Ross Stores Inc. (ROST) Q2 2020 Earnings Call Transcript

Ross Stores Inc  (NASDAQ: ROST) Q2 2020 earnings call dated Aug. 20, 2020

Corporate Participants:

Barbara Rentler — Chief Executive Officer

Travis Marquette — Group Senior Vice President and Chief Financial Officer

Michael J. Hartshorn — Group President and Chief Operating Officer

Analysts:

Matthew Boss — J.P. Morgan — Analyst

Mark Altschwager — Robert W. Baird — Analyst

Lorraine Hutchinson — Bank of America Merrill Lynch — Analyst

Kimberly Greenberger — Morgan Stanley — Analyst

Janine Stichter — Jefferies — Analyst

Kate Fitzsimons — RBC Capital Markets — Analyst

Paul Lejuez — Citigroup — Analyst

Simeon Siegel — BMO Capital Markets — Analyst

Marni Shapiro — Retail Tracker — Analyst

Alexandra Walvis — Goldman Sachs — Analyst

Bob Drbul — Guggenheim — Analyst

Michael Binetti — Credit Suisse — Analyst

John Kernan — Cowen & Company — Analyst

Laura Champine — Loop Capital — Analyst

Roxanne Meyer — MKM Partners — Analyst

Dana Telsey — Telsey Advisory Group — Analyst

Jamie Merriman — Bernstein — Analyst

Jay Sole — UBS — Analyst

Ike Boruchow — Wells Fargo — Analyst

Chuck Grom — Gordon Haskett — Analyst

Adrienne Yih — Barclays — Analyst

Presentation:

Operator

Good afternoon, and welcome to the Ross Stores’ Second Quarter and 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 growth and financial results, store openings and re-openings and other matters that are based on the company’s current forecast of aspects of its future business. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those statements and from historical performance or current expectations. Additional information about related risk factors is included in today’s press release, and in the company’s fiscal 2019 Form 10-K and fiscal 2020 Form 10-Q and 8-Ks on file with the SEC.

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

Barbara Rentler — Chief Executive Officer

Good afternoon. Joining me on our call today are Michael Hartshorn, Group President, Chief Operating Officer; Travis Marquette, Group Senior Vice President and Chief Financial Officer; and Connie Kao, Vice President, Investor Relations.

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

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

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

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

Sales during the quarter were significantly impacted by several factors, including COVID-19s negative effect on consumer demand particularly in California, Florida, Texas and Arizona, which represents about 50% of our store base. Further during the initial re-openings overall sales were ahead of our conservative plans as we benefited from pent-up demand and aggressive markdowns to clear aged inventory. In the weeks thereafter, trends were negatively impacted from depleted store inventory levels, while we were ramping up our buying and distribution capabilities.

For the 13-weeks ended August 1, 2020 earnings per share were $0.06 on net income of $22 million. This compares to net income of $413 million or earnings per share of $1.14 for the same period last year. Year-to-date, the loss per share was $0.81 versus earnings per share of $2.29 last year. Our net loss of $284 million is compared to net income of $834 million in the first half of 2019. Sales for the first six months of 2020 declined 42% to $4.5 billion.

At quarter end, total consolidated inventories were down 39% from the prior year was average store inventories down 10% versus the same period last year. Packaway levels at quarter-end were 25% of the total, compared to last year’s 43% as we use packaway to replenish store inventory throughout the quarter. As planned, we did not open any new stores in the second quarter. We continue to expect to add about 39 locations this fall for a total of 66 new stores for the full-year.Now Travis Marquette will provide further color on our second quarter results.

Travis Marquette — Group Senior Vice President and Chief Financial Officer

Thank you, Barbara. As Barbara noted stores operated on average were 75% of the period with comparable store sales down 12% versus last year from the date of their re-openings to the end of the fiscal quarter. The decline was driven by a lower number of transactions that was partially offset by a larger average basket size. Average unit retail was down during the period, reflecting the strong sell-through of deeply discounted aged inventory.

