Good afternoon, and welcome to the Ross Stores Second Quarter Fiscal Year 2020 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 may contain forward-looking statements regarding expectations about future operations and financial results, store openings and reopenings 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 those statements and from historical performance or current expectations.

Additional information about related risk factors is included in today's press release and in the company's fiscal 2019 Form 10-K and fiscal 2020 Form 10-Q and 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 Michael Hartshorn, Group President, Chief Operating Officer; Travis Marquette, Group Senior Vice President and Chief Financial Officer; and Connie Kao, Vice President, Investor Relations.

We will begin our call today with an update on the status of the company's operations, including some color on our store reopenings, followed by a review of our second quarter performance. Afterwards, we'll be happy to respond to any questions you may have..

As a reminder, all store and distribution center locations were closed from March 20 through May 14, when we began a phased process of resuming operations. On average, our stores were open for about 75% of the quarter, though operating on shorter hours compared to the prior year. All our distribution centers were reopened by the end of May..

The ongoing COVID-19 health crisis remains very fluid, and we continue to closely monitor local developments to assess any potential changes to our operations as mandated by local, state or other government directives. We remain committed to prioritizing the health and well-being of our associates and customers as we navigate through this pandemic..

Turning now to our financials. Total sales for the second quarter were $2.7 billion compared to $4 billion in the prior year, reflecting the negative impact from store closures during the period. Comparable store sales were down 12% for reopened stores from the date of the reopening to the end of the fiscal quarter.

Sales during the quarter were significantly impacted by several factors including COVID-19's negative effect on consumer demand, particularly in California, Florida, and Arizona, which represents about 50% of our store base..

Further, during the initial reopenings, overall sales were ahead of our conservative plans as we benefited from pent-up demand and aggressive markdowns to clear aged inventory. In the weeks thereafter, trends were negatively impacted from depleted store inventory levels, while we were ramping up our buying and distribution capabilities.

For the 13 weeks ended August 1, 2020, earnings per share were $0.06 on net income of $22 million. This compares to net income of $413 million or earnings per share of $1.14 for the same period last year. Year-to-date, the loss per share was $0.81 versus earnings per share of $2.29 last year..

Our net loss of $284 million is compared to net income of $834 million in the first half of 2019. Sales for the first 6 months of 2020 declined 42% to $4.5 billion. At quarter end, total consolidated inventories were down 39% from the prior year, with average store inventories down 10% versus the same period last year..

Packaway levels at quarter end were 25% of the total compared to last year's 43% as we use packaway to replenish store inventory throughout the quarter. As planned, we did not open any new stores in the second quarter. We continue to expect to add about 39 locations this fall for a total of 66 new stores for the full year..

Now Travis Marquette will provide further color on our second quarter results. .

Thank you, Barbara. As Barbara noted, stores operated on average for 75% of the period with comparable store sales down 12% versus last year from the date of their reopenings to the end of the fiscal quarter. The decline was driven by a lower number of transactions that was partially offset by a larger average basket size.

Average unit retail was down during the period, reflecting the strong sell-through of deeply discounted aged inventory..

Operating margin for the quarter was 3.2% compared to 13.7% last year. Both cost of goods sold and selling, general and administrative expenses reflect the deleveraging effect from lower sales versus last year and expenditures for COVID-19-related measures.

In addition, cost of goods sold was impacted by the unfavorable timing of packaway-related expenses. These higher costs were somewhat offset by the partial reversal of the inventory valuation reserve we took in the first quarter resulting from the faster-than-expected sell-through of aged inventory.

This reversal benefited the second quarter by $174 million or $0.19 per share..

Total net COVID-related expenses for the quarter in cost of goods sold and SG&A combined were approximately $65 million, primarily for costs associated with restarting the business, supplies, cleaning and payroll related to additional safety protocols..

We ended the quarter in a healthy financial position with over $4.3 billion in liquidity, which includes an ending unrestricted cash balance of about $3.8 billion and an undrawn $500 million revolver..

