Title

Presentation

Ross Stores, Inc. beats earnings expectations. Reported EPS is $1.59, expectations were $1.5.

Operator: Good afternoon, and welcome to the Ross Stores Second Quarter 2024 Earnings Release Conference Call. The call will begin with prepared comments by management followed by a question-and-answer session. [Operator Instructions] 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, the 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 the 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 2023 Form 10-K and fiscal 2024 Form 10-Q and 8-Ks on file with the SEC. And now I’d like to turn the call over to Barbara Rentler, Chief Executive Officer.

Barbara Rentler: Good afternoon. Joining me on our call today are Michael Hartshorn, Group’s 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 2024 results, followed by our outlook for the second half and full fiscal year. Afterwards, we’ll be happy to respond to any questions you may have. As noted in today’s press release, second quarter sales and earnings were above our expectations as our stronger value offerings resonated with our customers. Operating margin improved versus last year, increasing 115 basis points to 12.5%. Total sales for the period grew 7% to $5.3 billion, up from $4.9 billion last year with comparable store sales up 4%.

Earnings per share for the 13 weeks ended August 3, 2024 were $1.59 on net income of $527 million. These results are up from $1.32 per share on net earnings of $446 million in last year’s second quarter. For the first six months, earnings per share were $3.05 on net income of $1 billion. These results compare to earnings per share of $2.41 on net earnings of $818 million for the first half of 2023. Sales for the 2024 year-to-date period grew to $10.1 billion, up from $9.4 billion in the prior year. Comparable sales for the first half of 2024 were up 3%. Cosmetics and Children’s were the strongest merchandise areas during the quarter, while geographic performance was broad-based. Like Ross, dd’s DISCOUNTS performance also improved as shoppers responded favorably to the stronger values and fashions offered in stores.

In addition, dd’s faced easier compares versus last year, benefiting their recent performance. While we are encouraged by the improved trends, we continue to adjust assortments in the newer markets to address this more diverse customer base. At quarter end, total consolidated inventories were up 8% versus last year, while average store inventories were up 3% due to the 53rd week calendar shift. Packaway merchandise for 39% of total inventories at quarter end, up slightly from 38% last year. Turning to store growth. We opened 21 New Rock and three dd’s DISCOUNT locations in the second quarter. We remain on track to open a total of approximately 90 new locations this year comprised of about 75 Ross and 15 dd’s. As usual, these numbers do not reflect our plans to close or relocate about 10 to 15 older stores.

Now, Adam will provide further details on our second quarter results and additional color on our updated outlook for the remainder of fiscal 2024.

Adam Orvos: Thank you, Barbara. As previously mentioned, our comparable store sales were up 4% for the quarter, driven by a combination of higher traffic and basket size. Second quarter operating margin of 12.5% was up 115 basis points over 11.3% last year. Our improved profitability benefited from higher sales and lower distribution and incentive costs that were partially offset as planned by lower merchandise margins. Cost of goods sold during the period improved by 60 basis points. Distribution and buying costs delivered by 70 and 55 basis points, respectively, while domestic freight costs declined by 15 basis points. As expected, merchandise margin decreased by 80 basis points. SG&A for the period improved by 55 basis points, mainly due to higher sales and lower incentive costs.

During the second quarter, we repurchased 1.8 million shares of common stock for an aggregate cost of $262 million. As a result, we remain on track to buy back a total of $1.05 billion in stock for the year. Now let’s discuss our outlook for the remainder of 2024. As Barbara noted in today’s press release, our low to moderate income customers continue to face high cost on necessities, pressuring their discretionary spending. Looking ahead, our prior year sales comparisons also become more challenging during the second half of the year amidst an external environment that is highly uncertain. As a result, we continue to maintain a cautious approach in forecasting our sales. For both the third and fourth quarters, we are planning comparable sales growth of 2% to 3% on top of 5% and 7% gains, respectively, in 2023.

