Ross Stores, Inc.

Q3 2022 Earnings Conference Call

11/17/2022

spk03: Good afternoon and welcome to the raw stores third 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 raw 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 2021 Form 10-K and fiscal 2022 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. Thank you, ma'am. Please go ahead.
spk12: Good afternoon. Joining me in our call today are Michael Hartron, Group President, 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, third quarter results were above our expectations as we delivered stronger values throughout our stores. Operating margin for the period was 9.8% versus 11.4% last year, reflecting the deleveraging effect from the comparable sales decline as well as pressure from higher markdowns and unfavorable timing of pathway-related costs. Earnings per share for the 13 weeks ended October 29, 2022 for $1 on net income of $342 million. This compares to $1.9 per share on net earnings of $385 million for the 13 weeks ended October 30, 2021. Total sales for the quarter were $4.6 billion in line with the prior year. with comparable sales down 3% on top of a robust 14% gain in the third quarter of 2021. The first nine months, earnings per share were $3.08 on net earnings of $1.1 billion compared to $3.82 per share on net income of $1.4 billion for the same period in 2021. Sales for the year-to-date period totaled $13.5 billion with comparable store sales down 5% versus a strong 14% increase last year. For the third quarter at Ross, Hughes was the best performing business, while Florida and Texas were the top performing regions, as they were bolstered by the outperformance of border and tourist locations. At Didi's discount, sales trends improved versus the first half, but continued to trail Ross' results due to ongoing inflationary pressures that are having a larger impact on DD's lower-income customers. Inventory levels moderated significantly from the first half of the year, with total consolidated inventories at the end of the quarter up 12% compared to last year. Average store inventories during the quarter were up 4% versus 2021 and down when compared to pre-pandemic levels. Packaway merchandise represented 41% of the total compared to 31% last year when we used Packaway merchandise to fuel robust sales gains. Turning to store growth, we completed our expansion program for 2022 with the addition of 28 new Roths and 12 DDs discounts in the third quarter. For the year, we added a total of 99 locations comprised of 71 Roths and 28 DDs discounts. We now expect to end the year with 1,693 raw stores and 322 DV discount locations for a net increase of 92 stores. Now Adam will provide further details on our third quarter results and fourth quarter guidance.
spk18: Thank you, Barbara. As previously stated, comparable store sales were down 3% in the quarter. Although traffic improved from the second quarter, it still declined versus the prior year. Partially offsetting these declines was a higher average basket size. Operating margin of 9.8% for the third quarter was down 160 basis points from last year. Cost of goods sold grew by 230 basis points in the quarter. Merchandise margin declined 165 basis points, primarily due to higher markdowns. Distribution costs were up 140 basis points mainly due to unfavorable timing of pack-away related costs and deleverage from our new distribution center, while occupancy delevered by 20 basis points. These higher expenses were partially offset by a 75 basis point decrease in buying costs, mainly from lower incentives. Lastly, pressure from domestic freight expenses eased in the third quarter and improved 20 basis points as we anniversaried the freight headwinds that began in the second half of last year. SG&A for the period improved by 70 basis points as deleverage from the negative comparable sales was more than offset by lower incentives. During the third quarter, we repurchased 2.8 million shares of common stock for an aggregate cost of $244 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 expect a very promotional holiday selling season and ongoing inflationary headwinds to pressure our low to moderate income customers. That said, we face our easiest sales and earnings comparisons in the fourth quarter and are raising our guidance given our third quarter sales momentum and improved holiday assortments. For the 13 weeks ending January 28, 2023, we now expect comparable store sales to be flat to down 2% on top of a 9% gain in the prior year. As a result, earnings per share are forecasted to be in the range of $1.13 to $1.26. The operating statement assumptions that support our fourth quarter guidance include the following. Total sales are projected to be flat to up 3%. We expect operating margin to be in the range of 9.7% to 10.5% versus 9.8% last year. This mainly reflects the anniversarying of significant cost pressures from ocean freight and lower incentives, partially offset by the deleveraging effect from lower same-store sales, unfavorable timing of packaway-related costs, and higher markdowns. Net interest income is estimated to be about $14 million. Our tax rate is expected to be approximately 23%. And weighted average diluted shares outstanding are projected to be about 342 million. Based on our year-to-date results and fourth quarter guidance, earnings per share for fiscal 2022 are now projected to be in the range of $4.21 to $4.34. compared to $4.87 last year. Now I'll turn the call back to Barbara for closing comments.
