Ross Stores Q3 2023 Earnings Call Transcript

Participants

Corporate Executives

• Barbara Rentler, Chief Executive Officer
• Adam Orvos, Executive Vice President, Chief Financial Officer
• Michael Hartshorn, Group President and Chief Operating Officer

Analysts

• Matthew Boss, J.P. Morgan
• Mark Altschwager, Robert W. Baird
• Paul Lejuez, Smith Barney Citigroup
• Lorraine Hutchinson, Bank of America Co.
• John Kernan, TD Cowen
• Chuck Grom, Gordon Haskett
• Brooke Roach, The Goldman Sachs Group, Inc.
• Michael Binetti, Evercore ISI
• Adrienne Yih, Barclays Capital
• Alex Straton, Morgan Stanley
• Marni Shapiro, Retail Tracker
• Dana Telsey, Telsey Advisory Group
• Aneesha Sherman, Sanford C. Bernstein
• Corey Tarlowe, Jefferies Financial Group Inc.
• Laura Champine, Loop Capital Markets
• Unidentified Participant

Presentation

[Operator]

Good afternoon and welcome to the Ross Stores Third Quarter 2023 Earnings Release Conference Call. The call will begin with prepared comments by management, followed by a question-and-answer session. [Operator Instructions] Before we get started, on behalf of Ross Stores, I would like to note that the comments made on this call will contain forward-looking statements regarding expectations about future growth and financial results including sales and earnings forecast, 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 risk and uncertainties that could cause actual results to differ materially from historical performance or current expectations. Risk factors are included in today's press release and the company's fiscal 2022 Form 10-K and fiscal 2023 Form 10-Qs and 8-Ks on file with the SEC.

And now I'd like to turn the call over to Barbara Rentler, Chief Executive Officer.

[Barbara Rentler, Chief Executive Officer at Ross Stores]

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 third quarter performance, followed by an update on our outlook for the fourth quarter and fiscal year. Afterwards, we'll be happy to respond to any questions you may have.

As noted in today's press release, we are pleased that both sales and earnings outperformed our expectation for the quarter, as customers responded favorably to the terrific values we offered throughout our stores. Operating margin for the period was 11.2%, up from 9.8% last year. Leverage from the same-store sales gains and lower freight costs were partially offset by higher incentive and store wages. Earnings per share for the 13-weeks ended October 28, 2023 were $1.33 compared to earnings per share of $1 last year.

Net income for the period rose to $447 million versus $342 million in the prior year period. Total sales for the quarter were $4.9 billion, up from $4.6 billion last year, with the comparable store sales gain of 5%. For the first nine months, earnings per share were $3.74 on net earnings of $1.3 billion compared to $3.08 per share on net income of $1.1 billion for the same period last year.

Sales for the year-to-date period grew to $14.4 billion, with comparable store sales up 4% over last year. For the third quarter, Ross cosmetics, accessories and shoes were again the strongest performing businesses on geographic results for broad-based. Like for us, dd's DISCOUNTS shoppers also responded favorably to its strong value offerings driving improved sales trends during the quarter.

At quarter-end, total consolidated inventories were up 5% versus last year, while average store inventories were up 2%. Packaway merchandise represented 39% of total inventories, versus 41% in the same period of the prior year. During the third quarter, we also completed our expansion program for 2023 with the addition of 43 new Ross and eight dd's DISCOUNTS. For the year, we added a total of 97 locations, comprised of 72 Ross and 25 dd's. We now expect to end the year with 1,764 Ross stores and 345 dd's DISCOUNTS locations for a net increase of 94 stores.

Now, Adam will provide further details on our third quarter results and fourth quarter guidance.

[Adam Orvos, Executive Vice President, Chief Financial Officer at Ross Stores]

Thank you, Barbara. As previously stated, comparable store sales rose 5% in the quarter, primarily driven by higher traffic. Operating margin increased 135 basis points to 11.2%. Cost of goods sold improved by 260 basis points in the quarter. Merchandise margin was the main driver with a 235 basis point increase, primarily from lower ocean freight costs. Distribution expenses improved by 45 basis-points, mainly due to favorable timing of packaway related costs.

