Q2 2020 Ross Stores Inc Earnings Call

I will begin with prepared comments by management, followed by a question and answer session.

To ask a question during the session you will need to press star one on your telephone.

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 reopening.

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.

Statements in from historical performance or current expectations.

Additional information about related risk factors is included in todays press release. He didn't compete fiscal 2019 form 10-K in fiscal 2020 form 10-Q, and it keeps on file with yes, you see.

Now I'd like to turn the call over to Barbara Rentler, Chief Executive Officer.

Good afternoon, joining me on our call today or Michael <unk> Group, President Chief Operating Officer, Travis Mark Rupe, Senior Vice President and Chief Financial Officer at Cagny Cow, 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 reopening.

I would buy a review of our second quarter performance after which we'll be happy to respond to any questions you may have.

As a reminder, all store and distribution center locations for close from March 20, or so were made 14.

Well, we began to phased process every resuming operations.

On average our stores were opened for about 75% of the quarter.

<unk> operating on shorter hours compared to the prior year.

All our distribution centers reopens by the end up nine.

The ongoing covert 19 health crisis remains very fluid.

We continue to closely monitor local developments twoish us any potential changes to our operations as mandated by local state or other government directive.

We remain committed to prioritizing the health and wellbeing of our associates and customers as we navigate through this pandemic.

Turning now to our financials.

Total sales for the second quarter or $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 gate of the reopening to the end of the fiscal quarter.

Sales during the quarter were significantly impacted by several factors, including Cobot Nike is negative effect on consumer demand, particularly in California, Florida, Texas, and Arizona, which represents about 50% of our store base.

Further during the initial reopening 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 wrapping up our buying and distribution capabilities.

For the 13 weeks ended August 1st 2020 earnings per share, where six cents on net income of $22 million.

This compares to net income of 413 million or earnings per share of $1.14 cents for the same period last year.

Year to date the loss per share was 81 cents versus earnings per share up $2 in 29 cents last year.

Our net loss of $284 million is compared to net income up $834 million in the first half of 29 team.

Sales for the first six months of Twentytwenty 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 at 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.

Thank you Barbara.

As Barbara noted stores operated on average for 75% of the period with comparable store sales down 12% versus last year for me because of their reopening 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.

Well the cost of goods sold and selling general and administrative expenses reflect the de leveraging effect on lower sales versus last year and expenditures for coated 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 19 cents per share.

Total net coated related expenses for the quarter in cost of goods sold and best DNA combined were approximately $65 million.

Merely for costs associated with restarting business applies cleaning and payroll related to additional safety critical.

We ended the quarter and 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 not materially change from the second quarter.

Comparable store sales for the first two and a half we trending down mid teens versus last year.

Given the lack of visibility on the potential impact from this ongoing health prices, we're not providing sales for earnings guidance.

Now I will turn the call back to Barbara for closing comments.

Thank you Travis.

Aside from the pandemic finpac on consumer demand as initial reopening sell significantly exceeded our conservative forecast, we were unable to ramp up our buying and distribution capabilities quickly enough to adequately replenished stores.

As Travis mentioned earlier, the ongoing Cobot 19 health crisis remains extremely uncertain and we have limited insight into how this pandemic could further impact consumer demand and the retail an economic landscape.

There's additional risk if cobot 19 cases remain elevated for increase.

Potentially prompting larger scale shutdowns of our operations.

Given these are uncertain uncertainties, we believe the most prudent approach is to plan and manage the business very cautiously while continuing to prioritize the health and safety, if 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 WAC price executive well help see us through these uncertain times.

Over the longer term, we remain well positioned as an off price retailers to continue to gain market share, giving a large number of retail store closures.

Consumers continued focus on value and convenience.

We've proven in the past that we have successfully competed and this type of retail environment. I believe we will do so again at this point, we'd like to open the call respond to any questions you might have.

As a reminder to ask your question you will need to press star one on your telephone to withdraw your question press the pound warehouse cheap.