Operating margin for the quarter was 3.2%, compared to 13.7% last year. Both cost of goods sold and selling, general and administrative expenses reflect the de-leveraging effect from lower sales versus last year and expenditures for COVID-19-related measures. In addition, cost of goods sold was impacted by the unfavorable timing of packaway-related expenses. These higher costs were somewhat offset by the partial reversal of the inventory valuation reserve we took in the first quarter, resulting from the faster than expected sell-through of aged inventory. This reversal benefited the second quarter by $174 million or $0.19 per share.

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

We ended the quarter in a healthy financial position with over $4.3 billion in liquidity, which includes an ending unrestricted cash balance of about $3.8 billion and an undrawn $500 million revolver. As we move into the third quarter trends have not materially changed from the second quarter with comparable store sales for the first 2.5 weeks trending down mid-teens versus last year. Given the lack of visibility on the potential impact from this ongoing health crisis, we are not providing sales or earnings guidance.

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

Barbara Rentler — Chief Executive Officer

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

As Travis mentioned earlier, the ongoing COVID-19 health crisis remains extremely uncertain and we have limited insight into how this pandemic could further impact consumer demand and the retail and economic landscape. There is additional risk, if COVID-19 cases remain elevated or increase, potentially prompting larger scale shutdowns of our operations. Given these uncertainties we believe the most prudent approach is to plan and manage the business very cautiously, while continuing to prioritize the health and safety of our customers and associates.

As we move forward during this challenging period, we remain confident that our strong financial foundation and outstanding team of experienced off-price executives will help see us through these uncertain times. Over the longer term, we remain well positioned as an off-price retailer to continue to gain market share giving the large number of retail store closures and consumers’ continued focus on value and convenience. We’ve proven in the past that we have successfully competed in this type of retail environment and believe we will do so again.

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

Questions and Answers:

 

Operator

[Operator Instructions] Your first question comes from Matthew Boss from J.P. Morgan.

Matthew Boss — J.P. Morgan — Analyst

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

Michael J. Hartshorn — Group President and Chief Operating Officer

Matt, it’s Michael Hartshorn. On the recent trends, I think there’s a number of factors that are impacting what we’re seeing currently. I certainly think there are things internally that we can focus on in terms of execution, we’re still not where we want to be on ramping up the DCs and continue to have lower receipts then planned. I do think there are external factors that include things like the expiration of unemployment that happened at the end of July. Obviously, with no back to school as the country has moved to distance learning, I think those are the primary factors.

And looking on long-term growth, obviously, the pre-COVID trend had customers migrating to value and convenience and this disruption just accelerated those trends with the number of store closures, our value proposition and 1,800 in growing conveniently located store locations. I think we have a significant opportunity to gain market share over the longer term.

Matthew Boss — J.P. Morgan — Analyst

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

Travis Marquette — Group Senior Vice President and Chief Financial Officer

Yes, sure, Matthew. This is Travis. In terms of the merger components for this quarter, similar to last quarter given the significant deleveraging effect of having our stores closed for a portion of the quarter we’re not providing the specific margin components. The puts and takes this quarter I covered in my remarks. And then in terms of the go-forward look, again given the ongoing uncertainty we’re not providing any forward guidance or commentary on future margins right now.

Matthew Boss — J.P. Morgan — Analyst

Great. Best of luck.

Operator

Your next question comes from Mark Altschwager from Baird.

Mark Altschwager — Robert W. Baird — Analyst

Good afternoon, thanks for taking my question. I was hoping you could touch on some of the current inventory dynamics. I guess, what is availability look like in the marketplace, so both in general and then some of the stronger trending categories? And how do you feel about your ability to really chase back into some of these key categories, should the demand backdrop recover faster than you’re seeing right now? Thank you.

Barbara Rentler — Chief Executive Officer

Sure. Overall, we continue to see a lot of supply out there, but it’s not as consistent across the merchandise areas. We believe that these creates opportunities in some products and some areas and gaps in other areas. In terms of stronger trending categories that’s kind of a broad question, but I would say in most businesses there has been supply and without having with that trending category is, kind of, hard to comment on it. But what I would say is that in key categories, you know, the merchants are out there chasing every day and we have very conservative plans that they are working towards. And I think over time in the categories that have, I’ll say gaps in the assortment today I think eventually that will catch up.

Mark Altschwager — Robert W. Baird — Analyst

Thank you.