Domestic freight and occupancy levered by 40 and 25 basis points respectively. Partially offsetting these benefits were higher buying costs that increased 85 basis points, mainly from higher incentives. SG&A costs for the period increased by 125 basis points, primarily driven by higher incentive costs and store wages. During the third quarter, we repurchased 2.1 million shares of common stock for an aggregate cost of $239 million. We remain on track to buy back a total of $950 million in-stock for the year.

Now let's discuss our fourth quarter guidance. We continue to face macroeconomic volatility, persistent inflation and more recently geopolitical uncertainty. In addition, we are up against our most difficult quarterly sales comparisons versus 2022 in the fourth quarter. As a result and while we hope to do better, we believe it is prudent to maintain a cautious approach in forecasting our business and are reiterating our prior sales guidance for the fourth quarter.

For the 13-weeks ending January 27th, 2024, we continue to plan same-store sales to be up 1% to 2%. Earnings per share for the 14-weeks ending February 3rd, 2024 are projected to be in the range of $1.56 to $1.62 compared to $1.31 in the fourth quarter of 2022. This guidance range includes an approximate $0.02 per share unfavorable impact from the timing of expenses that benefited the third quarter.

Based on our year-to-date results and our fourth quarter forecast, earnings per share for the 53 weeks ending February 3rd, 2024 are now expected to be in the range of $5.30 to $5.36 versus $4.38 last year. Incorporated in this guidance for both the fourth quarter and full-year is an estimated earnings per share benefit of $0.16 from the 53rd week in fiscal 2023. The operating statement assumptions that support our fourth quarter guidance include the following.

Total sales are projected to grow 8% to 10%, including an estimated $260 million benefit from the 53rd week. We expect operating margin to be in the range of 11.3% to 11.5% versus 10.7% last year. This range includes a 65 basis point benefit from the extra week. We are planning for higher merchandise margins given lower ocean freight costs, though moderating from the improvement earlier this year.

In addition, lower domestic freight and distribution costs partially due to favorable packaway timing are expected to benefit margin. Partially offsetting these lower costs is our forecast for higher incentive compensation. Net interest income is estimated to be about $45 million, as we continue to benefit from higher interest rates on our cash balance. Our tax rate is expected to be approximately 23% to 24% and weighted-average diluted shares outstanding are projected to be about $335 million.

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

[Barbara Rentler, Chief Executive Officer at Ross Stores]

Thank you, Adam. Looking ahead, despite all the challenges in the external environment, we are encouraged by our healthy above planned results to date this year. We also remain confident in the resilience of the off-price sector and our ability to operate successfully within it, especially given consumers' heightened focus on value and convenience. As a result, we remain optimistic about the company's future prospects and our ability to expand market share and profitability over time. At this point, we'd like to open up the call and respond to any questions you may have.

Questions and Answers

[Operator]

Thank you. [Operator Instructions] The first question comes from the line of Matthew Boss with J.P. Morgan. Please proceed with your question.

[Matthew Boss, Analyst at J.P. Morgan]

Great, thanks and congrats on another nice quarter. So, Barbara, could you elaborate on changes across categories that you've made to increase your value focus. It seems like that was a clear takeaway from your comments. Maybe also if you could speak to the cadence of traffic that you saw as the third quarter progressed and just how you see your assortments positioned in the holiday to take share?

[Mark Altschwager, Analyst at Robert W. Baird]

Matthew, I'll start with the traffic. As we said in the commentary, traffic was the primary driver of comp for the quarter on a stack base -- basis. The comps were fairly consistent across the quarter with a couple of fits and starts late in the quarter regionally with weather, as it always is this time of year. That said, for the entire quarter, weather was neutral.

[Barbara Rentler, Chief Executive Officer at Ross Stores]

And that by change across categories, you mean performance?

[Matthew Boss, Analyst at J.P. Morgan]

More the value, I think you talked about a greater value focus starting in the second quarter. It sounds like it resonated further in the third quarter. So just maybe changes that you've made as it relates to that?

[Barbara Rentler, Chief Executive Officer at Ross Stores]

Well, the value changes that we've made across the entire box? So the merchants are out there, really looking for rate branded products, where they can offer compelling values. So that's really -- it's not in any one area that's across all partner. Obviously, some businesses are further along than others as you would expect, but that's a -- that's a company wide focus now to offer the most compelling value to the customer at this time. And changes to the assortment for the fourth quarter were just fair, it's really after gifting. We've expanded some of our products in gifting categories, so I wouldn't talk about on the call, but it's really a focus on gifting.

