Good afternoon, and welcome to the Ross Stores' First Quarter 2019 Earnings Release Conference Call. This 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 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. Risks factors are included in today's press release and the company's fiscal 2018 Form 10-K and fiscal 2019 8-Ks on file with the SEC. Now I'd like to turn the call over to Barbara Rentler, Chief Executive Officer.

Good afternoon. Joining me on our call today are Gary Cribb, Group Executive Vice President, Stores and Loss Prevention; Michael Hartshorn, Group Executive Vice President and Chief Financial Officer; Travis Marquette, Group Senior Vice President and Deputy Chief Financial Officer; and Connie Kao, Vice President, Investor Relations. We'll begin our call today with a review of our first quarter 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, for the first quarter, we delivered sales gains at the high end of our guidance as well as better-than-expected earnings per share growth despite continued underperformance in Ladies apparel. Earnings per share for the 13 weeks ended May 4, 2019 was $1.15, up from $1.11 for the same period last year. Net earnings for the 2019 first quarter were $421 million compared to $418 million in the prior year. These results include an approximate $0.02 per share benefit from favorable timing of expenses that are expected to reverse over the balance of the year. Total sales for the period increased 6% to $3.8 billion with comparable store sales up 2%. For the first quarter, the strongest merchandise category at Ross was men's while the Midwest was the best performing geographic region. As I just mentioned, Ladies apparel trails a chain. Our execution in this important business remains below our standard and consequently, we did not offer our customers the compelling values they have come to expect from us. While we are working diligently to improve our merchandise assortments, which were out of balance in a number of areas in Ladies, plus strengthen our value propositions, it can take some time to correct issues like this in a chain of our size. That said, we do believe that the actions we are taking will lead to improved results as we move through the year. As we ended the period, total consolidated inventories were down 4% over the prior year. Average in-store inventories were up 1% as planned while packaway, as a percentage of total inventories, was 44% compared to 49% last year. As it has for time now, dd’s DISCOUNTS posted better-than-expected gains in both sales and operating profits for the quarter. Turning to store growth. Our 2019 expansion program is on schedule with the addition of 22 new Ross and 6 dd’s DISCOUNTS locations in the first quarter. We remain on track to open a total of approximately 100 locations in 2019 comprised of 75 Ross and 25 dd’s DISCOUNTS. As usual, these numbers do not reflect our plans to close or relocate about 10 stores. Now Michael Hartshorn will provide further color on our first quarter results and details on our second quarter guidance.

Thank you, Barbara. Let's start with our first quarter results. Our 2% comparable store sales gain was primarily driven by an increase in the size of the average basket. While operating margin of 14.1% was down 95 basis points from last year, it was better-than-expected mainly due to above planned merchandise margin and favorable timing of expenses. Cost of goods sold rose by 85 basis points in the quarter, a 30 basis point improvement in merchandise margin was more than offset by a 60 basis point increase in distribution cost as we were up against last year's benefit from packaway-related expense. In addition, freight costs grew by 35 basis points and occupancy and buying expenses increased by 10 basis points each. Selling, general and administrative expenses for the period increased 10 basis points as higher wage-related costs were partially offset by favorable timing of expenses. During the first quarter, we repurchased 3.4 million shares of common stock for a total purchase price of $320 million. We remain on track to buy back a total of $1.275 billion in stock for the year. Let's turn now to our second quarter guidance. For the 13 weeks ending August 3, 2019, we're forecasting same-store sales to increase 1% to 2% on a top of a 5% gain last year. Earnings per share for the second quarter are projected to be in a range of $1.06 to $1.11, up from $1.04 in the prior year period. The operating statement assumptions for our second quarter guidance include the following: total sales are projected to grow 5% to 6%. We expect to open 28 new stores during the period including the 22 Ross and 6 dd’s DISCOUNTS locations. If same-store sales are in line with our guidance then we project operating margin to be in the range of 13.2% to 13.4%. The forecasted decline from last year's 13.8% mainly reflects headwinds from higher wage and freight cost, partially offset by the anniversarying of last year's negative impact from packaway timing. In addition, we would expect some deleveraging on occupancy if comparable sales performed in line with our guidance. We expect net interest income of about $4 million, our tax rate is expected to be approximately 24% to 25% and weighted average diluted shares outstanding are projected to be about $363 million. Based on our first quarter results and second quarter guidance, we now project earnings per share for fiscal 2019 to be in the range of $4.38 to $4.52. This compares to EPS of $4.26 last year, which included a $0.07 per share benefit from the favorable resolution of a tax matter in the fourth quarter. Now I'll turn the call back to Barbara, for closing comments.

