Ross Stores Inc  (NASDAQ: ROST) Q1 2020 Earnings Call Transcript

Ross Stores Inc  (ROST) Q1 2020 earnings call dated May 21, 2020

Corporate Participants:

Barbara Rentler — Chief Executive Officer

Travis Marquette — Group Senior Vice President and Chief Financial Officer

Lorraine Hutchinson — Bank of America Merrill Lynch — Analyst

Michael J. Hartshorn — Group President and Chief Operating Officer

Analysts:

Mark Altschwager — Robert W. Baird & Co. — Analyst

Kate Fitzsimons — RBC Capital Markets — Analyst

Tracy Kogan — Citigroup — Analyst

Kimberly Greenberger — Morgan Stanley — Analyst

Adrienne Yih — Barclays — Analyst

Michael Baker — Nomura Instinet — Analyst

Matthew Boss — JPMorgan — Analyst

Charles Grom — Gordon Haskett — Analyst

Jay Sole — UBS — Analyst

Robert Drbul — Guggenheim Securities — Analyst

Ike Boruchow — Wells Fargo — Analyst

Laura Champine — Loop Capital — Analyst

Alexandra Walvis — Goldman Sachs — Analyst

Michael Binetti — Credit Suisse — Analyst

Marni Shapiro — The Retail Tracker — Analyst

Dana Telsey — Telsey Advisory Group — Analyst

John Kernan — Cowen & Company — Analyst

Jamie Merriman — Bernstein — Analyst

Presentation:

Operator

Good afternoon, and welcome to the Ross Stores First Quarter Fiscal Year 2020 Earnings Release Conference Call. The call will begin with prepared comments by management followed by a question-and-answer session. [Operator Instructions]

Before we get started, on behalf of Ross Stores, I would like to note that the comments made on this call may contain forward-looking statements regarding expectations about future operations and financial results, including store openings and reopenings and other matters that are based on the Company’s current forecast of aspects of its future business. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those statements and from historical performance or current expectations. Additional information about related risk factors is included in today’s press release and in the Company’s fiscal 2019 Form 10-K and fiscal 2020 Form 8-Ks on file with the SEC.

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

Barbara Rentler — Chief Executive Officer

Good afternoon. Joining me on our call today are Michael Hartshorn, Group President and Chief Operating Officer; Travis Marquette, Group Senior Vice President and Chief Financial Officer; and Connie Kao, Vice President, Investor Relations. We’ll begin our call today with an update on the current status of the Company’s operations including our store reopening plans, followed by a review of our first quarter performance and details of our financial position entering the second quarter. Afterwards, we’ll be happy to respond to any questions you may have.

As a reminder, all store and distribution center locations were closed from March 20th through the quarter-end to help prevent the ongoing spread of the coronavirus. Further, our corporate and buying offices were also closed with most associates continuing to work remotely. With the closure of our retail operations, we made the difficult but necessary decision to temporarily furlough the majority of our store and distribution center associates, as well as some other employees across the business effective April 5. More recently, on May 14, we began a phased process of reopening stores on a market by market basis. This followed a careful review of current guidance from health officials and advisors, as well as federal, state and local governments. Approximately 700 stores have reopened since with the remaining stores expected to be reopened over the coming weeks.

Our top priority will always be the health and well-being of our associates and customers and we will only reopen stores when it is safe to do so. Further, the state of the pandemic remains very dynamic and these plans could change materially as we cautiously move forward. As we restart operations, we are implementing a variety of measures with the goal of keeping our associates, customers and the communities we serve safe. These measures will include additional cleaning and sanitation of stores and workspaces providing associates with Personal Protective Equipment based on CDC or other health guidelines and implementing physical distancing practices.

We will also be reopening and ramping up our distribution center networks in the coming weeks. In addition, we expect to reopen our corporate and buying offices in the coming months. As with our stores, we are putting in place additional health and safety measures across all areas of these facilities.

Turning now to our financials. As noted in today’s press release, our first quarter results reflect a unprecedented impact the COVID-19 pandemic has had on our business, which led to the closure of all stores from March 20th through the end of the quarter, and of our first quarterly loss in more than 30 years. Total sales for the quarter were $1.8 billion, down from $3.8 billion in the prior year. Given that stores were open for less than seven weeks of the 13-week period, the comparable store sales metric is not meaningful for the quarter. For the 13 weeks ended May 2nd, 2020, we incurred a loss per share of $0.87 versus earnings per share of $1.15 for the same period last year.

The net loss for the period was $306 million versus net income of $421 million last year. In addition to the significant negative impact due to the lack of revenue from the closure of all stores beginning March 20, our operating loss also includes a one-time non-cash inventory valuation charge relating to the portion of the inventory that we now expect to sell below our original cost. As we ended the quarter, total consolidated inventories, net of this valuation charge, were down 3% over the prior year with packaway levels at 42% of the total compared to last year’s 44%. Average in-store inventories were up 1% at quarter-end versus the same period last year.

