, I think, Michael O'Sullivan mentioned, we're anticipating inventory to be down in the low single digit in the back half.
Jessica Schoen:
And so as you continue to manage it, how much, going forward, in years to come, do you feel like there's a lot of incremental reduction that you could do?
Michael O'Sullivan:
I wouldn't use the word "a lot". I think -- we think that there might be some additional opportunity based upon doing a better job of buying great merchandise and trying to flow merchandise to the store more rapidly. And we may be able to squeeze out more inventory. We haven't put together plans for next year yet, but that's certainly something we're going to look at.
Operator:
Your next question comes from the line of Laura Champine from Canaccord.
Laura Champine:
John, could you give us an update on the CapEx budget for this year? And then where it should settle out in years beyond?
John Call:
Sure. The CapEx budget is around $670 million this year. As we're building on a couple of DCs, we actually bought out the lease of 1 DC. As Michael mentioned, we're putting plans together for next year. And we'll announce those towards the end of the year, we'll have more updates on our CapEx plans going forward.
Laura Champine:
If I can ask a second question then. The margin pressure, you mentioned about 40 basis points comes from a change in shortage [ph]. Is the balance of the margin pressure just a typical lack of sales leverage on that 2% to 3% comp?
John Call:
Yes, that's where it came from. And that's EBIT margin leverage. And you actually get some deleverage on some of the expense lines, with the 2% to 3% comp.
Operator:
Your next question comes from line of Oliver Chen from Citigroup.
Nancy Hilliker:
This is Nancy Hilliker, filling in for Oliver Chen. We'd like to know is that a bit more about your view in expansion. Are you targeting any regions in particular that you're thinking about going into? And are you seeing real estate opportunities given any retailers in the macro environment right now? And then also, just if you could comment on -- you've done so well in your current categories. Is there any room for expansion either in adjacent categories or bringing in a new brand?
Michael O'Sullivan:
Nancy, on the first part of your question about regions and real estate, historically, our strategy, when we've moved into new markets, has been to expand in a fairly targeted way, so we open up in a market and then we build up our presence and share in that market before we move onto a whole new region. So given that we only entered the Midwest market 1.5 years ago, that's probably going to be our focus, I would say, for the next several years. And then on real estate, we continue to be happy with the real estate opportunities we're seeing. We have a great and very experienced real estate team who've done a great job of finding good locations for us in the last few years. And what we see in the pipeline remains very strong.
Michael Balmuth:
And relative to new categories in the business, we're always testing and experimenting with new categories and looking for new brands. Unfortunately, we have a very large team of merchants scouring the market and building relationships. And we expect to have some new fresh and exciting things next year. But the forum would prevent me from going into it right now.
Operator:
Your next question comes from Marni Shapiro from Retail Tracker.
Marni Shapiro:
Two questions. Just one on the uptick in the store openings. Is that spread throughout, or is any of that higher proportion to the Midwest, given the performance to date? And then just in the second half, any particular categories where you see bigger opportunity, either because of the first half performance or because of changes in the market?
John Call:
So I'll take the question on the additional new stores. I mean, it isn't really concentrated in any one area. It just represented an opportunity for us to move up stores into this year, and it was relatively minor.
Michael Balmuth:
On the categories, I believe that you asked about for the fourth quarter. Home would be one of them based on performance last year and the improvement schedule we're on and the improvement we've had in the previous quarter and Ladies Apparel & Accessories. We feel good about them also.
Operator:
[Operator Instructions] Your next question comes from line of Neely Tamminga.
Neely Tamminga:
Great. I just had a few follow-up questions here to today's conversation. First, if you can give us a little on dd's. As I'm thinking about the chain hitting about 120 new stores and heading towards 200 or so, does that put that chain that chain in a competitive advantage take on more, better product as it can be a one-stop solution for vendors looking for opportunities to clear? And then if I may also follow-up here. Could you just comment on the digital side of your business of marketing? Any thoughts maybe this year or next year to shift a little bit more towards digital marketing, really to help expand your social media footprint. That would be really helpful.
Michael Balmuth:
On the first question relative to dd's. Was that relative to dd's carrying better product?