Operator

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

Lorraine Hutchinson — Bank of America Merrill Lynch — Analyst

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

Michael J. Hartshorn — Group President and Chief Operating Officer

Lorraine, on the stocking, I’m going to go through the sequence of the quarter and that will help explain of the actions that we’re taking to get inventory levels that are appropriate for the plan. When we first began our phase reopening of stores that’s the first thing we did and then we opened our DCs and we did it in that order because of government restrictions in California and actually Pennsylvania at that point in time. Because sales exceeded our conservative expectations when we reopened at the same time we were ramping an initially — opening an initially ramping our DCs, the result was the depleted store inventory. The initial ramp-up of our distribution centers took longer and we had — than we had hoped, and we’ve had further difficulty ramping up our DCs to full capacity due to staffing challenges. We’ve taken aggressive steps to improve our production levels that include higher wages and incentives and believe those actions will allow us to quickly — more quickly ramp up to peak capacity over the next few months. So I think we would expect to see improvement as we progress through the quarter.

Barbara Rentler — Chief Executive Officer

And in terms of the contents of packaway, I mean, we’re pleased with the content of packaway we have now, we don’t feel like we have any residual issues or anything from spring. As to Michael’s point, we use packaway to drive our business in Q2 and got through everything. So the of content — of the levels that we own, we feel fine about the content. And in terms of just packaway in general the merchants, you know, as you know packaway fluctuates normally, and the merchants are out there chasing packaway now, looking for spring product, current product, whatever the great deals are because the most important thing about packaway is that what you own is really great content.

Operator

Your next question comes from Kimberly Greenberger from Morgan Stanley.

Kimberly Greenberger — Morgan Stanley — Analyst

Great, thank you so much for taking the question. Barbara I was very interested in what you said about the states that are seeing particular impacts from COVID, California, Arizona, Texas and Florida. You talked about in the second quarter that your store openings were in that — on store opening days you were comping down 12%, did you see a worse result in those four markets than the company average at minus 12%?

And then I just wanted to reflect on what’s happening currently here in August, and I wonder if there is at any way for you to figure out if the current month-to-date mid-teens decline in sales trends is indicative of underlying consumer demand right now? Or are you seeing headwinds from either insufficient inventory levels that might be impacting your sales here in August given that you’re still ramping? Or another potential explanation could be that with this abnormal back-to-school that you referenced maybe the kids business, juniors, young men’s are underperforming and other categories are doing better, and it’s just a function of slow demand there? I’m just trying to break apart the pieces to understand a little bit more of the underlying drivers of the business, if you can provide any insight there? Thanks.

Michael J. Hartshorn — Group President and Chief Operating Officer

Kimberly, it’s Michael/ On the regional trends Texas, Florida, California and Arizona underperformed the rest of the chain by a significant margins, now part of that is driven by the resurgence in those areas during the quarter. So they had a significant impact on the overall performance. Trends in certain areas have improved as the cases improved. And then on the current trend, we do believe that we — that part of the current trend is driven by lower than planned receipts with the DCs continuing to ramp-up. So we do think that, that is a factor in the current trend.

Barbara Rentler — Chief Executive Officer

And then as it pertains to the assortment and back-to-school, we plan those businesses very conservatively. We made the adjustments in the assortments that we thought were appropriate based on what was going on in the outside world with children going back to school or not. And obviously, we’re still in back-to-school so it’s kind of hard to rate the total experience. But we went in with pretty conservative plans for back-to-school.

Kimberly Greenberger — Morgan Stanley — Analyst

Okay, great, Barbara. And Michael, I just wanted to ask, to the extent that you think inventory levels or depressed inventory levels could be hurting current sales trend. Is there a way for us to think about when over the next one or maybe two months you would expect to be in a more — in a better in-store inventory position that would be — maybe reflective of where you’d like to have seen them today?

Michael J. Hartshorn — Group President and Chief Operating Officer

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

Kimberly Greenberger — Morgan Stanley — Analyst

Okay, great. Good luck here. Thanks.

