Ross Stores Inc (ROST) — Q2 2022 Earnings Call Transcript

Good afternoon. Joining me on our call today are Michael Hartshorn, Group President and 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 2022 performance, followed by our updated outlook for the second half and fiscal year. Afterwards, we'll be happy to respond to any questions you may have. As noted in today's press release, we are disappointed with our sales results, which were impacted by the mounting inflationary pressures our customers faced as well as an increasingly promotional retail environment. Earnings came in above our guidance range, primarily due to lower incentive costs resulting from the below-plan top line performance. Total sales for the period were $4.6 billion versus $4.8 billion in the prior year period. Comparable store sales were down 7% compared to a robust 15% increase in last year's second quarter, which was our strongest period of 2021. Earnings per share for the 13 weeks ended July 30, 2022, were $1.11 on net income of $385 million. These results compared to $1.39 per share on net earnings of $494 million for last year's second quarter. For the first 6 months, earnings per share were $2.08 on net income of $723 million. These results compared to earnings per share of $2.73 on net earnings of $971 million in the first half of 2021. Sales for the 2022 year-to-date period were $8.9 billion with comparable sales down 7% versus a strong 14% gain in the first half of 2021. Shoes and men's were the strongest merchandise areas during the quarter. Both Florida and Texas were the top-performing regions, mainly due to the outperformance of our border and tourist locations. We are making merchandising adjustments to meet changing customer demand. That said, the actions we have taken thus far were unable to offset the mounting financial pressures on our low- to moderate-income consumers and the impact on our business from an increasingly promotional retail environment. Similar to the first quarter, dd's DISCOUNTS performance in the second quarter continued to be well below Ross's, mainly due to today's escalating inflationary pressures that are having a larger impact on dd's lower-income customers. At quarter end, total consolidated inventories were up 55% versus the same period in 2021. While average store inventory during the quarter was up 15% versus last year, we operated with very similar levels when compared to pre-pandemic. Packaway merchandise represented 41% of total inventory versus 30% in the same period of the prior year when we used a substantial amount of packaways to meet robust consumer demand. Additionally, supply chain congestion continued to ease during the second quarter, resulting in above-plan early receipts of merchandise that we stored in packaway and will flow to stores throughout the fall season. Looking ahead, we expect these early receipts to wane and to have the appropriate inventory levels in the fourth quarter. Turning to store growth. Our 2022 expansion program is on schedule with the addition of 21 new Ross and 8 dd’s DISCOUNTS locations in the second quarter. We remain on track to open a total of approximately 100 locations this year comprised of about 75 Ross and 25 dd. As usual, these numbers do not reflect our plans to close or relocate about 10 stores. Now Adam will provide further details on our second quarter results and additional color on our updated outlook for the remainder of fiscal 2022.