Neely Tamminga:
Yes.
Michael Balmuth:
Okay. The customers who dd's caters to is somewhat below the Ross customer. So we market very carefully through all these different urban areas have a very different balance of product in each of the stores. And so I would say, as we're expanding, we are getting better at micro-marketing in dd's as opposed to elevating the product line to a higher price line. And so our emphasis is really getting it right for the customer base we have, which is below the Ross customer.
Michael O'Sullivan:
And then Neely, on your the question on your Digital Marketing, we have been investing in Digital Marketing over the last 2 years. It's become a bigger part of our marketing mix. And I think that we actually think there's some very interesting aspects, particularly with social marketing. And we're testing a number of things. And I would say that, yes, I think, it's quite likely that over the next few years, you'll see more growth in that area.
Operator:
And your last question comes from the line of the Patrick McKeever from MKM Partners.
Patrick McKeever:
You had commented on past calls that the performance of your stores near a J.C. Penney store and those that are not so near is fairly similar. Was that still the case? Did that continue to be the case in the second quarter? I'm just wondering if you had any views on some of the recent changes there, with the return to promotional pricing and whatnot.
Michael O'Sullivan:
Sure. So Patrick, we haven't seen any major change in terms of our stores’ performance-based upon their proximity to J.C. Penney. And I think our only view on the changes that are going on there is that over the long term, we don't think our long-term trend will be affected. I mean, we -- it's true that we actually performed very well last year when J.C. Penney was pursuing its new strategy. So, frankly, we've been performing very well for multiple years before that. So even if they return to their old strategy, we don't expect it to impact our long-term performance. That said, we do think there's some risks in the back half, but the overall retail environment will get more promotional, not only driven by J. C. Penney but potentially with other retailers, too. And we try to factor that risk into our guidance.
Patrick McKeever:
Okay. And then just back to the Juniors area. Was that a good area for you in the second quarter? And are you doing anything different to target that customer?
Michael Balmuth:
It was a good business for us in the second quarter, as it's been for quite some time. And we're not doing anything materially different from market with that customer, okay? I think that customer were presenting a product that we believe is trend right at very strong values. And I think to the young consumer who is very pressed economically, and so value, coupled with trend right, is really our focus.
Patrick McKeever:
But you didn't see any change in trend like it appears -- as it appears to have been the case across the teen apparel space in the quarter?
Michael Balmuth:
No, not for us.
Operator:
There are no further questions at this time. I'd turn the call back over to the presenters.
Michael Balmuth:
Thank you for joining us today and for your interest in Ross Stores. Have a wonderful remainder of the day.
Operator:
This concludes today's conference call. You may now disconnect.
Operator:
Good afternoon, and welcome to the Ross Stores First Quarter 2013 Earnings Release Conference Call. [Operator Instructions] Before we get started, on behalf of Ross Stores, I would like to note that the comments made on this call will contain forward-looking statements regarding expectations about future growth and financial results, including sales and earnings forecasts and other matters that are based on the company's current forecast of the 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 2012 Form 10-K and fiscal 2013 Form 8-Ks on file with the SEC.
I would now like to turn the call over to Michael O'Sullivan, President and Chief Operating Officer.
Michael O'Sullivan:
Good afternoon. Thank you for joining us. I will be presenting the prepared remarks today, along with John Call, our Group Senior Vice President and Chief Financial Officer. Michael Balmuth, our Vice Chairman and CEO, is under the weather and could not be with us this afternoon.