Turning to store growth. We opened 20 Ross and seven dd’s Discount locations in the first quarter and ended the period with 1,832 total stores. Given the significant uncertainty of consumer behavior and shopping patterns of stores reopen, we will not open new stores in the current quarter and now expect to open about 39 stores this fall for a total of 66 new stores for the full year.

Now Travis Marquette will provide further color on our first quarter results and details on our financial position entering the second quarter.

Travis Marquette — Group Senior Vice President and Chief Financial Officer

Thank you, Barbara. As Barbara mentioned earlier, we reported a net loss of $306 million or $0.87 per share for the first quarter. Operating margin for the period reflects the impact of the significant revenue decline from our store closures as well as a one-time non-cash inventory valuation charge of $313 million or $0.58 per share. As a reminder, we are on the lower of cost or net realizable value method of accounting for inventory, which provides that most markdowns are recognized when inventory is sold unless the markdown takes the item’s value below cost.

The one-time valuation charge in the first quarter reflects our estimate of inventory that we expect to sell below cost in the coming months. This first quarter reserve therefore reflects only a small portion of the total markdowns we believe will be necessary to sell through the existing spring inventory. We expect that the vast majority of markdown activity will occur in the second quarter. It is important to note that the ultimate impact of these markdowns will depend on the pace of sell-through as we move through the quarter.

Now let’s discuss our current financial position and balance sheet. As noted in our press release, in response to the severe economic disruption created by the COVID-19 pandemic, we quickly took decisive actions to increase our liquidity and financial flexibility. These included drawing down $800 million under our existing revolving credit facility, completing a $2 billion senior unsecured public bond offering and obtaining a new undrawn $500 million revolving credit facility. As previously announced, we suspended our stock repurchase program on March 19th. Before doing so, we repurchased 1.2 million shares of common stock for a total purchase price of about $132 million. We have no plans to repurchase shares for the remainder of the year.

In addition, we also announced today the suspension of our quarterly dividend payment. We are also aggressively cutting costs throughout the company by minimizing non-business critical operating expenses, rightsizing our merchandise receipt and inventory plans, and reducing capital expenditures to further enhance our liquidity. Capital expenditures for this year are now projected to be approximately $420 million, down from our initial guidance of $730 million. We ended the quarter in a strong financial position with over $3 billion in liquidity, which includes an ending unrestricted cash balance of about $2.7 billion and the new $500 million revolver.

As Barbara mentioned earlier, we are in early stages of resuming operations by reopening groups of stores as it becomes safe to do so over the coming weeks. However, we have no visibility on how quickly consumer demand will recover and the impact this will have on store traffic. Given these unknowns we are not providing second quarter sales and earnings guidance or an updated annual fiscal 2020 outlook at this time.

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

Barbara Rentler — Chief Executive Officer

Thank you Travis. We want to reiterate that given the extraordinary global health crisis created by COVID-19, the safety and well-being of our associates and customers will always be of the utmost importance to us. Considering the uncertainty on how this health crisis could impact consumers, we believe it is prudent to take a conservative approach to managing our business. Looking ahead, I want to emphasize that we have a deep bench of proven and experienced leaders throughout the business and as Travis noted a very strong financial foundation.

We also see significant opportunities in marketplace to acquire some of the best brands ever — bargains ever. Longer term, we remain well positioned in the off-price sector and believe consumers will continue to favor retailers focused on delivering both value and convenience. All of this makes us confidence in our ability to successfully navigate through these challenging times.

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

Questions and Answers:

Operator

[Operator Instructions]. Your first question comes from Lorraine Hutchinson from Bank of America.

Lorraine Hutchinson — Bank of America Merrill Lynch — Analyst

Thanks, good afternoon. I know it’s early days on the store openings but I was wondering if you could just provide some performance details for those stores that have been opened how they’re trending?

Michael J. Hartshorn — Group President and Chief Operating Officer

Hi Lorraine, it’s Michael Hartshorn. Stores for us have been reopened less than a week. So we wouldn’t provide commentary at this point. Beyond the initial openings though as Travis talked about in his commentary, there is a number of factors that will impact consumer demand post opening including the economy on the backside of commerce reopening, changes to customer behaviors, impact of social distancing and certainly the competitive environment among others. So at this point we can’t predict what’s going to happen after we reopen the stores for the remainder of the year. We do believe though there will be a negative impact on consumer demand throughout the remainder of the year.

Operator

Your next question comes from Mark Altschwager from Baird.

Mark Altschwager — Robert W. Baird & Co. — Analyst

Good afternoon, and thanks for taking my question. I was hoping you could talk a bit more about the process of realigning inventory. Obviously you took the write-down here in the quarter. How long do you think it will take to clear through some of the seasonally inappropriate goods and make room for fresh inventory? And then just any context on how aggressive you’re being with purchases in the marketplace today? Thank you.

Travis Marquette — Group Senior Vice President and Chief Financial Officer

Yeah, in terms of, in terms of inventory again, given the fact that our stores were closed for two months, we do have a substantial amount of aged seasonal goods. Again with the abrupt closure of the stores and the significant broad-based decline in trends leading immediately — immediately preceding the stores again, inventories were misaligned. So in that — in that light, we reviewed our inventory position and assessed the markdown risk that we had and have recorded in the first quarter the portion of markdowns that we believe will be below cost.