spk12: Thank you, Adam. Despite the many challenges over the last few years, coupled with today's uncertain macroeconomic and geopolitical environment, we remain optimistic about our future growth prospects. Our top priority is and always will be delivering fresh and exciting name brand merchandise at compelling discounts every day in our growing surveys of over 2,000 locations. With consumers' heightened focus on value and convenience, this bodes well for our ability to expand our market share and profitability in the future. At this point, we'd like to open up the call and respond to any questions you may have.
spk03: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the queue. You may press star two if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. We ask that you please limit yourself to one question only. Thank you. One moment, please, while we poll for questions. And our first question comes from the line of Matthew Boss with JP Morgan. Please proceed with your question.
spk19: Thanks, and congrats on that nice quarter. It's great to see the return to beaten race. So, Barbara, maybe relative to your internal expectations, what did you see from traffic? Or maybe could you speak to the cadence of comp trends as the third quarter progressed? And then could you just elaborate on the improved holiday assortments that you cited in the release?
spk20: On the traffic trends, as we mentioned, this is Michael Hartzler and Matthew As we mentioned in the prepared comments, with the comp down 3%, as we mentioned, traffic did improve for the quarter, but it still declined versus the prior year. So offsetting the traffic declines was a higher average basket. The back basket was driven by higher AURs while UPTs were flattish. The increase in the average basket was more than offset by the decline in the number of transactions. As we move through the quarter, what we saw on a stacked basis, so compared to 2019, our trends improved as we progressed through the quarter.
spk19: Great. And then just to follow up, maybe relative to the third quarter, Could you just elaborate on maybe the macro or the competitive landscape assumptions that you embedded in your fourth quarter comp guide? It does embed a moderation. Is that prudence? Is it something that you've seen? Or are you embedding more competitive backdrop and maybe a deterioration in the macro in the fourth quarter?
spk20: I would say that from our point of view, the macroeconomic environment obviously remains uncertain, but we do think that the holiday period is going to be very promotional. So that's what we've embedded into the guidance. And then just as a reminder, last year, sales at the end of the quarter did trail off. It's our easiest quarterly compare. Trailed off for two main reasons. One was the spike in Omicron cases. And then at this point last year, the supply chain continued to be a real challenge for us and other retailers. Great color. Congrats again. Oh, sorry.
spk19: Go ahead, Barbara.
spk12: Okay. The holiday assortment. So, look, we believe our holiday assortment this year will really have an improved offering of both, you know, branded bargains based off of availability in the marketplace and also particularly our gift giving because of the imbalances we had from the supply chain congestion, as Michael just, you know, alluded to. So, we feel between the two of those, we'll be able to offer great brands, strong values, and a broader assortment.
spk19: Best of luck.
spk12: Thank you.
spk03: And our next question comes from the line of Alex Stratton with Morgan Stanley. Please proceed with your question.
spk01: Great. Thanks so much for taking my question. Just as it relates to the updated guidance, perhaps could you kind of talk about what the key swing factors are there that could drive you either to the higher or the lower end of that new range? Thank you.