As we move into the third quarter, trends have not materially changed from the second quarter, with comparable store sales for the first 2.5 weeks trending down mid-teens versus last year. Given the lack of visibility on the potential impact from this ongoing health crisis, we are not providing sales or earnings guidance..

Now I'll turn the call back to Barbara for closing comments. .

Thank you, Travis. Aside from the pandemic impact on consumer demand, as initial reopening sales significantly exceeded our conservative forecast, we were unable to ramp up our buying and distribution capabilities quickly enough to adequately replenish stores.

As Travis mentioned earlier, the ongoing COVID-19 health crisis remains extremely uncertain, and we have limited insight into how this pandemic could further impact consumer demand and the retail and economic landscape.

There is additional risk if COVID-19 cases remain elevated or increased, potentially prompting larger scale shutdowns of our operations. Given these uncertainties, we believe the most prudent approach is to plan and manage the business very cautiously, while continuing to prioritize the health and safety of our customers and associates..

As we move forward during this challenging period, we remain confident that our strong financial foundation and outstanding team of experienced off-price executives will help see us through these uncertain times..

Over the longer term, we remain well positioned as an off-price retailer to continue to gain market share given the large number of retail store closures and consumers' continued focus on value and convenience. We've proven in the past that we have successfully competed in this type of retail environment and believe we will do so again..

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 Matthew Boss from JPMorgan. .

Great.

Barbara, on the cadence of customer traffic that you've seen since reopening, how much of the recent moderation do you attribute to health concerns versus the lighter inventory that you cited? And larger picture, do you believe anything in the competitive landscape has changed as we think about market share beyond the pandemic?.

Matt, it's Michael Hartshorn. On the recent trends, I think there's a number of factors that are impacting what we're seeing currently. I certainly think there are things internally that we can focus on in terms of execution. We're still not where we want to be on ramping up the DCs and continue to have lower receipts than planned.

I do think there are external factors that include things like the expiration of unemployment that happened at the end of July, obviously, with no back-to-school as the country has moved to distance learning. I think those are the primary factors..

And looking on long-term growth, obviously, the pre-COVID trend had customers migrating to value and convenience.

And this disruption just accelerated those trends with a number of store closures, our value proposition and 1,800 and growing conveniently located store locations, I think we have a significant opportunity to gain market share over the longer term. .

Great. And then just a follow-up on gross margin. How best to think about the puts and takes on merchandise margins in the back half of the year? Any help would be really greatly appreciated. .

Yes. Sure, Matthew. This is Travis. In terms of the margin components for this quarter, similar to last quarter, given the significant deleveraging effect of having our stores closed for a portion of the quarter, we're not providing specific margin components. The puts and takes this quarter, I covered in my remarks.

And then in terms of the go-forward look, again, given the ongoing uncertainty, we're not providing any forward guidance or commentary on future margins right now. .

Your next question comes from Mark Altschwager from Baird. .

I was hoping you could touch on some of the current inventory dynamics.

What does availability look like in the marketplace, just both in general and in some of the stronger trending categories? And how do you feel about your ability to really chase back into some of these key categories should the demand backdrop recover faster than you're seeing right now?.

Sure. Overall, we continue to see a lot of supply out there, but it's not as consistent across the merchandise areas. We believe that these creates opportunities in some products in some areas and gaps in other areas. In terms of stronger trendier categories, that's kind of a broad question.

But I would say in most businesses, there has been supply in that -- without having what that trendy category is, kind of hard to comment on it. But what I would say is that in key categories, the merchants are out there chasing every day, and we have very conservative plans that they're working towards.

And I think over time, in the categories that have, I'll say, gaps in the assortment today, I think eventually, that will catch up. .

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

Just following up on that question, when do you think you'll be appropriately stocked? And then as you look at your packaway volumes, do you feel comfortable with the mix and content of that inventory that it's appropriate for the current environment?.

