Ross Stores, Inc. (NASDAQ:ROST) Q3 2022 Earnings Call Transcript November 17, 2022
Ross Stores, Inc. beats earnings expectations. Reported EPS is $1, expectations were $0.81.
Operator: Good afternoon and welcome to the Ross Stores Third Quarter 2022 Earnings Release Conference Call. Before we get started, on behalf of Ross Stores, I would like to note that the comments made on this call will contain forward-looking statements regarding expectations about future growth and financial results, including sales and earnings forecasts, new store openings and other matters that are based on the company's current forecast of aspects of its future business. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from historical performance or current expectations. Risk factors are included in today's press release and the company's fiscal 2021 Form 10-K and fiscal 2022 Form 10-Qs and 8-Ks on file with the SEC. And now I'd like to turn the call over to Barbara Rentler, Chief Executive Officer. Thank you, ma'am. Please go ahead.
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Barbara Rentler: Good afternoon. Joining me on our call today are Michael Hartshorn, Group President, Chief Operating Officer; Adam Orvos, Executive Vice President and Chief Financial Officer; and Connie Kao, Group Vice President, Investor Relations. We will begin our call today with a review of our third quarter performance, followed by an update on our outlook for the fourth quarter and fiscal year. Afterwards, we will be happy to respond to any questions you may have. As noted in today's press release, third quarter results were above our expectations as we delivered stronger value throughout our stores. Operating margin for the period was 9.8% versus 11.4% last year, reflecting the deleveraging effect from the comparable sales decline as well as pressure from higher markdowns and unfavorable timing of packaway-related costs.
Earnings per share for the 13 weeks ended October 29, 2022, were $1 on net income of $342 million. This compares to $1.09 per share or net earnings of $385 million for the 13 weeks ended October 30, 2021. Total sales for the quarter were $4.6 billion, in line with the prior year, with comparable sales down 3% on top of a robust 14% gain in the third quarter of 2021. The first 9 months earnings per share were $3.08 on net earnings of $1.1 billion, compared to $3.82 per share on net income of $1.4 billion for the same period in 2021. Sales for the year-to-date period totaled $13.5 billion with comparable store sales down 5% versus a strong 14% increase last year. For the third quarter at Ross shoes was the best performing business, while Florida and Texas were the top performing regions as they were bolstered by the outperformance of border and Forex locations.
At dd's DISCOUNTS, sales trends improved versus the first half, but continue to trail Ross's results due to ongoing inflationary pressures that are having a larger impact on dd's lower-income customers. Inventory levels moderated significantly from the first half of the year with total consolidated inventories at the end of the quarter up 12% compared to last year. Average store inventory during the quarter were up 4% versus 2021 and down compared to pre-pandemic loans. Packaway merchandise represented 41% of the, total compared to 31% last year, when we used packway merchandise to fuel robust sales gains. Turning to store growth. We completed our expansion program for 2022 with the addition of 28 new Ross and 12 dd's DISCOUNTS in the third quarter.
For the year, we added a total of 99 locations comprised of 71 Ross and 28 dd's DISCOUNTS. We now expect to end the year with 1,693 Ross stores and 322 dd's DISCOUNTS locations for a net increase of 92 stores. Now, Adam will provide further details on our third quarter results and fourth quarter guidance.
Adam Orvos: Thank you, Barbara. As previously stated, comparable store sales were down 3% in the quarter. Although traffic improved from the second quarter, it still declined versus the prior year. Partially offsetting these declines was a higher average basket size. Operating margin of 9.8% for the third quarter was down 160 basis points from last year. Cost of goods sold grew by 230 basis points in the quarter. Merchandise margin declined 165 basis points, primarily due to higher markdowns. Distribution costs were up 140 basis points, mainly due to unfavorable timing of packaway-related costs and deleverage from our new distribution center, while occupancy delevered by 20 basis points. These higher expenses were partially offset by a 75 basis point decrease in buying costs, mainly from lower incentives.
Lastly, pressure from domestic freight expenses eased in the third quarter and improved 20 basis points as we anniversaried the freight headwinds that began in the second half of last year. SG&A for the period improved by 70 basis points as deleverage from the negative comparable sales was more than offset by lower incentives. During the third quarter, we repurchased 2.8 million shares of common stock for an aggregate cost of $244 million. We remain on track to buy back a total of $950 million in stock for the year. Now, let's discuss our fourth quarter guidance. We continue to expect a very promotional holiday selling season and ongoing inflationary headwinds to pressure our low to moderate-income customers. That said, we face our easiest sales and earnings comparisons in the fourth quarter and are raising our guidance given our third quarter sales momentum and improved holiday assortments.
For the 13 weeks ending January 28, 2023, we now expect comparable store sales to be flat to down 2% on top of a 9% gain in the prior year. As a result, earnings per share are forecasted to be in the range of $1.13 to $1.26. The operating statement assumptions that support our fourth quarter guidance include the following: Total sales are projected to be flat to up 3%. We expect operating margin to be in the range of 9.7% to 10.5% versus 9.8% last year. This mainly reflects the anniversarying of significant cost pressures from ocean freight and lower incentives, partially offset by the deleveraging effect from lower same-store sales, unfavorable timing of packaway-related costs and higher markdowns. Net interest income is estimated to be about $14 million.
Our tax rate is expected to be approximately 23%. And weighted average diluted shares outstanding are projected to be about 342 million. Based on our year-to-date results and fourth quarter guidance, earnings per share for fiscal 2022 are now projected to be in the range of $4.21 to $4.34 compared to $4.87 last year. Now, I will turn the call back to Barbara for closing comments.
Barbara Rentler: Thank you, Adam. Despite the many challenges over the last few years, coupled with today's uncertain macroeconomic and geopolitical environment, we remain optimistic about our future growth prospects. Our top priority is and always will be delivering fresh and exciting named brand merchandise at compelling discounts every day in our growing store base of over 2,000 locations. With consumers' heightened focus on value and convenience, this bodes well for our ability to expand our market share and profitability in the future. At this point, we would like to open up the call and respond to any questions you may have.
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