Yahoo Finance Ross Stores, Inc. (NASDAQ:ROST) Q3 2023 Earnings Call Transcript
Ross Stores, Inc. (NASDAQ:ROST) Q3 2023 Earnings Call Transcript November 16, 2023
Ross Stores, Inc. beats earnings expectations. Reported EPS is $1.33, expectations were $1.21.
Operator: Good afternoon and welcome to the Ross Stores Third Quarter 2023 Earnings Release Conference Call. The call will begin with prepared comments by management followed by a question-and-answer session. [Operator Instructions] 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 2022 Form 10-K and fiscal 2023 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.
Barbara Rentler: Good afternoon. Joining me on our call today are Michael Hartshorn, Group President and Chief Operating Officer; Adam Orvos, 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 third quarter performance followed by an update on our outlook for the fourth quarter and fiscal year. Afterwards, we'll be happy to respond to any questions you may have. As noted in today's press release, we are pleased that both sales and earnings outperformed our expectations for the quarter as customers responded favorably to the terrific values we offer throughout our stores. Operating margin for the period was 11.2%, up from 9.8% last year.
Leverage from the same-store sales gain and lower freight costs were partially offset by higher incentives and store wages. Earnings per share for the 13 weeks ended October 28, 2023, were $1.33 compared to earnings per share of $1 last year. Net income for the period rose to $447 million versus $342 million in the prior year period. Total sales for the quarter were $4.9 billion, up from $4.6 billion last year, with the comparable store sales gain of 5%. For the first 9 months, earnings per share were $3.74 on net earnings of $1.3 billion compared to $3.08 per share on net income of $1.1 billion for the same period last year. Sales for the year-to-date period grew to $14.4 billion with comparable store sales up 4% over last year. For the third quarter at Ross, cosmetic, accessories and shoes were again the strongest performing businesses, while geographic results were broad-based.
Like Ross, dd’s DISCOUNTS shoppers also responded favorably to its strong value offerings, driving improved sales trends during the quarter. At quarter end, total consolidated inventories were up 5% versus last year, while average store inventories were up 2%. Packaway merchandise represented 39% of total inventories versus 41% in the same period of the prior year. During the third quarter, we also completed our expansion program for 2023 with the addition of 43 new Ross and 8 dd’s discounts. Over the year, we added a total of 97 locations comprised of 72 Ross and 25 dd’s. We now expect to end the year with 1,764 Ross stores and 345 dd’s DISCOUNTS for a net increase of 94 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 rose 5% in the quarter, primarily driven by higher traffic. Operating margin increased 135 basis points to 11.2%. Cost of goods sold improved by 260 basis points in the quarter. Merchandise margin was the main driver with a 235-basis point increase, primarily from lower ocean freight costs. Distribution expenses improved by 45 basis points, mainly due to favorable timing of packaway-related costs. Domestic freight and occupancy levered by 40 and 25 basis points, respectively. Partially offsetting these benefits were higher buying costs that increased 85 basis points, mainly from higher incentives. SG&A costs for the period increased by 125 basis points, primarily driven by higher incentive costs and store wages.
During the third quarter, we repurchased 2.1 million shares of common stock for an aggregate cost of $239 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 face macroeconomic volatility, persistent inflation and more recently, geopolitical uncertainty. In addition, we are up against our most difficult quarterly sales comparisons versus 2022 in the fourth quarter. As a result and while we hope to do better, we believe it is prudent to maintain a cautious approach in forecasting our business and reiterating our prior sales guidance for the fourth quarter. For the 13 weeks ending January 27, 2024, we continue to plan same-store sales to be up 1% to 2%.
Earnings per share for the 14 weeks ending February 3, 2024, are projected to be in the range of $1.56 to $1.62 compared to $1.31 in the fourth quarter of 2022. This guidance range includes an approximate $0.02 per share unfavorable impact from the timing of expenses that benefited the third quarter. Based on our year-to-date results and our fourth quarter forecast, earnings per share for the 53 weeks ending February 3, 2024, are now expected to be in the range of $5.30 to $5.36 versus $4.38 last year. Incorporated in this guidance for both the fourth quarter and full year is an estimated earnings per share benefit of $0.16 from the 53rd week in fiscal 2023. The operating statement assumptions that support our fourth quarter guidance include the following: Total sales are projected to grow 8% to 10%, including an estimated $260 million benefit from the 53rd week.
We expect operating margin to be in the range of 11.3% to 11.5% versus 10.7% last year. This range includes a 65-basis point benefit from the extra week. We are planning for higher merchandise margins, given lower ocean freight cost, though moderating from the improvement earlier this year. In addition, lower domestic freight and distribution costs, partially due to favorable packaway timing are expected to benefit margin. Partially offsetting these lower costs are forecast for higher incentive compensation. Net interest income is estimated to be about $45 million as we continue to benefit from higher interest rates on our cash balance. Our tax rate is expected to be approximately 23% to 24% and weighted average diluted shares outstanding are projected to be about 335 million.
Now I'll turn the call back to Barbara for closing comments.
Barbara Rentler: Thank you, Adam. Looking ahead, despite all the challenges in the external environment, we are encouraged by our healthy above-plan results to date this year. We also remain confident in the resilience of the off-price sector and our ability to operate successfully within it, especially given consumers' heightened focus on value and convenience. As a result, we remain optimistic about the company's future prospects and our ability to expand market share and profitability over time. At this point, we'd like to open up the call and respond to any questions you might have.
Operator: [Operator Instructions] And the first question comes from the line of Matthew Boss with JPMorgan.
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