Ross Stores, Inc.

Good afternoon and welcome to the Ross Stores first quarter 2023 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 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 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 2022 Form 10-K and fiscal 2023 Form 8-Ks on the file with the SEC. And now I'd like to turn the call over to Barbara Rentler, Chief Executive Officer. Please go ahead.

Good afternoon. Joining me in our call today are Michael Horkstrom, Group President, 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 first quarter 2023 performance, followed by our outlook for the second quarter and fiscal year. Afterwards, we'll be happy to respond to any questions you may have. As noted in today's press release, Despite continued inflationary pressures impacting our low to moderate income customers, first quarter sales were relatively in line with our expectations. Total sales were $4.5 billion, up from $4.3 billion last year, while comparable store sales rose 1%. Earnings per share for the 13 weeks ended April 29, 2023, for $1.09, a net income of $371 million. These results compare to $0.97 per share on net earnings of $338 million for the 13-week ended April 30, 2022. Cosmetics and accessories were the strongest merchandise areas during the quarter, while the Midwest was the top-performing region. CDs discounts performance in the first quarter continued to trail Roth. reflecting the aforementioned inflationary pressures that continues to have a larger impact on our lower income households. At quarter end, total consolidated inventories were down 16% versus last year. Average store inventories were up 2% at the end of the quarter. Packaway merchandise represented 42% of total inventories versus 43% last year. Turning to store growth, We opened 11 new Ross and eight DDs discount locations in the first quarter. We continue to plan for approximately 100 new stores this year, comprised of about 75 Ross 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 first quarter results and additional color on our outlook for the remainder of fiscal 2023.

Thank you, Barbara. As previously mentioned, our comparable store sales were up 1% for the quarter, driven by an increase in transactions. First quarter operating margin of 10.1% was down from 10.8% in 2022. As expected, this decline primarily reflects higher incentive compensation versus last year when we underperformed our expectations. Cost of goods sold improved by 50 basis points due to a combination of factors. Merchandise margin was up 120 basis points, primarily due to lower ocean freight costs, while domestic freight costs declined by 60 basis points. Partially offsetting these two favorable items were higher distribution expenses of 65 basis points driven primarily by unfavorable timing of pack-away related costs and deleverage from the opening of our Houston distribution center. Buying increased by 60 basis points due to higher incentive compensation and occupancy deleveraged five basis points. SG&A for the period rose 115 basis points mainly due to higher incentive compensation and store wages versus last year. During the first quarter, we repurchased 2.2 million shares of common stock for an aggregate cost of $234 million. We remain on track to buy back a total of $950 million in stock for the year. Now let's discuss our outlook for the remainder of 2023. For the 13 weeks ending July 29, 2023, comparable sales are forecast to be relatively flat. Second quarter 2023 earnings per share are projected to be $1.07 to $1.14 versus $1.11 for the 13 weeks ended July 30, 2022. Our guidance assumptions for the second quarter of 2023 include the following. Total sales are forecast to increase 1% to 4% versus the prior year. We plan to open 27 locations in the second quarter, including 18 Ross and nine DDs discounts locations. Operating margin for the second quarter is planned to be in the 9.8 to 10.1% range, down from 11.3% in 2022, as higher merchandise margin from lower ocean freight costs is forecast to be offset by an increase in expenses, primarily related to incentive compensation and store wages. We expect net interest income to be approximately $31 million. The tax rate is projected to be about 25%. And diluted shares outstanding are expected to be approximately $339 million. Now turning to the full year. Based on our first quarter results and guidance for the second quarter, comparable store sales for the 52 weeks ending January 27, 2024 are still planned to be relatively flat. We now project earnings per share for the 53 weeks ending February 3rd, 2024 to be $4.77 to $4.99 compared to $4.38 for the 52 weeks ended January 28th, 2023. This guidance includes an estimated benefit to full year 2023 earnings per share of approximately 15 cents from the 53rd week. Now I'll turn the call back to Barbara Rettler for closing comments.