Operator

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

Janine Stichter — Jefferies — Analyst

Hi, thanks for taking my questions. Want to ask a little bit about the complexion of the comp, I think you mentioned higher average basket and lower AUR — average basket makes sense, as we’re hearing about shoppers consolidating their trips. Wondering if you’re still seeing that towards the tail end of 2Q into 3Q? Or if the inventory shortages are having a role in maybe offsetting some of that? Then also AUR sounds like it was driven lower by some the clearance activity earlier in the quarter. Wonder if the AUR should still be expected to be down in 3Q or we could start to see that stabilize now that you’re so keen on inventory. Thank you.

Travis Marquette — Group Senior Vice President and Chief Financial Officer

Hi, this is Travis. In terms of the average basket, we do continue to see customers coming in a little bit less frequently, they’re buying more when they do. So the average basket size continues to be up that sort of just generally towards the end of Q2. In terms of Q3, again it’s really early in the quarter, and I think it’s really too early to draw trends, and we don’t — I think we’re not providing further details on the breakdown of the sales number this time.

Janine Stichter — Jefferies — Analyst

Okay, thank you very much.

Operator

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

Kate Fitzsimons — RBC Capital Markets — Analyst

Yes. Hi, thank you for taking my question. Travis, I believe you called out $65 million in COVID-related expenses in the quarter. Just directionally as we move into the back half, is there any way to piecemeal, how we should think about some of these enhanced cleaning PPE, etc, as well as the labor piece, it sounds like in order to get the distribution centers more fully up and running you’re having to make some investments there. So just directionally, how should we think about some of these puts and takes, I guess on the SG&A line as we move through the back half?

Travis Marquette — Group Senior Vice President and Chief Financial Officer

Yes, sure. A couple of comments. The $65 million was both as a reminder in SG&A, as well as COGS. As you might have guess the majority of those were in SG&A, as it related to personal protective equipment, sanitize — sanitation supplies, payroll etc. As I mentioned, a portion of those did relate to — cost related to restarting the business and so that portion we wouldn’t expect to repeat. Having said that, we do expect elevated levels of COVID expenses as we continue to move through the year. Your question, specifically on the DC investments, those were not part of the $65 million in Q2.

Operator

And your next question comes from Paul Lejuez from Citigroup.

Paul Lejuez — Citigroup — Analyst

Hey, thanks guys. Curious about the packaway opportunities that you’re seeing today, compared to a normal period maybe talk in terms of good, better, best, maybe it’s talk home versus apparel, and I’m also curious about the initial margins that, do you expect on packaway based on the deals that you’re seeing?

And then second, just curious if you could talk about the number of new vendor opportunities you’re seeing. Is there any way to quantify what you’re seeing out there? Thanks.

Barbara Rentler — Chief Executive Officer

Sure. In terms of packaway opportunities, I don’t know if I really — can tell you by a good, better or best. Home versus apparel. Apparel tends to be more of packaway then home on normally — on a normal basis. I think, yes, I think there are opportunities that are not perhaps as balances they’ve been in the past. The supply out there isn’t as consistent across merchandise areas as the way it normally is. So, the opportunities that are out there were perhaps not quite as balanced. What I would say is, there are more opportunities in the last couple of weeks that seems to be emerging and so we’re feeling like packaway is moving in the right direction. But again it’s not necessarily as broad-based as it normally is, because of the gaps of supply that are out there created by all the issues from COVID and the market and all the things that have gone on there.

In terms of the margin, we don’t really look at packaway as a margin driver, we look at packaway as a sales driver. So in terms of, if you’re asking about pricing as it pertains to packaway, you know, the merchants are out always looking for great deals on packaway. So packaway tends to be prices that are very sharp normally and is also something that we used to drive value into the stores. So in terms of a margin scenario, if we bought something that was a great deal, we would probably pass it along to the customer. Again, we use it as a sales driver.

In terms of new vendors, obviously, we have a large merchant team, 900 merchants out there looking to open new resources, open new vendors, situations like this obviously create opportunities, and sometimes people are a little bit more open to listen. And so we’re out there now looking for new vendors and to see if we can expand the vendor base. And so that’s kind of ongoing and I think we’ll continue to be ongoing. But that is a focus for merchants every day of the week is to try to expand the vendor base.