Order to allow everyone time for questions. We ask that you. Please limit yourselves to one question. Please standby will be compiled acuity roster.

Your first question comes from Matthew Boss from JP Morgan.

Great. Thanks.

Brett 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 later inventory that you cited and larger picture do you believe anything in the competitive landscape has changed since we think about market share beyond the pandemic.

Matt its Michael Hartshorn on the a recent trends I think theres a number of factors that are impacting what we're seeing currently like I. Certainly think there are things internally that we can focus on in terms of execution. We're still in there would not where we want to be on.

Ramping up the Dcs and continue to have lower receipts and then plan.

I do think there 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 tobin trend had customers migrating to value in convenience and this disruption just accelerated those trends.

With a number of store closures, our value proposition than 1800, and growing conveniently located store locations I think we have a significant opportunity to gain market share over the longer term.

Great and then just a follow up on gross margin how best to think about the puts and takes on merchandise margin in the back half of the year any help would be really greatly appreciate it.

Yeah, Yeah sure Matthew this is Travis in terms of the merger components for this quarter.

You know similar to last quarter, given the significant de leveraging effect of having our stores closed for a portion of the quarter, we're not providing the specific margin component.

The the puts and takes this quarter I I covered in my remarks.

And then in terms of the the go forward look again, given the ongoing uncertainty, we're not providing any forward and forward guidance or commentary on future margins.

Great Best of luck.

Your next question comes from.

Mark Altschwager from Baird.

Good afternoon. Thanks for taking my question I was hoping you could touch on some of the current a inventory dynamics what does the billability look like in the marketplace spoke in general.

With a stronger trended categories and how do you feel about your ability to really change back into some of these key categories should the demand backdrop recover faster than you're seeing right now. Thank you.

Sure overall, we continue to see a lot of supply out there, but it's not it's consistent across the merchandise area. We believe that these operating creates opportunities and some products in some areas and gaps another area.

In terms of stronger trend year categories, that's kind of.

Broad question, but I would say in most businesses there there's been supply and that you know, but I'm happy with that trendy category, it's kind of hard to comment on it.

But what I would say is that in key categories. You know the merchants are out there are chasing every day and we had very conservative plans that they're working toward.

I think over time in the categories that have.

I'll say gaps in the assortment today I think eventually that will catch up.

Thank you.

Your next question comes from Lorraine Hutchinson from Bank of America.

Thank you. Good afternoon, just following up on that question. When do you think you'll be appropriately stuff and then as you look at your Packaway volumes do you feel comfortable with the the mix in content of that inventory that it's appropriate for the current environment.

Lorraine on the on on the stocking I'm I'm going to go through the sequence of the quarter and that will help explain a actions that we're taking.

To get to inventory levels that are appropriate for the plan.

When we first began our phase reopening of stores. That's the first thing we did and then we opened our de season, we did it in that order because of government restrictions in California, and actually Pennsylvania is a point in time.

Because sales exceeded our conservative expectations when we reopened at the same time, we were ramping in initially.

Opening an additional initially ramping our DC is the result was the depleted store inventory. The initial ramp up of our distribution centers took longer and we had than we had hope and we've had further difficulty ramping up our dcs to full capacity due to staffing challenges.

We've taken a 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 the peak capacity over the next few months.

So.

I think we would expect to see improvement as we progress through the quarter.

And and in terms of the contents of Packaway I mean.

We're pleased with the content to pack away. We have now we don't feel like we have any residual issues or anything from spring adds to Michael's point, we use packaway to drive our business in Q2 and go after everything so the concept of the levels that we own we feel we feel fine about the content and in terms of just packaway enjoy.

General and merchants you know as you know packaway fluctuate normally.

And the merchants are out there chasing packaway now looking for you know spring product car product whatever the great deals are because the most important thing about packaway is that what you own is really great content.

Your next question comes from Kimberly Greenberger from Morgan Stanley.

Great. Thank you so much for taking the question Barbara theory interested in what you said about the state that are seeing particular impacts from coated, California, Arizona, Texas and Florida.