Thank you, Adam. As noted on our last earnings call, we had expected fiscal 2023 to be another challenging year. This was especially true given the continued uncertainty in the macroeconomic, geopolitical, and retail environments. As a result of today's uncertain external landscape, especially the prolonged inflationary pressure negatively impacting our customers' discretionary spends, Shoppers are seeking even stronger values when visiting our stores. In response, we remain focused on delivering the most compelling bargains possible while diligently managing expenses and inventory to maximize our opportunities for growth. At this point, we'd like to open up the call and respond to any questions you may have.

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 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. And in the interest of time, we ask that you please limit yourself to one question. Thank you. One moment, please, while we poll for questions. And the first question comes from the line of Matthew Boss with JP Morgan. Please proceed with your question.

Great, thanks. So, Barbara, maybe given the pressure on your low to middle income or low to moderate income customer base that you cited, how do you feel today about your merchandise assortments across categories from that value perspective? And then how are you managing buys in the marketplace just given the current level of disruption across the apparel landscape today?

The merchandise performer from a value perspective, first let me lead with, you know, we weren't really satisfied with our results. So as I look across the different businesses, you know, we had some businesses where the business didn't perform as well as we had expected, and we're addressing those issues. So let me start with that. As I look at value across the store, that has been a main focus for the merchants. for the last few months. So I'd say that we've made progress across the board, but I still think that that is a major focus for us, offering the customer the best branded bargains possible at the best possible values we can put out there. So I would say we're on a journey, and everyone is really, the merchant team is highly focused on this, and I really think that that's an important part, especially for our mid to lower income customers. And then in terms of managing, you're saying in terms of managing supply in the marketplace? Is that how I interpret that question?

Yeah, just how you're managing buys given how much disruption there is in the overall apparel landscape, how much you're leaving, thinking about current open-to-buy relative to maybe things opportunistic from a pack-away perspective.

Oh, okay. Well, we have enough open to buy for both pack away and to chase the business. So right now the plan is postured that we would chase the business as we're coming across and we're monitoring the speed of spending. And the hotel, same scenario, hotel inventories are basically at the same rate as they were last year. And so the merchants are out in the market seeking out deals. And based on those deals, we make those decisions. So if a deal comes in one business, And that wasn't really even planned for that business. We might take that plan up. So, you know, we're really looking for with the overarching idea that what we want to do is get best possible values on the floor. So the merchants go to the market and then there's discussions about what's out there. I know, you know, that there is, you know, pretty broad based availability out there. Maybe, you know, across most businesses anyway, most brands in the market, because, you know, as you know, supply fluctuates by by type of product and vendor, but Um, you know, you have to kind of be out there and be in it to really see what's out there and then come back and then decide where do we want to, where do we want to take the deal? But that is our focus in both companies, delivering the best branded bargains that we possibly can.

Great. Best of luck.

And the next question comes from the line of Mark Altrager with Baird. Please proceed with your question.

Good afternoon. Thank you for taking my question. So you're holding your comp guide for the year, though you noted the consumer is looking for deeper value and your merchants are focused on that. So I guess I'm wondering how the expected makeup of that flat comp has changed versus your expectations at the start of the year. And to the extent that there's perhaps some lower ticket involved, are there any margin implications we should be aware of? Thank you.

Hi Mark, it's Michael Hartshorne. Let me start by just talking a little bit about the first quarter. You know that the comp in the first quarter was driven by number of transactions and that was you know for us that's our proxy for traffic. It was up versus a year ago so that's a good sign on customer traffic returning. The average basket was flat and it was flat on units per transaction up on a lower AUR. As far as how we're looking at the year, our outlook has not changed. We'll continue to manage the business with a conservative posture and be in a position to chase trends, chase the business, and manage expense and inventory very conservatively. On a stack basis, as we move through the quarter, And as weather became more favorable, we did see trends improve on a multi-year basis. So what that says to us is obviously healthy traffic and a trend that in our mind hasn't changed and hasn't changed our outlook for the year.

That's great. Thanks for the call.

