Q2 2022 Ross Stores Inc Earnings Call

August 18, 2022

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.

If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.

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-K's on file with the SEC.

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

Good afternoon, joining me on our call today are Michael Hartshorn Group, President and Chief operating Officer.

Adam or vote, 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 of the 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 customer base as well as an increasingly promotional retail environment.

Earnings came in above our guidance range, primarily due to lower incentive cost, resulting from the below planned topline 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 32020 to $1 11.

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 six months earnings per share were $2 <unk> on net income of $723 million.

These results compared to earnings per share of $2 73 on net earnings of $971 million in.

In first half of 2021.

Yeah. So the 22 2022 year to date period for $8 9 billion.

With comparable sales down 7% versus a strong 14% gain in the first half of 2021.

Shoes, and men's was the strongest merchandise areas during the quarter, both Florida and Texas for the top performing regions, mainly due to the outperformance of our border and tourist locations.

Yeah.

We are making merchandising adjustments to meet changing customer demands.

That said the actions we have taken thus far were unable to offset the mounting financial pressure 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 customer.

At quarter end total consolidated inventories were up 55% versus the same period in 2021.

Well average store inventories during the quarter were up 15% versus last year, we operated with very similar levels when compared to pre pandemic.

Tackling merchandize represented 41% of total inventory versus 30% in the same period of the prior year. When we use a substantial amount of pathways to meet robust consumer demand.

Additionally, supply chain congestion continue to ease during the second quarter, resulting in above plan early receipts of merchandise that we stored in pack away 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 eight 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'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 2022.

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.

Here 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-19 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 cost and markdowns.

Distribution cost increased 85 basis points due to a combination of unfavorable timing of pack away related expenses and deleverage from our new distribution center.

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-19 costs.

During the second quarter, we repurchased two 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 two 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 comparable sales for the 13 weeks ending October 29, 2022 to declined 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 72 to 83.

Versus a $1 nine last year and $1 four to $1 21 for the fourth quarter compared to $1 four 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 forecast 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 seven eight to eight 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 rightsize, 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 pack away related costs.

Interest expense is estimated to be approximately $400000. 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, an untapped borrowing capacity.

We also continue to return large amounts of cash 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'll turn the call over to Barbara for closing comments. Thank you Adam.

We are facing a very difficult and uncertain macroeconomic environment that we expect will continue to strain our customers' discretionary spending.

So 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 overtime.

At this point, we'd like to open up the call and respond to any questions you may have.

Thank you.

At this time, we will be conducting a question and answer session.

If you'd like to ask a question. Please press star one on your telephone keypad.

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We ask that you please limit to one question.

Our first question comes from the line of Lorraine Hutchinson with Bank of America. Please proceed with your question.

Thanks, Good afternoon.

I think one of the better fourth quarter comp versus three <unk> 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.

Hi.

Hi, It's Michael Hartshorn first on the fourth quarter guidance alone. If you look at the multi year compare we did a nine.

Last year. So it's one of the easiest compares which is really the driver of that 4% to seven comp this year.

<unk>.

So lorraine in terms of.

Opportunities in terms of the fourth quarter, I think that would be around gifting.

We didn't maximize some of our gifting areas last year.

Thank you.

Thank you. Our next question comes from the line of Paul Lajoie with Citigroup. Please proceed with your question.

Hey, Thanks, guys.

Sorry, if I missed it but I'm curious about the performance of home versus apparel.

There were any.

Notable trends in those categories.

How they trended throughout the quarter.

Got worse better and 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 a factor then thanks.

Home sales are relatively in line with the chain average and the performance of home and apparel with pretty similar for the quarter.

Both businesses had.

Areas of business that we're strong in areas of the business that were weaker so they were relatively in line.

Paul on the 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 on a multiyear basis.

And I think if you looked across retail I think people.

Weekend in.

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.

Yes.

And we're also seeing a little bit of an improvement at the end of July and into August .

Anything that you can share on that front.

Yes, we wouldnt, we wouldnt comment on.

Trends within this next quarter.

Okay. Thanks, good luck.

Thank you. Our next question comes from the line of Kimberly Greenberger with Morgan Stanley . Please proceed with your question.

Okay, great. Thanks, so much 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.

We're 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've made in the second quarter.

And.

But.

Where you sit today, how what's your evaluation of the progress and is there still more to go in the second half of the year. Thanks.

Sure.

The pivot was to take us out of casual products into more.