You talked about in the second quarter that your your store openings.

We're in that did on store opening days you were Comping down 12% did you see a worst result in nodes for market's been that the company average at minus 12% and then I I just wanted to reflect on what's happening.

Currently here in August and and I Wonder if there is it 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 where are you seeing headwinds from from either insufficient inventory levels that that might be impacting your sales here in August.

When you're still ramping or another potential explanation could be that with this you know abnormal back to school that you referenced maybe the kids business Juniors young men's or underperforming and other categories are doing better and it's just a function of.

Slow demand, there and I'm just trying to.

Break apart the pieces to understand a little bit more of the underlying drivers that the business.

You can find any insight there. Thanks, Kimberly Kimberly it's it's a Michael I'm on the regional trends, Texas, Florida, California, and Arizona underperformed the rest of the chain by a 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 on the current trend, we do believe that we that part of the.

Current trend is driven by a lower than planned receipts with the the Dcs are continuing to ramp up. So we do think that that is a factor in the current trends.

And then it as it pertains to the assortment and and back to school, we planned those businesses very conservatively, we made the adjustment.

In the Assortments that we thought were where appropriate based on what what's going on and you know the outside world with.

Isn't going back to school or not and you know obviously, we're still went back to school. So it's kind of heart rate that total experience, but we went in with pretty conservative plans for back to school.

Okay, Great Barbara and Mike like I, just wanted to ask on it to the extent that you see inventory levels or depressed inventory levels could be hurting current till trend is there is there a way for us to think about when over the next.

Juan or maybe two months you would expect to be a in a more.

Any better in store inventory position that would be maybe reflective of where you'd like to have seen them.

Today.

Sure Kimberly I think I would repeat Mike my comment with Marine we've taken aggressive actions.

In the Dcs, we probably took them later than we should but we do expect to Oh, we do expect those out actions to.

Improve our throughput and bring the levels up the peak capacity over the next couple of months.

Okay, great. Good luck here thanks.

As a reminder to ask a question press star one in order to allow everyone time for questions. We ask that you. Please limit yourselves to one question each.

Your next question comes from changed its your from Jefferies.

Hi, Thanks for taking my question on walk a little bit about the complexion of the crop I think you mentioned higher average ball getting lower you are always box. It makes sense. It's we're hearing about shoppers can polymetallic when they get you're still seeing that towards the tail end of two Q3, Q or inventory shortages are having a role or not.

Cutting some of that then also you are sounds like it was driven lower by all from the clearance activity earlier in the quarter Wonder if that a wash its probably expected to be down in particular, we could send to see that stabilize out there so kind of been please thank you.

Hi, This is try to us in terms of the average basket. So we do continue to see customers.

Being in a little bit less frequently but my more women 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. I think you know, it's really too early to draw trends and we don't.

We.

We're not providing further details on the on the breakdown of itself.

Thank you very much.

Your next question comes from keep Fitzsimmons from RBC capital markets.

Yes, hi, Thank you for taking my question Travis I believe you called out 65 million encoded related expenses in the quarter just directionally as we move into the back half is there any way to piece meal. You know how we should think about some of these you know enhance cleaning p. et cetera, as well as the labor piece.

It sounds like in order to get the distribution centers more fully up and running no you're having to make some investments there. So I just directionally you know how should we think about some of these up yet puts and takes I guess on the S. Yoo Nay line as we move through the back half.

Yes, sure a couple of comments of the 65 million was both as a reminder, in S. DNA as well as Cogs as you might have guessed majority of those weren't as teenagers related to personal protective equipment since I've had a.

And it's indication supplies payroll et cetera.

As I mentioned a portion of those did relate to cost related to restart of the business and so that portion we wouldn't expect to repeat having said that we do expect elevated levels of corporate 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.

And your next question comes from Paul Lessray from Citigroup.