Paul Lejuez — Citigroup — Analyst

Got it. And then just one follow-up. When we hear you talk about some gaps out there. Are the goods you want not available to you? Or were you just slower to bring demand than you should have been?

Barbara Rentler — Chief Executive Officer

Two things. Well, the good that are available as all closeouts are. Closeouts are never consistent amongst every business any season, any year. I think this year, there’s just been with everything that’s going on, which I know you’re on in the market in factories overseas. And there seems to be, I’ll say some bigger, bigger pockets. In terms of the pace at which we’re buying it, I would say that when the — when we reopened the stores in retrospect, in hindsight, we probably could have gone out and started to buy a little bit sooner than we did, as we started to ramp the stores back up. We didn’t anticipate consumer demand the way it turned out to be. So I feel like there was probably an opportunity that we could have done that a little bit better.

But I’m not necessarily sure that would have impacted the assortment, because I think these — some of the gaps are just — they’re just some a big gaps. This classifications is a business where they’re in, and somewhere there’s not. And our expectation is that over time it will be a little bit more reasonable as vendors, many vendors didn’t commit and bring in some goods and so it puts us in a chase, and the merchants are out there chasing and have been chasing since we opened both for packaway or to flow in stores.

Paul Lejuez — Citigroup — Analyst

Got it. Thank you. Good luck.

Barbara Rentler — Chief Executive Officer

Thanks.

Operator

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

Simeon Siegel — BMO Capital Markets — Analyst

Thanks very much. Understanding all that, there’s obviously uncertainty today and not along the future. But on back of these inventory conversations, do you have a view on what’s the broader pricing or promotional environment should look like going forward as. Okay, thinking into holiday, which I know it feels like it’s so far ahead. And then just, sorry for the dumb question. As you — it’s great you had that packaway product to replenish the stores during the depletion. Any reason you wouldn’t have gotten further into the packaway? Is that just seasonality, or is there something other reason on this [Indecipherable].

Barbara Rentler — Chief Executive Officer

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

Simeon Siegel — BMO Capital Markets — Analyst

Sure. Yes, sorry. Just wondering, it’s great that you were able to use the packaway to fill the stores. Is there any reason you didn’t go deeper? And if the answer is seasonality then that what’s great answer or easier or something else on…

Barbara Rentler — Chief Executive Officer

Meaning go deeper, meaning release work?

Simeon Siegel — BMO Capital Markets — Analyst

Yes, bring more into the stores.

Barbara Rentler — Chief Executive Officer

I think in packaway — the packaway releases were what we thought was appropriate to flow to the stores at the time. So packaway is not — it’s a broad assortment of products that we put into the hotel and so you flow them based off of, what’s the right timing, right product to the floor. So depending upon what the products were, that’s how we flow it. Is not every business doesn’t have packaway to it, some of that packaway in the hotel could have been for fall. So we flowed what we thought was appropriate and we flowed what we thought we needed to get through to make sure that we came in and clean into the fall season and that we weren’t carrying residual products that we didn’t want to have. So that’s what determined what we released and how we released it.

In terms of the promotional environment, I would expect that promotions will continue, it’s a highly competitive environment. Retailers are trying to clear through all their excess inventory and there’ll be a long liquidation activity also coming from store closures, bankruptcy announcement. So our expectation is that it will be a promotional environment as we go forward.

Operator

Your next question comes from Marni Shapiro from Retail Tracker.

Marni Shapiro — Retail Tracker — Analyst

Hey, guys. I forget, best of luck, getting through the next couple of weeks to back-to-school. But can I ask you a question with — I think you mentioned that transactions were down and I’m assuming that’s due to foot traffic not conversion, but if you could confirm that? And then if you could talk a little bit about operationally what your thoughts are on opening up the stores for longer hours, raising capacity levels as you get into — closer to the peak season and what your thoughts around that, even if it’s specific to just — we’ll extend it on the weekends, maybe not during the week. I’m just curious what you’re thinking is?

Michael J. Hartshorn — Group President and Chief Operating Officer

Sure, Marni. On transactions and conversions, we don’t measure conversion we use transactions as our proxy for traffic, so we don’t measure that. On — in terms of hours, so we did when we opened significantly reduce the hours we operate, we operated from 10 to 7. So we think that had some impact on the performance, as we move through the quarter we have extended hours to 9 o’clock across the chain currently, and we haven’t yet developed our hours for the holiday season.