Lorraine, on the stocking, I'm going to go through the sequence of the quarter, and that will help explain the actions that we're taking to get inventory levels that are appropriate for the plan. When we first began our phased opening of stores, that's the first thing we did, and then we opened our DCs.

And we did it in that order because of government restrictions in California and actually Pennsylvania at that point in time. Because sales exceeded our conservative expectations when we reopened, at the same time, we were ramping and initially opening and initially ramping our DCs, the result was the depleted store inventory.

The initial ramp-up of our distribution centers took longer than we had hoped. And we've had further difficulty ramping up our DCs to full capacity due to staffing challenges..

We've taken aggressive steps to improve our production levels that include higher wages and incentives. And believe those actions will allow us to quickly -- more quickly ramp up to peak capacity over the next few months. So I think we would expect to see improvement as we progress through the quarter. .

And in terms of the content of packaway, I mean, we're pleased with the content the pathway we have now. We don't feel like we have any residual issues or anything from spring. As to Michael's point, we used packaway to drive our business in Q2 and got through everything. So of the levels that we own, we feel fine about the content.

And in terms of just packaway in general, the merchants, as you know, packaway fluctuates normally. And the merchants are out there chasing packaway now looking for spring product, current product, whatever the great deals are, because the most important thing about packaway is that what you own is really great content. .

Your next question comes from Kimberly Greenberger from Morgan Stanley. .

Great. Barbara, I was very interested in what you said about the state that are seeing particular impacts from COVID, California, Arizona, Texas and Florida. You talked about in the second quarter that your store openings were in that -- the store opening days, you were comping down 12%.

Did you see a worse result in those 4 markets than the company average at minus 12%? And then I just wanted to reflect on what's happening currently here in August.

And I wonder if there's any way for you to figure out if the current month-to-date mid-teens decline in sales trends is indicative of underlying consumer demand right now? Or are you seeing headwinds from either insufficient inventory levels that might be impacting your sales here in August, given that you're still ramping? Or another potential explanation could be that with this abnormal back-to-school that you referenced, maybe the kids business, juniors, young men's are underperforming, and other categories are doing better, and it's just a function of slow demand there.

I'm just trying to break apart the pieces to understand a little bit more of the underlying drivers of the business, if you can provide any insight there?.

Kimberly, it's Michael. On the regional trends, Texas, Florida, California and Arizona underperformed the rest of the chain by significant margins. Now part of that is driven by the resurgence in those areas during the quarter. So they had a significant impact on the overall performance. Trends in certain areas have improved as the cases improved.

And then on the current trend, we do believe that part of the current trend is driven by lower-than-planned receipts with the DCs continuing to ramp up. So we do think that, that is a factor in the current trend. .

Okay. And then as it pertains to the assortment and back-to-school, we plan those businesses very conservatively. We made the adjustments in the assortments that we thought were appropriate based on what was going on in the outside world with children going back-to-school or not. And obviously, we're still in back-to-school.

So it's kind of hard to rate the total experience. But we went in with pretty conservative plans for back-to-school. .

Okay. Great, Barbara.

And Michael, I just wanted to ask, to the extent that you think inventory levels or depressed inventory levels could be hurting current sales trends, is there a way for us to think about when over the next 1 or maybe 2 months, you would expect to be in a more -- in a better in-store inventory position that would be maybe reflective of where you'd like to have seen them today?.

Sure, Kimberly. I think I would repeat my comment with Lorraine. We've taken aggressive actions in the DCs. We probably took them later than we should, but we do expect to -- we do expect those actions to improve our throughput and bring the levels up to peak capacity over the next couple months. .

[Operator Instructions] Our next question comes from Janine Stichter from Jefferies. .

I wanted to ask a little bit about the complexion of the comp. I think you mentioned higher average basket and lower AUR. The average basket makes sense since we're hearing about shoppers consolidating their trips.