If sales perform in line with this guidance, third quarter earnings per share are expected to be in the range of $1.35 to $1.41 versus $1.33 last year and $1.60 to $1.67 for the fourth quarter compared to $1.82 in 2023. This updated earnings guidance now reflects additional efficiencies we expect to achieve in the second half of 2024. If the second half performs in line with these projections, earnings per share for the full year are now forecast to be in the range of $6 to $6.13, up from $5.56 in fiscal 2023. As a reminder, both the 2023, fourth quarter and full year results included an approximate $0.20 per share benefit from the 53rd week. Now, let’s turn to our guidance assumptions for the third quarter of 2024. Total sales are forecast to increase 3% to 5% versus the prior year.

We expect to open 47 stores during the quarter, including 43 Ross and 4 dd’s locations. Operating margin for the 2024 third quarter is planned to be in the 10.9% to 11.2% range, compared to 11.2% in 2023. This outlook reflects lower incentive, freight and distribution costs that are offset by lower merchandise margins as we build on our efforts to offer more sharply priced branded bargains. Net interest income is estimated to be approximately $39 million. The tax rate is projected to be 24% to 25%, and diluted shares outstanding are expected to be approximately $331 million. Now, I will turn the call over to Barbara for closing comments.

Barbara Rentler: Thank you, Adam. While second quarter sales and earnings were above our expectations, we remain keenly aware of the uncertain external environment. In addition, we recognize that delivering the great values that our off-price customers have come to expect from us is more important than ever, especially given the continued pressures they face from the highest cost on necessities. Thus, we will stay laser-focused on maximizing our prospects for market share gains by providing shoppers with the most quality branded bargains in the marketplace. At this point, we’d like to open up the call and respond to any questions you may have.

Operator: Thank you. At this time we will be conducting the question-and-session. [Operator Instructions] And the first question comes from the line of Matthew Boss with JPMorgan. Please proceed with your question.

Matthew Boss: Great. Thanks and congrats on a really nice quarter. So Barbara, could you elaborate on the progression of business trends that you saw during the quarter? And just progress with your initiatives to amplify value, as well as brands into the back half of the year? And then for Adam, on gross margin, could you just maybe speak to the mark on opportunity based on current availability of goods or how best to think about gross margin drivers in the back half?

Michael Hartshorn: Matt, I’ll start with comp performance during the quarter. Cadence-wise for us, comps were strongest mid-quarter, both on a single year and a multiyear stack basis.

Barbara Rentler: And then in terms of progress on the value strategy, the stronger value offering is definitely resonating with our customers. So in the fall season, we’re going to continue to build on improving that value offering that we have out there now. And again, I just said it in my opening, the customer is really dealing with high cost on necessities. And I think the way for us to gain market share is really to continue down this value path.

Adam Orvos: And Matt, this is Adam. I know your question about the balance of the year and mark on specifically. So let me just walk you through some of the parts. So, we talked about DC cost leverage by 70 basis points in the quarter. We continue to see higher productivity in our distribution centers. We’ve invested in automation there. The hiring and retention environment is strong. We opened a newer DC in Houston that’s providing a lift. Buying costs were also favorable, but lower incentives were the primary factor there. And then domestic freight, as we expected was a slight benefit to us and ocean freight was neutral regarding mark on specifically. So the pressure to all of that is our merchandise margin, right? We voiced about our brand strategy that continues to ramp up as we move through the year and merchandise margin dropped by 80 basis points, and we expect that pressure to step up as we move into the second half — second half of the year.

Matthew Boss: Great color. Congrats again.

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

Chuck Grom: Thanks, very much. Great quarter. I was wondering if you could maybe touch on the cadence, talk about anything on the back-to-school results thus far. And also within categories, if you could speak to the home and also where you are on the apparel trends in the quarter? Thank you.

Michael Hartshorn: Sure. It’s Michael Hartshorn. The cadence wise, we wouldn’t say any — we wouldn’t talk about inter-quarter trends going into Q3. But as I said, comps were strongest mid-quarter for us. In terms of merchandise categories, Cosmetics and Children’s were the strongest areas while Home performed in line with the chain. Shoes were slightly below as it lapped tough compares from last year. And then overall, Apparel was relatively in line with the chain average.