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. Yes, Barbara you mentioned in the prepared remarks there was a lot of uncertainty, of course heading into back-to-school into fade. Can you talk a little bit about how you’re planning the business into the second half, perhaps you referenced to the mid-teens to down the teens trend that you’re seeing at the moment?

And then my second question was on logistics cost, how are you expecting those to trend going forward?

Michael J. Hartshorn — Group President and Chief Operating Officer

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

Barbara Rentler — Chief Executive Officer

Okay. Could you just do me a favor, just repeat the back-to-school question, because I didn’t capture the first part of it. Could you say that again, please?

Operator

It will be one moment, while I locate the line. Alexandra, your line is open.

Alexandra Walvis — Goldman Sachs — Analyst

Thank you. Appreciate it. No, I was just wondering how conservatively you’re planning the business into the back half given all of the uncertainty about consumer behavior as we head into that important holiday season?

Barbara Rentler — Chief Executive Officer

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

Operator

Your next question comes from Bob Drbul from Guggenheim.

Bob Drbul — Guggenheim — Analyst

Hi and good evening. Two quick questions, if I could. The first one is, can you just give us an updated thought process around the resumption of dividend or share repurchase? And the second question I think follows Alex’s a bit, but when you think about the uncertainty that you have, can you just maybe talk about how you’re planning sort of fall, winter, colder weather type products in the back half with everything else that’s going on? Thanks.

Travis Marquette — Group Senior Vice President and Chief Financial Officer

Yes. Sure, this is Travis. Just — with regard to the dividend and the share repurchase program, again there’s still, as we’ve mentioned several times significant uncertainty in the market. We don’t know what’s going to happen with COVID, with consumer demand. And we really would need greater visibility on sales and the sustainability of those sales before we would start to consider or evaluate reinstituting either of those.

Barbara Rentler — Chief Executive Officer

I mean, in terms of how we’re planning fall or winter products in the back half. We’re planning the entire business conservatively and so we would look at each one of those businesses, assuming outerwear, sweaters, those types of businesses and plan them relative to the conservative plan. So we would have an assortment on the floor, and then if business took off at a greater rate than we expected, we will come back and chase some of those products.

Operator

Your next question comes from Michael Binetti from Credit Suisse.

Michael Binetti — Credit Suisse — Analyst

Okay, thanks guys for taking our question. Michael, are you seeing any difference in the trend line in the markets where the schools have announced virtual versus in person? It sounds like that could have been a driver any evidence as the school systems are communicating in the local markets that back-to-school is showing up or it’s a little late. And then I don’t know, some of the schools are already passed back-to-school? Have you seen any improvement as you kind of moved passed the back-to-school season and in some of the southern markets at all?

Michael J. Hartshorn — Group President and Chief Operating Officer

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

Operator

Your next question comes from John Kernan from Cowen. John Kernan, your line is open.

John Kernan — Cowen & Company — Analyst

Hey, good afternoon everyone and thanks for taking my question. Can you comment on your ability to get back into product and inventory with the environment as we go through the back half of the year does improve from a traffic perspective. Obviously, see the inventory position now being pretty lean. So I’m just curious the speed at which you can ramp back up and get goods into stores throughout the back half of the year?

Michael J. Hartshorn — Group President and Chief Operating Officer

Yes, it’s a good question. Obviously, we plan the business very conservatively, we think we’ve done that strategically and we think that’s an appropriate approach to managing our business risk given these uncertain times. We’ve always — as we always do, we’ll chase the business with closeouts and supplement with packaway and that is ordinary course of business for us.

Operator

And your next question comes from Laura Champine from Loop Capital.

Laura Champine — Loop Capital — Analyst

Thanks for taking my question. I mean, obviously we hope that this is a once in a lifetime event. But does the problem with getting inventory in stores quickly enough highlight a potential to build in more direct ship from vendors to stores, so that you can be more flexible going forward, if demand doesn’t line up with your prior expectations? Or is this something that once DCs are running at full tilt shouldn’t be a long-term problem?