And the next question comes from the line of Paul with Citigroup. Please proceed with your question.

Hey, guys. Thanks. Here's about geographic dispersion. Maybe if you could talk about some of your big states, performance in those states, specifically California, how the trends look from the beginning of the quarter to the end of the quarter, and if maybe you could talk about apparel versus home performance. Thanks.

Sure, Paul. On trends during the quarter, as I just mentioned, on a stacked basis, we did see, and stacked basis versus pre-COVID, we did see trends improve as we moved through the quarter with April being the strongest. Geographically, we mentioned the Midwest was the top performing region for our larger markets. Texas was above the chain average. Florida was in line and California underperformed the chain average. uh given the difficult weather uh throughout the quarter in the west merchandise wise accessories and cosmetics were the best performing businesses as we said in the script overall shoes performed above the chain average while home was in line and apparel trails thank michael can you um just read a little bit more on uh california um any

quantification of how much it was below the chain and did that gap close between California and the rest of the chain by the end of the quarter?

It did close. We wouldn't get into the specifics, but it did underperform the chain average and it improved as weather improved. Thank you. Good luck.

And the next question is from the line of Lorraine Hutchinson with Bank of America. Please proceed with your question.

Thanks. Good afternoon. As you move through the quarter, did you see any signs of customers trading down into Roth or any other notable changes in consumer behavior?

I'd say overall, Lorraine, it's hard. There's so many factors that go into sales. Obviously, the low-end customer continues to be pressured, whether it's ongoing inflation, reduction in SNAP benefits,

lower tax refunds but it was hard to see whether there's a trade down customer in that data and the lower AUR in the quarter was that all moving towards sharper price points or is there a mixed component to that that we should factor in that was that's really off of sharper price points it wasn't it wasn't generated by mix

Thank you.

And the next question is from the line of Chuck Grom with Gordon Haskett. Please proceed with your question.

Good afternoon. The merchandise margin had a nice uptick here in the first quarter relative to the last quarter. Can you talk about the drivers? I think you called out freight and then how you're thinking about that line item over the balance of the year.

Yeah, Chuck, this is Adam. So I mentioned the merchandise margin grew by 120 basis points in Q1. Ocean freight was clearly the most impactful component here, driving the improvement. Our performance in March margin was in line with what we embedded in our guidance for Q1, and assuming rates stay where they are, expect that to continue as we move through the year.

Thank you.

And the next question is from the line of Adrian Yee with Barclays. Please proceed with your question.

Great, thank you very much. Barbara, I want to ask you about pack away the 42% this year versus 43%. First and foremost, it sounds like you believe that your assortment is on trend. And then typically, when there are these kind of late weather breaks to kind of warmer weather across retail, it gives you the opportunity to chase into sort of known winners. Do you feel better about the assortment heading into the second quarter? And then Adam, well, Adam or Barbara, You know, with Frontline still being very promotional, did that somehow impede the ability to drive maybe higher AURs because the value is not as evident as it may be when Frontline's a little bit less promotional? Thank you very much.

Okay, Adrienne, so let's start with PacWay. I think the first question was about PacWay, the content of PacWay. So the contents of PacWay, we feel good about that contents of PacWay. Last year at this particular moment in time was when we started to bring in goods because of all the carrier issues that went on when everything speeded up. We took goods and put them into PacWay, as we've told all of you, that we use later on in the year, really all direct imports. So the PacWay that we have in there now is really... closeout great deals that we feel very good about. So the percent might be the same, but the content is different. So that's the first one. The second one, in terms of the late weather break, I'm not sure I 100% understand what you mean by that.

So oftentimes when it's been cold in the Northeast and many people were sort of, retailers were sort of missing plan just because it was colder than for longer. And in the past, it seems like those types of poor weather transitions have given you the opportunity, but I think you just answered it in their first one.

Yeah, you're saying were there additional great deals out there because the weather wasn't good and people canceled and it wasn't good. That's kind of ongoing. If the merchants, yes, are in the market looking for closeouts, chasing the business and all of that. So that's very different by type of business. But yes, that's part of the supply availability that's out there.