spk18: Yeah, Alex. Yeah, sure. Alex, this is Adam. Hey, so given our guidance of flat to minus 2% comps, will have some deleverage impact from sales. Markdowns will be higher than last year in fourth quarter, but not as impactful as in third quarter. Domestic freight we see as slightly neutral, seeing some benefit in rate, but offset by still elevated fuel prices. Ocean freight will probably be the most tangible tailwind for us as you remember last year we're getting into the period where rates were escalating significantly demand was high so that'll be a tailwind for us and then given our performance last year and our under performance this year incentive costs will be lower in q4 versus last year and then finally depending how the end of the year plays out, will likely see some pressure from pack-away timing in fourth quarter also.
spk01: Great. That's super helpful. Maybe could I just follow up on your inventory levels? I think you said they were up low double digits year over year exiting the quarter, which seems like a pretty lean level. So maybe could you tell us, do you feel like you have enough heading into the fourth quarter, or how are you feeling about the levels and then just the broader assortment?
spk20: Overall, we feel really good about where we are at the end of third quarter. As we said in the prepared remarks, we ended up about 12%, which was a big improvement from the second quarter when we were up 55%. And the increase over last year is really pack-away inventory. So we were at 41% versus 31% last year. And last year was relatively low versus our historical levels because we used a substantial amount of our pack-away to chase sales that were well above our plan.
spk01: Thank you so much.
spk03: And our next question comes from the line of Mark Altschwager with Robert W. Baird. Please proceed with your question.
spk07: Good afternoon. Thanks for taking my question. What do you view as the key drivers to the improving comp trends you saw this quarter? Are you seeing evidence that the trade down is now occurring? Do you think this is a reflection of the AUR strategy you outlined last quarter? If you could expand on your overall assessments there, that would be great. Thank you.
spk12: Sure. From the second quarter to the third quarter, from an assortment perspective, we went in and reset our values and got them to where we believe they need to be in this very promotional environment. We right-sized our values through some markdowns in some places, and in some places we right-sized some of our inventory as we were watching shifts go on in the business. And the other big shift is apparel and home for us in the quarter performed relatively the same, but our shoe business, which was our best-performing business, was really, really fueled by strong values on branded products and availability in the market.
spk20: And in terms of the trade-down customer, with so many moving parts in the economy, it's difficult to parse out the individual drivers of the improvement. We have not seen a material shift with spending trends across different income demographics, but delivering better bargains to our consumer likely played the most significant role, as it typically does.
spk07: Great. Thank you. Best of luck over holiday.
spk03: And our next question comes from the line of Lorraine Hutchinson with Bank of America. Please proceed with your question.
spk15: Thank you. Good afternoon. I was just hoping you could square a couple comments for us. You talked about resetting values and really focusing on the sharp price points, and your AUR was up. So can you talk about the drivers of AUR in the quarter and then your views on the pricing strategy on a go-forward basis?
spk12: So Lorraine, value and price are two different things. So the merchants are out constantly assessing what's going on from pricing and competitive shopping and seeing what that is. So in some places where we felt that our AUR was just too high, we went in and took markdowns. But in other places, based off of assortment and opportunities that we've gotten in the marketplace, the AUR might be higher, but the value is different. And then the last component would be some of the shifts in the mix of some of the businesses themselves. So for example, our shoe business has been strong and shoes obviously runs a much higher rate. So there's a variety of things. But what I would say in total is that, you know, with back to being such a highly promotional environment that we're in, the merchants will be in the market really assessing where the values are moving. and what that looks like and, you know, trying to stay ahead of that. So with the, again, back to the your AUR question, that could depend on mix and that can depend on brand. So there's a variety of issues involved there.
spk15: Thank you.
spk03: And our next question comes from the line of Chuck Grom with Gordon & Haskett. Please proceed with your question.
spk09: Hey, thanks. Good afternoon. Congrats on a great quarter. You called out Florida and Texas as being strong regions, but you didn't call out California, which is a little bit surprising given the checks that were sent out in the month of October. So just wondering if you could just give us a little bit more color on geographic performance in the quarter.
spk18: Yeah, this is Adam. Chuck, Florida and Texas clearly outperformed for us. We're seeing the benefit in border locations. We're seeing the benefit in tourism locations, and those were clearly the outperformers. On the flip side, California underperformed in the quarter.