Thank you, Barbara. As previously mentioned, our comparable store sales were down 7% for the quarter as a decline in the number of transactions versus the prior year was partially offset by an increase in the size of the average basket. Second quarter operating margin was 11.3% compared to 14.1% in 2021. This decline was due to a combination of deleveraging effect on expenses from the decrease in same-store sales, higher markdowns and ongoing headwinds from higher freight costs that did not begin to escalate until the second half of 2021. These expense pressures were partially offset by lower incentive costs that were much higher last year when we significantly outperformed our plans. We also saw a decline in COVID expenses versus last year's second quarter. Cost of goods sold during the period increased by 320 basis points. Merchandise margin declined 205 basis points due to both higher ocean freight costs and markdowns. Distribution costs increased 85 basis points due to a combination of unfavorable timing of packaway-related expenses and deleverage from our new distribution center, while occupancy and domestic freight rose by 55 and 35 basis points, respectively. Partially offsetting these higher costs were buying expenses that improved by 60 basis points, again due to lower incentives. SG&A for the period levered by 40 basis points as deleverage from the lower comparable sales was more than offset by lower incentive and COVID costs. During the second quarter, we repurchased 2.9 million shares of common stock for an aggregate cost of $235 million. As previously announced, we expect to buy back $950 million of common stock during fiscal 2022 under our 2-year $1.9 billion repurchase program that extends through fiscal 2023. Now let's discuss our outlook for the remainder of 2022. As Barbara noted in today's press release, given our recent results as well as the increasingly unpredictable macroeconomic landscape in today's more promotional retail environment, we believe it is prudent to adopt a more conservative outlook for the balance of the year. We are now forecasting comparable sales for the 13 weeks ending October 29, 2022, to decline 7% to 9% on top of a strong 14% gain last year. For the fourth quarter, same-store sales are planned to be down 4% to 7% versus a 9% increase in the last quarter of 2021. As noted in our press release, if the second half performs in line with these updated sales assumptions, earnings per share for the third quarter is projected to be $0.72 to $0.83 versus $1.09 last year and $1.04 to $1.21 for the fourth quarter compared to $1.04 in 2021. Based on our first half results and second half guidance, earnings per share for fiscal 2022 are now planned to be in the range of $3.84 to $4.12 versus $4.87 last year. Now let's turn to our guidance assumptions for the third quarter of 2022. Total sales are forecasted to decline 4% to 7% versus the prior year. We expect to open 41 locations during the quarter, including 29 Ross and 12 dd's DISCOUNTS locations. Operating margin for the third quarter is planned to be in the 7.8% to 8.7% range versus 11.4% in 2021, primarily reflecting the deleverage on the same-store sales decline. In addition, merchandise margin is forecast to be pressured by ongoing increases in ocean freight costs. We are also projecting higher markdowns to right-size our inventory levels given the lower revenue forecast and adjust pricing as we expect an increasingly promotional retail environment. Lastly, third quarter operating margin also reflects unfavorable timing of packaway-related costs. Interest expense is estimated to be approximately $400,000. The tax rate is projected to be about 24% to 25% and diluted shares outstanding are expected to be approximately 345 million. Finally, I want to emphasize that Ross continues to be in a strong financial position with significant resources to manage through today's challenging economic and retail landscape. Our healthy balance sheet includes $5.2 billion in total liquidity with $3.9 billion in cash and $1.3 billion in untapped borrowing capacity. We also continue to return large amounts of cash to stockholders with a cumulative total of $1.4 billion expected to be paid out under our stock repurchase and dividend programs in 2022. Now I will turn the call over to Barbara for closing comments.

Thank you, Adam. We are facing a very difficult and uncertain macroeconomic environment that we expect will continue to strain our customers' discretionary spending. Though 2022 will likely remain a challenging year for our company, we believe our value-focused business model and our strong financial position will enable us to manage through these economic pressures and rebound over time. At this point, we'd like to open up the call and respond to any questions you may have.

So you've included a better fourth-quarter comp versus 3Q in your guidance. Can you talk about the areas of opportunity that you see in the fourth quarter? And also, what gives you confidence that things will improve?

It's Michael Hartshorn. First, on the fourth-quarter guidance alone, if you look at the multiyear compare, we did a 9% last year. So it's one of the easiest compares, which is really the driver of the 4% to 7% comp this year in guidance.

So Lorraine, regarding opportunities in the fourth quarter, I believe there is potential in gifting since we didn't fully capitalize on some of our gifting areas last year.

Sorry if I missed it, but curious about the performance of home versus apparel and if there were any notable trends in those categories, how they trend throughout the quarter, get worse, get better. And I'm also curious if you think the comp shortfall was all macro-driven or if you attribute any sort of execution issues that might have also factored in.

Home sales are relatively in line with the chain average and the performance of home and apparel was pretty similar for the quarter. Both businesses had areas of business that were strong and areas of business that were weaker, so they were relatively in line.

Paul, on the macro, I mean, of course, there are things that we know we could have done better in the business. In terms of trends during the quarter, we outperformed earlier in the quarter, both on a single-year and a multiyear basis. And I think if you looked across retail, I think people weakened in the back half of the quarter. Obviously, fuel prices peaked in June so a portion of the performance is certainly driven by the macroeconomic environment.

I think some have also seen a little bit of an improvement at the end of July into August. Anything you can share on that front?

Yes. We wouldn't comment on trends within this next quarter.

Okay. Barbara, during the last call, you mentioned a significant change in the categories and products that Ross shoppers were purchasing, especially by April and May compared to the beginning of the year. I understand you were working throughout the second quarter to adjust inventory and shift towards those categories. Could you share where you currently stand in that process, the progress you've made in the second quarter, and your assessment of that progress? Is there still more work to be done in the second half of the year?