Is that the customer wants it so more wear to work in men's and ladies' more social more going out type products, whether that would've been in shoes or or ready to wear that is really where the the main shift was on the apparel side.

We've made some we've made some progress there, but we certainly have a longer way to go but.

But I feel much better about where we were from <unk>.

Where we were in Q1 to where we are now.

Because we've really been able to.

Expand some expand some of those assortments and I felt like we were a little bit behind.

So and then in terms of go forward with.

Going to make whatever the customer demand is.

So.

Everything being so difficult out there a highly promotional environment.

We're going to see where the customer tells us where where and when and what she wants.

And then we will make the shift from there, but we feel like we're in a better state of balance between let's say casual and more weight of our products.

In mens and ladies.

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 didnt work with last year or in 2020, I'm just wondering if.

The the.

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 two.

The answer to that is yes, both new vendors or vendors that perhaps we hadn't seen availability pump for an extended period of time.

The availability out there is pretty broad based right now in oil products and a good better best if there's just a lot of merchandise in the country and so I think vendors themselves are looking to expand.

Span their business and if they had been doing business with us. It was an opportunity. So yes, I think that and I think that probably will continue based on the amount of inventory thats in the country.

Terrific. Thanks, so much.

Thank you. Our next question comes from the line of Chuck Grom with Gordon Haskett. Please proceed with your question.

Hey, Thanks, very much good afternoon, Barbara how do you balance taking advantage of the.

Great deals in the marketplace.

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, then those youre 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 the third or fourth quarter phenomenon or do we start to see that in 'twenty correct.

Okay.

So in terms of the deals are it's a good deal today does it get better as we go.

The merchants are really.

They are 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's a lot of product out there. What you really wanted 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 is something you have been able to really get orders voice.

Youre going to pull the trigger and buy there's lots of it there.

Alex where there's lots and lots of availability you might buy some metered in you might tackle some away for the following year I mean, theres not just one kind of cookie cutter answer here I think the key thing now for the merchants is really to be out there understanding the promotional environment right. So.

When you are buying goods now when you really have to be attuned to as 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 is 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 in a more promotional environment, which.

We all believe it's 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.

Get to I think we will see some for this year.

There'll be some pack away for spring and there may be even potentially be some pack away for fall, but we have to wait and see what wait and see what that looks like.

Great. Thank you.

Thank you. Our next question comes from the line of Matthew Boss with Jpmorgan. Please proceed with your question.

Great. Thanks, Barbara so larger picture on the mounting inflationary pressure that you cited on your customer.

Does this affect the value and convenience elements of your model or is there anything that youre seeing today, that's different than past times of consumer disruption, where your model actually outperforms overtime and then Adam while sales are below your target model today are there any structural underlying changes to the model margin as we.

Think about multi year in your view.

So.

In terms of in terms of the mounting inflation.

I think over the last few months, we had initially made strategic price increases.

And I think with the slowing consumer demand.

The escalating inflationary pressure 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 are customers looking for branded bargains, great values everyday <unk> come to expect for 40 years and Thats. What you expect 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 that's what helps us from 2008 2009.

And I think that basketball help what will help US here also is getting ourselves in the right value when the customers under so much pressure.

With all the while the macroeconomic issues that are out there.

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 planned sales next year profitability will be highly dependent on that kind of topline assumption Matthew just to just to add to that.

Since the pre pandemic.

The changes have been really around the cost in the business and those are acutely in two different places with wages and transportation whether domestically or.

On imports.

I think what we expect to see is both domestic and imports.

The cost to come down over time, we're already starting to see some.

Some break and 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-19, our structural at the current levels.

Sure.

Or at least at this level, what I would say about the wage market right now is still tight but it is stable which is much different from where we were last year wind.

We're getting people back to work and there is frenzy and demand in the U S.

So I think there is going to be some opportunity cost as transportation.

Comes down with the lower demand in the U S.

Yes.

Great Great color best of luck.

Thank you. Our next question comes from the line of Adrienne <unk> with Barclays. Please proceed with your question.

Great. Thank you very much.

Barbara just 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 arent at promotional might that alleviate.

Some of these.

Market share shifts that are going on so that's my first question and then from Michael can you talk about.

Any price pass through pass through if any and I know that you guys had been very very careful about that and what is your average unit cost look like at this point kind of heading into holiday. Thank you very much.

As it pertains to Walmart look I think we look at everyone as a competitor whether it's Walmart whether it be other off price service, whether it's Macy's.