In terms of ultimately what the sell-through and how long it will take to move through those again, it really depends. We don’t have a crystal ball, we don’t know how quickly the consumer will return to our stores. As Michael mentioned, there’s a lot of economic factors that will influence that and ultimately, as I mentioned, the impact of the markdowns will depend on what that rate of sell-through is as we move through the quarter.

Barbara Rentler — Chief Executive Officer

And in terms of fresh inventory in the stores, obviously we’re just first opening our stores now and trying to liquidate the goods that are in the stores and also the goods that were in process outside the DCs and in the DCs. So we need to first work through that. The merchants have not been actively buying in the marketplace. They’ve been staying very close to their vendors. And after we understand a little bit more about what sales and sell-throughs can look like, we will go back into the market, I would say with a very surgical lens of what it is we need and what we can understand of what we think the customer wants.

Mark Altschwager — Robert W. Baird & Co. — Analyst

Thanks for the color.

Operator

Your next question comes from the line of Kate Fitzsimons from RBC Capital Markets.

Kate Fitzsimons — RBC Capital Markets — Analyst

Yes, hi. Thank you very much for taking my question. I guess an extension of the last question is just when you are finally willing to go back into the marketplace and buy, how are you evaluating category opportunities on the other side of this? We’ve heard from some peers about home outperforming may be more than fashion apparel. So just curious maybe how industry trends could be dictating how you will be buying out of the gate? Thank you very much.

Barbara Rentler — Chief Executive Officer

Sure. Category opportunity. First, I think we have to see as we sell through our — through our inventory, what the customer is voting for whether it’s apparel or home. The home business overall has had a trend for a long period of time. One would expect that home go-forward would still be a good category especially as people are kind of home nesting and buying things that perhaps they normally might buy. But with that it will really depend on what the opportunities are out there in both apparel and in home.

We see a lot of goods out there. We’re anticipating that there’ll be a lot of great closeouts and branded bargains for the customer. So, I don’t want to put size around saying it’s one business versus the other. I think in this environment a lot of the deals may dictate where the — where the sales would go — come from.

Operator

Your next question comes from Paul Lejuez from Citigroup.

Tracy Kogan — Citigroup — Analyst

Thanks. It’s Tracy Kogan filling in for Paul. I was wondering if you guys could talk about how you’re thinking about packaway in this environment and maybe if you might be packing things away for less time than you normally would? And then as a corollary to that, how quickly could you flow things into stores? Thanks.

Michael J. Hartshorn — Group President and Chief Operating Officer

On the speed — Tracy on the speed, we can flow inventory from packaway very quickly, matter of days through the DC and a matter of a week or two into the stores.

Barbara Rentler — Chief Executive Officer

And just in terms of just the thought process around buying packaway, I’m assuming you mean packaway that I could release earlier than packaway that might not release till March of next year, is that really your question?

Tracy Kogan — Citigroup — Analyst

Exactly.

Barbara Rentler — Chief Executive Officer

I think — I think it depends on what the product is, right. So in some classifications of product there’ll be goods that would be appropriate sooner than later and in some products of some classifications you would really have to hold it until the spring season if it’s truly spring product. So it varies based off of the classification and the gender, the timing, the whole thing. But there is a lot of, there’s a lot of product out there in total, so, I would say there is a lot of choices, some of which probably could flow a little sooner.

Tracy Kogan — Citigroup — Analyst

Great, thank you.

Operator

Your next question comes from Kimberly Greenberger from Morgan Stanley.

Kimberly Greenberger — Morgan Stanley — Analyst

Great, thank you so much. I wanted to understand if you had excluded packaway from your inventory, how many weeks of inventory would you typically have on hand? Is it sort of eight weeks or 10 weeks at normal sales volume? And then secondarily, are all of your distribution centers also reopening at this time and as your stores are reopening, are you in a position to be able to actively flow inventory to stores now that you’ve got some of them opening? Thanks.

Michael J. Hartshorn — Group President and Chief Operating Officer

Kimberly, on the distribution centers, we have management teams in all of our distribution centers and are ramping — preparing to ramp up production and that includes California, the Carolinas and also in Carlisle, Pennsylvania. So, we’re ready to start the DCs. In South Carolina, we’ve already started production and prepared to start backfilling stores as the need — as they need.

Travis Marquette — Group Senior Vice President and Chief Financial Officer

In terms of in-store inventory turns. Again, if you just focus on in-store only, our turns are quite quick. I don’t think we’ve quantified that specifically in the past, but it would be significantly faster than if you’re just trying to look at the total inventory metric on the balance sheet.

Kimberly Greenberger — Morgan Stanley — Analyst

Okay, great. And lastly, I’m wondering if, if you have any comments on just how business was trending pre-COVID for either the month of February or the month of February and the first week of March, just any way to understand directionally how the business was moving before we went into this very, very unusual times?

Travis Marquette — Group Senior Vice President and Chief Financial Officer

Yeah. Sure, as we talked about previously, sales trends were above plan in February and we felt good about sales up until early March when I think as we talked about there was a very rapid deceleration and just prior to when we closed our stores on March 20th.

