Ross Stores, Inc. (ROST) CEO Barbara Rentler On Q1 2019 Results - Earnings Call Transcript

Ross Stores, Inc. (NASDAQ:ROST) Q1 2019 Earnings Conference Call May 23, 2019 4:15 PM ET

Company Participants

Barbara Rentler - Chief Executive Officer

Michael Hartshorn - Executive Vice President and Chief Financial Officer

Travis Marquette - Senior Vice President and Deputy Chief Financial Officer

Conference Call Participants

Matthew Boss - JP Morgan

Lorraine Hutchinson - Bank for America

Mark Altschwager - Baird

Kimberly Greenberger - Morgan Stanley

Michael Binetti - Credit Suisse

Krisztina Katai - Deutsche Bank

Simeon Siegel - Instinet

John Morris - D.A. Davidson

Tracy Kogan - Citi

Marni Shapiro - Retail Tracker

Jay Sole - UBS

Laura Champine - Loop Capital

Alexandra Walvis - Goldman Sachs

Jamie Merriman - Bernstein

Dana Telsey - Telsey Advisory Group

Bob Drbul - Guggenheim

Krista Zuber - Cowen

Presentation

Operator

Good afternoon, and welcome to the Ross Stores First Quarter 2019 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, new store openings, 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 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 2018 Form 10-K and fiscal 2019 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 Gary Cribb, Group Executive Vice President, Stores and Loss Prevention; Michael Hartshorn, Group's Executive Vice President and Chief Financial Officer; Travis Marquette, Group's Senior Vice President and Deputy Chief Financial Officer; and Connie Kao, Vice President, Investor Relations.

We'll begin our call today with a review of our first quarter performance, followed by our outlook for the second quarter and fiscal year. Afterwards, we'll be happy to respond to any questions you may have.

As noted in today's press release, for the first quarter, we delivered sales gains at the high end of our guidance as well as better-than-expected earnings per share growth despite continued underperformance in Ladies apparel. Earnings per share for the 13 weeks ended May 4, 2019 was $1.15, up from $1.11 for the same period last year. Net earnings for the 2019 first quarter were $421 million, compared to $418 million in the prior year. These results include an approximate $0.02 per share benefit from favorable timing of expenses that are expected to reverse over the balance of the year. Total sales for the period increased 6% to $3.8 billion, with comparable store sales up 2%.

For the first quarter, the strongest merchandized category at Ross was Men while the Midwest with the best performing geographic region. As I just mentioned, Ladies apparel trails a chain. Our execution in this important business remains below our standards and consequently we did not offer our customers the compelling values they have come to expect from us. While we are working diligently to improve our merchandise assortment, which are out of balance in a number of areas and ladies, plus strengthen our value proposition, it can take some time to correct issues like this in a chain of our size.

That said we do believe that the actions we are taking will lead to improved results as we move through the year. As we ended the period total consolidated inventories were down 4% over the prior year. Average in-store inventories were up 1% as planned or packaway as a percentage of total inventories was 44% compared to 49% last year.

As it has for some time now these discounts posted better than expected gains in both sales and operating profits for the quarter. Turning to store growth, our 2019 expansion program is on schedule with the addition of 22 new Ross and 6 dd's DISCOUNTS locations in the first quarter. We remain on track to open a total of approximately 100 locations in 2019 comprised of 75 Ross and 25 dd's DISCOUNTS. As usual, these numbers do not reflect our plans to close or relocate about 10 stores.

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

Michael Hartshorn

Thank you, Barbara. Let's start with our first quarter results. Our 2% comparable store sales gain was primarily driven by an increase in the size of the average basket. While operating margin of 14.1% was down 95 basis points from last year, it was better than expected mainly due to above planned merchandize margin and favorable timing of expenses. Cost of goods sold rose by 85 basis points in the quarter. A 30-basis point improvement in merchandise margin was more than offset by a 60-basis point increase in distribution costs as we were up against last year's benefit from packaway related expense.

In addition, freight costs grew by 35 basis points and occupancy and buying expenses increased by 10 basis points each.

Selling, general and administrative expenses for the period increased 10 basis points as higher wage related costs were partially offset by favorable timing of expenses. During the first quarter, we repurchased 3.4 million shares of common stock for a total purchase price of $320 million. We remain on track to buyback a total of $1.275 billion in stock for the year.

Let's turn now to our second quarter guidance. For the 13 weeks ending August 3, 2019, we are forecasting same store sales to increase 1% to 2% on a top of a 5% gain last year. Earnings per share for the second quarter projected to be in the range of $1.06 to $1.11, up from $1.04 in the prior year period.

The operating statement assumptions for our second quarter guidance include the following. Total sales are projected to grow 5% to 6%. We expect to open 28 new stores during the period including 22 Ross and 6 dd's DISCOUNTS locations.

If same store sales are in line with our guidance then we project operating margins to be in the range of 13.2% to 13.4%. The forecasted decline from last year's 13.8% mainly reflects headwinds from higher wage and freight costs, partially offset by the anniversarying of last year's negative impact from packaway timing. In addition, we would expect some deleveraging on occupancy if comparable sales perform in line with our guidance.

We expect net interest income of about $ million. Our tax rate is expected to be approximately 24% to 25% and weighted average diluted shares outstanding are projected to be about $363 million. Based on our first quarter results and second quarter guidance, we now project earnings per share for fiscal 2019 to be in the range of $4.38 to $4.52. This compares to EPS of $4.26 last year which included a $0.07 per share benefit from the favorable resolution of a tax matter in the fourth quarter.

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

Barbara Rentler

Thank you, Michael. To sum up, we delivered respectable results in first quarter despite difficulties in our Ladies apparel business. As I said earlier, we're working hard to improve our merchandise assortment and strengthen the values we offer in this important business. We do believe the steps we are taking in ladies will lead to improve performance over time.