I think theres a lot of opportunities for the consumer to buy Oregon, snap and whether form other target whoever it is and so it's hard for us to measure that.

The most important 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 and that is a shift from where we were.

I think it's very it's hard for us to measure that but again, it's more 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.

Helpful. Thank you.

One on pricing, what we saw during the quarter on it.

So AUR is were up during the quarter.

As we said in the commentary.

The minus seven comp was a function of lower traffic and higher basket.

The basket was really driven by a higher AUR.

We would expect for the fall season with us.

Really trying to drive value and with our.

Additional markdowns wed expect AOS to moderate versus the first half over the balance of the year.

Thank you very much and best of luck.

Thank you. Our next question comes from the line of Mark All Swogger with Baird. Please proceed with your question.

Great. Thank you for taking my question I guess for Michael or Adam.

<unk> outlook is slightly better in Q4 versus Q3, so the magnitude of the implied margin inflection I think it's fairly significant.

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. Thank you.

Just on.

Q4.

As I mentioned in the <unk> question.

It 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 of it so that should be a benefit versus last year and then in the fourth quarter.

Was the peak of our cost increases including incentives.

And costs in the business, whether it was ocean freight.

Or wage.

Increases to staff staff, the store and the Dcs for holiday. So we're up against that and that'll be a benefit versus last year 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 L Y and then.

Probably some favorability specifically in ocean freight in fourth quarter.

And then probably a little bit more timing impact from our pack away cost.

In third quarter versus fourth quarter.

Very helpful.

Thank you.

You bet.

Thank you. Our next question comes from the line of Brooke Roach with Goldman Sachs. Please proceed with your question.

Good afternoon, and thank you for taking our question.

Barbara I'd like to ask you if youre 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.

And then maybe as a follow up.

You commented on plans to adjust pricing in markdowns in the third quarter can you comment on the magnitude and the timeline to achieve a more normalized markdown level.

And when you might be a little bit more clean thank you.

On the on the consumer we're not seeing any.

Change certainly since if I take the first to the second quarter with our comps have been.

Relatively consistent the composition of comps had been relatively consistent.

If I compare it to when we started to lap the stimulus from last year and.

Customer surveys.

And our own.

Performance would suggest that.

No.

We're really seeing pressure as the the lower lower end consumer.

But on the trade down customer there is no indication that the snow data that would suggest that that's happening, 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 all because our range of customers with that Brian .

Thank you. Our next question comes from the line of Michael Binetti with Credit Suisse. Please proceed with your question.

Hey, guys. Thanks for all the help here I just want to make sure I have.

I understand.

Alongside you guys on the model I think that as we look at like the three year growth rate.

And third quarter and fourth quarter. It takes a two to three points step down in the way that you're guiding fourth quarter is.

But youre expecting markdowns to to ramp, which I would assume that would give you a good shot at bringing in a new customer as it is that deceleration.

I'm curious what the acceleration is based on is that based on your insight to the industry slowing or.

Barb you just mentioned that 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.

It's a it's really a function, it's our biggest quarter.

It bodes serves us well to be very cautious, especially after missing two quarters in a row on an.

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 and also based on the supply lines in the world.

If in fact, the trend line turns out to be better than we think it is we're going to be able to chase some of that.

Okay. Thanks, a lot basketball.

Thank you. Our next question comes from the line of Ike <unk> with Wells Fargo. Please proceed with your question.

Hey, guys just want to talk about the pack away inventory.

On a year over year as a percent of inventory and in dollars up pretty meaningfully I know youre not going to go into specifics, but just curiously you maybe at a high level can you talk about that.

The buying margin the closeout margins you guys are basically seeing today versus 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 just any kind of color at a high level would be interesting. Thanks.

First on the <unk>.

What we have in pack away.

We are up as a percentage of total inventory, but that is up against last year. When we were using a lot of our pack away and the frenzied.

Demand in the second quarter, which was a tough tough comp for two.

2021, and then also pack away right now includes early receipts of merchandise and Thats, mainly home product.

And what happened there is that last year, we were experiencing longer lead times, we were having difficulty getting products.

On time.

On plan. So what we did this year is extended our lead times.

Coming into the first quarter and 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 La and also Covid, continuing COVID-19 shutdowns in China, neither of those risk played out and with lower demand in the U S lead times actually improved so we have stored in pack away early receipts of homes.

That will flow in the back half of the year.

Near term.

In terms of margins on Closeouts and upfront.