Also on the call are Norman Ferber, Chairman of the Board; Gary Cribb, Executive Vice President, Stores and Loss Prevention; Michael Hartshorn, Senior Vice President and Deputy CFO; and Connie Wong, Director of Investor Relations. We will begin with a brief review of our first quarter performance, followed by our outlook for the second quarter and fiscal year. Afterwards, we'll be happy to respond to any questions you may have. As noted in today's press release, we are pleased with the slightly better than expected sales and earnings we delivered in the first quarter, especially considering this growth was achieved on top of strong prior year gains. These results continue to be driven by our ongoing ability to offer terrific bargains to today's value-oriented consumers. Earnings per share for the 13 weeks ended May 4, 2013, were $1.07, a 15% increase on top of a 26% gain in the prior year. Net earnings for this 2013 first quarter grew 12% to $234.6 million. First quarter sales rose 8% to $2,540,000,000, up from $2,357,000,000 in the first quarter of 2012. Comparable store sales for the 13 weeks ended May 4, 2013, rose 3% over the 13 weeks ended May 5, 2012. This compared to a robust 9% same-store sales gain for the 13 weeks ended April 28, 2012. The strongest merchandise categories during the quarter were Juniors and Accessories, while the best-performing regions were the Pacific Northwest, the Southwest and California. Earnings before interest and taxes grew to a record 14.9% of sales, up from 14.4% in the first quarter of 2012. This increased level of profitability was mainly driven by higher merchandise gross margin and also benefited from favorable timing of expenses. John will provide some additional color on these operating margin trends in a few minutes. As we ended first quarter, total consolidated inventories increased about 8% compared to the prior year, with average in-store inventories down about 3%. Packaway as a percentage of total inventories was even with last year at 45%. Both Ross and dd's DISCOUNTS sales and profits continue to benefit from our ability to flow a larger percentage of fresh merchandise to our stores by operating our business with lower inventory levels. dd's sales and profitability improved in the first quarter as each merchandise offerings also continued to resonate well with their target customers. Our store expansion program remains on track with about 80 locations scheduled to open during 2013, comprised of approximately 60 Ross and 20 dd's DISCOUNTS. Now John will provide further color on the first quarter results and details on our second quarter guidance.
John Call:
Thank you, Michael. Our 3% comparable store sales gain in the first quarter was primarily driven by an increase in the size of the average basket. Operating margin grew by about 50 basis points in the quarter to 14.9%.
A 45-basis-point improvement in the cost of goods sold was mainly driven by higher merchandise margin, which grew by about 50 basis points over last year, including approximately 5 basis points from a lower shrink accrual. Freight and distribution costs declined by approximately 10 basis points each. The latter was mainly due to timing of packaway-related expenses. These favorable items were partially offset by approximately 15 basis points in higher buying costs and 10 basis points of deleveraging on occupancy. Selling, general and administrative expenses declined about 5 basis points, mainly due to lower store expenses as a percent of sales. During the first quarter, we repurchased 2.3 million shares for a total purchase price of $138 million. We are on track in 2013 to buy back about half of our new 2-year $1.1 billion authorization or approximately $550 million in common stock. Let's turn now to our second quarter guidance. For the 13 weeks ending August 3, 2013, we are targeting same-store sales to increase 1% to 2% over the 13 weeks ended August 4, 2012. This compares to a strong 7% increase in last year's second quarter. Earnings per share for the second quarter of 2013 are projected to be in the range of $0.89 to $0.93, up from $0.81 last year. This represents forecasted EPS growth of 10% to 15% on top of a 27% increase in the second quarter of 2012. Our EPS targets for this year's second quarter are based on the following assumptions. Total sales are expected to grow about 6% to 7%, driven by a combination of new store growth, and as previously mentioned, same-store sales that are forecast to be up 1% to 2%. We plan to open about 26 net new stores during the period, including 19 Ross Dress for Less and 7 dd's DISCOUNTS. We are targeting operating margin to be flat to up 20 basis points on top of an exceptional 110-basis-point increase in the prior year for a projected range of 12.8% to 13%. We are planning net interest expense to be approximately $500,000, and our tax rate is expected to be about 38%. We also estimate weighted average diluted shares outstanding of about 217 million. Moving to our outlook for the year. As noted in today's press release, we now project earnings per share for the 52 weeks ending February 1, 2014, to be in the range of $3.70 to $3.81. This compares to our initial forecast of $3.65 to $3.80 and earnings per share of $3.53 in fiscal 2012. As previously reported, the 53rd week last year added about $0.10 to earnings per share in fiscal 2012. This updated guidance range reflects that approximately $0.02 of the above planned earnings per share result in the first quarter is related to favorable timing of expenses that are expected to shift into subsequent quarters within the fiscal year. Finally, as a reminder, we will no longer be reporting sales or providing sales guidance on a monthly basis. Now I'll turn the call back to Michael for closing comments.