Thank you, Michael. To sum up, we delivered respectful results in the first quarter despite difficulties in our Ladies apparel business. As I said earlier, we're working hard to improve our merchandise assortments and strengthen the values we offer in this important business. We do believe the steps we're taking in Ladies will lead to improved performance over time. At this point, we'd like to open up the call and respond to any questions you might have.

[Operator Instructions] Your first question comes from the line of Matt Boss from JPMorgan.

Congrats on a nice quarter. I guess on the top line, can you speak to Ladies apparel performance, maybe, versus plan in the first quarter? And just how much do you attribute to company's specific execution versus relative category weakness as we've heard this trend from a number of retailers in the last couple of quarters?

Sure. Well, obviously, I wouldn't talk versus plan, all I'll say is that Ladies on the top line trailed the chain. In terms of company execution versus relative performance in the outside world, we really feel that our execution was below our standards. And obviously, there are other outside factors, there's weather and there was whatever, but in terms of execution, we felt that our assortments were out of balance, that our value offerings were not as compelling as they should have been and obviously, the price value equation is critical. And so we really feel like it's an execution issue and not necessarily based off of other factors in the outside world.

Got it. And then maybe just a follow-up on the margin front. On gross margins, what's your expectation for merchandise margin in the second quarter and then the balance of the year in the back half?

Sure, Matt. We don't give specific guidance by quarter. I will tell you when we started the year, we planned merchandise margin relatively flat for the year and at this point, that's what's embedded into our guidance for the remainder of the year.

Your next question comes from Lorraine Hutchinson from Bank of America.

You've had a couple of your senior leaders leave over the past few months. I'm just hoping you could talk about the bench under them if you're planning external searches? Or how you are thinking about the leadership team going forward?

Sure. What I would say, overall, our ability to -- we have a very deep bench of talented and long-tenured executives on the operational side and on the merchandising side. And so we have a strong succession plan in all of those worlds underneath. So we feel strongly that our bench at the senior level and the level below that is very solid. And as we know that certain executives where we knew that they were leaving, we had transition plans put in place for them, so that we could have a smooth transition and not have disruption to the business.

Your next question comes from Mark Altschwager from Baird.

With respect to the comp guidance of 1% to 2%, I think last quarter you guided 0% to 2% given some of the headwinds you identified in Women's apparel. So I mean, is the fact that you're returning to that 1% to 2% range, even with the tougher Q2 comparison or reflection that you think the Women's apparel issue is improving as you move forward? Or are there other categories that are perhaps making up big difference in giving you some more broad-based confidence in the trajectory of the comp?

Yes. I'd say on the guidance, I mean, we did it too in the first quarter, so the 1% to 2% is kind in line on how we usually guide the business and that's all I'd read into it and that's the way I think about it.

Your next question comes from Kimberly Greenberger from Morgan Stanley.

