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Ross Stores, Inc. (ROST) Q3 2020 Earnings Call Transcript

ROST Earnings Call – Final Transcript

Ross Stores, Inc.  (NASDAQ: ROST) Q3 2020 earnings call dated Nov. 19, 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

Analyst:

Matthew Boss — J.P. Morgan — Analyst

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

Kate Fitzsimons — RBC Capital Markets LLC — Analyst

Paul Lejuez — Citi — Analyst

Kimberly Greenberger — Morgan Stanley — Analyst

Ike Boruchow — Wells Fargo — Analyst

Michael Binetti — Credit Suisse — Analyst

Janine Stichter — Jefferies & Co. — Analyst

Paul Trussell — Deutsche Bank — Analyst

Lorraine Hutchinson — Bank of America Merrill Lynch — Analyst

Marni Shapiro — The Retail Tracker — Analyst

Jay Sole — UBS — Analyst

Simeon Siegel — BMO Capital Markets — Analyst

Laura Champine — Loop Capital — Analyst

Bob Drbul — Guggenheim Securities — Analyst

Alexandra Walvis — Goldman Sachs — Analyst

Jamie Merriman — Sanford C. Bernstein — Analyst

Dana Telsey — Telsey Advisory Group — Analyst

Chuck Grom — Gordon Haskett — Analyst

Roxanne Meyer — MKM Partners LLC — Analyst

Presentation:

Operator

Good afternoon and welcome to the Ross Stores Third Quarter Fiscal Year 2020 Earnings Release Conference Call. [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, 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-Qs 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 and Chief Operating Officer; Travis Marquette, Group Senior Vice President and Chief Financial Officer; and Connie Kao, Group Vice President, Investor Relations. We’ll begin our call today with a review of our third quarter and year-to-date performance. Afterwards, we’ll be happy to respond to any questions you may have. The vast majority of our stores were operating throughout the third quarter. That said, given the worsening pandemic, we will remain vigilant in monitoring local developments to assess any potential changes that might be necessary to our operations based on local state or other government directives. We will continue to make the health and well-being of our associates and customers a top priority.

Turning now to our financial results; total sales for the third quarter declined 2% to $3.8 billion with comparable store sales down 3%. Sales improved substantially compared to the second quarter following a slower start in August. This acceleration was driven by several factors, including an improvement in our merchandise assortment, a later back-to-school season, stronger performance in our larger markets and our return to more normal store hours. In October, the company refinanced $775 million in senior notes to significantly reduce the annual interest expense and total cash outlays over the life of the debt. This action resulted in a one-time charge of $240 million, or $0.65 per share impact to net earnings in the third quarter of fiscal 2020.

Including this impact, for the 13 weeks ended October 31, 2020, net income was $131 million or $0.37 per share compared to $371 million or $1.03 per share for the same period last year. Year-to-date, the loss per share was $0.43 on a net loss of $153 million, also including the aforementioned onetime charge. This compares to net income of $1.2 billion or $3.32 per share for the same period in 2019. Sales for the first nine months of 2020 were $8.3 billion versus $11.6 billion last year. Third quarter operating margin of 4.4% was down from 12.4% last year and was negatively impacted by the one-time debt refinancing charge, which was equivalent to 640 basis points. In addition, the year-over-year margin decline reflects higher COVID-related operating costs in 2020 and the deleveraging effect on expenses throughout the business, from the decline in same-store sales.

At quarter end, total consolidated inventories were down 25% from the prior year with average store inventories down 8%. During the period, we continued to make progress on our distribution capabilities to support peak sales during the holiday selling season. Packaway levels at quarter end were 26% of the total, compared to last year’s 39%. For the third quarter, the strongest merchandise areas at Ross, was home, while the Midwest and the Southeast were the best-performing geographic regions. Similar to Ross, dd’s DISCOUNTS performance accelerated during the quarter, as their value offering also resonated well with customers. Overall, our improved core business results demonstrates consumers’ continued focus on value and our ongoing ability to deliver the bargains our customers come to expect from us. Turning to store growth, as expected, we opened 30 Ross and nine dd’s DISCOUNTS locations in the third quarter, completing our expansion program for 2020. After the planned closing of about 10 existing stores in the fourth quarter, we anticipate ending the year with 1,585 Ross and 274 dd’s DISCOUNTS locations, for a net increase of 54 for fiscal 2020.

Now, Travis will provide further color on third quarter results.

Travis Marquette — Group Senior Vice President and Chief Financial Officer

Thank you, Barbara. As Barbara noted, comparable store sales decreased 3% versus last year. This decline was driven by a lower number of transactions that was partially offset by a larger average basket size. Again, as mentioned earlier, operating margin for the quarter was 4.4%, down from 12.4% last year. Cost of goods sold increased 35 basis points in the period. Merchandise margin grew by 190 basis points, driven by a favorable buying environment and lower inventory shortage. These items were more than offset by freight costs that rose 90 basis points and higher distribution expenses of 70 basis points. In addition, buying and occupancy delevered by 40 basis points and 25 basis points, respectively.

Selling and general and administrative expenses increased 765 basis points, which includes the previously mentioned 640 basis point impact from the one-time debt refinancing charge, in addition to the deleveraging effect from the decline in same-store sales and higher corporate-related operating costs in 2020. Total net COVID-related expenses for the quarter were approximately $25 million with a slightly higher impact to cost of goods sold than SG&A. We expect net COVID-related costs to be significantly higher in Q4 relative to Q3. These increases primarily relate to managing impact from industry-wide capacity constraints and congestion as well as wage and incentive actions in our supply chain and stores.