Michael O'Sullivan:
Thank you, John. Again, we are pleased with our solid first quarter performance, especially considering our strong prior year comparisons and the ongoing uncertain macroeconomic retail and political environment. We remain well positioned as an off-price retailer with an ongoing focus on offering compelling discounts on name brand fashions to today's value-focused customers.
Looking ahead, we will stay focused on the most critical drivers of our business. First, we will continue to make strategic investments in our merchandise organization. Prioritizing and expanding these resources remains the key to further increasing our very large vendor base and our access to the best name brand bargains in the marketplace. Secondly, as we have said before, we continue to fine-tune our systems and processes to plan and allocate at a much more detailed level, which strengthens our ability to deliver great bargains to the right store at the right time. This initiative is more important than ever, especially with the lower levels of inventory we now carry, plus our current expansion into new markets. Over the balance of 2013, we are planning selling store inventories to be down in the low single-digit range versus the prior year. As you know, operating on leaner inventories has improved sales, inventory turns and gross margin for many years now. Finally, we continue to implement numerous productivity enhancements and efficiencies throughout the company. These programs have helped us to strictly manage expenses in our distribution centers, stores organization and back-office functions. The successful execution of these initiatives has dramatically improved our sales productivity and profitability over the past several years. We believe our ongoing focus on these priorities will maximize our opportunities for future growth in sales and profits over both the short and long term. At this point, we would like to open up the call and respond to any questions you may have.
Operator:
[Operator Instructions] And your first question comes from Daniel Hofkin with William Blair & Company.
Daniel Hofkin:
And just a couple of quick questions as it relates to the sales trend. Over the balance of the year, I know you're -- it sounds like you're keeping the 1% to 2% full year comp plan. How would you expect traffic versus ticket to contribute for the year as a whole?
John Call:
So Daniel, in the first quarter, traffic was fairly flat. The contribution came from the average basket, which was up slightly. That kind of stuff is tough to predict. We think we do a good job of putting attractive bargains in front of customers. That helps drive traffic. So we don't plan our business around necessarily what we think traffic or basket is going to do, but the customers tend to self-select. So I would expect more of the same, comps up 1% to 2%, traffic flat to up slightly.
Daniel Hofkin:
Okay. And as it relates to margin expectations for the second quarter or for the full year, can you shed any more light in terms of between gross and SG&A, what your expectations are?
John Call:
Sure. Implicit in the guidance is inventory, as we said, would be down kind of low single digits. That implies faster turns on a 1% to 2% comp. So we would expect some incremental gross margin increase, partially offset by some deleverage in G&A.
Operator:
And your next question comes from Mike Baker with Deutsche Bank.
Michael Baker:
Great. So 2 questions. One, can you talk to us about what's going on with your Home-related business, which I think had been an area where you had as well [ph] but were making some changes there. Are we starting to see any benefit or traction from those changes? And then secondly, can you tell us how your new markets are performing, Chicago, particularly, been there now for at least a year, I think, as part of the comp base. So can you talk to us about how the stores are comping and how the initial productivity is, et cetera?
Michael O'Sullivan:
Sure. So Mike, on your first question about Home, we actually feel good about the progress that we're making in Home. As we came into the year, we had a plan to strengthen assortments in the Home business, and that plan is on track. So we're feeling good about the progress we're making there. On your second question regarding new markets, as you referenced, we entered the Midwest region in October of 2011. So it's still relatively early, but everything we've seen so far in terms of sales, customer research, our on-the-ground customer feedback has been positive. So we're feeling good about how those markets are going. At this point, although you -- as you mentioned, there are a few stores that have turned comp, they haven't been comped for very long. So I wouldn't call out those or talk about those specifically.
Michael Baker:
Okay. But those new markets, in line with plan, above plan, below plan, as expected?
Michael O'Sullivan:
They're on plan to slightly better, yes.
Operator:
And your next question comes from Brian Tunick with JPMorgan.