[Matthew Boss, Analyst at J.P. Morgan]

Great. And then maybe as a follow-up, Adam. How best to think about merchandise margin recapture opportunity in the fourth quarter, just given the environment a year ago and any change in terms of flow through in the model on 3% to 4% same-store sales as we think more multiyear?

[Michael Hartshorn, Group President and Chief Operating Officer at Ross Stores]

Yeah, on the latter part, no change in the flow through the model, right? We still expect to lever on the three to four comp. In your question on -- merchandise margin was fourth quarter specific?

[Matthew Boss, Analyst at J.P. Morgan]

Yeah.

[Adam Orvos, Executive Vice President, Chief Financial Officer at Ross Stores]

So, ocean freight, which we benefited from all year, will still be a benefit in the fourth quarter, but as we said in the call comments will moderate considerably. We started to see pretty significant rate reductions about this time last year. So will there be further benefit in fourth quarter, but not like we have seen in the first three quarters of the year. Would expect that really to be the main driver on merchandise margin, all other components should be pretty consistent with last year.

[Matthew Boss, Analyst at J.P. Morgan]

Great. Best of luck.

[Adam Orvos, Executive Vice President, Chief Financial Officer at Ross Stores]

Thanks.

[Operator]

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

[Mark Altschwager, Analyst at Robert W. Baird]

Great, thanks for taking the question. I guess first, your plan for the fourth quarter top line hasn't really changed despite comps exceeding the high-end your plan by a couple 100 basis-points in the third quarter. Curious as that gives you more confidence in the upside case or are there things you've seen in recent trends that would suggest a more material quarter-over-quarter deceleration is the right expectation?

[Michael Hartshorn, Group President and Chief Operating Officer at Ross Stores]

It's Michael again. I would say for the most part is, there's a lot going on in the external environment, whether it's macro-economy. We expect it to be a very promotional retail environment and now you have geopolitics into the mix and it is our toughest compare for the year. So given everything going on externally, we think it's prudent to remain very conservative in running the business in the fourth quarter.

[Mark Altschwager, Analyst at Robert W. Baird]

Thank you. And maybe a follow-up for Barbara. The North American wholesale channel continues to be challenging for many vendors given the dynamic macro. I'm curious what you're hearing with respect to product availability heading into calendar 2024? Thank you.

[Barbara Rentler, Chief Executive Officer at Ross Stores]

Well, currently, there is a lot of availability in the market as I know you know that. Here -- sorry, look at availability at this point, vendors in this environment, vendors are really looking for ways to increase their market share and so they've shifted some of their business towards the growing retail channel. So it's in fact they get less bookings -- we talked about them having less bookings for fall and there is still availability. So bookings are one thing than how much need if I could bring in to drive market-share or just ship channels is another thing, so I don't necessarily think they have a -- you can judge just by bookings what they say about their bookings and there are quite frankly, there are some vendors that are really looking to gain market-share in this period in time are and are taking creative risk on bringing in more to it. So it's kind of a -- it's kind of a mixed bag, but they're really looking to expand to they do business with and to ship channel, so I think that's the reason why goods continue to become available.

[Mark Altschwager, Analyst at Robert W. Baird]

Thank you.

[Operator]

[Operator Instructions] The next question comes from the line of Paul Lejuez with Citigroup. Please proceed with your question.

[Paul Lejuez, Analyst at Smith Barney Citigroup]

Hey, thanks, sorry if I missed it, but could you talk about performance in the home category? And then also, I was curious about store performance-based on income demographic location. So any change in terms of how any specific income cohort behaved during the quarter? Thanks.

[Michael Hartshorn, Group President and Chief Operating Officer at Ross Stores]

Well, on the income, as we said in the commentary, the comp performance was fairly broad-based across geographies, but also what I'd say is trade area demographics including income. So, your bigger question is, are you seeing a trade-down? We saw very broad-based performance across income levels.

[Barbara Rentler, Chief Executive Officer at Ross Stores]

And in terms of the home performance, home performed slightly below the chain average.