Wondering if you're still seeing that towards the tail end of 2Q into 3Q? Or if the inventory shortages are having a role in maybe offsetting some of that? And then also AUR sounds like it was driven lower by some of the clearance activity earlier in the quarter.

Wonder if the AUR should still be expected to be down in 3Q or if we could start to see that stabilize now that you're so clean on inventory?.

This is Travis. In terms of the average basket, we do continue to see customers coming in a little bit less frequently but buying more when they do, so the average basket size continues to be up. That's sort of just generally towards the end of Q2. In terms of Q3, again, it's really early in the quarter.

And I think it's really too early to draw trends, and we don't think we -- we're not providing further details on the breakdown of the sales, not at this time. .

Your next question comes from Kate Fitzsimons from RBC Capital Markets. .

Travis, I believe you called out $65 million in COVID-related expenses in the quarter. Just directionally, as we move into the back half, is there any way to piecemeal how we should think about some of these enhanced cleaning, PPE, et cetera, as well as the labor piece.

It sounds like in order to get the distribution centers more fully up and running, you're having to make some investments there.

So just directionally, how should we think about some of these puts and takes, I guess, on the SG&A line as we move through the back half?.

Yes. Sure. A couple of comments. The $65 million was both, as a remainder, in SG&A as well as COGS. As you might have guessed, the majority of those were in SG&A as it related to personal protection equipment, sanitation supplies, payroll, et cetera. As I mentioned, a portion of those did relate to costs related to restarting the business.

And so that portion, we wouldn't expect to repeat. Having said that, we do expect elevated levels of COVID expenses as we continue to move through the year. Your question, specifically on the DC investments, those were not part of the $65 million in Q2. .

And your next question comes from Paul Lejuez from Citigroup. .

Curious about the packaway opportunities that you're seeing today compared to a normal period. Maybe talk in terms of good, better, best, maybe you talk home versus apparel.

And I'm also curious about the initial margins that you expect on packaway based on the deals that you're seeing?.

And then second, just curious if you could talk about the number of new vendor opportunities you're seeing.

Is there any way to quantify what you're seeing out there?.

Sure. In terms of packaway opportunities, I don't know if I really can tell you by a good, better, best. Home versus apparels, apparel tends to be more packaway than home on -- normally on a normal basis. I think there are opportunities that are not perhaps as balanced as they've been in the past.

The supply out there isn't as consistent across merchandise areas as the way it normally is..

So the opportunities that are out there are perhaps not quite as balanced. What I would say is there are more opportunities in the last couple of weeks that seems to be emerging. And so we're feeling like packaway is moving in the right direction.

But again, it's not necessarily as broad based as it normally is because of the gaps of supply that are out there, created by all the issues from COVID and the market and all the things that have gone on there..

In terms of the margin, we don't really look at packaway as a margin driver. We look at packaway as a sales driver. So in terms of -- if you're asking about pricing as it pertains to packaway, the merchants are out always looking for great deals on packaway.

So packaway tends to be prices that are very sharp normally and is also something that we use to drive value into the stores. So in terms of a margin scenario, if we bought something that was a great deal, we would probably pass it along to the customer. Again, we use it as a sales driver..

In terms of new vendors, obviously, we have a large merchant team, 900 merchants out there looking to open new resources, open new vendors. Situations like this, obviously, create opportunities, and sometimes people are a little bit more open to listen. And so we're out there now looking for new vendors and to see if we can expand the vendor base.

And so that's kind of ongoing. And I think we'll continue to be ongoing. But that is a focus for merchants every day of the week is to try to expand the vendor base. .

Got it. And then just 1 follow-up.

When we hear you talk about some gaps out there? Are the goods you want not available to you? Or were you just slower to bring demand than you should have been?.

Two things. Well, the goods that are available as all closeouts are, closeouts are never consistent amongst every business any season, any year. I think this year, there's just been -- with everything that's gone on, which I know you're versed on in the market, in factories overseas. And there seems to be, I'll say, some bigger pockets.