Hey, Thanks, guys I'm curious about the takeaway opportunities that you're seeing today compared to normal period, maybe talk in terms of good better best or maybe just talk homebuyers apparel and then also curious about the initial margins, but do you expect on backward based on the deals that you're.

Okay, and then second just curious if you could talk about number of new vendor opportunities you're seeing is there anyway to quantify.

Are you, saying up there thanks.

Sure in terms of Packaway opportunities.

I don't know if I'm really trying to buy a good better best.

<unk> versus apparel.

<unk> apparel tends to be more packaway than hallmark normally on a normal basis I think there yeah. I think there are opportunities that are not perhaps balances they've been in the past.

The supply out there isn't as consistent across merchandise areas.

As we normally is so the opportunities that are out there or perhaps not quite as bad.

What I would say as there are more opportunities in the last couple of weeks that seem to be emerging and so we're feeling like Packaway you know, it's moving moving into right direction, but again, it's not necessarily at broad based is it as it normally is because of the gap a supply that are out there created by.

All the issues from Covidien and the market and all the things that have gone have gone on there in terms of the margin. We don't really look at accurately as a as a margin driver. We look at packaway into sales driver. So in terms of if you're asking about pricing as it pertains to Packaway you know 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 used to drive value.

Into into the stores so in terms of a margin.

Scenario, if we bought something that was a great deal.

We would probably pass 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 opened new vendors you know situations like this obviously create opportunities and sometimes people 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.

Expand the vendor base.

And so that's kind of ongoing and I think we'll continue to big ongoing but that is a focused convergence every day every day at the weekend to try to expand the vendor base.

Got it just one follow up when you're talking about yeah. Some some gaps out there or the good you was not available to you or you just slower to bring the man.

Yeah. That's been then you shouldn't <unk>.

She thinks about the good the goods that are available you know as all close outs are you know close outs are never consistent amongst every every business.

Any season any year I think this year, there's just been with everything that's gone on which I know your first on in the market in factories overseas and you know there seems to be I'll say, some bigger bigger pockets in terms of of the pace at which we're we're buying it.

I would say that you know when the.

Well, we reopened 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 rapid source backup.

We didn't anticipate the consumer demand the way it turned out to be so I feel like you know there was probably an opportunity that we could have done that a little bit better, but I'm not necessarily short that that would have impacted.

Hi, assortment, because I think the some of the gaps or just some they're just some big gas is classifications of business, whether they're in and some whether it's not and our expectation is that over time, it won't be a little bit more reasonable at vendors you know many vendors didn't commit and bringing some goods and so you know it puts us it.

Puts us in a chase and the merchants are out there chasing and had been chasing since since we opened both for packaway or to flow in stores.

Got it thank you conduct.

[music].

[noise]. Your next question comes from Simeon Siegel from BMO capital markets.

Thanks very much.

Understanding all but obviously that's right.

Back of these inventory conversations do you view on what the quarter pricing or promotional environment should look like going forward as.

Holiday, which you know feels like so far has and then just sorry for the dumb question as you.

You had that Packaway product.

Stores.

And the reason you wouldn't have got Berger.

That's just seasonality yours.

Yes.

[noise] you know I couldn't hear the last part of your question I Packaway kind of faded out I just need to stay the same thing over again every great.

Sure Yeah, sorry, just just wondering it's great that you were able to use the packaway to fill the stores is there any reason you didnt go deeper in the answer a seasonality right answer.

[noise], meaning go deeper meaning released for.

Yeah, I bring more into the stores.

I think we were I think packaway the pack waiver leases, where what we thought was appropriate to flow to the stores.

At the time, so packaway is not its a broad assortment of products.

That we put into the hotel and so you flow then based off of a what's right timing right product.

To the floor, so depending upon what what the products, where that's how we slow it.

It's not every business doesn't have have packaway to in some of that Packaway and I would tell could have been for fall. So you know we slowed we thought was appropriate and we slowed or we thought we needed to get through to make sure that became became in clean into the fall season and that weve are carrying residual products that we didn't want to have so that's what determined to what we released in and how.