And then the...

The spread, the kind of wide, the spread from frontline to your pricing.

I think you're just saying that they're promoting now. It's more promotional than it's been. And then what's our relationship to their promotional environment?

Yeah, does it make it harder to create that value notion when the frontline retailers are sort of every day sitting on 50 off?

Yeah, no, no. Well, listen, look, I think the promotional environment is still competitive. It's still a competitive market. We watch people get more promotional in these last few months. I don't think that that's going away. I think what has to happen is, and what is happening, is that the buyers have to be in the market constantly working with vendors to understand two things. One, not only just brand availability, but also pricing, because they know that they need to get they need to have their values be sharper. So they're competitive shopping, seeing what's going on in stores, and then they're in the market, and vendors are, you know, giving them the lay of the land, availability. I have what you're talking about, the excess goods close out. And also kind of where the pricing is. They're keeping that in mind because they're studying that. So for a while, you know, the world got very different, and there was much more regular price selling, particularly in department stores. You know, we're watching, as you're watching, that erode and it's becoming more promotional. So You know, those have been best practices for the company for years. And so that's what the merchants are doing to ensure that, you know, they're watching it and then making some assumptions about what they believe could happen in front of them, which would be what traditionally is done in all price prior to all the things that have gone on since COVID has started and more regular price selling and all of that.

Fantastic. That's very helpful. Thanks, Barbara. Best of luck. Thank you.

And the next question comes from the line of Ike Borachow with Wells Fargo. Please proceed with your question.

Yes, hi. This is Kaydon for Ike. Thanks for taking our question. I guess just to hone in on the gross margin piece, you know, you guys had a decent amount of volatility in both distribution and buying buckets last year within COGS. Can you walk us through how you think those line items progressed through the rest of the year, you know, maybe direction or magnitude? Thank you.

Yeah. Hi, Kate. This is Adam. So we'll take them individually. So ocean freight costs, you know, significant tailwind in Q1. Again, given all the volatility we've seen over time, don't want to get too far ahead of ourselves. But kind of what's embedded in the guidance is, you know, we'll continue to see that as a tailwind as we go through the balance of the year. Domestic freight, we called out the 60 basis points of improvement. year over year, again, highly dependent here on fuel prices. And obviously, there's wage increases embedded in those costs. But assuming those things stay stable, we'd continue to expect that to be a tailwind for us as we go forward. The biggest piece that we've called out for some time offsetting those benefits are incentive costs. So we gave you the details of that approximately in the call comments. I would also say in the second quarter when we look at it will probably be the most impactful quarter for us from an incentive cost, you know, increase this year versus last year. We also commented on distribution expenses. So again, you know, driven by timing of pack-away, and then the Plan D leverage from our newer distribution center in Houston.

Very helpful. Thank you. Thanks.

And the next question comes from the line of Alex Stratton with Morgan Stanley. Please proceed with your question.

Great. Thanks a lot for taking the question. So it feels like this is kind of an ongoing narrative for the last year that you're not super happy with the value you're offering the customer, though historically I think you've proven super consistent and successful there. So I'm just wondering, has anything changed in the buying organization, or what do you think the buying team is getting wrong now, and maybe how you're thinking about correcting this or putting initiatives in place to perhaps get this back on track? Thanks a lot.

Sure. Look, I think the value equation we've been working on for the last few months, over the last year, moving towards getting to that value point. I think we're kind of at a different place now than where we were a few months ago, both in brands and in values on the floor. So I don't see it kind of as the merchants aren't doing their job. I kind of see it as an evolution. very, very highly focused now on delivering compelling values as we watch our customers in both companies struggle with all the inflation and all the things that are going on around them. You know, we've gotten pretty, you know, very, let me put this way, we're very highly focused on delivering those values. So where we were, let's say, six months ago and how we're thinking about it now continues to evolve. And so we want to make sure that we have a really wide assortment of fresh receipts, branded merchandise, and where it's appropriate that we're sharpening our branded values to strengthen the offerings because it's a competitive retail environment. So I don't feel like it's not necessarily working. I feel like it's evolving. And I think our business last year evolved as we went along. And it's important for us to make sure that we deliver you know, really sharp values for our customer, particularly in this timeframe. And now that the world is getting even more competitive and more promotional, you know, we have to look through that lens also. So I think that, you know, we need to stay focused on it and do a better job on this and making sure that we really understand where it's appropriate, that we are sharpening our brand of values. And so I don't think it's not working. I think it's I think it's much more of an evolution. in all of our businesses.