Kimberly Greenberger — Morgan Stanley — Analyst

Okay, great. And lastly, is there any way for us to think about where you would expect second quarter inventory to land and would you, do you feel like you would be able to work through the aged inventory that you’re sitting with today? Is it your expectation that you will have cleared through and moved through that aged inventory by the end of the second quarter?

Michael J. Hartshorn — Group President and Chief Operating Officer

Kimberly, on pace, our goal is to move through it in the second quarter and we’re going to operate the business very, very cautiously both inventory, sales, expenses, capital and we’re going to put ourselves in a position of strength, so that we can chase the business, leverage expenses. So we would expect inventory to be down, down at the end of the second quarter.

Kimberly Greenberger — Morgan Stanley — Analyst

Okay. Thanks, Michael.

Operator

[Operator Instructions] Your next question comes from Adrienne Yih from Barclays.

Adrienne Yih — Barclays — Analyst

Yes, good afternoon. Barbara, I was wondering if you can talk to us about comparisons to the post 2008 — the 2009 and ’10 recovery period and what opportunity you see from potential bankruptcies like JCPenney? And then for Michael or Travis if you can quickly talk about when you’re opening these stores, just curious, how are you layering in payroll hours, how are you metering throughput and then what’s happening to the basket size? Thank you.

Michael J. Hartshorn — Group President and Chief Operating Officer

Sure. We wouldn’t comment on basket size. Again, the stores have been only open a week. Obviously there’s local regulations on how to meter in and out of the stores. We have security at the front of each store that’s metering based on those predetermined occupancy limits. In most cases we’re below, even below metering than what the restrictions required to make sure we keep customers and associates safe. We have included payroll to make sure that we’re keeping safe distances and trying to move people through the registers as appropriate.

Barbara Rentler — Chief Executive Officer

And then —

Adrienne Yih — Barclays — Analyst

Thank you.

Barbara Rentler — Chief Executive Officer

And then in terms of comparison to 2008, I think the current retail environment is, is — is different. Obviously this crisis is much worse. We’re expecting the recovery to be much slower. During the financial crisis, we didn’t have to close stores, we didn’t have to navigate through health and safety mandates, shelter-in-place, social distancing. So — so, we think this is very different and we think it will be a slow recovery on our way back. In terms of Penney’s and bankruptcies, there’s been a lot of bankruptcies. I think long term the way for us to think about it is that there is an opportunity for market share, particularly in the moderate portion of the business.

Adrienne Yih — Barclays — Analyst

Thank you very much. Best of luck and stay safe.

Barbara Rentler — Chief Executive Officer

Thank you.

Operator

Your next question comes from Mike Baker from Nomura.

Michael Baker — Nomura Instinet — Analyst

Thank you. Excuse me. Thank you. Could you maybe discuss your fixed versus variable costs, including costs that fall into your cost if goods sold? And how might that change or will cost need to ramp up with some of the things you need to do to operate the stores now in terms of cleanliness and other safety precautions? Thank you.

Travis Marquette — Group Senior Vice President and Chief Financial Officer

Yeah, sure. If you think about our total operating costs, which would include both cost of goods as well as G&A, the vast majority of those are variable costs. If you pull out the merchandise margin line and just look at the remaining costs, it’s roughly about two-thirds fixed and one-third variable. In terms of, in terms of costs that will be added, as Michael alluded and we’ve talked about, there definitely will be additional cost that we will be working into the, into the business, particularly around managing social distancing, additional cleaning tasks as well as significant cost of Personal Protective Equipment.

So those will be added to the business as we move forward and we’ll do — we’ll work as aggressively as we can to try to find offsets. We’ve taken a number of actions to identify cost savings already and many of those will carry forward. But I would expect cost will be — will be a bit elevated related to those other factors.

Michael J. Hartshorn — Group President and Chief Operating Officer

And I would just add that those safety investments are absolutely necessary as we prioritize health and safety for these associates and customers. So, we would expect the new protocols to be in place for the foreseeable future.

Michael Baker — Nomura Instinet — Analyst

Yeah, no doubt. I certainly appreciate that. Thanks for the color.

Operator

Your next question comes from Matthew Boss from JPMorgan.

Matthew Boss — JPMorgan — Analyst

Great, thanks. On merchandise margins as we think about the cadence of the headwind this year, any way to size up or think about the magnitude of second quarter merchandise margin pressure relative to the back half of the year and maybe just as importantly, what’s your confidence in returning to 2019 gross margin levels? Is that a 2021 event or over what timeframe is that a reasonable assumption to get back to where we were pre-pandemic?

Michael J. Hartshorn — Group President and Chief Operating Officer

Hey, it’s Michael, on getting back to pre-pandemic, there is just not enough visibility to give you a good answer on that at this point. The second quarter margin is going to be, it’s going to be based on the sell-through in these early days as we reopen the stores. So, we’ll see how that plays out and have more to report at the end of Q2.

Matthew Boss — JPMorgan — Analyst

Great. Best of luck.