We released it in terms of the promotional environment.

I would expect that you know promotions will continue its a highly competitive environment. You know 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 that it'll be a promotional environment as we go forward.

Your next question comes from Marni Shapiro from retail tracker.

Hey, guys.

Forget best of luck I'm getting to the next couple of weeks it back to school [laughter] skew a question, but 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 into closer to the peak season, and what your thoughts around that even if it's specific to just no will extended on the weekends, maybe not during the week I'm just curious what you're thinking is.

Sure Marni on on transactions and conversions, we don't measure conversion, we use trends we use transactions is our proxy for for traffic.

So we don't measure that on in terms of Ah hours. So we did when we open significantly reduce the hours. We operate we operated from tend to seven so we think that had some impact on the performance as we move through the quarter we have extended.

Hours or to nine o'clock across the chain currently and we haven't yet developed our hours for the holiday season.

Your next question comes from Alexander for Ramos from Goldman Sachs.

Good evening, thanks, so much and taking the question Yeah. Bob you mentioned in the prepared remark does a lot of uncertainty of course heading into back to school and into holiday can you talk a little bit about how youre planning the business into the second hall, perhaps reference to the mid teens did on the T. trend that youre seeing at the moment I mean.

Then my second question is on your logistics cost how are you expecting those two up to trend going forward.

On on logistics cost you know I've given with given the the wage increases certainly in the back half the year, we would expect to grow but you know we also have cost savings.

Throughout the business, including the distribution centers, because as we step up will be able to improve our productivity as well.

Okay 'cause it soon be favorite just repeat the back to school question, because I didn't capture the first part of it could you say that again please.

It will be one moment might look like.

Alex Andrew Your line is open.

Oh. Thank you appreciate it I was just wondering how conservatively youre planning the business into the back half given you know will have the uncertainty about consumer behavior as we head into that important holiday season.

Sure we plan to continue to to manage the business conservatively I mean, given all the ongoing cobot 19 related risks, including you know potential for additional additional rounds of store closures and distribution center closures. So our plan is to plant it conservatively.

And to Chase our way back.

Your next question comes from Bob Triple from Guggenheim.

Hi.

Good evening to two quick questions. If I could the first one is can you just give us an updated thought process around the resumption of a dividend or share repurchase and second question. I think follows Alex is a bit but when you think about the uncertainty that you have can you just maybe talk about how you're planning sort of I don't fall winter colder weather type.

Products in the back half with everything else that's going on thanks.

Yeah sure. This is Travis just with regard to the dividends and share repurchase program again, there's still as Weve mentioned several times significant uncertainty in the market, we don't know what's going to happen with Covance.

Consumer demand and we really would need greater visibility on sales and the sustainability of those deals.

Before we would start to consider.

Or evaluate reinstituting either.

I mean, it terms of how we're planning fall or winter products in the back half.

We're planning the.

The entire business conservatively and so we would look at each one of those businesses I'm, assuming outerwear sweaters those type of businesses and plant them.

Relative to the conservative to the conservative plants. So we would have an assortment on the floor and then if business took off at a greater rate than we expected we will come back and chase some of those products.

Your next question comes from Michael Binetti from Credit Suisse.

Okay. Thanks, guys for taking my question.

Michael are you seeing any difference in the trend line in the markets where in schools have announced virtual versus in person. It's it sounds like that could have been a driver any evidence is the school systems are communicating in the local markets.

Back to school is showing up or it's a little late and then I don't know some of the schools are already passed back to school any have you seen any improvement as you kind of move past back to school season, and then in some of the southern markets at all.

Yeah, Michael I would we wouldn't talk about current trends going into the quarter. We obviously gave the the topline trend to give you an indication of what's going on over all.

I'd say, there's 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.

Your next question comes from John Karen Prohm Cowen.

John Kernan your line is open.

Hey, good afternoon, everyone. Thanks for taking my question.

Can you comment on your ability to get back to product in inventory environment as we go through the back half the year doesn't hurt my track perspective.