Operator: And the next question comes from the line of Mark Altschwager with Baird. Please proceed with your question.

Mark Altschwager: Good afternoon. Thank you taking my question. So just thinking about the updated guide here, you beat the high end of your EPS guide by $0.10 in the quarter. I think you’re raising the high end for the full year to $0.15. Second half comp still in that 2% to 3% range. So maybe just talk us through any key changes to the operating outlook for the back half of the year, key margin drivers for the back half versus what you were expecting 90 days ago? I think you mentioned some additional efficiencies, maybe expand on that and just anything else you can call out? Thank you.

Michael Hartshorn: Sure. On the — nothing has really changed on the back half of the year versus how we originally planned the year. The one thing that did change, you’ll notice for the quarter, we did flow through the beat in the second quarter through the year. And then based on some of the expense initiatives and cost savings initiatives, we gave an updated view of the efficiencies across the business. We’re continuously looking for ways to be more productive, but it’s even more important given the planned merchandise margin pressure from our branded strategy. So what you see is, we had a projection when we started the year, we’re actually a bit ahead of that, and we flowed that through the back half guidance.

Mark Altschwager: Thank you.

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

Paul Lejuez: Thanks, guys. I think you said basket was up, curious if you could maybe talk about AUR versus UPT? Also curious if you could share where you are right now on a dollar basis? What is the current AUR in the business, current basket size? And then second, just curious, I know you said your customer is under pressure, but I’m wondering if you noticed any change in your customer behavior in the second quarter versus the first quarter or how you were thinking your customer might behave when you gave guidance originally? Thanks.

Michael Hartshorn: Sure, Paul. First, on the AUR for the quarter, the comp was driven by a combination of higher traffic and a higher basket. The average basket was slightly up as average unit retails were partially offset by fewer items per transaction. On the AUR, we’re not focused on driving specific price points, but rather we’re focused on offering a good, better — good, better, best product assortment at a great value. We don’t give specifics on the actual AUR or the basket. In terms of health of the consumer, I would say, based on our performance since it improved in the second quarter, what I would say, though, for us, it’s obviously – we saw an improvement. But judging from industry reports, both in the first quarter and now year-to-date, the customer is clearly seeking value now, especially with, what I’d say, stubbornly persistent inflation on necessities and also an uncertain macro economy.

As a result, now more than ever, we believe price value is critical for her when determining where to shop.

Q – Paul Lejuez: And did I hear right thing that AUR was up a little bit, UPT is down?

A – Michael Hartshorn: Yes, correct.

Q – Paul Lejuez: But can you just maybe tie that together with the focus on value, providing the customer more value. Is there a mix impact to that AUR? Just curious what would explain it being higher as you offer more value?

A – Michael Hartshorn: Sure, Paul. It’s about – it aligns with our branded strategy. Again, we’re focused on providing more brands at a great value, and that’s led to the slight increase in AUR.

Q – Paul Lejuez: Got it. Makes sense. Thank you.

Operator: And the next question comes from the line of Michael Binetti with Evercore ISI. Please proceed with your question.

Michael Binetti: Hey, guys. Thanks for taking our question. Congrats on a great quarter. I guess just on the — maybe you could unpack that merch margin for us a little bit more. I thought at one point that the pure product margin was planned to have the most year-over-year pressure in the second quarter, since I think you started rolling out some of the merchandise strategy in the back half of last year. I know you do include promotion in that line. So maybe just unpack that a little bit for us. And if that your product margin pressure is better or worse as you get into the second half? And then separately, I know you always speak to about a point of upside on the same-store sales, driving about 10 or 15 basis points of leverage.

I think you guys got about 70 basis points on the 1 point beat to the top end there. Maybe you could break down the contributors there to the favorability and maybe any thoughts on why that wouldn’t continue in the back half? Or if you do think if there is a better flow-through opportunity?