Thank you.

And our next question comes from the line of Simeon Siegel with BMO Capital Markets. Please proceed with your question.

Thanks. Hey, good afternoon. Any change in the percent of sales being driven by top vendors versus last year and then just versus historical trends? Just wondering if concentration of the largest vendors has changed at all. And then just because it's coming up fairly frequently, any updated thoughts on shrink? Thank you.

I'll start. It's Michael Simeon on shrink. Shrink was a little bit higher for us last year. It wasn't meaningfully higher. We've assumed that it'll stay at or slightly above those levels in our estimates, but no updates will. We typically...

update the financial impact of that when we take true of our physical inventory in the third quarter and the percentage of our top vendors versus historical I mean that that moves based off of supply right so one year we could have a great deal of merchandise from one vendor top vendor and then and then the next year a little bit less but a little bit more from someone else so I think that kind of it kind of moves around I don't think it's changed that much. I don't know we're defining as top vendors, but it hasn't changed that much. It changes more by the vendor itself and the availability that's out there.

Great. Thanks a lot, guys. Best of luck for the rest of the year.

And just as a reminder, in the interest of time, we ask that you limit yourself to one question. Thank you. Our next question comes from the line of Dana Telsey with the Telsey Advisory Group. Please proceed with your questions.

Hi, good afternoon, everyone. As you think about the performance of DDs and what's happening in the environment, was there any differential in DDs performance in the fourth quarter to the first quarter in what you saw? And then just lastly, on the Bed Bath & Beyond locations that are available, if you were to get any, would that be in addition to the current run rate of store openings this year, or would it be part of it? Thank you.

Hi, Dana. On DDs, the sales trends continue to trail Ross results during the first quarter. I wouldn't comment on the differential between fourth and first. Obviously, their customer faces even more macro headwinds relative to Ross, which is, I think, reflected in their underperformance. I would also say, though, similar to Ross, we are sharply focused on offering better values to help drive improved sales performance there. On Bed, Bath, and Beyond, it will no doubt provide opportunities for new store locations. We'll have to review each potential new site on a case-by-case basis to see if it's appropriate for us, but I would say it's not going to impact our 100-store opening plan for this year.

Thank you.

And our next question comes from the line of Bob Drupal with Guggenheim. Please proceed with your question.

Hi. Good afternoon. I guess just a question for me is as you think about what's happening in the macro, when you look at your good, better, best mix, are you migrating your offering to the lower end of the spectrum? I'm just curious just in terms of the buys or how you're thinking about the merchandising piece of it. Thanks.

Sure. So we have a good, better, best strategy, and that is really driven by the assortment that we put on the floor and the values we put out there. So we want a tiered strategy because you can attract a much more broader set of customers, but that can move based on supply, based on availability, based on our purchases. So it fluctuates as you go.

As you think about the rest of the year, you're not really buying for more of a good environment versus a better versus best in your offering?

I think that depends by business. Got it. I can't tell you that that is a company-wide strategy. I think that moves by business based on what the business is. Clearly, the GD's customer in particular is very price sensitive, so really paying attention to the values we're putting on the floor, the pricing we're putting on the floor, both. But even at DeeDee's, it moves around. But we are obviously conscious there, particularly with that customer.

Great. Thank you.

And the next question comes from the line of Brooke Roach with Goldman Sachs. Please proceed with your question.