How is the city inventory position now being pretty Wayne So I'm just curious.

The speed of which you can ramp back up and get goods into stores throughout the back out.

Yes, it's a good question, obviously, we plan the business very conservatively, we think we we've done that strategically.

And we think that's 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.

[noise] and your next question comes from more Champagne from loop capital.

Thanks for taking my question I mean, obviously, we hope that this is a once in a lifetime event, but does the.

No 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.

Once the Cesar running at full tilt shouldn't be a long term problem.

I think it's the latter once we have the DC is running at full tilt, we do not think it's a longer term issue.

Your next question comes from Roxanne Meyer from MKM partners.

Great. Thanks for taking my question I wanted to ask about you know any color you can provide on trends by category. Several of your peers I've talked about the strength of home and then it related to that as a follow up you know you mentioned that you plan to 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. Thanks a lot.

Yeah, let me start with the trends by mercenaries tender again, given the whose reopening of the stores and in particular, the significant impact of clearance and results for the quarter, It's really hard to get a a clear sense of the product from the one thing that clear is that the consumer during the quarter was very much more focused on hold.

As opposed to apparel.

What would it what I think you're at direct and also it is just where where are we seeing the shifts in product, whereas the consumer headache versus where she's been so yes, I would say Travis This point home home is certainly a place that the consumers flocked to and and as a business that we believe and actually home gets bigger as.

As you know what you enter into the fourth quarter I would think also in in apparel. The shipset that we're starting to see which I think everyone is starting to see if the consumer moving more towards casual products active wear athletic wear as as perhaps she's working remotely now and sell.

So making that pivot and that shift is is we ever gone. We normally have a large casual business you know our career as you know 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.

At the consumer has moved in that direction and that's what we would see you know in the back to school business like a juniors her young men's you would see that same that same shift on the floor now and a continued shift because that is the bulk of where those businesses are for us.

Normally.

Your next question comes from Dana Telsey from Telsey Advisory group.

Good afternoon, everyone. As you think about the DTC business are you seeing the same trends that Dts as you are as compared to Ross.

And then if you think about your vendor base Barbara.

It's an opportunity to also expand the vendor base and our terms of payment at all being adjusted predominantly in the industry from what happened in the short term in the short term. Thank you.

Dan on Undies, I'd say the details experience somewhat similar performances Ross the supply chain and buying ramp up issues impacted the entire company and they include both Rawson DTC.

And from a vendor base prospective yeah, obviously, we're always trying to expand the vendor base and you know.

Usually when business is difficult to learn you know.

There are often more potential opportunity to expand that base of 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 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 over the last.

Few months and so I think everyone is reacting to what they need to do for the business, but but I really couldn't I really can talk about a permanent shift in the industry.

Your next question comes from Jamie Merriman from Bernstein.

Thanks, very much Barbara when you're talking about your pivoting to categories that are our strong kits on can you talk a little bit about how that works and the timing in terms of how often you know buying budgets are allocated and I'm just wondering like how quickly you could really.

Pivot, let me just necessary and then you talk in your prepared remarks about you know thinking through and industrial weighing the rest of a future shut downs on so and given your comments here on the DC locations in California in Pennsylvania can you just remind us of of where your big Pcs are located and if their server.

Nation strategies, you can put in place if there were shut down on the impacted the California disease. Thanks.

On the on the de sees about seemed a little.

Over half of our capacity is on the West coast.

We have de season in the Bakersfield Central Valley area.

When do you see there several in Riverside. We also have a DC in Pennsylvania into in in South Carolina. If if we had to shut down the California de sees it would have a significant impact on on.

The June.

Yeah.

Just as far mitigation strategies, obviously, it's going to be important for us in our future growth or next D.C. opens in Houston will have another DC somewhat after that that we would expect to be non California.

Sure and in terms of pivoting to categories that are strong.

How quickly can do it I mean, it's literally depends on on each category knees in each.