It's hard to compare one year to another based on its hard to compare what I bought this year versus what they had historically so it's not necessarily quite as simple as it is growing.

It depends on it so.

I think it remains to be seen on the closeout rates to be seen what kind of value if we need to put on the floor.

And yeah, but availability when people want to move it.

But the measure by Amazon.

Alright, thank you.

Thank you.

Thank you. Our next question comes from the line of Jay sole with UBS. Please proceed with your question.

Great. Thank you so much I just wanted to dig into the AUR strategy for the back half of the year are you, saying that youre going to use AUR as a lever to try to take share and alleviate some of the traffic issue that you've had recently.

Yeah listen we're.

Where in the value business and in the last.

A couple of quarters, we've really you know we've made some strategic price increases.

And the customer based on slowing demand and inflationary pressures has voted that she doesn't she doesn't necessarily.

I 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 for value and clearly the more value we offer the customer.

History would tell us that we would perform better so that as that is our strategy I mean based off of where she is and the pressure that the customers under.

That's really that's really what we need to do we need to understand what the outsized wrongdoing and we need to offer better values.

Okay. Thank you so much.

Thank you. Our next question comes from the line of Dana Telsey with Telsey Advisory Group. Please proceed with your question.

Good afternoon, everyone as you see the differences between the Ross and Dd's chain.

Are the differences between between the two and what whether its traffic or whether it's product sell through and what you're saying.

Is your AUR strategy different with Dd's and Ross in terms of magnitude for the back half of the year.

Hi, 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.

<unk>.

Last year, the inflationary pressure here has even a larger impact on the Dd's low income customer Cds average household income is $40 to 45000. Therefore this customer is obviously more sensitive to the pressures in fuel and food costs and other.

<unk>.

Inflationary purchases.

I would say like Ross.

Our focus is on delivering the best bargains, but we need to even provide greater value.

Two the dd's customer and likewise.

We built an higher markdowns in the back half of the year.

Thank you.

Thank you. Our next question comes from the line of Laura Champine with loop capital. Please proceed with your question.

Thanks for taking my question I've got a couple so when 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.

I mean thats the goal given the pack away opportunities you see.

Hi, Lawrence Michael on logistics costs, we're already seeing them.

Dave already seem 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.

It may take some time to come down, but certainly the current.

The current <unk>.

Non contract market is below the contract rates. So we're starting to see some movement even on contract rates.

Domestic.

And 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 will will come down and maybe not to the levels that we saw pre pandemic.

And then in terms of the in terms of the inventory levels 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 two things going on two things going on at the same time.

Got it thank you.

Thank you. Our next question comes from the line of Nisha Sherman with Bernstein. Please proceed with your question.

And 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 I'm just trying to understand the rationale for the higher markdowns Youre doing now as well as into the second half is it about your product mix and youre seeing slowing trends in certain categories and the rebalancing.

Or is it more about benchmarking to the external environment, that's becoming more promotional what's the what's the drop the bigger driver of the markdowns you expect.

I think it's a combination of both but I think I think the promotional environment.

It's gotten so aggressive in such a short period of time that we need 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's always you know businesses that aren't good or that need to take markdowns more aggressively but that's really that's really it's the promotional cadence and just really watching where the AUR is in the outside world can be very very.

Conscious of that and understanding that so.

Getting the faster we get to the value equation that she really wants.

The better are the better our performance will be.

Okay. Thank you.

Thank you. Our next question comes from the line of Cory <unk> with Jefferies. Please proceed with your question.

Hi, Good afternoon. Thanks for taking my question 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 underpinning the profitability and the profit goals that you have for the remainder of this year.

Yeah.

I would say from a 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 R.

Big pockets of expense, we've continued to add new capabilities.

In stores and in the distribution centers to increase efficiency and reduce costs.

Great and then as it relates to the store opportunity in real estate and the rent structures in your lease renewals are you seeing anything.

Incrementally helpful on the expense side, there as well.

I wouldn't say, there's anything material in that renewal process, but we.

We will continue to open stores as we said in the comments, we'll open 100 stores this year and at this point.

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.

Okay.

Very helpful. Thank you very much and best of luck.

Thank you. Our next question comes from the line of Simeon Siegel with BMO capital markets. Please proceed with your question.

Thanks, Good afternoon.

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 markdown color and then sorry for what is 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 I'm just trying to understand what it means you made more money on the bottom line because sales Miss.