spk20: And on California, the checks didn't come out to the end of the quarter, so it didn't have a material impact on Q3. In California, fuel prices have remained significantly more elevated than the rest of the country. we believe, squeezing the lower to moderate income customer.
spk09: Okay. Thank you very much.
spk03: And our next question comes from the line of Paul Lejewis with Citigroup. Please proceed with your question.
spk08: Hey, guys. I'm curious what's going on from a shrink perspective. You know, we've had a couple companies call out, I think, a drag from shrink. I think you guys usually do a physical count in 3Q. So I'm curious what you're seeing on that front. And then also just on inventory, typically third quarter inventory is a few hundred million bucks above 2Q. Now that's a few hundred million below. So I'm just kind of curious about what you're thinking is in terms of quantity and quality and how you're thinking about inventory levels relative to sales go forward. Thanks.
spk20: Paul, on physical inventory, we did take a physical inventory during the third quarter and it was slightly higher than last year. And then on inventory levels in Q2, we were, we believe we had too much inventory, which is why it's down versus versus the second quarter. And then go forward, Michael. I wouldn't comment on your end, but it's going to be dependent on pack-away opportunities in the marketplace. All right. Thanks. Good luck.
spk03: And our next question comes from the line of Brooke Roach with Goldman Sachs. Please proceed with your question.
spk00: Good afternoon, and thank you so much for taking our question. Barbara, I was wondering if you could contemplate and reflect on, based on the availability of branded goods in the market today, can you talk to the outlook that you see for merch margins for the next few quarters? How are you thinking about taking that mark on and passing that along through the P&L versus passing that value on to the consumer and competing for additional comp opportunity over the next few quarters? Thank you.
spk12: Sure. As you know, there's a lot of availability in the market, and it's really broad-based, and all categories, all brands, it's really broad. In terms of margin, I think the way we think about it now is, you know, the customer, our customer, especially the moderate to low-income customer, is really focused on value. So, you know, we'll look at every brand based off of how that brand sits in the world and the competitive nature of the pricing of that brand. and then we'll value it appropriately. Because that's really what the customer told us when we went in and we right-sized some of our values, that we weren't as competitive as we would have been historically. So I would look at it more from the opportunity of getting great brands on the floor, putting better values out there to please the customer and then ultimately to drive sales.
spk00: Great. And then just one quick follow-up. I think in the prepared remarks, you mentioned a sequential improvement at DDs. Can you talk to the drivers of that and any change that you're seeing in the behavior of your low-income customer versus maybe more of a middle to high-income customer within your portfolio?
spk20: Sure. On DDs, the improvement from Q2 to Q3 was similar than Ross, although it continued to trail as a reminder. The DD's customer's average household income is $40,000 to $45,000 versus $60,000 to $65,000 for Ross. So very similar improvement between Q2 and Q3.
spk03: Thank you. And as a reminder, we ask that you please limit yourself to one question only. Thank you. Our next question comes from the line of Michael Benetti with Credit Suisse. Please proceed with your question.
spk05: Hey, guys. Thanks for your question. Congrats on a great quarter. You guys are typically really conservative when it comes to the forward guidance. Others today and yesterday have spoken to software start to fourth quarter. Michael, I know you won't speak specifically about inter-quarter, but you mentioned maybe that fuel is going to neutralize some of the stimulus benefit in your biggest market. A few of your macro thoughts there, but what gives you the confidence to raise into fourth quarter, knowing what we know about the industry here, a little different than how you approached a couple of the most recent quarters? And then I guess, Michael, you've also spoken to us in the past about what your view is of a normal algorithm for this business, what flow-through looks like on your normal sales target. Any initial thoughts on how flow-through could look next year if we're lucky enough to be back to a conducive market for a normal comp?