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

Question-and-Answer Session

Operator

[Operator Instructions]

Your first question comes from the line of Matt Boss from JP Morgan.

Q - Matthew Boss

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

A - Barbara Rentler

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

Q - Matthew Boss

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

A - Barbara Rentler

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

Operator

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

Q - Lorraine Hutchinson

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

A - Barbara Rentler

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

Operator

Your next question comes from Mark Altschwager from Baird.

Q - Mark Altschwager

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

A - Michael Hartshorn

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

Operator

Your next question comes from Kimberly Greenberger from Morgan Stanley.

Q - Kimberly Greenberger

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

A - Michael Hartshorn

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

A - Barbara Rentler

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

Operator

Your next question comes from Michael Binetti from Credit Suisse.

Q - Michael Binetti

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

A - Michael Hartshorn

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

A - Barbara Rentler

And then in terms of difference, I'm sorry, there was little echo here. In terms of our business is inventing to comments people have made on the outside. We look at a number of metrics, ladies to plan, other apparel businesses to plan and key classifications, churn, I mean there's a variety of metrics that we look at to make that assessment overall. I mean isn't just one metric, it's a series of metrics.

Q - Michael Binetti

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

A - Michael Hartshorn

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

Operator

Your next question comes from Paul Trussell from Deutsche Bank.

Q - Krisztina Katai

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

A - Barbara Rentler

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

Operator

Your next question comes from Simeon Siegel from Instinet.

Q - Simeon Siegel

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

A - Michael Hartshorn

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

A - Barbara Rentler

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

Operator

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

Q - John Morris

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

A - Michael Hartshorn

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

Operator

The next question comes from Ike Boruchow with Wells Fargo.

Q - Unidentified Analyst

Good afternoon, everyone. This is Laurie for Ike. Wanted to ask about the margin dynamics in the core just around freight. Since I know that it's been such an outsized drag on your cost. How are you thinking about that dynamic for the balance of the year and in Q2? Thank you.

A - Michael Hartshorn

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

Operator

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

Q - Tracy Kogan

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

A - Barbara Rentler

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

Operator

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

Q - Marni Shapiro

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

A - Michael Hartshorn

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

Operator

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

Q - Jay Sole

Great, thank you. A couple questions ago the word tariff was mentioned. Can you just talked about how the company is planning to handle the situation if there are new tariffs applied to apparel and footwear? And can you talk about what percent of your merchandise is imported from China? And if it's stores directly. Thank you.

A - Michael Hartshorn

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

Operator

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

Q - Laura Champine

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

A - Barbara Rentler

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

Operator

Your next question comes from Alexandra Walvis with Goldman Sachs.

Q - Alexandra Walvis

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

A - Barbara Rentler

From the -- just from the general, the general classification of home, some of our businesses are far better than other --I'm sorry go ahead. Well, go ahead continue. Why don't you continue with the question?

Q - Alexandra Walvis

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

A - Barbara Rentler

Okay. Generally some businesses in home are better than others. I really wouldn't go into the specifics of that on the call. I think the home categories as a general statement for the market is that's where a lot of people have absorbed increased cost. And so I think the market may be depending upon a classification of business event, the market may be a little bit more disruptive than others, [some pluses] more than others and therefore in some of the businesses there's more opportunity for us. And some of the other businesses there is less opportunity. And so and then you know so the balance of it may be a little bit different than it's been probably for everyone in the last few months. Without getting into any more specifics on the call I mean that's kind of the general gist of what's going on.

Operator

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

Q - Jamie Merriman

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

A - Michael Hartshorn

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

Operator

Question comes from the line of Dana Telsey from Telsey Advisory Group.

Q - Dana Telsey

Hi, good afternoon, everyone. As you think about just the state of the consumer, anything you're picking up that in this first quarter was different than in quarters past that would have made a difference in top-line? Whether it is delayed tax refunds or obviously the comparisons. And did you see a difference in performance of dd's versus Ross? Thank you.

A - Michael Hartshorn

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

Q - Dana Telsey

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

A - Michael Hartshorn

So we tend to relocate on average about 10 relocate or/and open about 10 stores on a year. And we're always looking to improve stores that are underperforming for various reasons. On the second question was an opportunity to improve leases. Occupancy overall on leases, I mean we've seen a pretty good market for the last number of years. And so I think it's remained pretty stable to that to what it's been like over the last several years.

Operator

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

Q - Bob Drbul

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

A - Michael Hartshorn

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

A - Barbara Rentler

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

Q - Bob Drbul

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

A - Michael Hartshorn

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

Operator

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

Q - Krista Zuber

Good afternoon. This is Krista Zuber on for John. Thank you for taking our questions. I just wanted to follow up on two previous questions. One on inventory and one on freight. Just in terms of where you're thinking your inventory positioning or levels will be at the end of the year? And then secondly on freight, you mentioned that sort of your guidance or your thinking was unchanged. Is that a reflection of the renegotiations you would expect it to have this year for the rate? Thank you.

A - Barbara Rentler

Sure. On inventory at the end of the year that's a long way out, but the way we have a plan is store positions to be relatively flat at this point. On freight, we have pretty good visibility on our renegotiations with over freight again a recap last year, the cost escalated as we moved through the year. And so in the front half, we've continued to see wage pressure but freight pressure just based on rates and market to inflationary cost in the freight industry. And then in the back half, we're up against those larger increases. So our viewpoint at this point is that they will abate as we move through the year.

Q - Krista Zuber

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

A - Travis Marquette

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

End of Q&A

Operator

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

Barbara Rentler

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

Operator

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