Brian Tunick:
I guess, sorry to do it to you again, but regarding a lot of calls around J. C. Penney and perhaps they're going to be more promotional in driving traffic, so just hoping you could maybe talk about any data you have regarding maybe your perspective of where market share might have come from the last couple of years and maybe anything you can share about your core shopper. How many different retailers do you think they visit, so it's not just about J. C. Penney, I think, as we look at 2013?
Michael O'Sullivan:
Sure. Brian, I think as we've spoken before, I think one of the most important characteristics about the apparel retailing market is just how fragmented it is. There are many, many competitors. And as a result of that, we never take our customers for granted. They have plenty of choice about where they shop. And the important thing for us is that we focus on delivering great bargains. And if we do that, then frankly, it doesn't really matter what any single competitor does. We know we'll do well. And one other point I would make specific to -- you referenced J. C. Penney -- specific to J. C. Penney, is that obviously, J. C. Penney had a promotional strategy, I think, until February of 2012. And if you look at the years leading up to that, we did very nicely. So if they go back to the future, I don't think it will cause us too much concern in terms of our long-term trend.
Operator:
And your next question comes from Laura Champine with Canaccord.
Laura Champine:
My question is about the sales guidance. It looks really conservative just given what we're hearing from other retailers, and I know you don't have exposure to the nasty weather in the Northeast. But your trend in the most recent month was really strong. The 1% to 2% comp guidance for this quarter, what's driving that?
Michael O'Sullivan:
When we came into the year, Laura, we cited a few sort of headwinds that were built into our guidance, the -- some economic issues, the higher payroll taxes, sequester cuts, and then frankly, the fact that we're up against very strong comps from the last few years. So frankly, none of those things have changed. We're happy with how we did in the first quarter, but those economic headwinds are still there. And frankly, if you look at it over a sort of 3-year stacked basis, our guidance actually seems pretty reasonable. So maybe the guidance is a little bit conservative, and we'd certainly hope to do better. But right now, we're comfortable with that sales guidance.
Operator:
And your next question comes from John Kernan with Cowen.
John Kernan:
So I guess, thematically, how much faster can you guys turn inventory? And how much more can you possibly benefit from lower in-store inventory levels from a merch margin perspective? And then I've got one follow-up.
Michael O'Sullivan:
At this point, John, we think maybe there's some additional incremental opportunity, which is why we're trimming inventories again this year. And certainly, our sales trend doesn't seem to have suffered from that. So I think the real answer is we don't know how much opportunity there is left. We think there's probably some, but at this point, it's probably incremental.
John Kernan:
And then can you talk about some of the buying opportunities you've had given some of the weather volatility that's affected full-price retail?
Michael O'Sullivan:
Sure. It's actually -- it's hard for us to isolate the drivers of supply, whether it's weather or the economy or competitive issues, but talking with Michael Balmuth earlier and talking with the merchants, I know we're very happy about the supply that we're seeing.
Operator:
And your next question comes from Marni Shapiro with Retail Tracker.
Mark Friedman:
It's Mark Friedman pinch-hitting for Marni. Can you talk a little bit more detail about some of the strategic investments in the merchandise organization. Is there anything new that you've done in the last couple of months since you reported year end or the way you're thinking about it going for 2014?
Michael O'Sullivan:
Mark, I think people who have followed us for some years know that we've long regarded the merchant organization as critical. It's sort of the key strategic asset that you have in off-price. So we've invested a lot over the years in terms of developing one of the best merchant organizations that there is. So it's really been a very long-term program and long-term initiative for us. I wouldn't say there's anything new that we've done. It's just more of the same in terms of strengthening that merchant group.
Operator:
And your next question comes from David Mann with Johnson Rice.
David Mann:
In terms of the comment you made earlier about traffic, in past years, even in, I think, the fourth quarter, you saw nice traffic gain, so I'm just curious if you can put some context on to why you think traffic might be moderating now? And do you have any efforts to specifically to try and drive traffic or expand the customer reach?