I wanted to know if there's any color you can provide on just the monthly cadence in the first quarter? And whether you saw the same sort of headwinds in February this year from delays in tax refunds that you had seen perhaps 2 years ago? And then secondarily, Barbara, I'm wondering if there is a good basic way to help us understand the out of balance in Women's, we're all -- many of us are finance people not merchants. So just maybe in simple terms, how would you explain to a non-merchant person what is the out-of-balance issue? And then is the lack of the value proposition you talked about or lack of compelling value, is that a function of the availability of goods in the market, the price that those goods are available for or perhaps maybe just some mistakes in the buying process? Any insight would be really appreciated.

Kimberly, on the trends during the quarter, sales strengthened as the quarter progressed and as frankly as weather improved and obviously, also with the later Easter that was 3 weeks later last year. Like others, we -- the delay in tax refunds did have a short-term impact until they got caught up pretty quickly. I think overall, the tax refunds were slightly down for the kind of tax filing year. But hard to understand that's any impact to us for the entire quarter.

And then Kimberly, in terms of out of balance, I mean that some of the simplest examples would be I own not enough shorts, too much denim, it could be out of balance by classifications, it could be out of balance by price points. I mean those are the kinds of things I've been talking about out of balance to give you a couple of examples to put sides around it. In terms of offering the compelling value, it has nothing to do with the availability of goods, if there's a lot of merchandise in the market, there continues to be merchandise in the market. I would say that the overall merchandise offerings just weren't where they needed to be and really it was execution issues that were really below our standards.

Your next question comes from Michael Binetti from Crédit Suisse.

I wanted to maybe, Barbara, ask a similar question what Matt asked before. But when you think about how to isolate your comments to your business versus what's going on more broadly in a marketplace, obviously there's a quite a bit going on out there right now. But how much do you -- how do you assess your comment that Midwest was the strongest market relative to your own company's performance versus externals like the big Bon-Ton bankruptcy a year ago? Have you guys tried to measure how much that's helping add to the Midwest?

Sure. On the Midwest -- Michael, on the Midwest, Midwest has been comping well for us for -- frankly, since we entered the market in 2011. And it's been one of our strongest performing comp. And it continues to be a place that we're adding stores. So it's a newer store base and have been -- continued to be successful there in gaining market share.

And then in terms of -- I'm sorry, there was an echo there. In terms of our business [indiscernible] to comments people have made on the outside, we look at a number of metrics, Ladies to plan, other apparel businesses to plan and key classifications, churn, I mean, there's a variety of metrics that we look at to make that assessment overall. I mean it isn't just 1 metric, it's a series of metrics.

Got it. And then if I could follow-up quickly. I think you said the merch margin was up 30 basis points in the quarter, but you think flat for the year. Michael, is there a point on the horizon where we see a minus sign in front of that? And then if so, any reason why? That's a planning or just erring on the side of conservatism?

Well, when we entered the quarter, we were actually able to take -- be able to remain very flexible and so our margins were able to take advantage of closeouts during the quarter, which helped the margin. I would also say that we entered and exited the quarter with healthy inventory positions and therefore there wasn't markdown exposures.

Your next question comes from Paul Trussell from Deutsche Bank.

This is actually Krisztina Katai, on for Paul. I was just wondering if you could just maybe talk a little bit more about the weakness that you continue to see in Ladies apparel. I know you've discussed it earlier, but I'm just wondering what are some of the steps that you have taken to improve these results. And maybe the timeline to remedy it? And then just if you could just discuss some of the categories, what you saw there? I mean you called out men's outperforming, but what about some of the other categories such as home and beauty? If you could just share anything there?

Sure. First, as it pertains to Ladies issues, as I've said before, we're working diligently to improve the assortments in this important area. But it's going to take time to complete -- address all of the issues for a chain of our size. That said, we believe that we will see improved performance as we move through the year. In terms of other categories, home and beauty, home was relatively in line with the chain and beauty outperformed the chain.

Your next question comes from Simeon Siegel from Nomura Instinet.

Just given your comments on the inventory and the supply in the market, just any help on understanding why the inventory decline? And I guess, specifically packaway would've -- I thought, you would have had a nice opportunity there. So just any thoughts on that and the comfort in the ability to comp with the down inventory.