In terms of the pace at which we're buying it, I would say that when the -- when we reopen the stores, in retrospect, in hindsight, we probably could have gone out and started to buy a little bit sooner than we did as we started to ramp the stores back up..

We didn't anticipate the consumer demand the way it turned out to be. So I feel like there was probably an opportunity that we could have done that a little bit better. But I'm not necessarily sure that, that would have impacted the assortment because I think the -- some of the gaps are just some -- they're just some big gaps.

This classification is a business where they're there, and some where there's not. And our expectation is that over time, it will be a little bit more reasonable as vendors -- many vendors didn't commit and bring in some goods. And so it puts us in a chase.

And the merchants are out there chasing and have been chasing since we opened, both for packaway or to flow-in stores. .

Your next question comes from Simeon Siegel from BMO Capital Markets. .

Understanding all that there's obviously uncertainty today and quite along in the future.

But on the back of these inventory conversations, do you have a view on what the broader pricing or promotional environment should look like going forward as thinking of holiday, which I know feels like it's so far ahead? And then just -- sorry for the dumb question.

As you -- it's great that you had that packaway products to replenish the stores during the depletion. Any reason you wouldn't have gotten further into the packaway.

Is that just seasonality? Or is there something other reason on this?.

I couldn't hear the last part of your question on packaway you kind of faded out. I just need you to say the same thing over again, that would be great, the packaway piece. .

Yes. Sorry. Just wondering, it's great that you were able to use the packaway to fill the stores. Is there any reason you didn't go deeper? And if the answer is seasonality then that.

your answer -- easy answer or something else on?.

Meaning go deeper, meaning release work. .

Yes. Bring more into the stores. .

I think the packaway releases were what we thought was appropriate to flow to the stores at the time. So packaway is not it's a broad assortment of products that we put into the hotel. And so you flow them based off of what's the right timing, right product to the floor. So depending upon what the products were, that's how we flow it.

Is not -- every business doesn't have packaway to it. Some of that packaway in the hotel could have been for fall..

So we flowed what we thought was appropriate, and we flowed what we thought we needed to get through to make sure that we came in clean into the fall season. And that we weren't carrying residual products that we didn't want to have. So that's what determined what we released and how we released it..

In terms of the promotional environment, I would expect that promotions will continue. It's a highly competitive environment. Retailers are trying to clear through all their excess inventory. And there'll be a long liquidation activity also coming from store closures, bankruptcy announcements.

So our expectation is that it will be a promotional environment as we go forward. .

Your next question comes from Marni Shapiro from Retail Tracker. .

Best of luck getting through the next couple of weeks of back-to-school.

But can I ask you a question with -- I think you mentioned that transactions were down, and I'm assuming that's due to foot traffic, not conversion, but if you would confirm that? And then if you could talk a little bit about operationally, what your thoughts are on opening up the stores for longer hours, raising capacity levels as you get in closer to the peak season? And what are your thoughts around that, even if it's specific to just we'll extend it on the weekends, maybe not during the week.

I'm just curious what your thinking is. .

Sure, Marni. On transactions and conversions, we don't measure conversion. We use transactions as our proxy for traffic. So we don't measure that. On -- in terms of hours, so we did when we opened significantly reduced the hours we operate. We operated from 10 to 7. So we think that had some impact on the performance.

As we move through the quarter, we have extended hours to 9 o'clock across the chain currently. And we haven't yet developed our hours for the holiday season. .

Our next question comes from Alexandra Walvis from Goldman Sachs. .

Barbara, you mentioned in the prepared remarks there was a lot of uncertainty. Of course, heading into back-to-school and then to holiday.

Can you talk a little bit about how you're planning the business into the second half, perhaps you referenced to the mid-teen to down mid-teens trend that you're seeing at the moment?.

And then my second question is on logistics costs.

How are you expecting those to trend going forward?.