spk20: Sure. On the what gives us confidence on the guidance. So the multi-year stack in the Q4 is lower than what we actually achieved last year. in the third quarter. We're confident about the assortment that we have for the holidays and any conservatism would be based on the macroeconomic environment and what we think is going to be a very, very promotional holiday. In terms of the flow through for next year, as you would expect, operating margin improvements will be highly dependent on sustained strong sales growth over time and then how quickly some of the inflationary cost pressures subside. But I'd say over the longer term, we think we can achieve gradual improvement in profitability. As for 2023 specifically, we're in the midst of our budgeting process for next year currently, and we'll be able to provide an update on our year-end call when we'll have a better sense of the macro economy entering the year and to the opportunities we have in places like ocean and domestic freight. I would say also keep in mind with lower incentive costs that have benefited our profitability this year will reset the baseline next year and thus incentives will be a headwind in SG&A.
spk05: Okay, thanks Michael.
spk03: And our next question comes to the line of Adrian Yee with Barclays. Please proceed with your question.
spk11: Good afternoon. Thank you very much. Excuse me. Barbara, can you talk about the buying environment and how much better it has gotten perhaps in the past, you know, 60 to 90 days since last quarter? And then how long does it take from, say, a contract negotiation to being able to get that product ready and available for sale in your stores? Thank you very much.
spk12: Sure. Yes, the buying environment has gotten even better, broader, more brands, all classifications. So it has absolutely, in the last 60 to 90 days, more vendors want to move more merchandise and also some new resources that perhaps we weren't doing business with before also want us to purchase some merchandise. So yes, there's a lot of supply out there. Adrienne, just say the second part of your question again.
spk11: Yeah, I was wondering from the time that you actually negotiate. Oh, the timing, sorry.
spk12: Yep, yep, yep. Thank you. The timing, sorry. Well, it depends how quickly a vendor can ship, right? So assuming I buy the goods on Monday and the vendor could ship, you know, in a week, you know, probably takes about three to four weeks, depending upon what, you know, there's a lot of variables here, Adrian, you know, where they're shipping from, what DCs, all of that. But basically, as a general rule, I would say, somewhere between three to four weeks.
spk11: Okay, fantastic. Best of luck for holiday. Congrats.
spk03: Thank you. And our next question comes from the line of Laura Champine with Loop Capital. Please proceed with your question.
spk16: Thanks for taking my question. I'm interested in the contrast between what looks like more promotional department stores this year versus last. and the off-price kind of effort to raise the ring a bit. How is your pricing umbrella holding up versus those mall-based stores this year?
spk12: Well, Laura, we went in and actually went in and right-sized some of our values. And we'll continue to do that in the fourth quarter, which is why we're staying built into our guidance. We have some additional markdowns in there. You know, the promotional calendar, I mean, you know what's going on out there. You can see it as everyone's trying to move through inventory in some places. The promotional calendar looks as sharp as 19, as deep as 19. A couple of businesses, you say to yourself, it's a little deeper than 19. So, you know, the merchants are out there assessing that, and then we're either buying to the values that we think we need to be based off of all the supply that's out there, or we're going in and revaluing some of the things that we have that we think we need to get to the right price value. But it is just as promotional as it's been historically, and so that's kind of the headsets the merchants have as they're out there now making purchases in the outside world. And then, of course, the logic of every value is dependent upon the brand and how that fits, you know, in the outside world.
spk03: Got it. Thank you. And the next question comes from the line of Marnie Shapiro with Retail Tracker. Please proceed with your question.
spk14: Hey, guys. Congratulations on a great quarter and best of luck for holiday. If you could just – I know you're not giving guidance yet for 23, but is it fair to assume that store openings will be about the same for next year, or is there any change to thinking on DDs given the environment? And then I think, Barbara, I just want to chase a little bit more into the improved mix you said for the holiday season – Clearly, there's a lot of product out there, but were you referring to improved mix versus 21 versus the first half versus the third quarter or just in general? There's so much inventory and we're having a good time.