The shift was to move from casual products to offering more items that customers wanted. This included a greater focus on wear-to-work options for both men and women, as well as more social and going-out products, whether in shoes or ready-to-wear. This was the main change we made in our apparel offerings. While we've made some progress, there's still work ahead. I feel more optimistic about our current position compared to Q1, as we've been able to expand our offerings after feeling somewhat behind. Looking forward, we will respond to customer demand. In this challenging environment, with high levels of promotions, we will pay attention to what customers indicate they want and adjust accordingly. We believe we now have a better balance between casual products and wear-to-work items for both men and women.

Fantastic. That's really helpful, Barbara. And just one follow-up on the product. Are you starting to see new vendors come to Ross? Maybe vendors that you didn't work with last year or in 2020? I'm just wondering if the more robust buying environment is yielding an opportunity to maybe work with additional vendors that you haven't seen for the last year or two.

The answer to that is yes. Both new vendors and those we haven't seen availability from in a while are now offering a wide range of products. There's a significant amount of merchandise available in the country. Vendors are eager to grow their businesses, and this presents an opportunity for those who haven't previously worked with us. So yes, I believe this trend will continue given the current inventory levels nationwide.

Barbara, how do you balance taking advantage of the great deals in the marketplace today versus waiting for better deals down the road? Because I imagine the deals today look a lot better than they did a few months ago than those you're getting today. And I guess as a follow-up, when should we expect those to start showing up in the P&L for you guys? Is that a third and fourth quarter phenomenon? Or do we start to see that in '23?

Okay. Just first, in terms of the deals, it was a good deal today just to get better as we go. The merchants are really out there in the market shopping to see what's out there, shopping to see what the availability is. And to assess where the product is the best product is going to happen. There is a lot of product out there. What you really want to do is get the best product at the best price, so the merchants are out there assessing what that looks like. And then you really want to get the most desirable product, right? So if it's the best product and you think that's a really sharp price and something you haven't been able to get, you're going to pull the trigger and buy it. If there's a lot of products where there's lots and lots of availability, you might buy some metered in, you might pack some away for the following year. I mean, it's not just one kind of cookie-cutter answer here. I think that the key thing now for the merchants is really to be out there understanding the promotional environment, right? So when you're buying goods now, what you really have to be attuned to is what is the right value. So the buyers have to be very strategic in terms of buying the right merchandise at the appropriate value for customers, given the current inflationary environment. So I think it's supply, and it's really studying what's going on in the outside world with so much inventory sitting in retail stores, with the inflated inventory and a more promotional environment, which I think we all believe is probably going to get more heightened in the fourth quarter. So there's a variety of things that need to happen there, so I don't think it's quite the cookie-cutter. So to get to, I think we'll see some for this year. I think there'll be some packaway for spring, and there may even potentially be some packaway for fall. But we have to wait and see what that looks like.

Great. Barbara, so larger picture, on the mounting inflationary pressure that you cited on your customer, how does this affect the value and convenience elements of your model? Or is there anything that you're seeing today that's different than past times of consumer disruption where your model actually outperforms over time? And then Adam, while sales are below your target model today, are there any structural underlying changes to the models margin as we think about multiyear in your view?

So Matthew, in terms of mounting inflation, I think over the last few months, we had initially made strategic price increases. And I think with the slowing consumer demand and the escalating inflationary pressures, it all comes down to value. And so for us to be successful, we really need to make sure that we understand the value of what's going on around us and get ourselves really highly focused on that because that really, in the end, is what will make us successful. Our customer is looking for branded bargains, great values every day. That's what she's come to expect for 40 years, and that's what she expects from us now. So I think that really comes down to the merchants being in the market, understanding the availability, understanding what's going on and then knowing when to pull the trigger and to drive it because that's what helped us from 2008 to 2009. And I think that, that will help us here also in getting ourselves in the right value when the customer is under so much pressure with all the macroeconomic issues that are out there.

And Matthew, this is Adam. So we don't see anything structurally different in our model, still feel bullish about the environment, the retail environment in our model going forward. When we talk about multiyear and think about 2023, specifically, I think the key is we're going to have to see how the inflationary aspects play out in the second half. That's obviously a critical variable. How we plan sales next year, profitability will be highly dependent on that kind of top line assumption.

Matthew, just to add to that, obviously, since the pre-pandemic, the changes have been really around the cost in the business, and those are acutely in 2 different places with wages and transportation, whether domestically or on imports. I think what we expect to see is both the domestic and import costs to come down over time. We're already starting to see some break in those costs here in the back half, especially on the import costs. So I think those will come down, which will be a benefit to us. On the wage front, I think the increases we saw during COVID are structural at the current levels and are at least at this level. What I'd say about the wage market right now is it's still tight, but it is stable, which is much different from where we were last year when we were getting people back to work and there was frenzied demand in the U.S. So I think there is going to be some opportunity in cost as the transportation comes down with the lower demand in the U.S.