Size range engender, 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 based 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 was a trend shifts the markets follows that trends shift and then.

Supply naturally naturally kind of goes there and so then you can you can take a bigger lift than perhaps you can initially as as the market recognizes what's working what's not working themselves.

Your next question comes from GE Saliq from you've yes.

Thank you Barbara My question is you mentioned, there's a lot of near term factors impacting that trend in third quarter. So far back to school like a stimulus in the inventory issue the covert rising gold cases, but to what extent you think traffic is being impacted by perhaps customers going online all in finding bargains, there because they're just not comfortable coming.

Stores right now.

Michael just want to parliament questions 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 where they furloughed and then when you tried to bring them back. They just they werent picked on other jobs are they just didn't want to come back. So you've had to raise wages. If you could just explain that all the more that'd be appreciated. Thank you.

Sure on it on the de sees we did furlough our associates and we operate the de seized with both both Tim or labor in from Labor permanent labor for surge capacity, we did see or permanent workforce good retention in returning from for.

But I suspect with the a surge of E commerce and the impact of commerce coming back up post closure closure or the warehousing competitive labor market has increased quickly and significantly.

So I think those are the main factors on on what's driving the the DC staffing shortfall I would also add that in a covert environment.

We want to make sure that people are safe and we don't want them coming coming to work is if sick. So you know there's also things like attendance that we're addressing as well.

And in terms of the impact of online and our business I think that I think that.

Hard for us to measure the exact the exact relationship of that.

You know obviously online business has been very good, especially in and central 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.

Your next question comes from a departure from Wells Fargo [noise].

Hey, everyone I'm I'll follow up on Jays question, but I'll ask it differently I'm not necessarily E. Commerce I know you guys I'm sure how good communication when it comes with your customers you're talking about why they're not coming back as much as they did last year is it you know between the you know kuvin concerns the economy and maybe customer loss.

Our job or you know and from a family has gone down and then thirdly, you know your own inventories shortage in are not having the right stuff in store do you know, which is the main factored it looks like is there a rank order of those is running we kind of talked about.

I, but I would say, it's hard to to break out between those components I think it's very clear. That's a number one factor is the impact of of the virus you know as we said in her comments that the markets that were impacted the most.

We're also the markets that had the largest largest outbreaks. So I think that's clear that that's the number one factor.

But I don't want to minimize we think we could have done things better during the quarter. So there are factors.

You know that we've 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 the impact of business.

Your next question comes from Chuck Grom from Gordon Haskett.

Hi, Good afternoon smoker for me just I'm curious just almost on top states or if you're still seeing so do so sales here in August or if we ever.

The Republic back cancer that international average.

I didn't hear the first part of the question.

Well just on the sales in those tough tough stage I'm just wondering if the sales were coverage of Florida, California cluster Shergar.

In those states they continue to trail the chain.

We have seen some small improvement.

And your last question comes from Adrian you from Barclays.

Good afternoon, everybody Barbara I was wondering if you didn't talk about.

If 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 you know pre holiday weeks any changes to hours or.

You know traffic driving events or something that's or and then for Michael or try to see if you could talk about what portion is distribution center payroll versus total payroll like employee payroll not including corporate head to head quarters.

I imagine you're not seeing as much of that wage pressure at the store payroll line, but if you could talk about anything you know did people come back or Didnt come back at you know that similar to the disease or is that normalized thank you very much.

I'll try to get 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 de sees were impacted by the surgeon in E commerce with the closures.

Have a you know 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 we wouldn't discuss those at this point as we're still working through this one.

And in in terms of of event Black Friday that you know.

We don't you know we don't really run events are our thing is that we want to make sure that we have great friends values on the floor and obviously our inventories go levels go up in that time period, and that's a week, that's what the customer values and that's it that's what we look to do to drive traffic is just having great band branded bargains on the floor.

I will turn the call back over to Barbara for closing remarks.

Thank you for joining us today and for your interest or voice stores, which we wish you and your families continued health and safety. Thank you.

Ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.

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