John Call:
David, that traffic number, which was flattish, that doesn't concern us a whole lot. It ebbs and flows, a point here, a point there, so we don't think it's a -- necessarily a bad fact in terms of what we have going on. Our comps came through. Our sales came through. We're seeing good flow. So we're not overly concerned.
David Mann:
And then the ticket gain, is that coming more from units or price?
John Call:
Mainly coming from price, at least in the quarter it was.
David Mann:
Okay. And then in terms of SG&A, I think on the last call and previous calls, you've talked about being able to leverage your leverage point for expenses at about 1% to 2%. I guess in the first quarter, you didn't necessarily leverage -- or hardly levered with a higher comp, and then for the year, you're not talking about it too much. So are you seeing a higher level of expense? Or is that leverage point changing at all?
John Call:
No, we think -- so we may have said 1% to 2%. Really, when we look at it, it's probably 2% to 3%. There's timing issues between quarters, all that sort of thing. But on the year, we think 3% will -- should deliver some leverage, flat to some, and that's kind of where we are.
Operator:
And your next question comes from Oliver Chen with Citigroup.
Oliver Chen:
Regarding a longer-term question, where do you think your operating margin can go? And will that be more gross margin or SG&A leverage driven? And as a follow-up, if you could -- it sounds like there's a lot of opportunity domestic bricks and mortar, but could you update us on your thoughts on global and e-comm?
Michael O'Sullivan:
Sure. Oliver, on your first question about margins, if you look at what's happened to our margin over the past several years, there's really been 3 drivers of our improved margin. One is lower markdowns, which has been driven by tighter inventory controls. The second is lower shrink, which has been driven by specific initiatives we've made around shortage control. And then the third has been expense leverage on ahead-of-plan sales. So when you think about those 3 drivers, we think that there's no reason why we should give up on any of them. We don't see margins declining because we're not going to walk away from any of those 3. But if you look at where the opportunities are going forward, for incremental margin, it's really in that third one, further expense leverage from ahead-of-plan sales, which is the hardest thing to predict. So to answer your question, we think there might be some additional opportunity in margin, but it's really around sales. And if we can -- if the sales are there, we'll be able to drive margin further. On your second question about e-commerce, as we've commented in the past, our assessment is that in e-commerce, it's very hard for an off-price business to make money, particularly at lower price points and at the price points that we operate at, with the cost of shipping, the cost of marketing, taking returns, et cetera. The economics just don't add up. Now most of the activity in the last few years externally has been with companies that operate at much higher price points, price points that we don't really compete at. And even those companies appear to be struggling to make money. So we don't regard e-commerce as a high priority, at least not right now. For us, the priority is really our bricks and mortar business, our off-line business where we know we can be successful, we know we have strong returns, and we have plenty of growth opportunity. So that's really where our focus is.
Oliver Chen:
And as a quick follow-up, could you just tell us how you feel about the health of the consumer? Do you feel like you continue to see volatile trends in relation to how macroeconomically that customer -- what kind of challenges they might be facing?
Michael O'Sullivan:
Sure. I mean, our observation is that the overriding characteristic about this economy is it's very unpredictable and that the consumer remains pretty stretched and that they're looking for value. And in that kind of environment, we would expect, I think you would expect that the off-price model, when it's well executed, should do pretty well.
Operator:
And your next question comes from Roxanne Meyer with UBS.
Roxanne Meyer:
I'm just wondering, first, if you could share any benefit from the calendar shift both in 1Q and looking ahead to the remaining quarters of the year, just how timing may have an impact on the cadence of your earnings? And then second, Juniors has been a source of strength for you guys for a while now. Just wondering if you've noticed any difference in trends between the consumer who is purchasing that category, whether disproportionately driving traffic or price or units versus some of your other demographics?
John Call:
On the first question about the calendar, Roxanne, there is a shift that favors the first part of the year. We have a week kind of dislocation. It doesn't match up from a sales reporting standpoint versus a fiscal or earnings reporting standpoint. It's probably worth about 1 point comp. That comes back in the back half. So the back half is actually hurt by about 1 point comp, so there's a 2-point swing between first half and back half in terms of our business and what that extra week meant.