Great color. Best of luck.

Great. Barbara, this is sort of more of an opinion question for you. I'm wondering if you believe that the aggressive discretionary promotions at Walmart and Target are maybe temporarily taking some market share away. And I guess in the past, when they aren't as promotional, might that alleviate kind of some of the kind of market share shifts that are going on? So that's my first question. And then for Michael, can you talk about any price pass-through attempts, if any? And I know that you guys have been very, very careful about that. And what does your average unit cost look like at this point kind of heading into holiday?

Adrienne, regarding Walmart, we view all competitors equally, whether it's Walmart, other off-pricers, or Macy's. There are numerous opportunities for consumers to find bargains now, whether from Walmart, Target, or anyone else, making it challenging for us to quantify that. The key focus for us at this moment is to grasp value and determine our positioning in the value equation from the customer's perspective. This marks a shift from our previous approach. It's undoubtedly hard for us to gauge this, but it indicates increasing competition. Both Walmart and Target have been notably aggressive with their pricing to move inventory, and it's our responsibility to understand this dynamic.

On pricing, what we saw during the quarter on AUR, so AURs were up during the quarter. As we said in the commentary, the minus 7% comp was a function of lower traffic and higher basket. The basket was really driven by a higher AUR. What we'd expect for the fall season with us really trying to drive value and with our additional markdowns, we'd expect AURs to moderate versus the first half over the balance of the year.

I guess for Michael or Adam, the sales outlook is slightly better in Q4 versus Q3, though the magnitude of the implied margin inflection, I think, is fairly significant if I'm reading it all correctly. Is that primarily markdowns in Q3 that are expected to be kind of cleared through by Q4? Or are there kind of other things that are going on there?

Just on Q4, as I mentioned in Lorraine's question, that was our lowest comp last year, and that was a function of, one, with supply chain congestion, we didn't get all the goods we wanted to in the stores before the holiday, and there was also an Omicron spike leading up to Christmas that dampened traffic a bit. So that should be a benefit versus last year. And then the fourth quarter was the peak of our cost increases, including incentives, and cost in the business, whether it was ocean freight or wage increases to staff in the store and the DCs for holiday. So we're up against that, and that will be a benefit versus last year.

And Mark, this is Adam. Just to build on that, I think when you look at timing in third quarter versus fourth quarter, ocean freight probably is still headwinds as we move into third quarter just based on the comparison to LY and then probably some favorability, specifically in ocean freight in fourth quarter, and then probably a little bit more timing impact from our packaway cost in third quarter versus fourth quarter.

Barbara, I'd like to ask you if you're seeing any evidence of trade-down in your business. Are you seeing any new customer acquisition above and beyond traditional levels from customers that typically don't shop Ross Stores? And then maybe as a follow-up, you commented on plans to adjust pricing and markdowns in the third quarter. Can you comment on the magnitude and the timeline to achieve a more normalized markdown level and when you might be a little bit more clean?

On the consumer front, we haven't noticed any significant changes. If I look at the transition from the first to the second quarter with our comparisons, they've remained quite stable. The makeup of those comparisons has been consistent as well. When I think back to when we started to compare against last year's stimulus effects, our customer surveys and our performance indicate that the pressure is mostly felt in the lower-end consumer segment. However, among customers who might trade down, our data does not suggest any indications of that occurring.

But we do serve a wide range of customers. Today, we serve a wide range of customers. So we're going to watch trends closely and then we'll make merchandising adjustments accordingly. So it would probably take us some time to see because our range of customers is so broad.

I just want to ensure that I understand. I'm considering the model along with you. As we examine the three-year growth rate in the fourth quarter, it seems like there's going to be a 2- to 3-point step down in your guidance for that quarter. However, you expect markdowns to increase, which I assume will provide a good opportunity to attract new customers. Is that considered deceleration? I'm interested to know what this deceleration is based on. Is it linked to your insights on the industry slowing down? Or, Barb, you mentioned your hope that trade-down will begin to happen after some time. Is that not factored into your fourth-quarter expectations? I would appreciate some clarification on how you are viewing this deceleration.

Michael, this is our biggest quarter, and it is important for us to be cautious, especially after missing our projections for two consecutive quarters. We are approaching the fourth quarter with caution because we anticipate a highly promotional environment.

