Release Date: August 22, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Second-quarter sales and earnings exceeded expectations, with total sales growing 7% to $5.3 billion and comparable store sales up 4%.
- Operating margin improved by 115 basis points to 12.5%, driven by higher sales and lower distribution and incentive costs.
- Earnings per share increased to $1.59 from $1.32 in the previous year's second quarter, reflecting strong profitability.
- Ross Stores Inc (ROST, Financial) opened 21 new Ross and three dd's DISCOUNTS locations in the second quarter, with plans to open approximately 90 new locations this year.
- The company repurchased 1.8 million shares of common stock for $262 million, remaining on track to buy back a total of $1.05 billion in stock for the year.
Negative Points
- Despite improved trends, Ross Stores Inc (ROST) remains cautious due to the uncertain external environment and high costs for necessities faced by low to moderate-income customers.
- Merchandise margin decreased by 80 basis points, and this pressure is expected to increase in the second half of the year.
- The company faces challenges in newer markets, requiring adjustments to assortments to address a more diverse customer base.
- Shrinkage remains a concern in a difficult retail theft environment, with expectations of some deterioration from last year.
- The company anticipates continued pressure on discretionary spending due to high costs for necessities, impacting future sales growth.
Q & A Highlights
Q: Barbara, could you elaborate on the progression of business trends that you saw during the quarter and just progress with your initiatives to amplify value as well as brands into the back half of the year?
A: The stronger value offering is definitely resonating with our customers. In the fall season, we're going to continue to build on improving that value offering. The customer is dealing with high costs and necessities, and the way for us to gain market share is to continue down this value path.
Q: On gross margin, could you speak to the mark-on opportunity based on current availability of goods, or help us to think about gross margin drivers in the back half?
A: We continue to see higher productivity in our distribution centers, and buying costs were favorable due to lower incentives. Domestic freight was a slight benefit, and ocean freight was neutral. However, merchandise margin dropped by 80 basis points, and we expect that pressure to step up as we move into the second half of the year.
Q: Can you touch on the cadence, talk about anything on the back-to-school results thus far, and also within categories, if you could speak to the home and apparel trends in the quarter?
A: Comps were strongest mid-quarter. Cosmetics and children's were the strongest areas, while home performed in line with the chain. Shoes were slightly below as it lapped top compares from last year. Overall, apparel was relatively in line with the chain average.
Q: Could you talk us through any key changes to the operating outlook for the back half of the year, key margin drivers in the back half versus what you were expecting 90 days ago?
A: Nothing has really changed on the back half of the year versus how we originally planned. We did flow through the beat in the second quarter through the year and updated our view of the efficiencies across the business. We are continuously looking for ways to be more productive, especially given the planned merchandise margin pressure from our branded strategies.
Q: I think you said basket was up. Can you talk about AUR versus UPT and share where you are right now on a dollar basis? Also, have you noticed any change in your customer behavior in the second quarter versus the first quarter?
A: The comp was driven by a combination of higher traffic and a higher basket. The average basket was slightly up as average unit retails were partially offset by fewer items per transaction. We don't give specifics on the actual AUR or the basket. Based on our performance, the customer is clearly seeking value now, especially with persistent inflation on necessities and an uncertain macro economy.
Q: Can you unpack the merchandise margin for us a little bit more? Is the pure product margin pressure better or worse as you get into the second half?
A: We started our efforts at the end of last year, but the step-up was this year. We reported an 80 basis point drop in Q2, and as we continue to increase the penetration of brands, we'll see additional pressure in the back half.
Q: Can you give us more color around the expense and cost savings that you expect in the back half? Are they more COGS benefits or SG&A benefits or both?
A: We are leveraging automation in the DCs and stores, such as automated vehicles, robots, and self-checkout systems. We have also introduced new handheld devices and flexible scheduling to improve productivity. We have found efficiencies in multiple parts of the P&L, with domestic freight being a primary example.
Q: Can you quantify the merchandise margin decline that you're expecting in the second half? Are there additional operating efficiencies available to offset any further merch margin pressure into next year?
A: We expect the merchandise margin impact to be higher than the 80 basis points reported in Q2. Offsets in the back half include domestic freight and distribution cost improvements. It's too early to talk about 2025 as we are just starting our budget process for next year.
Q: Can you talk about the ladies' business, the home business, and your focus on brands in each of those businesses? How are you thinking about pricing as we move forward into the back half of the year?
A: In the ladies' business, we are focusing on shifting assortments, getting more branded, and adding more values. The value strategy is our market share strategy. In home, we focus on specific branded businesses to ensure we offer incredible value to the customer. We are not planning specific AURs but are focused on the value compared to other retailers.
Q: Can you talk to the level and quality of inventory available in the marketplace today? Are you seeing any additional opportunities for new vendor partnerships?
A: Inventory availability remains favorable and broad-based. We are expanding our vendor base and adding new vendors. Vendors are looking to build relationships and do more business, which is beneficial for us in terms of adding value and building relationships.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