Michael O'Sullivan:
And then, Roxanne, on your second question about the Juniors business, as we mentioned in the remarks, the Juniors business was one of our top performing categories in Q1. And I would go on to say I think the Juniors business has long been an important business for us. It's a pretty well developed business for us. And we feel good about that business. I think we feel good about that customer segment. We've always done well with the younger customer.
Operator:
And your next question comes from Mark Montagna with Avondale Partners.
Mark Montagna:
Just a follow-up on that calendar shift question. Is there -- beyond just the comps, is there a margin shift beyond, say, leverage such as merchandise margin that might get shifted around because of the calendar change?
John Call:
There's a couple of other things implicit to our calendar. So recall that in the third quarter last year, we picked up a couple of cents based on a shortage true-up. That isn't in the plan or the guidance so far. And remember, the 53rd week, as we mentioned in the recorded comments, we picked up an extra $0.10. If you put that all together and normalize for everything, on the 1% to 2% comp, our guidance is that we'll grow earnings 8% to 11% for the year.
Mark Montagna:
Right. But I'm thinking in terms of if you shift a week out of the third quarter into the second quarter, is that week that's being shifted a high-margin week or a low-margin week? Because I'm running across other retailers where there's an interesting dynamic that is actually kind of meaningful that way?
John Call:
Yes, it may see more sales. I don't think it has to do with the kind of margin percent between the quarters, it's mainly a substitute.
Mark Montagna:
Okay. And then the distribution expenses that are going to rise in the future with packaway, is that -- should we just view that as evenly distributed between first -- second through fourth quarters?
John Call:
Yes, I'd say it's probably -- at least -- that one's a little hard to predict. Packaway is, based on where the market conditions were, came in a little bit higher than we had anticipated coming in. And right now, we'd assume that, that would flip in the second to third quarters, but we'll have to see what opportunities look like.
Operator:
[Operator Instructions] Your next question comes from Dutch Fox with FBR Capital Markets.
Dutch Fox:
I wanted to ask you a couple of quick questions about dd's. Just being in the stores and looking at them, they appear to be improving. Actually, they look very good year-over-year. I know you only talk about that concept directionally, but could you give us or help us a little bit with understanding how the dd's fleet is performing compared to the Ross Dress for Less stores? And also, how you expect that to evolve over the course of the year? And I don't have it in front of me, but have you talked about whether or not the concept is going to be accretive this year, and if so, how much?
Michael O'Sullivan:
Dutch, on the first part of that question regarding dd's, we don't disclose dd's financials separately mainly because the business just isn't material to the overall size of the corporation. But I would make some comments. We're very happy with dd's performance. And one thing I'd call out is, like Ross, dd's has benefited over the last few years from lower inventory levels. By controlling inventories, we've been able to drive the proportion of fresh merchandise that the shopper sees at dd's, and that's also helped with margin. So overall, we're pretty happy with the trajectory of that business.
John Call:
And relative to its profitability, we're happy, like Michael said, with the four-wall contribution, and it does tend to be slightly accretive, as it was last year.
Dutch Fox:
And that's included in your existing guidance?
John Call:
That's correct.
Operator:
And your next question comes from Ike Boruchow with Sterne Agee.
Irwin Boruchow:
I just wanted to touch on some of the investments that you'll be making, I guess, towards the end of this year in terms of the 2 new distribution centers that will be going up. Can you remind us the timing of when those will start to come into play and if there will be any impact on the P&L in terms of any incremental expenses? And if there are, would that be towards the end of this year or the beginning of next year? And just kind of how to think that through.
John Call:
Sure. So CapEx this year is planned at about $670 million. If you remember, that is up pretty significantly from the $424 million we spent last year. The biggest driver of that is around the 2 new distribution centers that we're building. They're sketched to open, one in 2014, the first part of 2014, and then the other in 2015. So as it relates to the 2013 P&L, there's no impact.
Operator:
And we have no further questions at this time. I'll turn the call back to our presenters.
Michael O'Sullivan:
Thank you, and thank you for joining us today and your interest in Ross Stores. Have a great day.
Operator:
And this concludes today's conference call. You may now disconnect.