Ross Stores, Inc.

Good afternoon, and welcome to the Ross Stores second quarter 2022 earnings release conference call. The call will begin with prepared comments by management, followed by a question and answer session. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Before we get started, on behalf of Ross Stores, I would like to note that 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-Q and 8-Ks on file with the SEC. Now I'd like to turn the call over to Barbara Rentler, Chief Executive Officer.

Good afternoon. Joining me on our call today are Michael Hartron, Group President and Chief Operating Officer, Adam Orvos, Executive Vice President and Chief Financial Officer, and Connie Cao, Group Vice President, Investor Relations. We'll begin our call today with a review of our second quarter 2022 performance, followed by our updated outlook for the second half 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 disappointed with our sales results, which were impacted by the mounting inflationary pressures our customers face, as well as an increasingly promotional retail environment. Earnings came in above our guidance range, primarily due to lower incentive costs resulting from the below-planned top-line performance. Total sales for the period were $4.6 billion versus $4.8 billion in the prior year period. Comparable store sales were down 7% compared to a robust 15% increase in last year's second quarter, which was our strongest period of 2021. Earnings per share for the 13 weeks ended July 30, 2022, $1.11 on net income of $385 million, These results compared to $1.39 per share on net earnings of $494 million for last year's second quarter. For the first six months, earnings per share were $2.08 on net income of $723 million. These results compared to earnings per share of $2.73 on net earnings of $971 million in the first half of 2021. Sales for the 2022 year-to-date period were $8.9 billion, with comparable sales down 7% versus a strong 14% gain in the first half of 2021. Shoes and men's were the strongest merchandise areas during the quarter. Both Florida and Texas were the top performing regions, mainly due to the outperformance of our border and tourist locations. We are making merchandising adjustments to meet changing customer demands. That said, the actions we have taken thus far were unable to offset the mounting financial pressures on our low to moderate income consumers and the impact on our business from an increasingly promotional retail environment. Similar to the first quarter, DD's discount performance in the second quarter continued to be well below Ross's, mainly due to today's escalating inflationary pressures that are having a larger impact on DD's lower income customers. At quarter end, total consolidated inventories were up 55% versus the same period in 2021. While average store inventories during the quarter were up 15% versus last year, we operated with very similar levels when compared to pre-pandemic. Hakawe merchandise represented 41% of total inventories versus 30% in the same period of the prior year, when we used a substantial amount of pack weight to meet robust consumer demand. Additionally, supply chain congestion continued to ease during the second quarter, resulting in above-planned early receipts of merchandise that we stored in pack weight and will flow to stores throughout the fall season. Looking ahead, we expect these early receipts to wane and to have the appropriate inventory levels in the fourth quarter. Turning to store growth, our 2022 expansion program is on schedule with the addition of 21 new Roths and eight DDs discount locations in the second quarter. We remain on track to open a total of approximately 100 locations this year, comprised of about 75 Roths and 25 DDs. As usual, these numbers do not reflect our plans to close or relocate about 10 stores. Now Adam will provide further details on our second quarter results and additional color on our updated outlook for the remainder of fiscal 2022.

Thank you, Barbara. As previously mentioned, our comparable store sales were down 7% for the quarter as a decline in the number of transactions versus the prior year was partially offset by an increase in the size of the average basket. Second quarter operating margin was 11.3% compared to 14.1% in 2021. This decline was due to a combination of deleveraging effect on expenses from the decrease in same-store sales, higher markdowns, and ongoing headwinds from higher freight costs that did not begin to escalate until the second half of 2021. These expense pressures were partially offset by lower incentive costs that were much higher last year when we significantly outperformed our plans. We also saw a decline in COVID expenses versus last year's second quarter. Cost of goods sold during the period increased by 320 basis points. Merchandise margin declined 205 basis points due to both higher ocean freight costs and markdowns. Distribution costs increased 85 basis points due to a combination of unfavorable timing of pack-away related expenses and deleverage from our new distribution center, while occupancy and domestic freight rose by 55 and 35 basis points, respectively. Partially offsetting these higher costs were buying expenses that improved by 60 basis points, again due to lower incentives. SG&A for the period levered by 40 basis points as deleveraged from the lower comparable sales was more than offset by lower incentive and COVID costs. During the second quarter, we repurchased 2.9 million shares of common stock for an aggregate cost of $235 million. As previously announced, we expect to buy back $950 million of common stock during fiscal 2022 under our two-year $1.9 billion repurchase program that extends through fiscal 2023. Now let's discuss our outlook for the remainder of 2022. As Barbara noted in today's press release, given our recent results as well as the increasingly unpredictable macroeconomic landscape in today's more promotional retail environment, we believe it is prudent to adopt a more conservative outlook for the balance of the year. We are now forecasting comparable sales for the 13 weeks ending October 29th. 2022 to decline 7 to 9% on top of a strong 14% gain last year. For the fourth quarter, same-store sales are planned to be down 4 to 7% versus a 9% increase in the last quarter of 2021. As noted in our press release, if the second half performs in line with these updated sales assumptions, Earnings per share for the third quarter is projected to be 72 cents to 83 cents versus $1.09 last year and $1.04 to $1.21 for the fourth quarter compared to $1.04 in 2021. Based on our first half results and second half guidance, earnings per share for fiscal 2022 are now planned to be in the range of $3.84 to $4.12 versus $4.87 last year. Now let's turn to our guidance assumptions for the third quarter of 2022. Total sales are forecast to decline 4% to 7% versus the prior year. We expect to open 41 locations during the quarter, including 29 Ross and 12 DDs discounts locations. Operating margin for the third quarter is planned to be in the 7.8% to 8.7% range versus 11.4% in 2021, primarily reflecting the deleverage on the same-store sales decline. In addition, merchandise margin is forecast to be pressured by ongoing increases in ocean freight costs. We are also projecting higher markdowns to right-size our inventory levels given the lower revenue forecast and adjust pricing as we expect an increasingly promotional retail environment. Lastly, third quarter operating margin also reflects unfavorable timing of pack-away related costs. Interest expense is estimated to be approximately $400,000. The tax rate is projected to be about 24% to 25%, and diluted shares outstanding are expected to be approximately $345 million. Finally, I want to emphasize that Ross continues to be in a strong financial position with significant resources to manage through today's challenging economic and retail landscape. Our healthy balance sheet includes $5.2 billion in total liquidity with $3.9 billion in cash and $1.3 billion in untapped borrowing capacity. We also continue to return large amounts of cash to stockholders, with a cumulative total of $1.4 billion expected to be paid out under our stock repurchase and dividend programs in 2022. Now I will turn the call over to Barbara for closing comments.