Operator

Your next question comes from Charles Grom from Gordon Haskett.

Charles Grom — Gordon Haskett — Analyst

Hi, thanks. Good afternoon. There’s a lot of talk out there about being — this being one of the best buying opportunities in a long time and Barbara you spoke to that during the prepared remarks, but there’s also some talk in the channel by vendors starting to packaway their own inventory. So, I guess I’m just curious if this — if this changes the opportunity set for you or do you think it’s more of a near-term phenomenon?

Barbara Rentler — Chief Executive Officer

Let me start with there is a lot of merchandise in the market and it’s very broad-based. In terms of vendors saying that they’re going to packaway goods. I think the majority of the vendors aren’t really in the position to do that. That they really wouldn’t have the — be in the cash position to do it. I think maybe the large vendors can do it, but if you take the market in total, I think that’s not the majority of people.

Operator

Your next question comes from Jay Sole from UBS.

Jay Sole — UBS — Analyst

Great, thanks so much. I got a question. The stores have been opened for very long. So, it’s hard to get a read probably on how much traffic is going to return and how quickly, but have you done any market research over the last few weeks trying to figure out how consumers may feel about the off-price shopping experience and the treasure hunt experience in this world of social distancing and if you think that they will feel just as comfortable in your stores when things were looking as they were before the pandemic started? Thank you.

Michael J. Hartshorn — Group President and Chief Operating Officer

Jay, we have seen customer research maybe more generally, but it’s really hard to read when you have customers sitting at home versus returning — returning, leaving their homes. I think their perspectives are going to be very different over time and I think they’re going to evolve very, very quickly. So, it’s really hard to rely on a data to make any decisions. I think the country opening very quickly, I think everything is evolving very fast. So, it’s hard to put a lot of reliance on that data.

Jay Sole — UBS — Analyst

Okay, thanks so much.

Operator

Your next question comes from Bob Drbul from Guggenheim.

Robert Drbul — Guggenheim Securities — Analyst

Hi, good afternoon. Just a couple of questions from me. I think the first one is, can you just update us on store opening plans for this year? Just sort of how you’re thinking about that both at Ross and at dd’s. And I’d just be curious if this situation has changed your thought process at all or if there is any sort of way forward for any e-commerce business at Ross? Thanks.

Michael J. Hartshorn — Group President and Chief Operating Officer

Sure. On store opening, so, as we said in the commentary, in the first quarter we did add 20 Ross, seven dd’s locations. For the balance of the year, we’re not going to open stores in the second quarter based on where we are in the pandemic and based on the uncertainty. And then based on lease obligations and opportunities we have in fall, we’re going to open 39 stores. So that’s 66 new stores for the year and that compares to our previous guidance of about 100 stores. I’d say beyond that at this time we wouldn’t comment beyond this year but we still believe we have the opportunity to grow to 3,000 stores. And then on e-commerce, I’d say, our view has not changed at this point. Our focus and efforts are going to be on safely and profitably reopening our bricks and mortar stores this year.

Robert Drbul — Guggenheim Securities — Analyst

Got it. And if I could just ask one more, in terms of like the vendors and your vendor partners, do you think that ones that are talking about packaway, do you think they’ll be able — they will be good at it? Do you think that they — they are qualified to make good judgments on packaway? I don’t know, if you could just maybe give us some perspective on that Barbara, that would be helpful. Thanks.

Barbara Rentler — Chief Executive Officer

On when the — on the vendors packing away their own goods?

Robert Drbul — Guggenheim Securities — Analyst

Yeah, yes.

Barbara Rentler — Chief Executive Officer

I want to make sure. Listen, just because they haven’t done it before doesn’t mean they won’t do it well. I would imagine that they go through and would assess the way we would assess what the mix of their inventory is and what they think can go forward into the next year and depending upon what type of manufacturer I am, if I have basics, I might I think I could carry those forward, but I might not want to carry forward my fashion goods.

I would think there would be a lot of pieces of it that would be somewhat similar to our thinking in terms of just understanding what you think you can sell when you get to that period because when you’re holding goods, it’s critical to understand when I go to sell, in their case sell at or us release it, you know it’s the right goods at the right time. So, I would imagine they’re putting together a process of how they feel about their assortments and then making a judgment call. But again, I’m not a vendor.

Robert Drbul — Guggenheim Securities — Analyst

Okay, thank you very much for your perspective.

Barbara Rentler — Chief Executive Officer

You’re welcome.

Operator

Your next question comes from Ike Boruchow from Wells Fargo.

Ike Boruchow — Wells Fargo — Analyst

Hey, good afternoon and hope you all are staying safe. I guess it’s just on mean — on the margins, I think you guys typically do a nice job of breaking down the gross margin line. I mean the very least, could you help us on merchandise margin versus store occupancy merch margin either including or excluding the write-down? And then Travis I think you said merch margin pressure should be worse in Q2 and I guess I’m trying to understand should merch margins be worse or should gross margins be worse? Just, I know you’re not giving guidance, but still a little color on the margins just to make sure we know how to model this out? Thanks.