On logistics cost, given the wage increases, certainly in the back half of the year, we would expect to grow. But we also have cost savings throughout the business, including the distribution centers because as we staff up, we'll be able to improve our productivity as well. .

Okay. Could you do me a favor? Just repeat the back-to-school question because I didn't capture the first part of it.

Could you say that again, please?.

It will be one moment while I locate the line. .

Now I was just wondering how conservatively you're planning the business into the back half, given all of the uncertainty about consumer behavior as we head into that important holiday season?.

Sure. We plan to continue to manage the business conservatively. I mean given all the ongoing COVID-19-related risks, including potential for additional rounds of store closures and distribution center closures. So our plan is to plan it conservatively and to chase our way back. .

Our next question comes from Bob Drbul from Guggenheim. .

Two quick questions, if I could. The first 1 is, can you just give us an updated thought process around the resumption of a dividend or share repurchase? And the second question, I think, follows Alex's a bit.

But when you think about the uncertainty that you have, can you just maybe talk about how you're planning sort of fall, winter, colder weather-type products in the back half with everything else that's going on?.

Yes. Sure. This is Travis. Just with regard to the dividend and the share repurchase program, again, there's still, as we've mentioned several times, significant uncertainty in the market. We don't know what's going to happen with COVID, with consumer demand.

And we really would need greater visibility on sales and the sustainability of those sales before we would start to consider or evaluate reinstituting either of those. .

And in terms of how we're planning fall or winter products in the back half, we're planning the entire business conservatively. And so we would look at each 1 of those businesses, I'm assuming outerwear, sweaters, those type of businesses and plan them relative to the conservative plan. So we would have an assortment on the floor.

And then if business took off at a greater rate than we expected, we would come back and chase some of those products. .

Your next question comes from Michael Binetti from Crédit Suisse. .

Okay. Michael, are you seeing any difference in the trend line in the markets where the schools have announced virtual versus in-person? It sounds like that could have been a driver.

Any evidence as the school systems are communicating in the local markets that back-to-school is showing up or it's a little late? And then I don't know if some of the schools are already passed back to school.

Have you seen any improvement as you kind of move pass the back-to-school season in some of the southern markets at all?.

Yes. Michael, we wouldn't talk about current trends going into the quarter. We obviously gave the top line trend to give you an indication of what's going on overall. I'd say there's so many factors that we're seeing in the sales between the virus resurgence and unemployment trends and other things, I think it's really hard to see right now. .

Your next question comes from John Kernan from Cowen. .

Can you comment on your ability to get back into product and inventory if the environment, as we go through the back half of the year does improve from a traffic perspective? Obviously, see the inventory position now being pretty lean.

So I'm just curious, the speed at which you can ramp back up and get goods into stores throughout the back half of the year?.

Yes. It's a good question. Obviously, we plan the business very conservatively. We think we've done that strategically. And we think that an appropriate approach to managing our business risk given these uncertain times.

We've always -- as we always do, we'll chase the business with closeouts and supplement with packaway, and that is ordinary course of business for us. .

Our next question comes from Laura Champine from Loop Capital. .

I mean obviously, we hope that this is a once in a lifetime event.

But does the problem with getting inventory in stores quickly enough highlight a potential to build in more direct ship from vendors to stores so that you can be more flexible going forward if demand doesn't line up with your prior expectations? Or is this something that once DCs are running at full tilt shouldn't be a long-term problem?.

I think it's the latter. Once we have the DCs running at full tilt, we do not think it's a longer-term issue. .

Your next question comes from Roxanne Meyer from MKM Partners. .

Great. I wanted to ask about any color you can provide on trends by category. Several of your peers have talked about the strength of home. And then related to that as a follow-up, you mentioned that you planned back-to-school business accordingly.

So I was just wondering how comfortable you feel about your mix of goods in the store and your need to perhaps pivot categories to get to an ideal mix? And when you think that could be, if you're not there?.