Michael J. Hartshorn — Group President and Chief Operating Officer

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

Operator

Your next question comes from Roxanne Meyer from MKM Partners.

Roxanne Meyer — MKM Partners — Analyst

Great, thanks for taking my question. I wanted to ask about — any color you can provide on trends by category, several of your peers have talked about the strength of home. And then related to that as a follow-up, you mentioned that you planned back-to-school business accordingly. So I was just wondering how comfortable you feel about your mix of goods in the store and your need to perhaps pivot categories to get to an ideal mix, and when do you think that could be, if you’re not there. Thanks a lot.

Travis Marquette — Group Senior Vice President and Chief Financial Officer

Yes, let me start with the trends by merchandise category. Again given the phase reopening of the stores and in particular the significant impact of clearance sales on results for the quarter, it’s really hard to get a clear sense of product trends. But the one thing that’s clear is that the consumer during the quarter was very much more focused on home as opposed to apparel.

Barbara Rentler — Chief Executive Officer

What I think you’re at direct and also is just where we’re seeing the shifts in product, where is the consumer heading versus where she’s been. So yes, I would say Travis’ point home, home is certainly a place that the consumer has flocked to and is a business that we believe in. And actually home gets bigger as you know as you enter into the fourth quarter. I would think also in apparel, the shift that we’re starting to see which I think everyone is starting to see is the consumer moving more towards casual products, active wear, athletic wear, as perhaps she’s working remotely now.

And so making that pivot and that shift is where we’re going. We normally have a large casual business our careers businesses have never been the biggest part of our apparel at Ross ever. And so for us it’s really about shifting even more dollars over there as the consumer has moved in that direction, and that’s what we would see in the back-to-school business like the juniors or young men, you would see that same shift on the floor now and a continued shift, because that is the bulk of where those businesses are for us normally.

Operator

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

Dana Telsey — Telsey Advisory Group — Analyst

Good afternoon, everyone. As you think about the DDs business, are you seeing the same trends that DDs as you are — as compared to Ross? And then if you think about your vendor base Barbara, or is this an opportunity to also expand the vendor base and are terms of payment at all being adjusted permanently in the industry from what happened in the short-term? Thank you.

Michael J. Hartshorn — Group President and Chief Operating Officer

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

Barbara Rentler — Chief Executive Officer

And from a vendor base perspective, obviously, we’re always trying to expand the vendor base and usually when business is difficult, it is when there are often more potential opportunity to expand that base, so the merchants are focused on trying to do that every day and particularly now. In terms of terms and adjustments permanently in the industry, I think, I really couldn’t comment on what globally that looks like for the entire industry. I think there has been a lot going on in the last few months. And so, I think everyone is reacting to what they need to do for the business, but I really can’t talk about a permanent shift in the industry.

Operator

Your next question comes from Jamie Merriman from Bernstein.

Jamie Merriman — Bernstein — Analyst

Thanks very much. Barbara, when you’re talking about, sort of pivoting two categories that are strong. Just — can you just talk a little bit about how that works and the timing, in terms of how often buying budgets are allocated? I’m just really wondering like how quickly you could really pivot assortments, if necessary? And then you talked in your prepared remarks about thinking through and sort of weighing the risk of future shutdowns. So — and given your comments around the DC locations of California and Pennsylvania, can you just remind us of where your big DCs are located and if there are, sort of, risk mitigation strategies you can put in place, if there were say shutdowns that impacted the California DCs. Thanks.

Michael J. Hartshorn — Group President and Chief Operating Officer

On the DCs about a little over half of our capacity is on the West Coast, we have DCs in the Bakersfield Central Valley area, one DC there, several in Riverside. We also have a DC Pennsylvania and two in South Carolina. If we had to shut down the California DCs, it would have a significant impact on the chain. As far mitigation strategies, obviously it’s going to be important for us in our future growth, our next DC opens in Houston, we’ll have another DC somewhat after that, that we would expect to be non-California.

