Dublin, Calif – Ross Stores Inc. is taking hard-earned lessons from its second quarter to adjust its operations and inventories going forward, in time for the holiday selling season.
During the company’s quarterly call last week, CEO and vice chair Barbara Rentler announced plans for “merchandising adjustments to meet changing customer demands.”
When asked by an investor about the home category performance in Q2, Rentler said results were “relatively in line with the chain average, and the performance of home and apparel was pretty similar for the quarter. Both businesses had areas of business that were strong and areas of business that were weaker, so they were relatively in line.”
At quarter end, total consolidated inventories jumped 55% from last year’s Q2 period.
“While average store inventories during the quarter were up 15% versus last year, we operated with very similar levels when compared to pre-pandemic,” she said.
Packaway merchandise represented 41% of total inventories versus 30% in the same period of the prior year when the company used a substantial amount of packaway to meet then-robust consumer demand.
Rentler continued: “Additionally, supply chain congestion continued to ease during the second quarter, resulting in above-plan early receipts of merchandise that we stored in packaways and will flow through the store throughout the fall season.”
Even so, these actions were unable to offset the mounting financial pressures on Ross Stores’ low- to moderate-income consumers, “and the impact on our business from an increasingly promotional retail environment,” she said.
Similar to the first quarter, dd’s Discounts’ Q2 performance continued to be well below that of Ross, mainly due to the inflationary pressures impacting the division’s lower-income shopper.
“Looking ahead, we expect these early receipts to wane and to have the appropriate inventory levels in the fourth quarter,” Rentler said.
More guardedly, the company is projecting merchandise margin to be pressured by ongoing increases in ocean freight costs and is planning for higher markdowns to right-size its inventory levels and pricing adjustments to compete in what it described as “an increasingly promotional retail environment.”
Results for the 13-week period, ended July 30, included:
- A 22% drop in net income to $384.5 million, or $1.11 per diluted share, from $494.3 million, or $1.39 per diluted share, a year ago
- A 4.6% net sales decline to $4.6 billion from $4.8 billion
- A 7% comp drop, compared to last year’s 15% gain
Adam Orvos, EVP and chief financial officer, provided more color around comps, citing an increase in the size of the average basket offsetting a decline in the number of transactions versus the prior year.
Men’s shoes was Q2’s strongest merchandise area, and both Florida and Texas were the top performing regions – mainly due to the outperformance of the retailer’s border and tourist locations, Orvos added.
Q2 earnings came in above the company’s guidance range thanks mainly to lower incentive costs resulting from the below-plan topline performance.
Year-to-date results included:
- A 25.5% decline in net income to $723 million, or $2.08 per diluted share, from last year’s $970.7 million, or $2.73 per diluted share.
- A 4.3% drop in net sales to $8.9 billion versus $9.3 billion
- A 7% comp loss, compared to a 14% gain in the first half of 2021.
As it readies for the fourth quarter holiday selling season, Ross will seize merchandising opportunities around gifting. “We didn’t maximize some of our gifting areas last year,” she said.
Ross is also focused on its 2022 expansion program, which is on schedule with the addition of 21 new Ross locations and eight dd’s Discount units. More broadly, the company remains on track to open a total of about 100 locations – comprising 75 Ross and 25 dd’s – and close or relocate about 10 stores.
Ross updated its outlook for the balance of 2022.
- A 7% to 9% comp decline
- Earnings per share in the range of $0.72 to $0.83
- A 4% to 7% total sales decline
- Operating margin in the range of 7.8% to 8.7%
- A 4% to 7% comp decline
- Earnings per share in the range of $1.04 to $1.21
For fiscal 2022, earnings per share are forecasted at between $3.84 and $4.12.