ROST
#Good afternoon.
Joining me on our call today are <UNK> Balmuth, Executive Chairman; <UNK> O'Sullivan, President and Chief Operating Officer; Gary Cribb, Executive Vice President, Stores and Loss Prevention; John Call, Executive Vice President, Finance and Legal; <UNK> <UNK>, 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 regions.
First quarter operating margin of 15.2% exceeded our expectations due to above plan sales and merchandise margins.
As we ended the first quarter, total consolidated inventories were up 6% versus the prior year with average in-store inventories 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 <UNK> <UNK> will provide further color on our first quarter results and details on our second quarter guidance.
Thank you, <UNK>.
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 <UNK> for closing comments.
Thank you, <UNK>.
As I said earlier, we had a solid first quarter, despite the challenging external environment.
Looking ahead, we have plenty of liquidity in our 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 climates 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'd like to open up the call and respond to any questions you might have.
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, and 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.
Sure.
<UNK>, it's <UNK> 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.
Sure, <UNK>.
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 80 to 90 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.
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, as the department store business is challenging to gain more market share.
Sure, <UNK>.
In terms of trends during the quarter, certainly, like you saw and I think across the retail landscape, sales strengthened as we moved through the quarter.
Sure, <UNK>.
It's <UNK> <UNK>.
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'd call out 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.
And then, <UNK>, 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.
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.
Sure, <UNK>.
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 3%, which is in line with historical averages.
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.
No.
We haven't changed our outlook, <UNK>, 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.
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.
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 an 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 turns.
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.
Sure.
Home has 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.
Sure, <UNK>.
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.
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.
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.
Sure, <UNK>.
The closures were fairly recent and late in the quarter, so the impact would have been very 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.
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.
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 average unit 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.
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.
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.
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.
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.
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.
And then on the second question, <UNK>, 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 business.
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.
And just to add one thing about packaway.
We feel very good about the content of our current packaway that we own today.
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.
Between the different types of products you mean, between Home, (inaudible).
Yes, exactly.
Yes, yes.
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.
Thank you for joining us today and for your interest in Ross Stores.
Have a great day.