Barbara Rentler — Chief Executive Officer

Sure. And in terms of pivoting to categories that are strong. How quick, you can do it? I mean, it’s really depends on each category in each size range and gender. So I couldn’t give you a specific time. What I would tell you is that, we would be more aggressively pursuing those categories base — and then based off of supply in the shorter term, we would drive it as much as we can. And in the longer term, what will usually happens is when there is a trend shift the market follows that trend shift, and then the supply naturally, kind of, goes there. And so then you can take a bigger lift than perhaps you can initially. As the market recognizes what’s working, what’s not working themselves.

Operator

Your next question comes from Jay Sole from UBS.

Jay Sole — UBS — Analyst

Thank you. Barbara, my question is, you mentioned there’s a lot of near-term factors impacting the trend in the third quarter so far, back-to-school, like a stimulus, the inventory issue, the rising COVID cases. But to what extent do you think traffic is being impacted by perhaps customers going online and finding bargains there because they’re not comfortable coming to stores right now?

And then, Michael, I just want to follow-up on the question about the DC staffing. Can you just explain a little bit more about what the challenges have been about — is it people not coming back? Were they furloughed? And then when you try to bring them back, they just — they weren’t — they found other jobs or they just didn’t want to come back? So you had to raise wages, if you could just explain that a little bit more, that would be appreciated. Thank you.

Michael J. Hartshorn — Group President and Chief Operating Officer

Sure. On the DCs, we did furlough our associates and we operate the DCs with both temp, labor and firm labor — permanent labor for surge capacity. We did see our permanent workforce, good retention in returning from furlough, but I suspect with the surge of e-commerce and the impact of commerce coming back post closure. The warehousing competitive labor market has increased quickly and significantly. So I think those are the main factors on what’s driving the DC staffing shortfall.

I would also add that in a COVID environment, we want to make sure that people are safe and we don’t want them coming to work, if sick. So there is also things like attendance that we’re addressing as well.

Barbara Rentler — Chief Executive Officer

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

Operator

Your next question comes from Ike Boruchow from Wells Fargo.

Ike Boruchow — Wells Fargo — Analyst

Hey, everyone. I’ll follow up on Jay’s question, but I’ll ask it differently, not necessarily e-commerce, I know you guys, I’m sure you have good communication with your customers. When you talk to them about why they’re not coming back as much as they did last year. Is it between the COVID concerns, the economy and maybe the customer lost their job or income of the family has gone down. And then the thirdly, your own inventory shortage, not having the right stuff in store. Do you know which is the main factor like, is there a rank order of those, is there any way you kind of talk to that?

Michael J. Hartshorn — Group President and Chief Operating Officer

Ike, I would say, it’s hard to break out between those components. I think it’s very clear that the number one factor is the impact of the virus. As we said in our comments that the markets that were impacted the most were also the markets that had the largest outbreak, so I think that’s clear, so that’s the number one factor. But I don’t want to minimize, we think we could have done things better during the quarter. So there are factors that we’ve talked about with inventory that we think we can impact. So the bottom line is we’re going to work on our own execution and do the things that we can do to impact of business.

Operator

Your next question comes from Chuck Grom from Gordon Haskett.

Chuck Grom — Gordon Haskett — Analyst

Good afternoon, just one quick one for me. Just I’m curious, just in those states, if you’re still seeing subdued sales here in August or if they both recovered back to sort of the national average? Thanks.

Michael J. Hartshorn — Group President and Chief Operating Officer

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

Chuck Grom — Gordon Haskett — Analyst

Just on the sales in those states. I’m just wondering, if the sales are covered, Florida, California, Texas there?

Michael J. Hartshorn — Group President and Chief Operating Officer

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

Operator

And your last question comes from Adrienne Yih from Barclays.

Adrienne Yih — Barclays — Analyst

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

Michael J. Hartshorn — Group President and Chief Operating Officer

I’ll try to hit through those. I’m going to go in reverse order, we’re not seeing the same issues in the stores and that’s likely, again the DCs were impacted by the surge in e-commerce with the closures of a number of bricks and mortar retailers. We’re not having that same issue in the stores. And then in terms of holiday plans, we wouldn’t discuss those at this point, as we’re still working through those plan.

Barbara Rentler — Chief Executive Officer

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

Operator

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

Barbara Rentler — Chief Executive Officer

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

Operator

[Operator Closing Remarks]