So inventory was down just slightly at the end of the quarter. So we think we can continue to operate at that level of inventory and turn faster. On packaway, we're actually up against the very large number of last year. Packaway tends to be between 40% and 49% of the total inventory and that can vary over time. But I think we're happy with the level and the content of our packaway inventory as we ended the quarter.

Right. And in terms of supply in the market, there's an abundance of supply in the market just based off of Q1 performance and just -- even in just traditional department stores. So supply is not the issue, buying it at the right price and the right time is really a merchant's judgment call.

Your next question comes from John Morris from D.A. Davidson.

Congratulations on a good quarter. Very brief, I'm just curious why this shifting of the timing of the expense? Why that was particularly or generally happening in the current quarter? And then on the merch margin, merch margin was up, Women's -- however, Women's underperformed. So maybe if you can dive a little bit deeper to help us understand the differences there. Was it all men's or should we look at it from a different -- with a different filter in terms of why you were able to have that merch margin up despite the Women's underperformance?

Sure. On the timing, it was really broken into 2 pieces. It's -- part of it's just the packaway timing. And all of these timing, by the way, is not versus last year's versus our original guidance. And so what you've noticed we did is, we beat the first quarter by $0.04 and then up the full year by $0.02 on the top end of the range. So we're just trying to call that out. But part of it was packaway-related and part of it was SG&A cost that we expected to happen in the first quarter that will happen later in the year. And then just kind of on the merchandise margins, the reason we didn't have -- we're able to operate with higher merch margin and -- what's very important when you have a business that underperforms is that you manage the inventory. And with Ladies and overall inventories, we entered -- both entered and exited the quarter with healthy inventory positions. So I think that's an important part of the margin improvement.

The next question comes from Ike Boruchow with Wells Fargo.

This is Lui, on for Ike. I wanted to ask about the margin dynamics in the quarter just around freight since I know that it's been such an outsized drag on your costs. How are you thinking about that dynamic for the balance of the year and in Q2?

Sure. So -- and maybe it's best to go through last year. Last year, the freight cost escalated as we moved through the year. So in our initial call this year, we said that we thought freight would be a negative impact for the first half of the year and then as we round some of the increases we had in the last year's second half, that the cost would abate. So that's -- our thoughts continue to be that the first half of the year, we'll have freight pressure and then we'll have a lower cost versus last year in the back half.

Your next question comes from the line of Paul Lejuez from Citigroup.

It's Tracy, filling in for Paul. I just had a follow-up question packaway. I was wondering if you're seeing more availability in certain categories versus others and maybe perhaps in categories that are already being impacted by tariffs.

Well, availability is pretty broad-based in terms of categories where the tariff is -- as I'm sure, you've properly read a lot of vendors brought merchandise into the country even starting a few months ago to get ahead of the 10% tariff even before the 25%. So I would say there is -- in certain pockets of those classifications, there are vendors who own inventories. And then there are some that really don't own excess inventories. So that's kind of a mix story based on classification. And then in terms of apparel, apparels availability is broad-based.

Your next question comes from the line of Marni Shapiro from The Retail Tracker.

Great job in a cold and very late Easter first quarter. I'm not going to ask about your Ladies apparel. I'm actually curious about your real estate. You were one of the few net openers of stores out there and in a space where there are a lot of people vacating. So if you could just talk to us a little bit about the tone of your -- of what you're seeing out there for your leases? And are you able to go back to some of your existing leases and renegotiate? Or what percentage of your leases are coming up for renewal each year? If you could just put some color around that.

So we have seen closures with other retailers and that's been going on for quite a while. We tend to look 2 to 3 years out and feel pretty confident that we'll be able to achieve our store opening targets. We didn't really comment on the leases, but whenever there's closures, it generally means good news for everybody.