Michael Hartshorn: Just to start with the flow-through. The upside was obviously driven by sales. And to your point, that’s about 10 to 15 basis points for every point in sale. But we also saw a better improvement on some of the expense initiatives and cost initiatives we have in the business. And so based on that, that’s the upside that we forecasted in the back half of the year.

Adam Orvos: Yes, Michael, this is Adam. I’ll jump in on the margin side of the question, right? We did start our efforts at the end of last year, but really the step-up was this year, right? And that’s why you saw gradual pressure in Q1. We were about 15 bps worse than the prior year, but some of that, we still had some residual ocean freight benefit that was helping that number in Q1. We reported the 80 basis points in Q2. And as I mentioned, as we continue to increase that penetration of brands and going after more brands, we’ll see additional pressure in the back half.

Michael Binetti: Thank you.

Operator: [Operator Instructions] Our next question comes from the line of Alex Straton with Morgan Stanley. Please proceed with your question.

Alex Straton: Great. Thanks all for taking the question. Congrats on a nice quarter. Just on expense and cost savings that you say you’re finding and you expect more in the back half. Can you just give us a little bit more color around some examples of what those are? And are they more COGS benefits or SG&A benefits or both? Thanks a lot.

Michael Hartshorn: Sure. Just to talk through, I guess, a couple of examples. We’re certainly leveraging automation in the DCs. We continue to make improvements there, and throughout the business, including DCs and stores. Just to give you a couple of examples in the DCs. We’ve implemented automated vehicles to move inventory, robots to build cartons as well as automated systems to sort inventory to the stores — at the store, which would be an SG&A and not COGS. We have a number of things to augment the work for associates. We piloted self-checkout in select locations. We have introduced new handheld devices to check inventory, to take markdowns into managed tasks and stores and are currently rolling out flexible scheduling that will help us be more productive in the stores.

Adam Orvos: And Alex, building on that a bit, we’ve found efficiencies in multiple parts of the P&L. I’d probably speak to domestic freight as being one primary example, where given what we’re seeing from our rate structure and our contracted rates, a little bit of help from fuel costs. We thought it made sense to flow that through specifically in the back half.

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

Lorraine Hutchinson: Thank you. Good afternoon. Can you quantify the merchandise margin decline that you’re expecting in the second half? And are there additional operating efficiencies available to offset any further merch margin pressure into next year?

Adam Orvos: Lorraine, this is Adam. We’re not quantifying the amount of the merchandise margin impact other than just saying it will — we expect it to be higher than the 80 basis points that we reported in Q2. I think, offsets that we’ll have in the back half, I just commented on domestic freight. That’s probably the primary category. Michael touched on distribution cost and our improvement there. That would be another category. As we’ve experienced so far in the first half, because we’re up against still a significant year from a profitability standpoint. So we expect to have — with these projections, some good news in incentive costs as we move into the back half, I would say those are probably the biggest moving parts in terms of offsets to the merchandise margin.

Michael Hartshorn: And Lorraine, it’s at this point, too early to talk about 2025. We’re just starting to go through our budget process for next year.

Lorraine Hutchinson: Thank you.

Operator: And the next question comes from the line of Dana Telsey with the Telsey Advisory Group. Please proceed with your question.

Dana Telsey: Hi. Good afternoon everyone. As you think about the ladies business, the home business, any updates on their performance and your focus, Barbara, on brands in each of those businesses? And in mind of this focus on value, how are you thinking about pricing as we move forward into the back half of the year? Thank you.

Barbara Rentler: Sure. So on the ladies business, we’re obviously — that’s one of our focuses in terms of shifting our assortments, getting more branded, adding more values because the ladies business, as you know, is critical to the entire business. So again, we’ve learned — we keep learning as we’re going, adding a lot of new vendors, trying different values. And so, that’s just going to kind of continue ladies and we’re going to adjust as we need to as we go. The value equation, I would — we’ve got value in pricing. When we talk value on pricing, I’m most afraid to say it. So our focus in all of it is on the value. The value compared to out the door and other retailers, the value, depending upon what segment I’m in, whether I promotional department store or [indiscernible], we’re focused on the value not so much the price.