Yes. Let me start with the trends by merchandise, et cetera. Again, given the phased reopening of the stores and, in particular, the significant impact of clearance sales on results for the quarter, it's really hard to get a clear sense of product trends.

So one thing that's clear is that the consumer during the quarter was very much more focused on home as opposed to apparel. .

What I think you're at, Roxanne, also is just where are we seeing the shifts in product, where is the consumer heading versus where she's been. So yes, I would say, to Travis' point, home is certainly a place that the consumer has flocked to and is a business that we believe in.

And actually, home gets bigger, as you know, as you enter into the fourth quarter. I would think also in apparel, the shift that we're starting to see, which I think everyone is starting to see, is the consumer moving more towards casual products, activewear, athletic wear, as perhaps she's working remotely now..

And so making that pivot in that shift is where we're going. We normally have a large casual business. Our carrier businesses have never been the biggest part of our apparel at Ross ever. And so for us, it's really about shifting even more dollars over there as the consumer has moved in that direction.

And that's what we would see in the back-to-school businesses like the juniors or young men, you would see that same shift on the floor now and a continued shift because that is the bulk of where those businesses are for us normally. .

Your next question comes from Dana Telsey from Telsey Advisory Group. .

As you think about the dd's business, are you seeing the same trends at dd's as you are -- as compared to Ross? And then as you think about your vendor base, Barbara, is this an opportunity to also expand the vendor base? And are terms of payments at all being adjusted permanently in the industry from what happened in the short term?.

Dana, on dd's, I'd say that dd's experienced somewhat similar performance as Ross, the supply chain and buying ramp-up issues impacted the entire company and that included both Ross and dd's. .

And from a vendor based perspective, obviously, we're always trying to expand the vendor base. And usually, when business is difficult is when there are often more potential opportunities to expand that base, so the merchants are focused on trying to do that every day and particularly now..

In terms of terms and adjustments permanently in the industry, I think I really couldn't comment on what globally that looks like for the entire industry. I think there's been a lot going on in the last few months.

And so I think everyone is reacting to what they need to do for the business, but I really can talk about a permanent shift in the industry. .

Your next question comes from Jamie Merriman from Bernstein. .

Barbara, when you're talking about sort of pivoting to categories that are strong.

Just can you just talk a little bit about how that works and the timing in terms of how often buying budgets are allocated? I'm just really wondering like how quickly you could really pivot assortments, if necessary? And then you talked in your prepared remarks about thinking through and sort of weighing the risk of future shutdowns.

So -- and given your comments around the DC locations of California and Pennsylvania, can you just remind us of where your big DCs are located? And if there are sort of risk mitigation strategies you can put in place if there were say shutdowns that impacted the California DCs?.

On the DCs about a little -- over half of our capacity is on the West Coast. We have DCs in the Bakersfield Central Valley area, 1 DC there, several in Riverside. We also have a DC in Pennsylvania and 2 in South Carolina. If we had to shut down the California DCs, it would have a significant impact on the chain..

As far as mitigation strategies, obviously, it's going to be important for us in our future growth. Our next DC opens in Houston. We'll have another DC somewhat after that, that we would expect to be non-California. .

Sure. And in terms of pivoting to categories that are strong, how quick you can do it? I mean it literally depends on each category in each size range and gender. So I couldn't give you a specific time.

But what I would tell you is that we would be more aggressively pursuing those categories base -- and then based off of supply in the shorter term, we would drive it as much as we can.

And in the longer term, what will usually happens is when there is a trend shift, the market follows that trend shift and then the supply all naturally kind of goes there. And so then you can take a bigger lift than perhaps you can initially as the market recognizes what's working and what's not working themselves. .

your next question comes from Jay Sole from UBS. .

Barbara, my question is you mentioned there's a lot of near-term factors impacting the trend in the third quarter so far, back-to-school, like a stimulus, the inventory issue, the rising COVID cases.

But to what extent do you think traffic is being impacted by perhaps customers going online and finding bargains there because they're just not comfortable coming to the stores right now?.