Good afternoon. Thank you for taking our question. Given the ongoing inflationary pressures in the macro, I'm wondering if you can provide updated thoughts on the longer-term path to recapturing pre-COVID operating margins. Are there any initiatives that you're contemplating to help drive that recovery outside of sharpening values and driving additional market share capture? Thank you.

Hi, Brooke. This is Adam. Thanks for the question. So our long-term operating margin improvements are going to be highly dependent on us delivering strong sales over a sustained period of time. And then the question on how long do inflationary pressures persist. But over the longer term, we believe we can achieve gradual improvement in profitability. I think, you know, if you get into, like, are there any structural questions related to that? We're seeing tangible benefit in freight costs. But we're still, these costs still are not at pre-pandemic levels. And then we're seeing some wage pressures in the stores. You know, when you talk about, you know, we've guided to CapEx of $810 million, so a big component of that, in addition to distribution center capacity, in addition to investing in the 100 new stores. you know, a big chunk of that is technology investments that'll drive further efficiencies within the stores and in our distribution centers. So more automation in our distribution centers and some store initiatives that we've touched on in the past.

Thank you.

And the next question comes from the line of Laura Champine with Loop Capital. Please proceed with your question.

Thanks for taking my question. It's about the weather's impact on your comp in Q1. Is that something you can quantify, or maybe if that's a tough one, maybe give us the discrepancy roughly between California and the rest of the chain?

Hi, Laura. It's hard to calculate. I mean, I think it's suffice to say it didn't help our business. you know, I would say California was slightly under the, you know, trailed the chain average and did improve as weather improved is what I, is what we'd say.

Got it. Thank you.

And the next question comes from the line of Marnie Shapiro with Retail Tracker. Please proceed with your question.

Hey, guys. I just wanted to clarify. I think you said the 30, 53rd week adds about 15 cents. Could we expect between like 350 to 400 million in sales. Is that a decent number to use for that week? Or is it a little less because it's a January week? Just curious.

Yeah, not for, probably a little bit less than that, that morning, given, given that it's, as you said, given that it's January, early February.

That's what I figured. And then this came up on other calls. It looks like your traffic is good, that people are looking for sharper deals, but you obviously called out accessories and cosmetics, beauty, which tends to have a lower AUR. Are people gravitating towards the lower-priced items, or as you've seen the weather improve, have you seen apparel come back in slightly higher AUR, but they're looking for the apparel items that are on sale or just at the better prices? I'm curious. sort of what the dynamic is there.

So apparel struggles in Q1. So I don't necessarily think it was driven off the prices. I think that the assortments were not necessarily where we wanted them to be. So depending upon what business that's in, that could have been the price, that could have been the product. There's a variety of factors in there. I don't think I could take it down to a common denominator price or say, was it driven by markdowns or wasn't driven? It really, it really, you know, I would say it was driven by the assortment when it's all said and done. Certainly the weather didn't help. But I don't, but I don't, you know, I don't think the weather is a big enough impact that I could sit here and say that. I think our assortments weren't necessarily where we wanted them to be. And so, you know, we're working on that, and we're going to continue to work on that. But it's not really based off of a price or one thing or, you know, we have our work cut out for us, and the merchants are working on that now.

And was it across? It wasn't driven by mix. It was driven being sharper priced across the assortment.

So it was across, you saw the softness across the assortment in apparel.

No, AUR.

It wasn't specific.

AUR. You asked was AUR driven by mix in the business. It was not driven by mix in the business.

But on the apparel side, was the softness across the board, whether it was men's polo shirts or women's dresses or kids, every department across the board was soft? Or were there certain spots, even without disclosing it if you don't want to, were there certain spots that really need a lot of work and other spots that were okay?

Well, obviously, we're not going to get into details, but within all the apparel businesses, I mean, common sense would tell you that some businesses are better than others, right? So with that, we wouldn't get into specifics, but, you know, there's no – if you're asking is there, like, a raging disaster in one particular area, I don't know. I know what you're trying to get at there.