spk20: Marnie, on the real estate front, we remain very confident in both chains and currently have no changes to our expansion plans. you know, certainly we'll provide more details for 23 when we report year-end. Okay.
spk12: And in terms of the mixed morning, I'd say, you know, going back to these two answers, going back to Q4, we missed a lot of gifting opportunity last year because of the whole, you know, supply chain carrier issues. So specifically the Q4, that's one piece of it. In terms of versus the entire year, there's just a lot more brands out there. So I think it's a combination of both being able to get, you know, really great close-ups, better pricing, and better brands, and the other piece of where there's just were holes, literally holes in our department. So it's both.
spk14: That's great. Best of luck for holiday, guys. Thank you, Maureen.
spk03: And our next question comes from the line of John Kernan with Cowan. Please proceed with your question.
spk06: Great, thanks for taking my question. Congrats on the momentum into holiday. So Michael, if we look at your sales productivity, just simply through sales per square foot, sales per store, it's above pre-COVID levels. The operating margin obviously is below, but it seems like there's momentum into the fourth quarter and next year. And you might have line of sight in terms of how to get back to pre-COVID levels of operating margin. What do you think is, what do you have the clearest line of sight in terms of, is it freight? Is it merchandise margin? Is it SG&A leverage? What do you think creates the clearest path back to pre-COVID levels of profitability?
spk20: Well, sales number one, you know, there are structural changes in wages across the U.S., but, you know, I don't think you're going to get that back to the labor that you had pre-COVID. Certainly, ocean freight is going to be a tailwind for us going into 2023. I would say domestic freight should be a tailwind as well, but that will be partly dependent on diesel fuel prices that are above $5 now, and so it'll be partly dependent on what happens with fuel. But most importantly, it will depend on top-line sales.
spk03: Got it.
spk06: Thank you.
spk03: And our next question comes from the line of Jay Soul with UBS. Please proceed with your question.
spk10: Great. Thank you so much. My question is just with all the inventory out there, not just in terms of apparel and footwear, but, you know, many categories, are you seeing any opportunities to expand the business into new areas, new categories that maybe you haven't before just because the buys are so good?
spk12: Look, I would say that the merchants are out there looking for all kinds of buys, and yes, that does happen. Often you wind up opening up some new resources, which we have, as is availability, and the vendors are looking to partner with people. So it's both. I mean, we're absolutely doing that, and, you know, that's a piece of it.
spk10: And, Barbara, do you think that can continue?
spk12: Well, I think once the... once you open up a resource or even start shopping a resource, even if the resource doesn't have merchandise that minute, usually things, over time, if you keep going back, you'll open the resource up. I think after this supply bubble really, really dies down, and we do expect it to go into next year because there is so much merchandise, and I think there's a lot of, you know, we don't really have full line of sight to what will be fall product that's in front of us since it's November. Yeah, I just, I think there's just, yeah, I don't know what to say. I think there's opportunities and there's some businesses we could go into in some different categories, not whole businesses, but categories within businesses that we could expand upon.
spk10: Got it. Thank you so much.
spk03: And our next question comes from the line of Ike Borichow with Wells Fargo. Please proceed with your question.
spk04: Hi, everyone. This is Jesse Sobelson on for Ike. Thanks for taking our question. We were just wondering, you know, as we look to pre-COVID margins, I think it was mentioned a little bit earlier in the Q&A, you were hovering around 13% pre-COVID, but you mentioned some higher structural costs, such as wages. Is this pre-COVID margin still attainable sometime over the next few years, or should we be thinking about a recovery but maybe landing somewhere below those pre-COVID levels? How are you guys thinking about that?
spk20: Sure, Jesse. I wouldn't predict where it's going to land other than any return would happen over a number of years and wouldn't happen overnight. We would expect it to have improved profitability over time is the way I'd answer that question.
spk04: All right. Well, thank you.
spk03: And our next question comes from the line of Anisha Sherman with Bernstein. Please proceed with your question.
