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Ross Stores, Inc. (NASDAQ:ROST) Q4 2022 Earnings Call Transcript

Ross Stores, Inc. (NASDAQ:ROST) Q4 2022 Earnings Call Transcript February 28, 2023

Operator: Good afternoon, and welcome to the Ross Stores Fourth Quarter and Fiscal 2022 Earnings Release Conference Call. The call will begin with prepared comments by management followed by a question-and-answer session. 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 customer's 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.

Department store, shopping, center
Department store, shopping, center

Photo by Carl Raw on Unsplash

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 packway 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% 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 3rd, 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 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 quarters 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 three 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 customer's 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.

Lorraine Hutchinson: Thank you. Good afternoon. 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?

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