[Paul Lejuez, Analyst at Smith Barney Citigroup]

Got it. Thanks. And just a follow-up on the merch margin, I think you mentioned freight is a big driver about, but can you talk about pure merch margin outside of freight, just I mean as markdowns what would be out-the-door merch margin was on pure product basis?

[Michael Hartshorn, Group President and Chief Operating Officer at Ross Stores]

Yeah, Paul, I won't go through component-by-component, but merch margin, in addition to the ocean freight benefit, but if you back ocean freight out, we were -- we were better than last year as we anniversary though markdowns that we took last year. So, third quarter last year was kind of our peak quarter for incremental markdowns last year.

[Paul Lejuez, Analyst at Smith Barney Citigroup]

Got it thanks. Good luck.

[Michael Hartshorn, Group President and Chief Operating Officer at Ross Stores]

Thanks.

[Operator]

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

[Lorraine Hutchinson, Analyst at Bank of America]

Thank you. Good afternoon. What were the drivers of dd's improved sales trends during the quarter and is that now running in-line with Ross?

[Michael Hartshorn, Group President and Chief Operating Officer at Ross Stores]

Sure, Lorraine. As dd's -- as we said also improved and were relatively in line with performance at Ross. We believe the improved performance here like it is at Ross is the customers responding to the broad assortment of values throughout the stores. And I'd also add easing inflation certainly doesn't hurt this customer.

[Lorraine Hutchinson, Analyst at Bank of America]

Thank you. And then any update on shrink from your recent physical inventory?

[Michael Hartshorn, Group President and Chief Operating Officer at Ross Stores]

Yeah, Lorraine, in third quarter -- so we took our second physical inventory of the year in third quarter and trued up those results expected. The results were in-line with our expectations and in-line with last year.

[Lorraine Hutchinson, Analyst at Bank of America]

Thank you.

[Operator]

[Operator Instructions] Thank you. The next question comes from the line of John Kernan with TD Cowen. Please proceed with your question.

[John Kernan, Analyst at TD Cowen]

Thanks. All right. Nice job in 3Q. Barbara, your buyers are obviously doing a great job, passing on value to the consumer. I'm wondering how initial markup trends are as weak as you focus on value?

[Barbara Rentler, Chief Executive Officer at Ross Stores]

Well, obviously, we're not going to talk about -- we're not going to talk about IMU [Phonetic], but I think as the merchants are in the market and they're really looking for compelling deals. They obviously have metrics that they should hit and I would say that they do that, but it is a really unbelievable deal. We're going to price the way we think we need the prices. Our strategy now is really to continue to deliver value. And so again they have metrics everyone sitting in metrics, but that's the focus, what is the right price, what is the right value to drive the customer and sort of gain market-share. So that's the head that everyone says.

[John Kernan, Analyst at TD Cowen]

Understood. And Adam, when you look at the model, what you think is the line-item in either COGS or SG&A that has the most potential for improvement, if you maintain the 3% to 4% same-store sales going-forward?

[Adam Orvos, Executive Vice President, Chief Financial Officer at Ross Stores]

We're just -- we're just getting into the -- we're working our way through the planning process. We'll come back and talk to you at the end-of-the year and kind of frame-up how we see that go-forward at that point in time. I think just to give you some generalities feel like we've recaptured most of the ocean freight at this point. When we look at container rates now are -- very similar to where they were in 2019. So we think by the end-of-the year we'll capture all that benefit.

On the domestic side of freight, we've recaptured some, but certainly not at 2019 levels, given that elevated fuel cost and elevated driver wages since 2019. So, we're pushing very hard on the other components, we'll come back and tell you more about the puts and takes at the end-of-the year.

[John Kernan, Analyst at TD Cowen]

All right, best of luck for holiday. Thank you.

[Adam Orvos, Executive Vice President, Chief Financial Officer at Ross Stores]

Thanks.

[Operator]

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

[Chuck Grom, Analyst at Gordon Haskett]

Thanks a lot. Nice, congratulations. Can you provide color on the trend the basket size and the composition between AUR and UPT this quarter and if you see that changing going-forward -- going-forward over the next few quarters. Thanks.

[Michael Hartshorn, Group President and Chief Operating Officer at Ross Stores]

Sure and as we said, traffic was the primary driver of the 5% comp, average basket was up just slightly as an increase in the units per transaction was partially offset by slightly lower average unit retails. And if we think about it going-forward, we'd like it to be driven by traffic, but we don't plan our business around the components. We plan the business on offering the best-value and if we get traffic and a basket size increase, that's great for the business.

[Chuck Grom, Analyst at Gordon Haskett]

Great, thanks.

[Operator]

And the next question comes from the line of Brooke Roach with Goldman Sachs. Please proceed with your question.

[Brooke Roach, Analyst at The Goldman Sachs Group]

Good afternoon and thank you for taking our question. I was hoping you could discuss the puts and takes behind your SG&A growth, now that we've lived through periods of elevated incentive comp investment this summer. How should we be thinking about growth of that line-item going-forward? And in particular, can you elaborate on what you're seeing in terms of store wage rate inflation? Thank you.

[Adam Orvos, Executive Vice President, Chief Financial Officer at Ross Stores]

Hi, Brooke. This is Adam. Yeah, so store wage as we said in the comments, continues to put pressure on us. That's largely driven by minimum wage changes that we need to take-in the marketplace. But I would say, overall on SG&A the biggest moving part this year has been incentive comp, right? So, as you'll remember, very little incentive comp last year and not only did we have to reset the bar this year, but we're obviously outperforming our financial plan. So that's the biggest kind of volatility in the SG&A line.

[Michael Hartshorn, Group President and Chief Operating Officer at Ross Stores]

I'll just add-on the wage front. I mean generally speaking, wages have stabilized throughout the stores and the dc's in any increases we're seeing are really driven by minimum wages. On SG&A going-forward, I think we'd expect that we'd be able to lever between the 3% and 4% comp as we have in the past.

[Brooke Roach, Analyst at The Goldman Sachs Group]

Thank you very much.

[Operator]

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

[Michael Binetti, Analyst at Evercore ISI]

Hey guys, congrats on a great quarter, nice to talk to you. I just want to ask you, do you think, Michael or Adam jump, what do you think about -- when you look at today to inform you is whether there is some opportunity in the pure merch margin for next year puts and takes that you're thinking about. Barbara, you mentioned seeing some -- you mentioned some great comments on some of the brand availability, is there -- is there an opportunity for AUR as you get better access to quality brand? And then I noticed you opened a bunch of a handful of stores in Michigan a few months ago and one single-store in Minnesota, these are new markets even though we've heard you guys talk so favorably about how the Midwest has gone since you launched it maybe 12 years ago, seems like you're starting to move into some new markets and some fairly big ones, maybe just some thoughts on the new market strategy?

[Michael Hartshorn, Group President and Chief Operating Officer at Ross Stores]

Sure, on merchant margin for next year, we're in the middle of our planning process now. So I'd wait until our year end call and we can give you some more feedback on that. As you mentioned, we entered Michigan and Minnesota during the third quarter, it's very early. On those -- so hard to comment at this stage, other than we're very optimistic about our new market growth.

[Barbara Rentler, Chief Executive Officer at Ross Stores]

And in terms of brands and the AUR increase, really I know it sounds like we'll go back to anything. We really are looking at every deal based on the value we put out on the floor. And so obviously, if they are favorite brands, those goods would -- even at great values would have higher AUR, but it's really a mix of all -- we have all brands whether they are moderate, they are better, they are good, better, best whether best. That's how we're really approaching it. So in terms of just saying, I'm going to raise the AUR because they increase depth and total, that's not -- that's not how we're thinking about it, we're thinking about it more holistically and that's the piece customers responding to.

[Michael Binetti, Analyst at Evercore ISI]

Thanks so much, guys. Congrats.

[Operator]

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

[Adrienne Yih, Analyst at Barclays Capital]

Great, thank you very much and I'll add my congratulation. Barbara, I often on the topic of your packaway in your short-stay. Historically when we have sort of disruptive weather and kind of like the unseasonable weather in the early in the quarter, you're able to use your short-stay flexibility to kind of [Indecipherable] to that. I'm just wondering, how advantageous has that been the season or is the macro kind of more challenging macro sort of overwhelming that. Thank you very much.

[Barbara Rentler, Chief Executive Officer at Ross Stores]

Just I will make sure I understand what you're saying, you're saying, that did we get seasonal products early and or all in the fourth quarter?

[Adrienne Yih, Analyst at Barclays Capital]

I think it's more that, weather has not transitioned to cold for any long permanent period of time. So, procuring frontline retailers talk about that lower their fourth quarters and there is a disconnect between how much they've ordered and think what things that they need to get read-out. So I'm wondering if that's then a benefit to you?

[Barbara Rentler, Chief Executive Officer at Ross Stores]

At this point in time, the goods are obviously building, so the weather has been -- the weather has been warmer than people anticipated. But at the moment-in-time when vendors decide to really move the goods and that really becomes really more longer-term packaway, so if you're sticking outerwear, sweaters classifications like that, yeah, really it would longer-term versus shorter-term deals, could still get deals in front of us, but really, that's really more of a longer-term play that vendors at the end-of-the year decide that they want to do when they're figuring out what they're going to buy for the next year. So, short-term I think people coming to -- having a reality check where they are with some of those classifications of product, so the real answer I guess is more news to follow, but at this moment in time, it hasn't been -- they haven't had a big movement if that's what you're looking for a big movement open at some.

[Adrienne Yih, Analyst at Barclays Capital]

Very, very helpful. Thanks so much. Happy Thanksgiving.

[Michael Hartshorn, Group President and Chief Operating Officer at Ross Stores]

Thank you.

[Operator]

And the next question comes from the line of Alex Straton with Morgan Stanley. Please proceed with your question.

[Alex Straton, Analyst at Morgan Stanley]

Great, thanks a lot for taking the question. Nice quarter, guys. Maybe for Barbara, some peers have highlighted opportunities in newer adjacent categories. So I'm just wondering has Ross entered any newer categories recently or what kind of thoughts do you have on opportunities in general and then, any changes in category mix-shift that you guys have done? Thanks a lot.

[Barbara Rentler, Chief Executive Officer at Ross Stores]

Sure, yes, we have entered into some new categories, obviously, I'm not going to talk about embedded on the call, but yes for the fourth quarter, we entered some different categories for gifting which are going on the floor now and in into December. And then just opportunities in general as we move into next year, I think we have some opportunities in expanding certain businesses. And then also coming back into some businesses that we exited, I would say sometime during COVID. So, I think -- I think there is an opportunity for some one newness on the floor, which is really what the customer that plus -- value is really what the customer is responding to. So every year we go in and look and say, what else -- what else can we expand with us, can we do, but this year we have, yeah, we have our categories in mind, we have not in mind where we are going to [Indecipherable].

[Alex Straton, Analyst at Morgan Stanley]

Thanks a lot. Good luck.

[Operator]

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

[Marni Shapiro, Analyst at Retail Tracker]

Hey guys, congratulations and then if I forget, best of luck for the holiday season. But I'm curious just on dd's, if we can dig in a little bit there. Are you with people looking to trade-down with their wallets a little tighter, are you finding that you are attracting more new customers into that brand and the traffic trends that drove the comp in the quarter, whether this was that also true for dd's. And then I recall dd's tends to have more favorable, a little bit more family focus, you tend to have a little bit more kids and toy focus even. I'm curious how you feel about the lead-up to holiday with the assortments and values there and is that still the case in dd's actually?

[Michael Hartshorn, Group President and Chief Operating Officer at Ross Stores]

On -- Marni on traffic, so traffic like Ross, the comp for dd's was entirely driven by traffic.

[Marni Shapiro, Analyst at Retail Tracker]

Excellent.

[Barbara Rentler, Chief Executive Officer at Ross Stores]

And then in terms of assortment, yes, it is -- it is family focused box and the dd's customer does have more children. So businesses like toys in the fourth quarter [Technical Issues].

[Marni Shapiro, Analyst at Retail Tracker]

Did also holiday addresses due to that business as well in dd's?

[Barbara Rentler, Chief Executive Officer at Ross Stores]

We do all those businesses. All the traditional business as you would expect -- you expect holiday dresses, you'd expect toys you expect anything for family photoshoot and then you know toys or other little things that they give kids.

[Marni Shapiro, Analyst at Retail Tracker]

And then can I just ask a follow-up on that, are you seeing at dd's that the customer is now coming to dd's for these big holiday events like for Halloween for Christmas, does that customer come to dd's more regularly as a part of their part of their regular trip of stores to go to?

[Barbara Rentler, Chief Executive Officer at Ross Stores]

I think it's part of their regular stores to go to and do they like seasonal product for Halloween, harvest, Christmas, obviously, Christmas is very big, yes, yes.

[Marni Shapiro, Analyst at Retail Tracker]

Fantastic.

[Barbara Rentler, Chief Executive Officer at Ross Stores]

And I don't think that get up in the morning and say I need to go buy some Halloween. I think [Technical Issues] they're going to store, anything to say like and I think it's impulse purchases, probably for everyone.

[Marni Shapiro, Analyst at Retail Tracker]

Fantastic. Love that. Thank you so much. Best of luck for the holiday by weekend time.

[Adam Orvos, Executive Vice President, Chief Financial Officer at Ross Stores]

Thank you.

[Michael Hartshorn, Group President and Chief Operating Officer at Ross Stores]

Thank you.

[Operator]

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

[Dana Telsey, Analyst at Telsey Advisory Group]

Hi, congratulations on the nice results. Can you give some color on the regional performance and what you saw California maybe Texas and any of the other areas? And then also on categories, I think last-time on last quarter's call you mentioned that apparel trailed, but improved sequentially. What did you see this quarter? Thank you.

[Michael Hartshorn, Group President and Chief Operating Officer at Ross Stores]

Regionally, Dana, our largest market California was above the chain average, Texas and Florida were in line. And as we mentioned in the call, it was very broad-based across the country.

[Barbara Rentler, Chief Executive Officer at Ross Stores]

And then in terms of apparel, it slightly trailed the chain average and the comps were relatively similar between Q2 and Q3, but they did exceed plans.

[Dana Telsey, Analyst at Telsey Advisory Group]

Got it. Thank you.

[Operator]

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

[Aneesha Sherman, Analyst at Sanford C. Bernstein]

Thank you. So, Barbara, as retailers and brands have been talking about clearing excess stock, are you seeing any change in your inventory mix and your percent of close-out like through the year, are you seeing more importing and more upfront buying? And I have a quick follow-up for Adam, you mentioned labor costs and wages stabilizing. Can you talk about some of the new labor cost-saving models, you've been piloting like self-checkout and any -- any update you can share on the rollout of those? Thank you.

[Adam Orvos, Executive Vice President, Chief Financial Officer at Ross Stores]

On the self-checkout, we are in a very small number of stores. And as you can imagine, we're going very slowly to make sure we get it right. We're in about 100 stores right now and we're going to continue to pilot the operating model that we have there and we're very cognizant of the shrink environment. So, we're going to go slow.

[Barbara Rentler, Chief Executive Officer at Ross Stores]

And then in terms of upfront versus close-out as the year progress, I mean, it's pretty similar can peak up-and-down a little bit in the fourth quarter, you have home business, kind of more that DI, so that gets bigger and versus the rest of the year, but I would say it's similar. I think close-outs have come across all year pretty much in most businesses. And so I think, yeah, I don't see a bigger shift, it could go up or down two-three points, but nothing major.

[Michael Hartshorn, Group President and Chief Operating Officer at Ross Stores]

Yeah, Aneesha...

[Aneesha Sherman, Analyst at Sanford C. Bernstein]

Thank you.

[Adam Orvos, Executive Vice President, Chief Financial Officer at Ross Stores]

Just on those comments, within our capex, we're definitely investing in technology, more automation in our distribution centers. We're spending money in our storage just to automate a lot of our non-customer facing tasks, just more efficient ways to take markdowns and check inventory and also just investing in more analytics in the business.

[Aneesha Sherman, Analyst at Sanford C. Bernstein]

Great. Thank you.

[Operator]

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

[Corey Tarlowe, Analyst at Jefferies Financial Group]

Great, thanks. I was wondering if you could talk a little bit about what you saw in footwear, I'm not sure if you did highlight it or if I missed it, but really great to get color there?

[Barbara Rentler, Chief Executive Officer at Ross Stores]

Sure, shoes again was one of our best-performing businesses and that was pretty -- that was broad-based across all shoes.

[Corey Tarlowe, Analyst at Jefferies Financial Group]

Got it, thank you. And then just as it relates to higher buying costs, I believe you highlighted, could you discuss what drove that?

[Adam Orvos, Executive Vice President, Chief Financial Officer at Ross Stores]

That higher buying was all incentive cost-related.

[Corey Tarlowe, Analyst at Jefferies Financial Group]

Got it, understood. Thank you very much.

[Operator]

And the next question comes from the line of Laura Champine with Loop Capital Markets. Please proceed with your question.

[Laura Champine, Analyst at Loop Capital Markets]

Thanks for taking my question. It's really about California wage rate, not just with the minimum wage increase, but also the fast-food wage increase slated for the new year, how much of that or how much of a material impact do you think that might have on your expense lines for next year?

[Michael Hartshorn, Group President and Chief Operating Officer at Ross Stores]

Laura, obviously, we've been tracking up in California for some time with their minimum increases there. It's been a competitive market for us for a long-time. I think in regards to the fast-food workers, we'll have to see how that spills over, but we believe we accrued from a different pool than the fast-food industry.

[Laura Champine, Analyst at Loop Capital Markets]

That's helpful. If I could get a clarification a general sense of what percentage of your employees of your store-level employees are in California, will that line-up with your store count?

[Michael Hartshorn, Group President and Chief Operating Officer at Ross Stores]

It will be a little higher than our store count because those tend to be higher-volume stores, but slightly above our store count let's say.

[Laura Champine, Analyst at Loop Capital Markets]

Thank you.

[Operator]

And the last question comes from the line of Bob Drbul with Guggenheim Securities. Please proceed with your question.

[Unidentified Participant, at Ross Stores]

Hi, this is [Indecipherable] on for Bob. It looks like inventories are up 5 -- on the 5% comp increase. Could you please expand on packaways given a great brand availability, the recent backways have been trending down couple of percentage points below last year and every quarter this year, any changes and approach factor of higher deposit deployment of product, is it like better inventory productivity at stores. Any additional color would be super helpful. Thank you.

[Barbara Rentler, Chief Executive Officer at Ross Stores]

Though really no change -- no change to how we're running packaway. Sometimes when your business is very good -- we chased a lot of business this year, good to revive packaway fill up. So we've been in a constant chase and the thing about packaways when you're buying purchase that you're going to hold you have to be absolutely sure that the values are correct. So the merchants are very discerning on what they buy, when they put in packaway because when you're bringing it back-out, we want to make sure that the value is right. So, I don't think there's anyway to look back, there is a lot of goods out there could be packaway just put more goods into our packaway we could, I think it's the merchants job to really put the best product in there at the best possible values and we're focused, very focused on value. And so, see I don't think there's anything to read into, we feel -- we actually we feel very good about our content and packaway that we own this year because there's been a lot of very good deals and a lot of good products out there. So, we have plenty of money to buy packaway if we'd like to buy some, but that's really, that is really -- comes to merchant team, it's their call what they believe is the right value and then that's why therefore can fluctuate that plus to chase that we hadn't sales in the quarter.

[Unidentified Participant, at Ross Stores]

Got it, got it. So would you say that the product this year resonates better with the consumer like from the value perspective?

[Barbara Rentler, Chief Executive Officer at Ross Stores]

You mean packaway product or just product in general?

[Unidentified Participant, at Ross Stores]

Just product in general.

[Barbara Rentler, Chief Executive Officer at Ross Stores]

I think the customers really responding to the better values clearly press financially pressed and even though inflation is easing, she is still under pressure. And so whenever you can give the customer better branded bargain, an unbelievable value, she felt in a refund, which is why we are highly focused on that and that would therefore take us through stronger market-share.

[Unidentified Participant, at Ross Stores]

Got it, thank you so much and Happy Thanksgiving.

[Operator]

And ladies and gentlemen, there are no further questions at this time, I'd like to pass the call-back over to Barbara Rentler for any closing comments.

[Barbara Rentler, Chief Executive Officer at Ross Stores]

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

[Operator]

[Operator Closing Remarks]