Travis Marquette — Group Senior Vice President and Chief Financial Officer

Yeah, in terms of total operating margin again, the biggest impacts for the quarter were — the biggest impact was just the low level of sales. That combined with the valuation charge really is what drove the overall result. Given the significant deleverage related to sales, the details and the components of that really just aren’t, aren’t very meaningful and so we don’t think it’s really relevant to provide that — provide that breakdown. Your second question — remind me of your second question.

Ike Boruchow — Wells Fargo — Analyst

Just I guess merchandise margin trajectory Q2 relative to Q1.

Travis Marquette — Group Senior Vice President and Chief Financial Officer

Yeah, yeah. Relatively — again it’s going to completely depend on what the ultimate sell-through is of the product as we move through the quarter. As I mentioned, you know what the hit for the impact that we took in Q1, really just related to the below cost portion of those — of those markdowns and so the rest of the markdowns will be recognized as we sell the product in Q2. Depending on how quickly that product sells is going to determine sort of what the ultimate value of the markdowns that we need to take and what gross margin looks like but there is absolutely a risk that it could be depressed further in Q2.

Michael J. Hartshorn — Group President and Chief Operating Officer

Ike, so, in our markdown approach we’ll obviously take a first markdown and then based on sales the second markdown and then we will be very, very aggressive to liquidate the spring merchandise. So, it’s going to be highly dependent on how quickly we sell through the merchandise.

Ike Boruchow — Wells Fargo — Analyst

Thanks, Michael. Thanks Travis.

Operator

Your next question comes from Laura Champine from Loop Capital.

Laura Champine — Loop Capital — Analyst

Hi, I’m curious when you will start to — when you will have to start buying for fall and back-to-school? And Barbara, how will you, what are the metrics or the factors that you will use to decide how deep that buy should be?

Barbara Rentler — Chief Executive Officer

How, how big the buy will be or just how —

Laura Champine — Loop Capital — Analyst

Exactly, exactly.

Barbara Rentler — Chief Executive Officer

Just how big. Well, I think, whenever you’re buying you’re not necessarily buying to the size of the buy, you’re buying to what you think you need and/or in our case, if it was a huge deal we might pack it away. We’re going to go into fall with very conservative plans, and so we’re going to buy, we’re going to control our speed of spending and the rate at which we buy goods since there is so much uncertainty out there.

However, if there was a great deal that we wanted to have, we thought the value was unbelievable and offers the customer a great branded bargain, it wouldn’t stop us from making a large deal, but I think it depends. But in terms of the approach to the stores, we’re going to go with conservative plan and we’re going to control what we spend, how much we spend again unless something is incredible and we want to, we want to buy it, in which case, part of it might turn out to be a packaway deal or not, but each deal is different.

Laura Champine — Loop Capital — Analyst

And how much can you delay that by for this fall? I mean when will you have to make your initial decisions on what the carry for back-to-school, what to buy for back-to-school?

Barbara Rentler — Chief Executive Officer

Well, first of all, we could — we could challenge what back-to-school is going to look like. Right. I mean right now, I’m not sure we even know when schools are going back if schools are going back, if there is going to be children learning remotely. So, I think that’s the first question of whether there is a true back-to-school, the way we know it, a traditional back-to-school. We’re going to buy it as close as we can — can buy it, the way we normally do, because again, we still have this inventory in front of us that we have to liquidate. We’re planning on liquidating, we’re planning on getting through it.

If I take the continuum, we have to open the stores, get through those goods and then come out and buy new goods for that July, August, September period based on trend line would determine how much we would buy. So, there’s a lot of factors in there, but we are going into it thinking it’s a very conservative plan because we’re not sure how the customer is going to respond once all the stores are open and is she willing to shop and come back after we get through this huge liquidation period across the whole country. So, I think it remains to be seen.

Laura Champine — Loop Capital — Analyst

Got it. Thank you.

Barbara Rentler — Chief Executive Officer

You’re welcome.

Operator

Your next question comes from Alexandra Walvis from Goldman Sachs.

Alexandra Walvis — Goldman Sachs — Analyst

Good evening. Thanks so much for taking the question here. My question was on negotiations with landlords. Can you talk about any rent deferrals that you achieved to April and into the second quarter? Will any permanent reductions perhaps be achieved or anything that you can share that would be, would be very helpful.

Michael J. Hartshorn — Group President and Chief Operating Officer

Hi, Alexandra, it’s Michael. Our real estate relationships are obviously critical to the long — long-term success of the business. Like many other retailers we are engaging with our landlord partners to negotiate either abatement or deferment of occupancy cost during the period of closure. At this point, we wouldn’t get into the specifics, at this point because the negotiations are ongoing across our fleet of landlords.

Alexandra Walvis — Goldman Sachs — Analyst

Great, thank you.

Operator

Your next question comes from Michael Binetti from Credit Suisse.