In home, the home business isn’t as branded obviously in the outside world as ladies or men’s or even kids for example. So in the home business, we’re really more focused on specific businesses where it is branded in the outside world. So we want to make sure that we’re — again, we have a good compare when you’re comparing against a brand. We’d be able to have a good compare so that we could go in and show again — show really incredible value to the customer because the value strategy is our market share strategy. I mean, where we’re figuring it out and every business is at different points in the process. But what we figuring it out is, it is really driving sales. So we’re just going to continue to do it. In terms of absolute pricing, we’re not really planning an AUR.

We’re really planning a value. Now with that, we will have good, better, best brands in the assortment because we don’t want to alienate any customers. So we want to make sure we still have a broad assortment of price points, where we have a broad assortment of products in the stores. So we don’t want to lose that because that’s an important part of the treasure hunt. But in terms of absolute pricing, as Michael said before, we’re not planning specific AUR. So really looking at the outside world and comparing that. Recognizing in front of us, we can see now as retailers are reporting their sales and talking about promoting going forward. We’ll run through that same drill the merchants do all the time, competitive shop, track outdoor pricing, out-the-door pricing and follow that same path.

But it really — it really is a value strategy. You want her to come in and to feel like she got a really an incredible deal every day of the week. So again, different businesses at different points in the journey, but that’s kind of where we are at this moment.

Dana Telsey: Thank you.

Operator: And the next question will come from the line of Brooke Roach with Goldman Sachs. Please proceed with your question.

Brooke Roach: Good afternoon and thank you for taking our question. Barbara, can you talk to the level and quality of inventory available in the marketplace today? Are you seeing any additional opportunities for new vendor partnerships. And are you seeing inventory opportunities come in at a better mark on rate for margins? Thank you.

Barbara Rentler: So in terms of just inventory availability, the ability remains favorable. It’s pretty broad-based, as I would normally say some businesses having more than others, but it’s still out there. In terms of quality itself. One is just availability. One is the quality of availability. Again, it’s kind of in all the brands here of products that there are. Brooke, what was the second question you said?

Brooke Roach: Whether or not you’re getting new vendors?

Barbara Rentler: Sure. Yes. In terms of vendors, vendors are — first of all, we’re out expanding on our vendor base. That’s one part of our adding value into the mix. Vendors are — we’re definitely adding new vendors to answer your question, and vendors are actually with business being challenging, particularly in certain segments of the market, vendors are looking to build relationships and to do more business. And so with that, obviously, cost price as a sector is certainly a sector that is continuing to do more business. And so, I would say we’re — from that — the total package together, we’re probably in the right place at the right time in terms of going out to add new vendors and to build out these relationships.

Operator: And the next question will come from the line of Bob Drbul with Guggenheim. Please proceed with your question.

Robert Drbul: Hi. Good afternoon. Just a couple of questions, quick ones. Can you talk a little bit about shrink and sort of how it’s performing within your business? And — just wondering if you could comment on California stores and just sort of how they’re doing versus the chain? And I guess the third one that I’d be curious about, just like labor and wage rates and wage pressures that you’re seeing throughout your chain? Thanks.

Michael Hartshorn: Sure. So let me — I’ll take all of these. So shrink, let’s start with shrink. It continues to be what I’d say, a very difficult retail theft environment, and we’re certainly not immune to that. We have and we’ll continue to invest in loss prevention initiatives to hold that shrink at bay. But frankly, we’re also focused on our own execution of the measures we do have in place today. We will true-up shrink in the third quarter, and our guidance at this point assumes some deterioration from last year. On comps geographically. So for — as we said in the commentary, geographic was fairly broad-based. For our largest market, California outperformed the chain, while Florida was in line, Texas was slightly below the chain average, and that was partially due to the impact from Hurricane Beryl that rolled through during the quarter.