Right. And also, based off the supply lines in the world, if, in fact, the trends line turns out to be better than we think it is, we're going to be able to chase some of that.

I would like to discuss the packaway inventory, which has increased significantly year-over-year both as a percentage of total inventory and in absolute dollars. While I understand you may not want to provide specifics, could you share some high-level insights on the current buying margins and closeout margins compared to 12 to 18 months ago? Are they beginning to improve? How do they compare with the same period last year or perhaps even further back? Any general insights would be appreciated.

Ike, regarding our packaway inventory, we're seeing an increase in its percentage of total inventory compared to last year, when we utilized a significant amount of it due to heightened demand in the second quarter, which was our strongest comparison for 2021. Currently, our packaway includes early merchandise receipts, primarily home products. Last year, we faced longer lead times and challenges in receiving products on schedule. This year, we adjusted our lead times during the first quarter of our ordering cycle. Interestingly, lead times improved in the first quarter, but we maintained the longer lead times into the second quarter due to concerns about port labor negotiations in L.A. and ongoing COVID shutdowns in China. Fortunately, neither of those risks materialized, and with reduced demand in the U.S., lead times improved. As a result, we have early receipts of home products stored in packaway that will be released in the latter half of the year.

In terms of margins on closeouts and upfront, it's difficult to compare one year to another because it's hard to assess what I purchased this year against historical data, so it's not as straightforward as just presenting the numbers. Therefore, it remains to be seen how the closeout rates will evolve. We have an understanding of the values we need to display and the timing of moving inventory. It requires careful consideration.

Great. I just want to dig into the AUR strategy for the back half of the year. Are you saying that you're going to use AUR as a lever to try to take share and alleviate some of the traffic issue that you've had recently?

Yes. We are focused on delivering value. In recent quarters, we have implemented some strategic price increases. However, due to slowing demand and inflationary pressures, customers have expressed that they don't see sufficient value. Our goal is to align the Average Unit Retail (AUR) with customer expectations and provide greater value. The AUR can fluctuate based on product mix, as it varies depending on the types of products available. The key focus here is on value. Historically, offering more value to customers leads to better performance. Given the pressures on our customers, it's essential for us to understand the external environment and enhance the value we provide.

Good afternoon, everyone. As you see the differences between the Ross and the dd's chain, what are the differences between the 2? And whether it's traffic or whether it's product sell-through and what you're saying? And is your AUR strategy at all different with dd's and Ross in terms of magnitude for the back half of the year?

Dana on dd's, so similar to Q1, dd's performance in Q2 continued to be well below Ross, although up against very robust comps last year. The inflationary pressure here has even a larger impact on the dd's low-income customer. dd's average household income is $40,000 to $45,000. Therefore, this customer is obviously more sensitive to the pressures in fuel and food costs and other inflationary purchases. I would say like Ross, our focus is on delivering the best bargains, but we need to even provide greater value to the dd's customer. And like Ross, we built in higher markdowns in the back half of the year.

I've got a couple. So when do you think that logistics costs will start to ease? And then secondly, you mentioned more clearance activity in Q3. When do you think that inventories come more in line with sales trends, assuming that's a goal given the packaway opportunities you see?

Laura, it's Mike. On logistics cost, we're already seeing them. They already seemed to have peaked and have started to come down. I think it's different between domestic and ocean freight. I think ocean freight, there are a lot of long-term contracts that it may take some time to come down. But certainly, the current noncontract market is below the contract rate. So we're starting to see some movement even on contract rates. Domestic, at least for us, we expect domestic costs to be relatively neutral in the back half because we started seeing them rising in the back half of last year. But I suspect over time, both of them will come down and maybe not to the levels that we saw pre-pandemic though.

And then in terms of the inventory level coming down, we see that moving as it goes throughout the fall. But with that, we have liquidity, and we're comfortable with our liquidity. And so we have open to buy to take advantage of opportunities. So it's kind of two things going on at the same time.

So if I heard it right, the in-store inventory levels at the moment are about in line with what you saw pre-pandemic. So just trying to understand the rationale for the higher markdowns you're doing now as well as into the second half. Is it about your product mix and you're seeing slowing trends in certain categories in the rebalancing? Or is it more about benchmarking to the external environment that's becoming more promotional? What's the bigger driver of the markdowns you expect?