Michael Binetti — Credit Suisse — Analyst

Hey guys, thanks for taking my question. First, I just wanted to try and clarify some of the language you had on gross margins earlier. So, in this quarter, you took a charge of over $300 million. It looks like it’s 1,600 basis points, 1,700 basis points of an impact to the grosses in the quarter. That was really just a component, you referred to that as a small part of it, Michael. So, I want to see that’s the inventory you as maybe selling below cost. And then if you look at next quarter we’re not talking about an inventory reserve, we’re talking about having to put inventory on markdown you sell it. But did you, did you mean that that impact of that could be similar to the order of magnitude of the charge in the first quarter?

And I’m not really trying to get you to commit to guidance for the company but to compare this to some of the mainline stores, the department stores who I think that that component will be as big as the reserve in the first quarter. Is that, is that what you’re saying it could be close to that size?

Michael J. Hartshorn — Group President and Chief Operating Officer

Yeah. So again, the the portion that we recognized. Let me just kind of take a step back. Again, we are on the cost method of accounting, so typically markdowns are only recognized in earnings when the product is sold. If the markdown takes the items below cost, then that portion that is below cost gets recognized immediately. So, as we assessed our inventory position at the end of the quarter, the portion that we recognized as of the end of Q1 is just the portion of markdowns that take the product, although its original cost.

Travis Marquette — Group Senior Vice President and Chief Financial Officer

And to be clear, it’s what we expect to happen during the second quarter. It’s not necessarily markdowns we’ve already taken.

Michael J. Hartshorn — Group President and Chief Operating Officer

Correct, correct. Again, ultimately the markdowns that we’ll recognize in Q2 relate to as the product is sold, it depends on what the markdown is as it goes out the door. And so that’s going to depend on the rate of sales. Obviously, we have first markdowns on that product. Now depending on rate of sales, we’ll take second markdowns and/or third markdowns and depending on how deep those go that will determine the ultimate markdown impact.

Travis Marquette — Group Senior Vice President and Chief Financial Officer

But to answer — a short answer to your question, yes, there could be more than that in the second quarter.

Michael Binetti — Credit Suisse — Analyst

Relative to the dollar. Okay. Okay. And then you mentioned some of the new costs related to standardization and things like that in stores COVID-related costs. But I’m wondering what are some of the other puts and takes you see from here as we back up and just take the aperture out a little bit. You’ve had a lot of pressure from wage growth that one would argue that with 20% of the country currently unemployed don’t know where that’s going, but perhaps that’s a little easier going forward. It seems like freight and energy have been a pressure, obviously you have a very intense supply chain, those look like they could be easier.

Is there, I mean do those — are those big enough to — those seem like they need more than enough to offset anything related to COVID as we roll through the year. And then final question, just would love to know how you’re, if you could help us think alongside give a little bit on how you will look at reinstating the dividend as you go, what are some of the earmarks you look for along the way?

Travis Marquette — Group Senior Vice President and Chief Financial Officer

Let me — this is Travis, let me just cover a couple of those. In terms of cost savings, let me go through a couple of things, you mentioned, in terms of wage rates, yes, obviously the economic situation is very different. But it’s important to remember that a lot of the wage rate pressure that we would be experiencing going forward relates to statutorily mandated minimum wage increases and at least as of now, there has been no change in those, particularly California but there are some other places. Again, it’s hard to say what’s going to happen in the freight markets, obviously fuel rates are down, that that could be helpful, but it’s really hard to speculate exactly what’s going to happen in terms of capacity and overall freight rates.

So, again there are puts and takes and we’ll have to see how it plays out. There’s a lot of uncertainty, so we don’t see, we don’t exactly know. In terms of, in terms of reinstating the dividend. Again, I think, what’s critical is that we’re going to have to have a much greater visibility on sort of what the sales trend is, what the sustainability of those trends are and in fact of that in relation to the needs of the business over both the short and the long term and so there are a number of factors that we’re going to have to look at before we would consider reinstating a dividend.

Michael Binetti — Credit Suisse — Analyst

Thanks a lot guys.

Operator

Your next question comes from Marni Shapiro from Retail Tracker.

Marni Shapiro — The Retail Tracker — Analyst

Hey, guys. It’s good to hear everybody’s voices, I’m glad you are all sound okay. Could you just talk a little bit about the store openings? You’ve clearly you’ve slowed them for this year. I’m curious if you’ve signed those leases that you intended and were pushing them to next year, or are those leases that weren’t signed yet and so there’s opportunity if you want there to be maybe at better prices, maybe you don’t open as many next year. I’m just curious where your thoughts are on that and how you easy it was to push those — push that number down to the 66?

Michael J. Hartshorn — Group President and Chief Operating Officer

Sure. On the, on the openings this year, we made the decision not only on the lease obligations but the cash to open the store. Many of those will get pushed into next year and then as we get a better view of what the post trend opening is as we move through the year, we’ll certainly make calls on new leases that were signed for next year, but wouldn’t comment further on how many stores that could be for next year at this point Marni.

Marni Shapiro — The Retail Tracker — Analyst

Yeah, that makes sense. And then just one follow-up, Barbara, you talked about somebody asked about packaways and how the big — how companies would do this. And I guess my follow-up there is, you do work with a lot of small and medium vendors, the ones that supply all the department stores and we don’t, they’re not publicly traded and not everybody knows of them. Are you — how — I guess how are you working with these guys? They’ve been partners with you for a very long time. I’m curious how your relationship with those vendors are because some of them could be in very tenuous shape given all the cancellations, not just from you guys but across all of retail.