I was kind of thinking on the positive. Was there something that you're saying –

I couldn't decide where you were going with that. Every business has businesses that were performed. Performed in some businesses didn't. And so, you know, we're not going to get into specifics on that. What I would say is that the merchants are very diligently working on the assortments, whether it's delivering the right product, whether it's the values. I mean, they're very, you know, really highly focused on that right now.

Okay, great.

Thank you so much.

And the next question comes from the line of Corey Tarlow with Jefferies. Please proceed with your question.

Hi, good afternoon, and thank you for taking my question. So, Barbara, just on the availability across your good, better, best spectrum that you have, is there any better availability within any one of those three segments as you speak to your merchants?

Oh, you're just saying where does the supply? The supply is pretty broad-based. I mean, you know, supply, you know, there's supply in most businesses. You know, there's always more in one vendor than the other, more in product than the other. I mean, it fluctuates. Overall, there's still a lot of supply. I wouldn't say it's bucketed in one of those three buckets. No, I would still say it's pretty broad-based.

Got it. And then just on the lower AUR comments, being driven by sharper price points. I guess within the context of the guide for the full year for flat comps, is the expectation that the AUR is likely to be lower throughout the rest of the year as well?

Putting out better values doesn't necessarily mean that your AUR is going down. But what we're focused on is we're focused on delivering really sharp values. So, you know, depending upon what, in your, using your example of the good, better, best, depending upon what that mix looks like, you know, that doesn't necessarily mean the AUR is going down. What we're really trying to do is we're really trying to focus on sharpening our branded values for the customer. And so we think that's our path to driving sales, and we think that's our path ultimately to gaining market share. So those two don't necessarily go hand in hand.

Understood. That's very helpful. Thank you very much and best of luck.

And the next question comes from the line of Jay Sol with UBS. Please proceed with your question.

Great. Thank you so much. You know, it looks like you beat the low end of your the guidance that you gave for EPS in the first quarter by about $0.10, but you're raising the low end of the full year guidance by about $0.12. Just tell us what the extra $0.02 is, where that's coming from. Thank you.

Yeah, I think the better way to look at it is what we did on the top end. We beat the top end by $0.04. You lose a quarter in that, and then we raise the full year by the $0.04. Got it.

Okay. Thank you so much.

And the next question comes from the line of Anisha Sherman with Bernstein. Please proceed with your question.

Thanks for taking my question. So your guidance implies your two-year stack comp for this quarter was minus six, and your guidance implies a deceleration of that stack to about minus seven for Q2, and then a pickup in the back half to get kind of closer to zero two-year stacks. Can you talk about how you're thinking about the progression through the year and why are you more cautious about Q2 and then a little bit more optimistic for the back half of the year?

Sure, Anisha. I think it's hard to look at these on a two-year stack with all the fiscal stimulus and COVID. So we're really looking at it pre-COVID, what's changed on a four-year stack and how that's progressed over time and You know, we went into the year and had a plan in the first quarter. What we saw is that four-year stack improved as we moved through the quarter and weather improved and exited in a place that would support that stack guidance for the year.

Okay, so just to clarify, you are embedding an improvement in the four-year stack through the course of the year?

Correct, yes.

Okay, thank you.

And the next question comes from the line of Krista Zuber with TD Cowan. Please proceed with your question.

Hi, it's Krista on for John. Just a quick question. On inventory, you've had at least two quarters here of fairly sizable declines. Just wondering how you're thinking about it through the balance of this year, and should we you know, continue to expect declines on a quarterly basis through the end of the year? Or do you think at some point you sort of pull in line with your sales growth expectations? Thank you.

Sure. If you look at the first quarter, for instance, we were down 16%, but we were up against elevated inventories last year when supply chain lead times eased and we had a surplus of early receipts. So what you'd expect as we move through the year, with that elevated inventory last year, it started to recede in third and fourth quarter and you get more comparable, but we should be lower given the excess inventory we had last year in the first half of the year.

And at this time, I'm seeing no further questions. I could pass it back over to Barbara Rentler for any closing comments.

Thanks for joining us today and for your interest in raw source.

Thank you, everyone. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.