Ross Stores, Inc.

Good afternoon and welcome to the Ross Source Fourth Quarter and Fiscal Year 2021 Earnings Release Conference Call. The call will begin with prepared comments by management, followed by a question and answer session. At this time, all participants are in listen-only mode. To ask the question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. Please be advised that today's call is being recorded. Before we get started, on behalf of Ross Source, 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 and the company's fiscal 2020 Form 10-K and fiscal 2021 Form 10-Qs and 8-Ks on file for the SEC. Now, I would like to turn the call over to Barbara Rundler, Chief Executive Officer.

Good afternoon. Good afternoon. Joining me on our call today are Michael Hartram, Group President and Chief Operating Officer, Adam Orbus, Executive Vice President and Chief Financial Officer, and Betty Chen, Vice President, Investor Relations. We will begin our call today with a review of our fourth quarter and 2021 performance, followed by our outlook for 2022 and the longer term. Afterwards, we'll be happy to respond to any questions you may have. As noted in today's press release, we achieved strong sales results in the fourth quarter despite the negative impact from both the surge in Omicron cases during the peak holiday selling period and continued supply chain congestion. Earnings per share for the 13 weeks ended January 29, 2022 were $1.04 on net income of $367 million. This compared to $1.28 per share on net earnings of $456 million for the 13 weeks ended February 1, 2020. Total sales for the fourth quarter were $5 billion, with comparable store sales up 9% versus the same period in 2019. For the 2021 fiscal year, earnings per share were $4.87, a net income of $1,723,000,000, up from $4.60 per share on net earnings of $1,661,000,000 in 2019. Total sales for 2021 rose 18% to $18.9 billion, with comparable store sales up 13%. Now let's turn to additional details on our fourth quarter results. For the holiday selling period, the best performing larger merchandise areas were children's and men's, while the Midwest and Southeast were the strongest regions. Similar to Ross, DD's discount trends remained solid during the period. However, their profitability was also negatively impacted by cost pressures related to freight, wages, and COVID. At quarter end, total consolidated inventories were up 23% versus 2019, mainly from an increase in in-transit merchandise due to longer lead times from the industry-wide supply chain bottlenecks. Average store inventories were down slightly versus 2019, while pack-away merchandise represented 40% of total inventories versus 46% two years ago. As noted in today's release, we are pleased to report that our board recently authorized a new two-year program to repurchase up to $1.9 billion of our common stock through fiscal 2023. This authorization replaces the $850 million remaining under the prior buyback we announced in May of last year. A total of $650 million of common stock was repurchased under the previous program in fiscal 2021. The Board also increased our quarterly cash dividend by 9% to 31 cents per share to be payable on March 31st, 2022 to stockholders of record as of March 15th, 2022. The increases to our stock repurchase and dividend programs reflect our ongoing commitment to enhancing stockholder value and returns, as well as our confidence in the strength of our balance sheet and projected future cash flows. Now, Adam will provide further details on our fourth quarter results and additional color on our outlook for fiscal 2022.

Thank you, Barbara. As previously mentioned, our comparable store sales increased 9% for the quarter. This gain was driven by growth in the size of the average basket, partially offset by a decline in transactions. Fourth quarter operating margin of 9.8% was down 350 basis points from 13.3% in 2019, mainly due to ongoing expense headwinds. Cost of goods sold increased 210 basis points due to a combination of factors. Domestic freight rose 100 basis points, and distribution costs increased 70 basis points, primarily due to the previously mentioned supply chain challenges in addition to higher wages. Merchandise margin declined 50 basis points due to higher ocean freight costs, while buying expenses grew 20 basis points. Occupancy levered 30 basis points on higher sales volume. SG&A for the period rose 140 basis points, again, due to pressure from the holiday-related pay incentives plus higher wages and COVID costs. Total net COVID-related expenses for the quarter were approximately 35 basis points, with a higher impact to SG&A than cost of goods sold. Now let's discuss our outlook for fiscal 2022. As Barbara noted in our press release, 2022 is a difficult year to predict for numerous reasons. We are up against last year's record government stimulus and the lifting of COVID restrictions that led to unprecedented consumer demand, which fueled extraordinary sales gains in the spring of 2021. In addition, we continue to face industry-wide supply chain headwinds, as well as external risks from the effects of inflation, both on consumer demand and on costs within our business. As a result, comparable store sales for the 52 weeks ending January 28th, 2023 are planned to be flat to up 3% versus a 13% gain in 2021. Earnings per share for 2022 are projected to be $4.71 to $5.12 compared to $4.87 in 2021. This reflects our expectation for sales and profitability to improve as we move through the year, given the substantial cost increases we incurred in the fall of 2021. Our guidance assumptions for the 2022 year include total sales are forecast to grow by two to 6%, we plan to return to our more normal opening cadence of 100 new locations in 2022, comprised of about 75 ROS and 25 DDs discounts. As usual, we expect to close about 10 older stores. Operating margin for the full year is planned to be in the 11.6 to 12.1 percent range, down slightly from 2021 due to deleveraging on lower same-store sales gains and again, ongoing expense headwinds, especially in the first half of 2022. Net interest expense is estimated to be $70 million. Depreciation and amortization expense, inclusive of stock-based amortization, is forecast to be about $560 million for the year. The tax rate is projected to be about 24% to 25%. and diluted shares outstanding are expected to be approximately $348 million. In addition, capital expenditures for 2022 are planned to be approximately $800 million. This outlay will fund further investments in our supply chain to support long-term growth and in technology to increase efficiencies throughout the business in order to maximize our prospects to capture profitable market share going forward. Let's now turn to our guidance for the first quarter. In addition to the aforementioned stimulus benefits and strong pent-up demand early last year, we also faced larger headwinds from higher freight and wage costs early in the year. As a result, we are forecasting comparable store sales for the 13 weeks ending April 30th, 2022 to be down two to down 4% on top of a 13% gain for the 13 weeks ended May 1st, 2021. Earnings per share for the 2022 first quarter are projected to be $0.93 to $0.99 versus $1.34 in the prior year period. The operating statement assumptions that support our first quarter guidance includes the following. Total sales are forecast to be down 2% to up 1% versus last year's first quarter. We plan to add 30 new stores consisting of 22 Ross and eight DDs discounts during the period. We project first quarter operating margin to be 10.2 to 10.6% compared to 14.2% last year. The expected decline reflects the deleveraging effect from the negative same store sales assumption as well as ongoing expense pressure from freight and wage costs early in the year. Net interest expense is estimated to be $19 million. Our tax rate is expected to be approximately 25%, and diluted shares are forecast to be about $350 million. Now I will turn the call back to Barbara Rentler for closing comments.