Plan and how to think about maybe what levers you have at your disposal if topline pressures get worse. Thank you.

Yeah.

On the comment on incentive cost 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 is certainly there are other things we can do on the cost structure.

If we saw.

A greater decline.

And sales.

<unk>.

They probably wouldn't be.

Eight decisions for the long term are going into 2023, but we could certainly get more stark with or expense structure.

And could you just.

Repeat the first question about the AUR markdowns could you just say that again.

Yes, sure. So just within AUR, I guess any way to think through like.

Our like for like is tough given given your product offering but just if you are how much may have been driven by mix shift versus like for like.

Uh huh.

Part part of it was driven by mix shift because they were businesses that we didn't maximize last year because of supply lines. For example, things like shoes, which runs a higher AUR. So part of it part of it comes from mix.

Mick.

Couldnt, we couldnt get the supply their needs as last year fast enough to drive the sales higher.

But the other part of it just comes from.

Strategically we strategically increased some prices wherever you have other potentially assortment shifts within the mix and so it's kind of hard to really quantify that do you know what I'm, saying, because we're comparing casual product to wear to work product now where the work product has higher <unk>.

More than than activewear so.

<unk>.

I would like to take a really it's a mix. It's really it's really a mix of both certainly apparel races, the AUR compared to casual and definitely shoot has helped to raise the AUR because it's.

It's just a different with different product base, and we couldnt get the supply we needed last year. So those would be my my two main call up on that.

Got it thanks, a lot best of luck for the rest of the year.

Thank you.

Thank you. Our final question comes from the line of Marni Shapiro with retail tracker. Please proceed with your question.

Thanks, guys.

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 pathways excuse me in back to school.

As kids are going back to school do you think you were well set up in uniform and what they need for back to school and are you seeing.

Difference in the way she is shopping meaning is she buying what she needs and holding off on what she wants you know maybe the new fashion top but her kids are getting her back to school clothing.

Uh-huh Marni on real estate no change, we expect to open 100 locations and Thats 41 stores.

Over the balance of the year.

Great. Thank you.

And in terms of in terms of back to school.

Thought to buying secondly, the necessity to be assigned uniforms, and backpacks and all of those products.

I also think that part of.

Part of what she bought for back to school as you might have bought her child short of people sort of taking markdowns on let's say denim shorts earlier, so I think I think it's a.

Bad.

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 and so it's hard to tell now with the pandemic right. So.

And so I think I think it's a combination of both but instead, it's very hard to read without having to get out two or three years of any real history on it. So 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.

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 all micron hit at some point in December and so it feels like there's a real opportunity, even just driving traffic to stores for gifting and during that period of time, assuming there's not some I don't know new variance the gamba five variants or whatever it is.

Youre right.

Last year, we were impacted especially approaching Christmas with the Omicron and then.

Within our own performance, we had difficulty getting good holiday goods through the supply chain.

I just want to confirm a great best of luck guys for the rest of back to school and Paul.

Okay. Thank you thanks.

Thank you ladies and gentlemen, we have reached the end of the question and answer session. I will now turn the call back over to Barbara Rattler for closing remarks.

Thank you for joining us today and for your interest in Ross stores.

This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.

Okay.

[music].

Good afternoon, and welcome to the Ross stores second quarter 2022 earnings release Conference call.

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

If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.

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-K's on file with the SEC.

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

Good afternoon, joining me on our call today are Michael Hartshorn Group, President and Chief operating Officer.

Adam or votes, 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 of fiscal year.

Afterwards, we'll be happy to respond to any questions you may have.

Earnings came in above our guidance range, primarily due to lower incentive cost, resulting from the below planned 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 32020 to $1 11.

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 six months earnings per share were $2 <unk> on net income of $723 million.

These results compared to earnings per share of $2 73 on net earnings of $971 million in.

In the first half of 2021.

Yeah. So the 22 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 for the top performing regions, mainly due to the outperformance of our border and fourth location.

Okay.

We are making merchandising adjustments to meet changing customer demands.

At quarter end total consolidated inventories were up 55% versus the same period in 2021.

Well average store inventories during the quarter were up 15% versus last year, we operated with very similar levels when compared to pre pandemic.

Parkway merchandise represented 41% of total inventory versus 30% in the same period of the prior year. When we use a substantial amount of pathways to meet robust consumer demand.

Additionally, supply chain congestion continue to ease during the second quarter, resulting in above plan early receipts of merchandise that we stored in fact way and will flow store throughout the fall season.