Ross Stores, Inc.

Good afternoon and welcome to the Ross doors fourth quarter in fiscal year 2020 earnings release conference call the call 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 will contain forward-looking statements regarding expectations about future growth and financial results, including sales and earnings forecasts, new store openings, COVID-related costs, 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 on the company's fiscal 2019 Form 10-K and fiscal 2020 Form 10-Qs and 8-Ks on file with the SEC. Now I'd like to turn the call over to Barbara Rently, Chief Executive Officer.

Good afternoon. Joining me on our call today are Michael Hartrung, Group President, Chief Operating Officer, Travis Marquette, Group Senior 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 fourth quarter and 2020 performance, followed by our outlook for 2021. Afterwards, we'll be happy to respond to any questions you may have. As noted in today's press release, our fourth quarter sales results exceeded our expectations. That said, the upsurge of COVID-19 resulted in lower traffic, especially in California, our largest state where we were subject to more stringent occupancy and operating hour restrictions. Earnings per share for the 13 weeks ended January 30th, 2021 were 67 cents on net income of $238 million. Total sales for the quarter were $4.2 billion with comparable store sales down 6%. For the 2020 fiscal year, Earnings per share were 24 cents on net income of $85 million. These results include a one-time pre-tax charge of $240 million, or 54 cents per share for the year, from the refinancing of $775 million in senior notes. Total sales for 2020 declined to $12.5 billion. Let's turn now to additional details on our fourth quarter results. For the holiday selling season, the best performing major merchandise area was home, while the Southeast and Midwest were the strongest regions. For the quarter, our largest states of California, Texas, and Florida significantly underperformed the chain average. DD's discounts business was also impacted by the COVID-19 issues, although to a lesser degree than Ross, given its smaller number of border and tourist locations. As we ended 2020, total consolidated inventories were down 18% versus the prior year, with pack-away levels at 38% of the total compared to last year's 46%. Average store inventories at year-end were down 16% from 2019 levels. As noted in today's release, our board recently approved the reinstatement of our quarterly cash dividend at a rate of 28.5 cents per share. The resumption of our dividend payout in 2021 reflects our strong cash position and our confidence in the company's long-term prospects. Now, Travis Marquette will provide further details on our fourth quarter results and additional color on our first quarter guidance and general outlook for fiscal 2021.

Thank you, Barbara. As previously mentioned, comparable store sales declined 6% in the quarter. This decrease was driven by lower traffic, which reflects customers' increased hesitancy to shop during the upsurge of the virus. This was partially offset by an increase in the size of the average basket. Fourth quarter operating margin was 9.5%, compared to 13.3% last year. Cost of goods sold increased 125 basis points in the quarter. A merchandise margin gain of 70 basis points was more than offset by higher costs, including freight, which increased 100 basis points due to ongoing industry-wide supply chain congestion. Buying costs were higher by 50 basis points. Occupancy delevered 30 basis points on lower sales volumes. Lastly, distribution costs grew 15 basis points primarily due to higher wages that were mostly offset by the favorable timing of pack-away expenses. SG&A for the quarter rose 260 basis points mainly due to the deleveraging effect from the decline in comparable store sales, higher COVID-related operating expenses, and timing of incentive costs. Total net COVID-related expenses for the quarter were approximately $40 million with a higher impact to SG&A than cost of goods sold. Turning to our balance sheet, we exited 2020 in a strong financial position with over $5.6 billion in liquidity, which includes an unrestricted cash balance of about $4.8 billion and our $800 million revolver that remains fully available. Now let's discuss our outlook for 2021. Our guidance and results throughout fiscal 2021 will be reported versus fiscal 2019. We believe the significant impact from the extended closure of our operations in the spring of 2020 and the ongoing headwinds caused by COVID-19 throughout last year make this a more relevant basis for comparison. As we enter 2021, there remains limited visibility regarding the ongoing pandemic and the pace and magnitude of an economic recovery. As a result, we are providing specific guidance for only the first quarter and a general outlook for the year. Let's move now to our first quarter guidance. As a reminder, our projections for this period are compared to the 13 weeks ended May 4, 2019. While we hope to do better, total sales are projected to be down 1 to up 4%, with comparable store sales down 1 to down 5%. This sales guidance reflects the potential impacts of lower demand during this year's Easter selling season and ongoing supply chain congestion. Earnings per share are projected to be 74 to 86 cents. The operating statement assumptions that support our first quarter guidance include the following. We project operating margin to be 9.9 to 10.8% versus 14.1% in 2019. This forecast reflects the deleveraging effect from the projected decline in comparable store sales and ongoing expense headwinds from increased supply chain costs and higher wages. In addition, COVID-related expenses will remain elevated and are projected to negatively impact EBIT margins by approximately 50 basis points in the period. While we expect to continue the aggressive expansion of our two chains, we plan to more moderate pace of openings this year, especially in the spring. During the first quarter, we expect to open four Roths and three BDs discounts locations during the period. Net interest expense is estimated to be about $20 million. Our tax rate is expected to be approximately 24% to 25%. And finally, weighted average diluted shares outstanding are projected to be about $356 million. As mentioned earlier, we are only providing a general outlook for the year at this time. From a top-line perspective, with the continued rollout of vaccines, potential additional government stimulus, and likely pent-up consumer demand, we expect sales trends to strengthen as we move through the year. Similar to the first quarter, though, we are projecting that operating margin relative to 2019 will continue to be affected by increased supply chain costs, higher wages, and COVID-related expenses. Therefore, profitability will be well below recent historical high levels. We expect to add about 60 stores consisting of approximately 40 Roth and 20 DDs discount locations. As usual, these numbers do not reflect our plans to close or relocate about 10 older stores. Net interest expense for the year is estimated to be about $76 million. Our tax rate is projected to be approximately 24% to 25%. We are planning average diluted shares outstanding to be about $356 million. Capital expenditures for 2021 are projected to be approximately $700 million, which includes investments for our next distribution center and the resumption of projects deferred from 2020. And depreciation and amortization expense, inclusive of stock-based amortization, is forecast to be about $495 million. Now we'll turn the call back to Barbara for closing comments.