On wages, I would say, generally speaking, wages in our stores and DCs are relatively stable. Most of the wage increases this year have been related to statutory wage increases in certain markets and states. And so, what you see from us is most of the wage, we’ll continue to take a market-by-market approach to staffing and where appropriate, we’ll adjust wages if we need to. You heard Adam talked earlier about productivity in the DCs, part of that productivity improvement is due to a very stable labor market in the DC sector, which means lower turnover for us and more productivity from the more tenured associates.

Robert Drbul: Okay. Thank you.

Operator: And the next question comes from the line of Adrienne Yih with Barclays. Please proceed with your question.

Adrienne Yih: Great. Thank you very much. Let me add my congratulations. Barbara, I was wondering if you can talk about just what you’re seeing in your target consumer behavioral patterns. Obviously, we’ve heard a lot that things are going back to kind of pre-pandemic, the highs when the traffic days are very high, the lows are a little bit quieter, buying closer to need. If you can talk a little bit about that. And then as the promotional or the environment gets more promotional at retail, is your strategy to be even — to maintain the spread, your historical spread? Or do you want to get a little bit even sharper still to be able to drive incremental market share gains? Thank you.

Michael Hartshorn: On the traffic patterns, we haven’t seen a significant change. Certainly, the events are more important. But as far as traffic during the quarter or during the week or during the weekends or towards events. We haven’t seen a significant shift.

Barbara Rentler: And as the environment gets more promotional, we don’t have a, I would say, a standard historical spread. What the merchants do is, they’re outcome shopping they’re seeing what’s going on, they’re monitoring what’s happening. And sometimes when you’re doing that, you have to also anticipate where you think a retailer is going to go and especially going to [indiscernible]. But — so we don’t have a historical read. We’re going to price it as sharply as we possibly can price it. So we’re going to look at that. We’re going to make those decisions — educated decisions. But with that, we’re seeing that this value strategy is really the path for us. So we’ll do it, obviously, the way we have historically done in terms of process and then be setting the value that we think is really strong.

Adrienne Yih: And then one clarifying question on the AUR and the branded aspect of it, how much more branded product do you have — however you want to characterize it, this year over the last. And the AUR on the brands is higher, but are the merch margins relatively flat? Are they lower just because it’s branded product? I’m just curious how the — what the merch margin match the AUR direction? Thank you.

Adam Orvos: Adrienne, this is Adam. I’ll jump in. We wouldn’t speak to kind of the mix of our business, how much is branded and non-branded. But the merchandise margin pressure that I spoke to is all related to the brand strategy and that step-up in penetration.

Adrienne Yih: Okay. Fantastic. Thank you. Very helpful. Best of luck.

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

Irwin Boruchow: Hi, everyone. Just a quick question, I guess, for me on the branded strategy. Clearly, it’s successful. The comps you guys have been up late last year and early this year are pretty robust. I guess just at a high level, I know you’re not going to give us your plans for 2025 and beyond. But is this a strategy that has multiyear duration? Is this more of a strategy that you kind of unlock it, you just let it ride as it is? I’m just kind of curious is there a step functions to it as we kind of move forward in terms of mix without quantifying that? So just at a high level, I would be curious.

Barbara Rentler: I think we’re still learning on the brand strategy. What the right mix, what the right penetrations are by business. So I don’t think we could quite answer that today. Obviously, our goal is to drive top line sales. But we got a lot of learning so far. We had a lot of learnings in spring. I’m sure we’ll have more learnings for fall. And we’re going to build off the success of those learnings based on what the customer is telling us.

Irwin Boruchow: Got it. Thanks, Barbara.

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

Marni Shapiro: Hi, guys, congratulations on the quarter. I was curious if we can talk about the kids business for a minute. The assortments have looked really good in the stores, especially some of the [indiscernible] assortments, which has been tough. Is the — are the recent trends inclusive of back-to-school. And if not, is — can you give us any kind of side line into what back-to-school look like in August? And then I know you talked about customers not changing their behavior or not buying closer to need. I’m curious if you’re seeing any delay in their purchasing on big seasonal items like a back-to-school or seasonal holidays like July 4 or Halloween or anything like that? Thank you.