Your next question comes from the line of Jay Sole with UBS.

A couple of questions going to where tariff was mentioned. Can you just talk about how the company is planning to handle the situation if there are new tariffs applied to apparel and footwear? And can you talk about what percent of your merchandise is imported from China into stores directly?

Sure. So like everybody else, we're closely monitoring the trade talks and tariffs and at this point, it's too early to say what the potential impact could be on the industry. Our focus is to maintain a pricing umbrella versus traditional retailers and offer the best values to the customers. At this point, it's unclear how the industry would react with increases to apparel and shoes. And -- but we certainly would not be the price increased leader in that regard. The silver lining is we have a flexible business model and can react to the price increases and disruptions like this that historically meant to supply opportunities for off-price. And then we wouldn't comment on the direct-sourcing question, what percentage is directly sourced from China.

Your next question comes from the line of Laura Champine with Loop Capital.

It is on the underperformance in the Women's apparel. Were there any changes in staffing for senior merchants? Or any significant changes in your relationship with vendors? Or any quality issues coming up with vendors that were unanticipated? I'm just trying to diagnose better what's going on and how long it might take to fix?

Okay. Well, in terms of the team, no, there were no significant changes. We have a very large and talented merchant team, very tenured. And it's the same team that has delivered results for many years and being able to deliver value to the customer. In terms of relationships in the market, no, we have -- again, we have a very large merchant team whether in Ladies or in the entire company. So out there -- we're constantly out there building relationships and trying to do more business. So I don't see any relationships or quality issues. The issues are really they are internal. They are execution issues and we're working diligently, as I said before, to correct those issues. But because of our size, we believe, we'll see improved performance as we move through the year. But the issues are not external, the issues are internal. It's our execution.

Your next question comes from Alexandra Walvis with Goldman Sachs.

I had a question on the category you mentioned in response to a prior question that was tracking in line with the chain. I think that represented a little bit of a deceleration in that category from prior, some of your peers and other retailers have called out some softness in home category and some difficulties with the competitive environment. I was wondering if you could comment on your experience there? How you're seeing demand, pricing and so forth?

From the -- just from the general, the general classification of home, again, some of our businesses are a lot better than...

Yes. That's...

I'm sorry, go ahead.

Yes. That was...

Walvis, go ahead and continue. Why don't you continue with the question?

Yes. Sure. I was just wondering if you could comment a little bit more on your experience in the general home classification and if you have any comments beneath that level in terms of what's performing well or less well and how well the market is in that category that would also be really helpful?

Okay. Generally, some businesses in home are better than others. I really wouldn't go into the specifics of that on the call. I think the home category, as a general statement for the market is that's where a lot of people haven't absorbed increased costs. And so I think the market maybe depending upon the classification discipline, the market maybe a little bit more disrupted than others, some classes more than others and therefore, in some of the businesses, there's more opportunities for us and in some of the other businesses, there's less opportunity. And so -- and then -- so the balance of it maybe a little bit different than it's been probably for everyone in the last few months. Without getting into more specifics on the call, I mean, that's kind of the general gist of what's going on.

Your next question comes from the line of Jamie Merriman from Bernstein.

I think in the prepared remarks you mentioned that the driver of the comp performance was the basket size increasing. But I'm just wondering if you could speak to what you've seen in traffic over the last quarter? I mean also maybe break that basket size down into price versus units.

Sure. So as we mentioned in the remarks the 2% comp was driven by the increase in the basket. The basket was driven by higher units per transaction, AUR was down slightly. And with traffic, given the performance in Ladies apparel, we think that had an impact on traffic for the quarter. And again, the way we measure traffic is through the number of transactions. We actually do not have traffic cameras.

The next question comes from the line of Dana Telsey from Telsey Advisory Group.

Do you think about just the state of the consumer, anything you are picking up that in this first quarter was different than in quarters past that would've made a difference in top line? Whether it is delayed tax refunds or obviously the comparison? And did you see a difference in performance of dd's versus Ross?