I believe it's a combination of factors. However, the promotional environment has become extremely competitive in a short amount of time, which necessitates action on our products. If we don't respond, we risk not providing the value that our customers are seeking. This has significantly influenced our approach. Additionally, there are always instances where specific businesses may underperform or require more aggressive markdowns. The key is the promotional strategy and closely monitoring the average unit retail in the broader market. Being mindful of these trends is crucial. The quicker we align with the value that customers desire, the more successfully we will perform.

Barbara, you mentioned realigning the value equation to where you think it needs to be. And with that, are there any cost savings initiatives that you have in place to help to kind of underpin the profitability and the profit goals that you have for the remainder of this year?

I would say from an expense structure standpoint, we absolutely have put in places, whether using technology in the stores or automation in our distribution centers, which is our big pockets of expense, we've continued to add new capabilities in stores and in the distribution centers to increase efficiency and reduce costs.

Great. And then as it relates to the store opportunity and real estate and the rent structures and your lease renewals, are you seeing anything incrementally helpful on the expense side there as well?

I wouldn't say there's anything material in that renewal process, but we will continue to open stores. As we said in the comment, we'll open 100 stores this year. And at this point, don't see any changes in our expansion plans. But I would say overall on the renewals and the new rents, there's nothing that I'd call out specifically.

Great. Very helpful. Best of luck.

Can you clarify the comparison between like-for-like AUR and AUR influenced by mix shifts? I'm trying to understand how the AUR relates to the markdown color. Additionally, could you explain the earnings beat in relation to lower incentive costs due to reduced sales? I'm trying to grasp how you were able to profit more despite missing sales targets and what strategies you might have if sales pressure continues to increase.

On the comment on incentive costs, it was a function of lower earnings. If we would have been at this comp level, we would have been fairly close to the low end of the earnings range. In terms of cost structure, certainly, there are other things we can do in the cost structure if we saw a greater decline in sales. They probably wouldn't be great decisions for the long term or going into 2023, but we could certainly get more stark with our expense structure.

And could you just repeat the first question about the AUR markdowns? Could you just say that again?

Yes, sure. So when considering AUR, it's challenging to analyze like-for-like due to your product mix. However, can you share how much of the AUR was influenced by changes in the product mix compared to like-for-like performance?

Part of it was driven by a shift in our product mix because there were areas we couldn't fully capitalize on last year due to supply chain issues, such as shoes, which typically have a higher average unit retail. So, some of this increase is related to that mix, where we didn't have enough supply last year to boost sales. Additionally, we strategically raised prices in certain areas with potential shifts in our assortment. It’s challenging to quantify exactly because we are now comparing casual products to wear-to-work products, the latter of which tends to have higher average unit retails than activewear. Overall, I can only say that it’s a combination of factors. Apparel contributes to a higher average unit retail compared to casual, and shoes also elevated that average due to differing product bases, and our supply constraints last year impacted this as well. Those are the main points I wanted to highlight.

Can you just give a quick update? Are there any changes on the store openings for this year? And then, Barbara, I have a bigger picture question just about the use of packaways in back-to-school. As kids are going back to school, do you think you are well set up in uniform and what they need for back-to-school? And are you seeing a difference in the way she's shopping? Meaning is she buying what she needs and holding off on what she wants? Maybe the new fashion top, but her kids are getting her back-to-school clothing.

Marni, on real estate, no change. We expect to open 100 locations, and that's 41 stores over the balance of the year.

In terms of back-to-school, the customer is definitely purchasing the essentials, including uniforms and backpacks. Additionally, she may have bought her child shorts when markdowns on denim shorts began appearing. Overall, it's a mixed situation. Historically, customers have tended to buy items much closer to the start of school or immediately after classes begin. However, it's challenging to assess this accurately due to the pandemic, which complicates the analysis. Therefore, it appears to be a combination of factors, but without the last two to three years of solid data, it's difficult to draw firm conclusions.

I understand your point. It seems like the back-to-school season will occur later this year, potentially due to some pressures. It appears she is purchasing what she needs, while other items might be on hold. There may be a weather break or other factors at play. Regarding holiday traffic, last year our inventories were well-managed, but we did experience the Omicron variant in December. There is a significant opportunity this year to attract customers to our stores for gifting, as long as we don't face any new variants.

You're right, Marni. Last year, we were impacted, especially approaching Christmas with Omicron. And then within our own performance, we had difficulty getting good holiday goods through the supply chain.

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