Barbara Rentler: Okay. First of all, thank you for the compliment on Kids, [indiscernible]. Look, at this point, we’re not going to talk about back-to-school because clearly, we’re still in it. So there’s still some in front of us as we go. In terms of delays in purchasing, I mean, you know there were some slight calendar timing shift. What I would say in terms of I’m buying it ware now, I’m buying some stuff ware now like [indiscernible] short scenario. I’m going to buy a new [indiscernible] to get to go back to school in. I think we’ve seen that go on for a couple of years now. I think you have to [indiscernible] mix and make a conversion. So I think actually, if we would use that example of short — denim shorts and long denim, they’re actually both performing pretty well.

And I think that has to do perhaps with the balance of the amount that we actually own. But kids still go back to school and shorts need that kind of that one last set and then the trick is to get [indiscernible] too much.

Marni Shapiro: Great. And too early to tell on things like July 4, did they buy [indiscernible] blue, very late or Halloween you’re not seeing a change there. How people come into the store. And sometimes in the past, I feel like we’ve seen customers buy really far in advance of holidays. But lately, I’ve been hearing from — seeing just in stores that there’s more of like a mad rush the week before whatever that event is, if that makes sense?

Barbara Rentler: So you’re saying, Halloween had sold much earlier three years ago than itself today. I think it depends on what the events this morning. I think certain things — certain holidays can sell early and go all the way through and then some people, it’s not quite as top of line and buy it at the end. But that moves — that can move the year-to-year. I’m not quite frankly, that also has a lot to do with the assortment that you put on the floor, how good it is whether it’s….

Marni Shapiro: Yes. That make sense. Best of luck with fall, guys.

Adam Orvos: Thank you

Michael Hartshorn: Thank you.

Operator: And the next question comes from the line of John Kernan with TD Cowen. Please proceed with your question.

John Kernan: Thanks for taking my question. Congrats on a great quarter. So Adam, when you think about the long-term margin potential of the business, there’s been some tremendous flow-through on the three comp in Q1 and now the four comp in Q2. To the bottom line, how do you think about the long-term operating margin structure of the business? You’ve been as high as 14% in the past. Obviously, there’s been a lot of wage inflation and supply chain inflation. I’m just wondering what’s the ceiling for this business from a long-term margin perspective?

Adam Orvos: John, I’d say nothing’s changed, right? We still think an additional point of comp gives us 10 to 15 basis points of margin expansion and that really hasn’t changed. The long term — where do we get to long term, we need to keep on delivering outsized comp sales gains. That’s really going to be the primary driver, right? And then there’s — I guess, the other variable is, how does some of the inflationary pieces play out? What if fuel rates look like long term, et cetera, is probably the biggest moving part coupled with wages. And do they continue to stay in somewhat of a stabilized environment. So those are probably the biggest things from a long-term standpoint.

John Kernan: That makes sense. Just a quick follow-up. There’s been a fair amount of immigration in the last several years. You’ve got a lot of stores in some of those border states. Have you seen a customer seeking value and benefited from that population growth in a lot of those states?

Michael Hartshorn: Specifically, as it relates to border stores, I mean, California and Texas have gone back and forth as being strong, strong drivers of growth over the years. You saw in the quarter, for instance, California outperformed, Texas underperformed. It’s kind of been like that over the past few years. Certainly, we do very well on the border with cross-border traffic that’s some of our best and highest volume stores, but immigration specifically, I don’t think we could point to across broad swaps of the regions.

John Kernan: Got it. Thank you.

Operator: And the next question comes from the line of Aneesha Sherman with Bernstein. Please proceed with your question.

Aneesha Sherman: Thank you and congrats on the good quarter. So Barbara, last quarter, you talked about apparel having underperformed for a while. Now it’s in line with chain. As you go into Q3, are you happy now with where you are on the brand’s assortment? Or do you see continued progress even in season between Q3 and Q4 as you get through the back half of the year? And then I have a quick follow-up, Adam or Michael, on the incentive comp. You’ve now beat plan for two quarters. Based on your current raised guidance for the back half, do you expect to still see incentive accruals benefit in the back half? Or do you see that benefit gradually moderating based on the performance so far? Thanks.