And then Michael, just want to follow-up on the question about the DC staffing.

Can you just explain a little bit more about what the challenges have been about? Is it people not coming back? Were they furloughed? And then when you tried to bring them back they just -- they weren't -- they found other jobs, or they just didn't want to come back, so you've had to raise wages? If you could just explain that a little bit more, that would be appreciated.

.

Sure. On the DCs, we did furlough our associates, and we operate the DCs with both temp labor and perm labor -- permanent labor for surge capacity. We did see our permanent workforce good retention in returning from furlough. But I suspect with the surge of e-commerce and the impact of commerce coming back post closure.

The warehousing competitive labor market has increased quickly and significantly. So I think those are the main factors on what's driving the DC staffing shortfall. I would also add that in a COVID environment, we want to make sure that people are safe, and we don't want them coming to work if sick.

So there's also things like attendance that we're addressing as well. .

And in terms of the impact of online in our business, I think that's hard for us to measure the exact relationship of that. Obviously, online business has been very good, especially in essential businesses and core basics and things like that. But I think it's hard for me to put a number to what that impact could be to our current business trend. .

Your next question comes from Ike Boruchow from Wells Fargo. .

I'll follow-up on Jay's question, but I'll ask it differently. Not necessarily e-commerce, but I know you guys, I'm sure you have good communication with your customers.

When you talk to them about why they're not coming back as much as they did last year, is it between the COVID concerns, the economy and maybe the customer lost their job or income of the family has gone down? And then thirdly, your own inventory shortage, not having the right stuff in store.

Do you know which is the main factor? Like is there a rank order of those? Is there any way you kind of talk to that?.

Ike, I would say, it's hard to break out between those components. I think it's very clear that the #1 factor is the impact of the virus. As we said in our comments, that the markets that were impacted the most were also the markets that had the largest outbreak. So I think that's clear that, that's the #1 factor. But I don't want to minimize.

We think we could have done things better during the quarter. So there are factors that we talked about with inventory that we think we can impact. So the bottom line is we're going to work on our own execution and do the things that we can do to impact the business. .

Your next question comes from Chuck Grom from Gordon Haskett. .

Just one quick one for me.

Just I'm curious, just in those FCAT states, if you're still seeing subdued sales here in August or if they were -- hope they have recovered back to sort of the national average?.

I didn't hear the first part of the question. .

Just on the sales in those FCAT states. I'm just wondering if the sales are covered, Florida, California, Texas, Arizona. .

In those states, they continue to trail the chain. We have seen some small improvement. .

And your last question comes from Adrienne Yih from Barclays. .

Barbara, I was wondering if you can talk about if we are in a reduced traffic environment as we go into the holiday season, changes to the store operating procedures for Black Friday and then into the critical pre-holiday weeks, any changes to hours or traffic-driving events or something of that sort? And then for Michael or Travis, if you can talk about what portion is distribution center payroll versus total payroll, like employee payroll, not including corporate headquarters? I imagine you're not seeing as much of that wage pressure at the store payroll line, but if you can talk about anything, did people come back or didn't come back similar to the DCs? Or is that normalized?.

I'll try to hit through those. I'm going to go in reverse order. We're not seeing the same issues in the stores, and that's likely -- again, the DCs were impacted by the surge in e-commerce with the closures of a number of bricks-and-mortar retailers. We're not having that same issue in the stores.

And then in terms of holiday plans, we wouldn't discuss those at this point as we're still working through those plans. .

And in terms of events, Black Friday, we don't really run events. Our thing is that we want to make sure that we have great branded values on the floor. And obviously, our inventories levels go up in that time period. And that's what the customer values, and that's what we look to do to drive traffic is just having great branded bargains on the floor. .

And I will turn the call back over to Barbara Rentler for closing remarks. .

Thank you for joining us today and for your interest in Ross Stores. We wish you and your families continued health and safety. Thank you. .

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect..