Ross Stores' (ROST) CEO Barbara Rentler on Q1 2016 Results - Earnings Call Transcript

| About: Ross Stores, (ROST)

Ross Stores, Inc. (NASDAQ:ROST)

Q1 2016 Earnings Conference Call

May 19, 2016, 4:15 pm ET

Executives

Barbara Rentler - CEO

Michael Balmuth - Executive Chairman

Michael O'Sullivan - President & COO

Gary Cribb - EVP, Stores & Loss Prevention

John Call - EVP, Finance & Legal

Michael Hartshorn - Group SVP & CFO

Connie Kao - VP, IR

Analysts

Paul Lejuez - Citi

Neely Tamminga - Piper Jaffray

Ike Boruchow - Wells Fargo

Daniel Hofkin - William Blair & Company

Stephen Grambling - Goldman Sachs

Kimberly Greenberger - Morgan Stanley

Brian Tunick - RBC

Matthew Boss - JPMorgan

Bob Drbul - Nomura

Richard Jaffe - Stifel

Michael Binetti - UBS

Omar Saad - Evercore ISI

Mike Baker - Deutsche Bank

Marni Shapiro - Retail Tracker

Roxanne Meyer - MKM

David Mann - Johnson Rice

Randy Konik - Jefferies

Operator

Good afternoon, and welcome to the Ross Stores First Quarter 2016 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 forecasts and other matters that are based on the company's current forecasts 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. Risk factors are included in today's press release and the company's fiscal 2015 Form 10-K and fiscal 2016 Form 8-Ks on file with the SEC.

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

Barbara Rentler

Good afternoon. Joining me on our call today are Michael Balmuth, Executive Chairman; Michael O'Sullivan, President and Chief Operating Officer; Gary Cribb, Executive Vice President, Stores and Loss Prevention; John Call, Executive Vice President, Finance and Legal; Michael Hartshorn, Group Senior Vice President and Chief Financial Officer; and Connie Kao, Vice President, Investor Relations.

We will 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.

Earnings per share for the first quarter were $0.73 or a 6% gain on top of a robust 19% increase in the prior year period. Net earnings for the quarter were $291 million, up from $282 million last year.

Sales increased 5% to $3.89 billion with comparable store sales up 2% on top of a strong 5% gain in the first quarter of 2015.

Despite facing our strongest prior year comparisons, along with merchandising execution issues in ladies apparel, sales performed at the high end of guidance, while earnings per share were slightly above our targeted range.

During the quarter, home and shoes were the best performing merchandised categories at Ross, while ladies apparel underperformed. Geographically the Mid-West and Mid-Atlantic were the strongest regions. Although our first quarter operating margin of 15.4% was down from last year, it was slightly above plan mainly due to higher merchandised margins that partially offset the expected impact from the unfavorable timing of packaway related expenses.

As we ended the first quarter, total consolidated inventories were flat versus the prior year with average in-store inventories down slightly. Packaway as a percent of total inventories was 46% compared to 45% at this time last year. Both sales and operating profits at dd's DISCOUNTS were better than expected in the first quarter as customers continue to respond positively to dd’s value offerings.

Our store expansion program remains on track as we opened 22 new Ross and six dd’s DISCOUNTS stores in the first quarter. We continue to expect to add a total of 90 new locations in 2016 comprised of approximately 70 Ross and 20 dd’s DISCOUNTS. As usual these numbers do not reflect our plans to close or relocate about 10 older stores during the year.

Now Michael Hartshorn will provide further color on our first quarter results and details on our second quarter guidance.

Michael Hartshorn

Thank you, Barbara. Our 2% comparable store sales gain was driven by an increase in the size of the average baskets. As Barbara mentioned, first quarter operating margin of 15.4% was down 30 basis points from last year which was better than our guidance for a 50 to 70 basis points decline.

Cost of goods sold increased 10 basis points in the quarter mainly due to a 55 basis point increase in distribution expenses from the expected impact of a new distribution center; we opened in the second quarter of last year, as well as the unfavorable timing of packaway related costs that benefited this period in 2015. These expense pressures were partially offset by merchandised margins that rose a better than expected 35 basis points and 10 basis points in lower buying costs.

Selling, general, and administrative expenses during the period increased by 20 basis points due to a combination of deleverage from the 2% increase in comparable store sales and also higher wages.

During the first quarter, we repurchased 3.1 million shares for a total purchase price of $176 million. This keeps us on track to buy back as planned a total of $700 million in stock for the year which will complete the two-year $1.4 billion program authorized by our Board of Directors in February 2015.

Let’s turn now to our second quarter guidance. We continue to forecast same-store sales for the 13-weeks ending July 30, 2016, to be up 1% to 2% on top of a 4% gain in the second quarter of 2015 with earnings per share of $0.64 to $0.67 compared to $0.63 last year.

Our guidance for the second quarter is based on the following assumptions. Total sales are projected to increase 4% to 5%. We expect to open 31 new stores during the period including 24 Ross and 7 dd’s DISCOUNTS locations.

Second quarter operating margin is projected to be relatively flat at 13.8% to 14.0% compared to last year’s 13.9%.

In addition, net interest expense for the quarter is estimated to be about $4 million. Our tax rate is expected to be approximately 38% to 39% and weighted average diluted shares outstanding are projected to be above $397 million. Based on our first quarter results and the second quarter guidance, we now project fiscal 2016 earnings per share to be in the range of $2.63 to $2.72 compared to $2.51 last year.

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

Barbara Rentler

Thank you, Michael. As mentioned earlier, even though we faced our toughest prior year comparisons and comparable store sales came in at the high-end of guidance with earnings per share performing slightly above our target range, we feel we should have done better.

In hindsight, we now know that we had some merchandised execution issues in ladies apparel during the quarter that are now in the process of being addressed. Looking ahead, we have plenty of open to buys, which gives our merchants the ability to select the best values from the large volume of products available in the marketplace today.

Being in this position will enable us to offer customers even more fresh and exciting new bargains as we move through the second quarter and the balance of 2016. As always, providing customers with the most compelling name brand values possible is a key driver of both our short and long-term success.

At this point, we would like to open up the call and respond to any questions you might have.

Question-and-Answer Session

Operator

[Operator Instructions].

Your first question is from Paul Lejuez with Citi.

Paul Lejuez

Hi, thanks, guys. On the last call, I believe you mentioned that you were holding back a little bit on some of your potential packaway buys because you thought the deals were going to get even better. I'm just wondering if that came to fruition throughout the quarter. And, if so, when do you plan to flow those goods into the stores? And also just kind of curious about performance in some of your larger states, California, Texas, Florida. Thanks.

Barbara Rentler

Okay. Paul, as it pertains to packaway, yes, we did buy packaway goods in the first quarter that we would use for second quarter and for fall. We’re actually pleased with the packaway assortments that we have. And in terms of --

Michael Balmuth

I think your other question was on regions, so Michael do you want to comment on that?

Michael Hartshorn

Sure on the regions Paul, the Mid-West and the Mid-Atlantic as we said in the comments were the strongest regions. The Mid-West has been very strong over the last several years, while the Mid-Atlantic benefited from a favorable weather comparison versus last year.

In terms of other states, you mentioned California our largest region performed slightly below the chain average. Texas was above the chain average on top of a strong performance last year when it was also above the chain average. And then Florida, trailed the chain average we believe some of the merchandising issues that Barbara mentioned in her comments had a bigger impact to Florida as we transitioned spring product earlier there.

Paul Lejuez

And then just one follow-up -- what's the timing on when you feel like you might have the merchandising issues fixed on the ladies apparel side?

Barbara Rentler

At this point, we’re working on -- we’re working on the issues that were there on the process of being addressed. We’re working to fix them as quickly as possible and it’s embedded in our guidance for Q2. So we hope to do that.

Operator

The next question is from Neely Tamminga with Piper Jaffray.

Neely Tamminga

Great. I was wondering if you could elaborate a little more in the ladies apparel merchandising issues. Is it within the category or is it kind of more broad-based? We’re just trying to better understand that issue. Thank you.

Barbara Rentler

Well what I would say is that we could have done a much better job of executing our merchandise game in ladies. And it was mainly in the transition to spring product that we made some execution errors.

Operator

Your next question is from Ike Boruchow with Wells Fargo.

Ike Boruchow

Hey sorry guys, can you hear me?

Michael Hartshorn

Yes.

Barbara Rentler

Yes.

Ike Boruchow

I’m sorry about that. I think this is the first time in the last four or five quarters that you didn't call out transactions as being up and a driver of comp. Is that all attributable? I assume that's not a real traffic number. Is the transactions not being called out, does that mean transactions were down? And again, is just that all related to the ladies apparel category?

Michael Hartshorn

Ike as we mentioned in our remarks that 2% comp was driven by the size of the average basket, transactions. Our proxy for traffic was flat during the quarter. The higher basket was driven mainly from higher units for transactions.

Ike Boruchow

Got it, thank you.

Barbara Rentler

What I would add Ike is that, that I believe in our assortments of ladies apparel are not up to the standards that our customers come to expect that probably makes us a little less compelling to shop.

Operator

The next question is from Daniel Hofkin with William Blair & Company.

Daniel Hofkin

Good afternoon. Could you may be quantify what comps might have been in other categories to give us some sense of what that impact would have been from ladies apparel and moving forward kind of how you see that, it sounds like you’re in the process of fixing it, do you think it’s realistically fixable by holidays third and fourth quarter? Thanks.

Michael Hartshorn

Sure. In terms of other merchandise performance we did have categories that performed well, home and shoes did very well for us. In terms of trying to understand the impact, it’s always hard to do. That said our comparable store sales did slow one to two points from our trends in the back half of last year.

Barbara Rentler

What I would say is we’re working to address the issues and to fix them as quickly as possible. No we’ve been doing this for long time now, we’ve made mistakes before and we’re going to get it fixed.

Operator

Your next question is from Stephen Grambling with Goldman Sachs.

Stephen Grambling

Hey good afternoon. Thanks for taking the question. Just to clarify on an earlier question, as you think about the distribution headwinds as well as the packaway headwinds, can you just clarify how that should progress over the course of the year? Thanks.

Michael Hartshorn

Sure, Steven. So in the quarter distribution costs were 55 basis points higher than last year and that’s split fairly evenly between anniversarying the opening of our distribution center in the second quarter of last year and also the timing of packaway related costs. As we get into the second quarter, the impact of that DC will be about half of what it was in the first quarter and will have it fully anniversaried when we get back to the back half of the year.

In terms of timing of packaway, if you recall last year, we got a benefit in the first quarter, we got a benefit in the third quarter, and took a charge in the fourth quarter. So we’re up against those this year. So we had about half of the 55 basis points with a drag in this first quarter and our upcoming second quarter, the guidance assumes packaway relatively flat.

Stephen Grambling

That’s very helpful. And then turning back to the top-line is there any comments that you can provide on the trend throughout the quarter especially as it relates to traffic, was it pretty consistent or was there any particularly strong changes as the quarter progress. Thanks.

Michael Hartshorn

Sure, Stephen. Sales were relatively consistent throughout the quarter. Comp sales for March and April combined which removed the impact of the Easter calendar shift were very similar to what we saw in February.

Stephen Grambling

Great, thanks so much. Best of luck in the back half.

Operator

Your next question is from Kimberly Greenberger with Morgan Stanley.

Kimberly Greenberger

Great, thank you. Barbara, I’m not sure if there is anything else that you would like to share about just your observations on the trends, the spring transition in ladies apparel, if so obviously we would love to hear them. And I’m wondering obviously that is impacting I would imagine to start here through the second quarter, do you think that there is an opportunity perhaps for that ladies business to get back on track by the time we get it to the July timeframe or do you really think that the full second quarter will be impacted, I would imagine that the issues here do not -- you would not expect them to continue into the back half of the year but I just want to make sure that’s a fair assumption. Thank you so much.

Barbara Rentler

So let me start with in terms of the transition of ladies, the only other flavor I would put to it is that really what we found is that we had wrong fabrications and colors, they were not appropriate. So our assortment was I would off course. In terms of start to the second quarter, we obviously couldn’t comment that in the quarter that we’re in. In terms of the back half, so we’re working on it, we’re drilling in, figuring out what’s wrong, working on it trying to fix things as quickly as possible but it’s hard to forget. So we’ve got it embedded in our guidance and we’re hoping to do better.

Kimberly Greenberger

Great. Thank you so much. And just one last question, obviously this execution challenge relates to current in-season product that you got in the stores. Can you reflect on the product that’s been put into packaway and do you think there is some risk that some of the products that’s been put into the packaway could also have suffered from a similar execution issue or do you have different guardrail around the product as it goes into the packaway relative to what you got in the stores at this time?

Barbara Rentler

No we’re comfortable with what we have in packaway; we don’t think the two issues relate.

Operator

The next question is from Brian Tunick with RBC.

Brian Tunick

Thanks, good afternoon. Couple of questions. I guess number one from an in-store inventory reduction opportunity, can you may be just give us an update there on sort of what we should think about the rest of the year could look like obviously you’ve made great strides, how you’re thinking we should expect in-store inventories to play out. And then Q1 is usually choppy between the tax refunds and obviously there was the gas price relief, did you guys have any chance to parse out, I guess California saw the wage hikes first, you call that I think out underperforming the change. Just any perspective as you think about the tax refunds, the gas price relief the wage hikes for your consumer?

Michael Balmuth

So Brian, I will take the second part of your question first, may be Michael Hartshorn will respond on the expectations for reductions throughout the rest of the year. But in terms of some of the issues you raised like gas prices, wages et cetera. I mean our business is always affected by sort of external variables and when we came into the year, we did -- we raised some concerns about the economic and the consumer outlook.

It’s difficult to as you say parse out of those different components and quantify their impact. The -- what I would say though is that I think we’ve always acknowledged that our performance is more than anything driven by our own execution. So although many of those things that you mentioned were important in Q1, I think our own execution was most important thing that’s why Barbara called it out in her comments.

Michael Hartshorn

Brian on inventory levels we came into the year expectations that after many, many years of inventory reductions that our expectation we’re going to operate the business with slightly lower inventory this year and that expectation hasn’t changed.

Brian Tunick

Okay. And then lastly on dd’s does it have any of the same women’s sportswear issues that Barbara is talking about it at Ross?

Barbara Rentler

No.

Brian Tunick

All right, thanks very much. Good luck for the summer.

Barbara Rentler

Thank you.

Michael Hartshorn

Thanks.

Operator

Your next question is from Matthew Boss with JPMorgan.

Matthew Boss

Thanks. So your forward-looking caution on the overall retail backdrop last quarter, I mean proved pretty spot on. I guess any changes to your larger picture outlook today versus where you were three months ago, how are you guys thinking about price competition in the back half and then just any categories of particular closeout opportunity that you’re seeing right now in the landscape?

Michael Hartshorn

So Matthew on the first piece, again I will say the external environment is one of a number of things that affects our performance. If consumer spending goes down and that leads to a more promotional competitive environment and that’s generally not good. But having said that, we certainly in the past that we can perform well in a tough -- even in a tough economic environment and again in Q1, we performed at the high-end but we feel like we should have done better but to the execution issue that Barbara described. So we remain cautious as we were when we came into the year in terms of the rest of the year and that again is factored into our guidance.

Barbara Rentler

In terms of supply, supply is very broad-based. There’s a lot of supply in the market.

Operator

Your next question is from Bob Drbul with Nomura.

Bob Drbul

Hi good afternoon. I just had couple of questions. I think the first one is in the strength in shoes is it the women’s shoes or is it athletic, can you talk a little bit about your trends in athletic overall and then strength in home, is it hard home or soft home, like what are you seeing in home and do you feel like that’s a sustainable trend that should continue for the rest of the year?

Barbara Rentler

Actually our strength in shoes is broad-based both in brown shoe and athletics. As this was strength in home, it’s broad-based between decorative homes and bed and bath. So both businesses are pretty healthy across the board.

Bob Drbul

Okay. And when you look at the wage pressures that your business is seeing, do you feel like that’s still a containable issue for you as the year progresses or do you think it’s getting any worse, how do you have that planned in for the rest of the year?

Michael Hartshorn

Bob we feel pretty good about our guidance with respect to the impact of wages this year. Obviously as you would expect we are looking at the longer-term as well and we’re working on our various plans to sort of deal with wage pressures over longer period of time and more to come on that in the future but for this year we feel very comfortable.

Operator

The next question is from Richard Jaffe with Stifel.

Richard Jaffe

Thanks very much guys. Could you talk about the trends at average retail price at Ross and at dd? And then if you could just comment on the cash balance which seems to be growing and wondering if you perhaps don’t want to get more aggressive on buybacks or dividend or what is your thought on the cash balance? Thanks very much.

Michael Hartshorn

AUR trend at both Ross and dd is pretty stable, pretty consistent with the prior year. In terms of the cash balance, we look at it time to time, we typically we’re in the middle of a two-year authorization, we’ll look at it next year in terms -- along with our longer-term plans and make a decision at that point.

Operator

The next question is from Michael Binetti from UBS.

Michael Binetti

Hey guys, good afternoon. May be I can ask about the -- from the inventory a little bit differently but this is I guess two quarters in a row where you’ve commented I think that the inventory in store has been negative, I don’t know if that’s related to the women’s apparel call out. But are there any may be looking a little bit above that was there any other categories like maybe you are a little bit too light on inventory to drive the comp?

Michael Hartshorn

No that was unrelated and that’s how we operate the business. That was our plan and surely we will execute.

Michael Binetti

Okay and then may be if I could just look a little bit longer-term, I want to think about may be 2017 if we just take a look at inventory in the past nine months and the channel or department stores have really missed their business plan by a significant amount. Looking -- I just see in your comps in the fourth quarter, you benefited from that and you just had your first quarter sound like inventory is fairly plentiful. If we assume a more rationale inventory ordering pattern from the department stores heading into this holiday and also fairly common theme from the brands like PVH and Ralph Lauren lately their big corporate strategies are just slow inventory flows into the department stores going forward. Do you have may be a point in history you could point to and say here is what a year like 2017 might look like as we will have the period of very favorable inventory situation?

Michael Hartshorn

No I can’t really think of a period in the history that it would be analogous. So what I would say is many of the things that you just said Michael are things that frankly people said at the beginning of every year in terms of here’s why supply is going to tighten up. And certainly we haven’t seen any sign of that and but so far this year and so we’re not expecting to see a major reduction in supply opportunities either for the remainder of this year may be it’s too early to tell for 2017 but at least no signs of that at this point.

Barbara Rentler

Actually our history would show that the supply will keep the coming. As the department store sector even though they pulled back, their business is way off and I don’t think it’s very difficult I think for vendor to get ahead of that, so history would show that, they would be plentiful supply as we go forward.

Operator

The next question is from Omar Saad with Evercore ISI.

Omar Saad

Thank you, good afternoon. I was wondering if you guys could talk a little bit about how you track your customer data, customer behavior and you never thought about something along the lines on loyalty programs or rewards program or even private label credits will be helpful to know, what are your thoughts on those things?

Michael Hartshorn

Sure Omar. We are -- we periodically look at various programs like loyalty programs, credit card et cetera. And it’s something we will continue to look at but our experience and what’s worked for us, I would say over many years is to keep it simple and to focus on having the right assortment and great values. And it’s all about customer research tells more than anything else that’s what customer -- that‘s what the off price customer cares about and that’s what’s going to drive our loyalty over time, quite apart from any sort of loyalty program on the side, it’s clearly all about the right assortment and great values. And if I just think about the most recent quarter, it’s clear that in Q1 we didn’t miss opportunities because we didn’t have a loyalty program, if we missed opportunity that was because we may have had some assortment misses.

Operator

Your next question is from Mike Baker from Deutsche Bank.

Mike Baker

Hi thanks, so as mentioned comps slowed 1% to 2% from the end of the last year. I guess what I’m going to ask is how much of that do you think is because of the ladies apparel assortment issue and how much is that you mentioned a couple of times that you correctly predicted that consumer was a little bit soft. So is this all because of the ladies issue, is it a little bit of both and then I have a follow-up to that.

Michael Hartshorn

Sure. It’s hard for us to say. I would say that what we typically try and do in our business is focus on what we can control. And so it’s not very helpful for us to sort of delve on external things that we can’t really do anything about. What we think we can do something about and what we could have done something about in Q1 is sort of making sure that we execute as well as possible and that’s really the focus rather than any external issues.

Mike Baker

Did you see a similar slowdown that you saw in ladies apparel, do you see anything you even closed out or any kind of slowdown in any other major categories?

Michael Hartshorn

No.

Barbara Rentler

No actually we felt good about our home business, our shoe business and we’re pretty pleased with our junior business. So it really was ladies apparel.

Mike Baker

Okay. So that would that helps trying like that but the follow-up question is in the past and I understand that these things happen, I mean you think it’s buying right every time but how long does it typically take to fix it, is it just you look to buy for the season and then you hope to buy it better for the next season or candidly fix inter-season with some late buys right now?

Barbara Rentler

What I would say is that we’re working to fix it as quickly as possible. So we are a 1,300 store chain, it takes a little bit of time but we’ve done this before and so that’s why we hadn’t built in our guidance.

Mike Baker

Okay. Typically when we’re going to last until the next season because that’s a different buy presumably.

Barbara Rentler

Yes, obviously that’s a fair assessment. You're saying just pure product to product.

Mike Baker

Correct.

Barbara Rentler

Yes I would that’s a fair assessment.

Operator

Your next question is from Marni Shapiro with Retail Tracker.

Marni Shapiro

Hi good afternoon everybody. I just wanted to dig in a little bit to what was going on at the store level away from women's. Are you finding that when she’s coming into the store, she’s not finding what she wants in women’s, she’s moving into home and with that in mind or into non-apparel with that in mind could you shed any light on how the accessories business, handbags and jewelry and what how that business did? And any insights you have as to what might be driving up the UPT? Is it a function of fewer trips, buying more when she comes in or just great product that she has to have everything?

Barbara Rentler

Okay, Marni that’s a few different things. I would say as she is coming into the store in Q1 if she wasn’t buying ladies apparel based on our performance in home and in shoes and other areas of the company that she bought other products. And in terms of accessories, our accessory business is still visible really based on our handbag business in particular which is pretty actually industry-wide issue. In terms of UPT, Michael?

Michael Hartshorn

Yes, Marni that the UPT has grown for us for a while, it helped to drive our comp last year and our perspective is that the consumers coming in and we have great bargains in the store and buying more transaction, it’s hard to delineate the thesis of that.

Marni Shapiro

Yes and it makes sense. And then just on like-for-like items, your pricing has remained, as I recall and I think you mentioned, sorry I’m trying to do Q1 but your pricing has remained fairly stable like-for-like. Sweater for sweater, bag for bag kind of thing.

Barbara Rentler

The AUR.

Marni Shapiro

Yes.

Barbara Rentler

The AUR sweater for sweater might be the same, the value might be better. So when there is a lot of supply in market and you get close out on say better or branded product that you can put out at a lower retail, the AUR could be the same but the value could be significantly better.

Marni Shapiro

Fair and just one last follow-up on that note, are you finding that I mean there is a lot of inventory out there, have you been able to open new centers that you haven’t been able to get into before over the course of the last couple of months and even six months?

Barbara Rentler

I would say that that the vendor community is pretty much open to doing business with us everywhere, I mean.

Marni Shapiro

Fantastic, all right. Best of luck guys for summer.

Barbara Rentler

Thank you.

Operator

Your next question is from Roxanne Meyer from MKM.

Roxanne Meyer

Great, good afternoon. Two questions one I’m just wondering what your 2Q guidance may be your 3Q guidance assumes about merchandised margins decline related to getting out of some of the women’s apparel that’s not working. And then secondly as it relates to the Mid-West markets, it’s been not performing for the nine quarters now, just wondering what it is that’s really driving the outperformance and whether or not you see that continuing? Thanks a lot.

Michael Hartshorn

Roxanne on guidance. So we only give one quarter at a time. We’ll talk about Q3 after the second quarter but the second quarter guidance assumes some increase in merchandised margin for the quarter.

Michael Balmuth

And then on the Mid-West Roxanne as you say, we are very happy with how the Mid-West has performed not just in Q1 but over the last couple of years, it’s been one of our top performing regions. When we enter the Mid-West in 2011, we said it would be a very successful business but it would take time and I’m certainly very pleased with the progress so far. I think it’s about having the right values in front of the customer. So we’re very pleased with how we’ve done in the Mid-West.

Operator

Your next question is from David Mann from Johnson Rice.

David Mann

Hi yes, thank you. In terms of the comment you made about the ladies issue being included in guidance, I guess I see that your full-year guidance seem to have gone up equal to the amount of the beat in the first quarter. So where in the guidance for the rest of the year would we see changes in assumptions for this ladies issue and what else might have you’ve changed to offset any impact from that?

Michael Balmuth

So David what I think we’re saying is we could -- we’re going to -- we expect to achieve our original guidance despite the ladies issue.

David Mann

Okay.

Michael Balmuth

That happens for the full-year. We raised our full-year guidance by the penny in the quarter.

David Mann

And I guess, I’m curious where and what would be some of the factors that might give you that confidence that you would be able to offset that?

Michael Hartshorn

So we were able to, in the first quarter. So in the first quarter we hit the high-end of our compound for 2% despite the issues that Barbara has described on the ladies side probably because there were other businesses that did very well. So if you keep play that out over the year, we feel good about our original guidance.

David Mann

Very good. And then one other question on the wages issue, do you have any initial thoughts on the potential impact on the new overtime regulation, how it might affect your business?

Michael Hartshorn

So we’ve looked at it and any impact at all would be non-material and it’s -- we're comfortable with our guidance as we go forward.

Operator

The next question is from Randy Konik with Jefferies.

Randy Konik

Hi quick questions. I just want to clarify when you make the comment the issues are embedded in the guidance, what does that mean exactly to the ladies apparel, does that mean that assumes it stays at the same trend it was in the first quarter or even assume some incremental degradation in the category. Just kind of get some I guess first color there. And then just a little bit more around the execution side comments, can you just give a little more clarity of what you exactly mean part of the execution, was it some sort of systems issue just bought the wrong thing, got it in the wrong source at the wrong time? Just a little more meat on the bone of what the actual issue is. Thanks.

Michael Hartshorn

Randy on the guidance, just to repeat what Barbara said earlier the issues are going to take some time to effect and we’re focused on as an organization it’s hard to get that done quickly. Despite that like in the first quarter, we obviously missed some opportunities thought we could have done better, thought we could have beat our original guidance. The guidance going forward is unchanged and we hope we can do better.

Barbara Rentler

In terms of the execution issues in Ladies, really it’s a mix issue. We just -- we bought wrong product in fabrications, in colors, we just didn’t transition into spring product appropriately.

Randy Konik

Okay. And then your outlook for merchandised margin already accounts for your potential issues around this category right. So everything you feel for the second quarter guidance, you’re properly accounting for the issue to be this ladies apparel issue to say kind of confined; is that correct?

Michael Hartshorn

That’s correct.

Randy Konik

Hello.

Michael Hartshorn

Yes.

Barbara Rentler

Yes, that’s correct.

Randy Konik

Okay. And then I guess lastly how should we be thinking about some of the items that we’re seeing out there in the marketplace around some different geographic performance, one of your competitor had I guess more strength in traffic trends versus your -- you just talk more about the basket size driving the comp. What do you think is a little bit of a difference in may be the desiring traffic trends you might have seen versus others?

Barbara Rentler

I think as I said before, I believe that when our assortments in ladies apparel are up to the standards the customer comes to expect that properly makes us a less compelling place to shop. And that would affect our traffic trends.

Michael Hartshorn

And also I mean there are some other factors; we are up against very strong prior year comparisons which I think you always have to look at that when you are comparing our performance with other retailers. And then you also factor in the point Barbara has been making about the ladies apparel business, being a pretty important business, and it’s a pretty key driver of traffic, you take those two things together, I think that explains why traffic was held up a little bit in the first quarter.

Randy Konik

So you’re able to commence -- are you able to lastly -- my last question here is, are you able to see that potentially in tracking let’s say customer visits per quarter, where you are saying if a customer goes in the store month one of the quarter, she loves what she sees, she’s probably going to be back a month later or something, is that you saw visits per store per person per quarter -- in the quarter accelerate the same person did you see that, were you able to see or track the credit card data to look at that?

Michael Hartshorn

No we can’t. Our business doesn’t lend itself for that kind of, sort of, it would be quite interesting but our business doesn’t lend itself to that kind of scientific approach. When we measure traffic just to be clear, we are measuring number of transactions. So we’re not looking at actual visits. We don’t have the capability to track actual visits. We’re looking at number of transactions and we use that as a proxy for traffic but it’s an imperfect proxy.

Operator

There are no further questions at this time. I will turn the call back over to Barbara Rentler for closing comments.

Barbara Rentler

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

Operator

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

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