With the consumer, there is nothing I'd call out. With tax refunds, the refund cycle was completed in the quarter. So perhaps there was timing differences within the quarter. But there is nothing really that I'd call out. I mean first quarter has been tough for us and other retailers versus the rest of the year for a number of years. And dd's versus Ross -- yes, dd's actually -- we were pleased with the performance and we're ahead of last year. So we're pleased -- as we said in our commentary, we're pleased with their results.

And on the real estate front, what are you seeing in terms of the opportunity for relocations? And as you're renewing existing leases, is there opportunity for occupancy cost improvement?

So we tend to relocate on average about 10 -- relocate or -- and open about 10 stores on a year. And we're always looking to improve stores that are underperforming for various reasons. On the -- the second question was on opportunity to improve leases?

Yes. On...

Yes.

On occupancy overall and leases, I mean we've seen a pretty big market for the last number of years and -- so I think it's remained pretty stable to that -- to what it's been like over the last several years.

Your next question comes from the line of Bob Drbul from Guggenheim Securities.

I was just wondering if you could give us an update just in terms of what you're seeing on your labor costs and the outlook for the year, if there's been any change from that perspective. And then second question is just around dd's versus Ross. Can you give us an idea on sort of vendor overlap and sort of how that might be trending over the last few years?

On the wage front, our most recent national increase, the $11 we did in the second quarter last year, we believe, it keeps us competitively positioned. That said, we always take a market-to-market approach in determining our wage rates and that will not change and in fact, many of our markets are well above the $11. And as we always have done, we'll make the necessary adjustments to ensure we continue to attract and retain talented associates.

And it pertains to dd's versus Ross with vendor overlap, the dd's customer is a lower-income customer. So there is some overlap to Ross, but not a large overlap with Ross.

Got it. And dd's, as you open up more stores, are you able to open in the closer proximity to Ross Stores. Can you just give us an idea just in terms of like the trade areas? How you really see that developing as well?

Yes. I think it -- I think we look at it market by market. There are some markets where Ross alone make sense and other markets where the 2 of them really enhance having them close by. So we take a market-by-market approach. And you'll find locations where we're next door to each other.

Your last question comes from the line of John Kernan from Cowen.

This is Krista Zuber, on for John. I just wanted to follow up on 2 previous questions. One on inventory and one on freight. Just in terms of where you're thinking your inventory positioning or levels will be at the end of the year? And then secondly on freight. You mentioned that sort of your guidance or your thinking was unchanged, is that a reflection of the renegotiations you'd expected to have this year for the rates?

Sure. On inventory, at the end of the year, that's a long way out. But the way we have it planned is store positions to be relatively flat at this point. On freight, we have pretty good visibility on our renegotiations with our freight, again, a recap last year, the cost escalated as we moved through the year. And so in the front half, we've continued to see wage pressure -- or not wage pressure -- the freight pressure on -- just based on rates and market, inflationary cost in the freight industry. And then in the back half, we're up against those larger increases. So our viewpoint at this point is that they will -- they'll abate as we move through the year.

And if ask -- I could just add one more follow-up. Just kind of looking at your free cash flow generation, I think you stepped up the CapEx this year to about $600 million when you gave guidance at the end of the fourth quarter. I'm just curious, is this how we should think about the run-rate of CapEx as a percentage of sales going forward?

This is Travis. We're still planning CapEx at around $600 million for the year. And as you may recall that includes the initial investments at our next distribution center. In terms of spending going forward, we wouldn't be too specific for the future, but suffice it to say, it takes a little while to build the distribution centers. So we expect CapEx to be elevated for the next couple of years.

I will now turn the call back over to Barbara Rentler, for closing comments.

Thank you for joining us today and for your interest in Ross Stores. Have a great day.

This concludes today's conference call. You may now disconnect.