Barbara Rentler — Chief Executive Officer

Well Marni, I mean, obviously, we’re working with all our vendors. The buyers haven’t been buying, they’ve been keeping close relationships and when we go back out into the marketplace, we’ll obviously shop all those same people we’ve been shopping and doing business with for years and then see what opportunities are out there.

Marni Shapiro — The Retail Tracker — Analyst

Yeah, I guess, what else is there to do unless you’re going to buy them and make them part of Ross Stores. Best of luck with opening everything.

Barbara Rentler — Chief Executive Officer

Thanks.

Operator

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

Dana Telsey — Telsey Advisory Group — Analyst

Good afternoon, everyone. As you think of the measures of fixed and variable expenses with the thought of reopening and whether it’s more limited hours or obviously the extra sanitation and treatment that’s needed within a store to operate. How do you think about some of the expenses coming back into the fold? Do you need as much store staff as you had before and with the combination of what you may be able to do on rents, is there an opportunity for a lower expense structure going forward in terms of how you’re thinking about it? Thank you.

Travis Marquette — Group Senior Vice President and Chief Financial Officer

Hi, Dana. I think it’s going to be difficult at least as the world looks today to drive expenses significantly lower. Obviously as we pull, we are pulling back where we can. If I think about the store environment we do have shorter hours that reduces cost to some extent, but we’ve always managed our stores pretty specifically to the sort of payroll demand by the store. So, there is not a lot of just blanket hours that we hand out. And so as we are reopening and we need to take into account additional labor to manage social distancing, to complete cleaning tasks and other things.

Again that’s going to have an impact on sort of overall cost for the stores. So but clearly though, we are continuing to evaluate our total P&L and we are continuing to look even though we’ve taken a number of actions already to reduce costs. We continue to and will continue to evaluate where we can find savings across the P&L.

Dana Telsey — Telsey Advisory Group — Analyst

And then is there any difference on the dd’s side in terms of getting operations back up and running as compared to the Ross Stores’ side, whether in terms of payroll or occupancy? And is there more occupancy in dd’s to manage rent costs than there is in Ross or just is it not different at all? Thank you.

Michael J. Hartshorn — Group President and Chief Operating Officer

Yeah, hi, Dana. It’s very similar across both chains. So, I wouldn’t say there were significant differences there.

Dana Telsey — Telsey Advisory Group — Analyst

Thank you. Best of luck.

Operator

Your next question comes from John Kernan from Cowen.

John Kernan — Cowen & Company — Analyst

Hey, good afternoon. Thanks for taking my question. Most of them have been answered, just curious, can you tell us what percent of your store base you expect to have open by the end of May? And then what you are anticipating to have open by the end of the quarter in July?

Michael J. Hartshorn — Group President and Chief Operating Officer

Sure. On openings, I wouldn’t tell you specifically May but we’re ready to open stores when the state of the pandemic allows us to do so and when the government allows us to do so. So, that’s out of our control of when that — when the openings will actually happen. Our expectation though based on what we’re monitoring that could change is that we’d have the chain opened by the end of June.

John Kernan — Cowen & Company — Analyst

Got it. Thank you.

Operator

And our last question comes from the line of Jamie Merriman from Bernstein.

Jamie Merriman — Bernstein — Analyst

Thanks very much. My question, Barbara is just on the vendor base and whether you see this as an opportunity to grow the vendor base and whether, I understand that the buyers are currently buying in the market, but if they’re pursuing new relationships, new opportunities on that front? And then just with your existing vendors whether orders needed to be canceled and were payments extended during the quarter? Thanks.

Barbara Rentler — Chief Executive Officer

Sure. In terms of growing the vendor base, there is an opportunity for us to continue to open new resources especially now some people are a little bit more flexible as business has gotten a little bit more difficult and the merchants are always trying to open new resources. So, whether we’re buying or not still calling people, still, still trying to build relationships, still trying to move the business forward. Just — just say the second part of your question again about existing vendors.

Jamie Merriman — Bernstein — Analyst

Whether you had to cancel orders and extend payment terms during the quarter just from a liquidity perspective.

Barbara Rentler — Chief Executive Officer

Initially we did cancel some orders in the beginning of the quarter when we first took action on what was going on when the pandemic started, but that’s very similar to what other retailers did. So we took the actions that we thought were necessary at that time to position us and then after that we feel that we will continue to remain engaged with the vendors we have our relationships with now as we come back, but we definitely took actions the way other retailers took actions to get ourselves positioned in a better position. So, we can manage our way through this very unprecedented situation. So, as we come back into the market we’ll be coming back and working with vendors again.

Jamie Merriman — Bernstein — Analyst

Great, thanks very much.

Operator

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

Barbara Rentler — Chief Executive Officer

Thank you for joining us today. Our thoughts go out to all of you and your families for your continued health and safety.

Operator

[Operator Closing Remarks]