spk13: Yeah, thank you. Barbara, on your point about resetting the value proposition, have you seen turns pick up sequentially through the quarter and is that what drove the in-store inventories to be so lean as you continue to lean in on markdowns? And then Adam, you mentioned earlier on an expectation of an easing of markdowns in Q4. Should we interpret that you're now reaching the level of turns that continue to be strong through the quarter and now you're you're happy with where your value proposition is. Have you seen the turn stay strong, kind of exiting the quarter and into Q4? Thank you.
spk20: Anisha, on absolute inventory levels, you know, these are the inventory levels we've been running throughout the year. We always prefer to be in a chase. And this is the way we'll, you know, we typically run the model and we'll continue to do so going forward. But the inventory levels, Again, in-store, in front of the customer, we're up over last year, but down versus pre-pandemic levels.
spk18: Yeah, and Nisha building on that a little bit. Your question about the markdowns, we've layered some additional markdowns versus last year into our fourth quarter guidance, and that's really largely driven. We know this is going to be a highly promotional environment, and we'll see how highly promotional it is, but just want to be prepared for that.
spk13: But can I clarify, Adam, so it's up versus last year, but is it right to say that it's easing sequentially versus where you were this quarter?
spk03: Absolutely.
spk13: Okay. Yes. Thank you.
spk03: And our next question comes from the line of Corey Tarlow with Jefferies. Please proceed with your question.
spk21: Hi. Good afternoon. Congrats on the quarter, and thanks for taking my question. So on new stores, I was wondering if you, I know you talked about completing your 2022 store growth plans. I was wondering if you could discuss a little bit about new store productivity, how that's looking versus what your benchmarks are and any additional color that you can add specifically on just new store performance.
spk20: Sure. So for us, a new store over on the fleet of stores, will typically come out of the box at 60% to 65% of the chain average, and that continues to be the case, even on the new store openings over the last couple of years.
spk21: Great. Thank you very much. Best of luck.
spk03: And our next question comes from the line of Bob Jubel with Guggenheim Securities. Please proceed with your question.
spk02: Hi. Good afternoon. Just two quick questions. On, I guess, Deedee's versus Ross, are the state performances, you know, Texas, Florida versus California, what you said, is it holding true for both formats in terms of the sales performance? And then just on the other side of it is in terms of, you know, your mix or your opportunity in categories, you know, what do you think in terms of where you outperformed your expectation in the third quarter? Like, which categories surprised you the most, I would say? Could you share that with us? Thanks.
spk20: Sure. On the DD's question, you know, we typically, the state performance is really on a consolidated basis, which is what we discussed. We don't get into the DD's. Again, I would just reiterate that overall, DD's improvement, I would say, across the board was very, similar to Ross, but continue the trail.
spk12: And in terms of merchandise mix or performance, outperform, I mean, choose really outperform. Other businesses that outperform would be some of the center core businesses. From a term perspective, that would be the plan.
spk04: Great. Thank you.
spk03: And our final question comes from the line of Simeon Siegel with BMO Capital Markets. Please proceed with your question.
spk17: Hi, this is Dan Stroller on for Simeon. Thanks for taking our question. On the topic of margin recapture, I think in the past you've talked about leveraging added technology in-store or at the DCs for efficiency and cost reductions. Just wondering where you stand in that regard or if there's more to come, basically what inning you're in in that chapter. Thank you.
spk20: I would answer that by saying we're constantly in the third or fourth inning. So we always have new investments we're making. Those include automation in the DCs, in stores. You know, they're ranging from automated robotics in the DCs. You know, we're piloting self-checkout in the stores. and also in the stores, more efficient ways to check inventory and take markdowns for our store associates. And we constantly have investments where we're trying to be more productive and efficient in the business.
spk17: Great. Thank you. Best of luck.
spk03: There are no further questions at this time. And I would like to turn the floor back over to Barbara Rentler for any closing comments.
spk12: Thank you for joining us today and for your interest in raw stores.
spk03: Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a great day.
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