Barbara Rentler: In terms of apparel underperformance and now apparel being in line with the chain, apparel is in line with the chain. Ladies, however, is still below the chain average. So in all the areas, we’re expecting to see more progress in apparel as the year goes on. So we’re building upon the learnings, building upon the things that the customer is voting for. And so I think that’s going to be for the next six months for all it takes us to really truly understand it. But in grand total, it was in line. But as you know, Children’s outperformed. So Ladies underperformed.

Adam Orvos: And Aneesha, on the incentive piece, with the guidance that we’re providing, we would still expect to see some incentive benefits. So again, it’s we’re going up year in 2023 where we significantly exceeded our financial plans, while we feel good about how we’re tracking. We’re up against a really outsized year.

Aneesha Sherman: Okay. Thank you.

Operator: And the next question comes from the line of Corey Tarlowe with Jefferies. Please proceed with your question.

Corey Tarlowe: Great. Thanks. Barbara, I think you mentioned in response to a prior question that you’re expanding the number of vendors that you have. Is there any way to put into historical context what the amount of new vendors you’re adding might look like versus history? And if there’s any incremental buying expense or people that you had to bring on to accommodate that?

Barbara Rentler: I mean — I really — I can’t give you a specific number. And quite frankly, when it comes to vendors, some vendors go out of business, some people go in business or adding more vendors. So it’s really hard for me to quantify to — quantify that for you.

Corey Tarlowe: Okay. Understood. And then just as it relates to shoes, is there any way you could talk about within the category, what you saw in lifestyle or athletic shoes versus brown shoes perhaps?

Barbara Rentler: Sure. First of all, shoes underperformed the chain, but was up against a very, very large comp. I think it was a little mixed on the way into the season. Athletic overall has been pretty good. As has active meet certainly some brands better than others. But overall, athletic and active has been good. It’s been a little bit more mixed on brown shoes depending upon for woman’s, ladies or kids. But we did see the run-up in flat handles, we did see block yields. We did see the sandal things take off. And we’re a little bit more strategic in our transition as we’re going into fall because last year we slowed foots early. And they did not perform early. And this year, we made a shift in timing.

Operator: And the next question comes from the line of Jay Sole with UBS. Please proceed with your question.

Jay Sole: Great. Thank you. My question is about international. Some of your competitors have talked about maybe doing deals or they have announced deals with off-price retailers in international markets. Have you explored that? I mean what are your thoughts about Ross expanding into international markets?

Michael Hartshorn: Good question. I wouldn’t comment on the deals. But for us, we have — we’re a 2,100 stores. We think we can grow 2,900 Ross, 700 dd’s, plenty of room to grow in the U.S., and our focus is on growing that store base profitably over the next number of years. So that’s where we’re putting our energy and our focus.

Jay Sole: Okay. Thank you so much.

Operator: And our final question comes from the line of Laura Champine with Loop Capital Markets. Please proceed with your question.

Laura Champine: Thanks for taking my question. You called out additional efficiencies benefiting your EPS guide in the back half and then gave some examples of those. How long is the tail there? Meaning, is this part of a longer-term program that will benefit earnings and margins into next year? Or should we just see the positive benefit of lapping in the first half and then it flattens out?

Michael Hartshorn: I’d answer that in a couple of different ways. First, these are — they’re not — there’s a number of initiatives and they all have different timing. Some will go into next year, some will help us in the next year. Some will run out this year. But then we have the next generation of efficiencies that we’ll work on for next year as well. As we said, long term, we think we can continue to gradually grow EBIT margin at a 3% to 4% comp, and that hasn’t changed.

Laura Champine: Got it. Thank you.

Operator: There are no more questions at this time. And I would like to turn the floor back over to Barbara Rentler for any closing comments.

Barbara Rentler: Thank you for joining us today and for your interest in Ross Stores.

Operator: And ladies and gentlemen, that does conclude today’s teleconference. You may disconnect your lines at this time. Have a great day.