Ross Stores, Inc.

Good afternoon and welcome to the Ross Stores second 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, please press star zero. 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 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 in the company's Fiscal 2022 Form 10-K and Fiscal 2023 Form 10-Q and 8-Ks on file with the SEC. And now I would like to turn the call over to Barbara Rentler, Chief Executive Officer.

Good afternoon. Joining me on our call today are Michael Horchrun, 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 second quarter 2023 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 pleased with our second quarter results, with both sales and earnings well above our expectations. Along with easing inflationary pressures, customers responded well to our improved value offerings throughout our stores. Total sales for the period were $4.9 billion, up from $4.6 billion last year, while comparable store sales rose 5%. Earnings per share for the 13 weeks ended July 29th, 2023 for $1.32 on net income of $446 million. These results compared to $1.11 per share on net earnings of $385 million in the prior year's second quarter. For the first six months, earnings per share were $2.41 on net income of $818 million. These results compared to earnings per share of $2.08 on net earnings of $723 million in the first half of 2022. Sales to 2023 year-to-date period were $9.4 billion with comparable sales of 3% versus a 7% decline in the first half of last year. Cosmetics and accessories were the strongest merchandise areas during the quarter, while performance across geographic areas was broad-based. Similar to Roth, DD's discount performance also improved due to better merchandise assortments and the aforementioned moderating inflation. At quarter end, total consolidated inventories were down 15%, versus last year, while average store inventories were up 4%. Packaway merchandise represented 38% of total inventories versus 41% in the same period of the prior year. Turning to store growth, we opened 18 new Roths and nine 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 2023.

Thank you, Barbara. As previously mentioned, our comparable store sales were up 5% for the quarter, driven by higher traffic. Second quarter operating margin was flat compared to last year at 11.3%. Cost of goods sold during the period improved by 185 basis points. Merchandise margin increased 200 basis points, primarily due to lower ocean freight costs. Domestic freight declined 60 basis points, while occupancy and distribution cost improved by 20 and 5 basis points, respectively. Partially offsetting these benefits were buying expenses that delevered by 100 basis points, mainly due to higher incentives. SG&A for the period increased 180 basis points as higher incentive costs and store wages more than offset the leverage from higher sales. During the second quarter, we repurchased 2.2 million shares of common stock for an aggregate cost of $230 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. As Barbara noted in today's press release, despite the recent moderation and inflation, our low to moderate income customer continues to face persistently higher costs on necessities. As a result, we believe it is prudent to continue to plan the business cautiously. However, given our improved second quarter performance, we are raising our second half sales and earnings outlook. We are now planning comparable store sales for the third and fourth quarters of 2023 to be up 2% to 3% and 1% to 2% respectively. 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 $1.16 to $1.21 versus $1 last year and $1.58 to $1.64 for the fourth quarter compared to $1.31 in 2022. Based on our first half results and second half guidance, earnings per share for fiscal year 2023 are now planned to be in the range of $5.15 to $5.26 versus $4.38 last year. Incorporated in this updated guidance range is an estimated benefit to earnings per share of approximately 16 cents from the 53rd week in fiscal 2023. Now let's turn to our guidance assumptions for the third quarter of 2023. Total sales are forecast to increase 4% to 6% versus the prior year. We expect to open 51 stores during the quarter, including 43 Ross and eight DDs locations. Operating margin for the third quarter is planned to be in the 10.3 to 10.5% range versus 9.8% in 2022, as the benefit from lower ocean and domestic freight costs more than offsets an increase in other expenses, primarily related to incentive compensation and store wages. Net interest income is estimated to be approximately $34 million versus $2.8 million last year, as we continue to benefit from higher interest rates on our cash balance. The tax rate is projected to be about 25%, and diluted shares outstanding are expected to be approximately $337 million. Now I will turn the call over to Barbara for closing comments.