Turning to our balance sheet, in addition to the refinancing of a portion of our senior notes during the third quarter, we also took several actions to reduce our ongoing debt costs, including the repayment of the $800 million revolving credit facility and terminating the undrawn $500 million revolver. Overall, we remain in a strong financial position, ending the quarter with over $5.2 billion in liquidity, which includes an unrestricted cash balance of about $4.4 billion and the $800 million revolver that remains available. As mentioned in our press release, entering the fourth quarter, our month-to-date comparable store sales in November are down mid-single digits.

In addition, there remains a high level of uncertainty related to the worsening health crisis, and we are concerned with how the upsurge of this pandemic might impact consumer demand during what we expect to be a highly competitive holiday shopping season. Given the lack of visibility we have concerning these external risks and how they may evolve and impact our business, we will continue to manage our operations conservatively and will not be providing specific sales or earnings per share guidance for the fourth quarter.

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

Barbara Rentler — Chief Executive Officer

Thank you, Travis. As we look ahead to the holiday season, we expect a highly competitive retail environment in a difficult economic and political atmosphere, both of which are complicated by our lack of visibility surrounding the worsening pandemic. Despite these near-term challenges, I want to emphasize that we have a talented and seasoned management team that we believe will enable us to effectively navigate through any short-term headwind. Over the longer term, we remain well-positioned in the off-price sector to gain market share, as we believe consumers will continue to favor retailers focused on delivering value and convenience, both of which we have and will continue to provide to our customers.

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 the line of Matthew Boss from J.P. Morgan. Please go ahead.

Matthew Boss — J.P. Morgan — Analyst

Great. Thanks and congrats on the improvement. So Barbara could you help bridge improvement from negative mid-teens to start August and more or less flat comps for the remainder of the quarter, I think, would be the math? Are you happy with your inventory assortment today and the availability that you see out there with close-out product? And then larger picture, to touch on your comments, just given the stability that your model is showing in the midst of the pandemic, how do you see opportunity for the off-price model post pandemic as it relates to market share?

Barbara Rentler — Chief Executive Officer

Sure. First, in terms of our inventory assortment, I think as the quarter went on, the merchants did a fine job of actually chasing the goods in the market and shifting the assortments into the classifications that the customer is desiring, which is more home and things that are casual, active wear. In terms of availability in the market, we’re seeing availability pretty broad-based in most classifications, and there’s plenty of supply, so we’re not as worried about a supply. And in terms of stability of the model for off-price, as we go forward, look, I think when we get to the other side post pandemic, there’s a customer who really likes shopping in stores, who enjoys the off-price model because there’s a treasure hunt and the excitement, and I’ll call it the fun and also for retail stores that really focus on value and convenience, and that’s really all those metrics of what the Ross model does.

Michael J. Hartshorn — Group President and Chief Operating Officer

Matt, it’s Michael Hartshorn. I’ll also add with the extraordinary large number of current and future retail closures. It does mean that she has fewer places to shop, and we think that off-price in general and Ross and dd’s specifically are well-positioned to gain market share post pandemic.

Matthew Boss — J.P. Morgan — Analyst

Perfect. And then just a follow-up on gross margin, could you just walk through any puts and takes for us to consider in the fourth quarter gross margin, anything preventing underlying merchandise margin expansion?

Travis Marquette — Group Senior Vice President and Chief Financial Officer

Sure. This is Travis. We’re not providing specific guidance for the fourth quarter, but a couple of comments on merchandise margins. We mentioned merch margin was up 190 basis points, driven by the favorable buying environment. We think there’s — that can continue for a little bit, over the longer term remains to be seen how long that will last, but we think that will continue. We also mentioned the shrink benefit, which was about one-third of the gain that we saw during the quarter. That’s obviously specific to Q3 and would not repeat in Q4. Just a little color on that, the benefit was due to the significant markdowns that we took earlier this year, which reduced the value of the items that we recognized in shrink during the quarter. If you exclude the markdowns, the impact on unit shrink was relatively flat.

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Matthew Boss — J.P. Morgan — Analyst

Great. Best of luck again.

Operator

Your next question comes from the line of Mark Altschwager from Baird. Please go ahead.

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

Great. Good afternoon. Thanks for taking my question. Just first, on inventory, just a follow-up there, pack and hold remains fairly low relative to where it’s been historically. I was wondering if you could speak to that and how you see that evolving here as you move forward. And then just given the current buying environment, which sounds like it’s pretty favorable, just wondering if you could speak to your level of confidence in being able to generate merchandise margins as we move into the spring of next year. Thank you.

Michael J. Hartshorn — Group President and Chief Operating Officer

On the packaway levels, similar to the last quarter, we used packaway to chase ahead of plan sales as sales — the acceleration of the quarter was well ahead of our internal plans. Overall, availability is plentiful, and we expect packaway to continue to build to historical levels.

Barbara Rentler — Chief Executive Officer

And then in terms of the current buying environment and margins, I think what we’ll see is that, over time, that the margin part of it will not be quite as favorable as it is today because the buying environment in the Q3 was really favorable. So we expect over time that it would more normalize.

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

Thank you.

Operator

Your next question comes from the line of Kate Fitzsimons from RBC. Please go ahead.

Kate Fitzsimons — RBC Capital Markets LLC — Analyst

Yes, hi. Thanks very much for taking my question. I guess last quarter you guys had called out underperformance in California, Texas, Florida and Arizona. Can you just give us an update on how some of those lagging markets were faring in the third quarter? And then just in terms of the negative mid-single digits quarter-to-date — is there any region that is leading the decline? That would be helpful just to frame up the regional complexion. Thank you.

Michael J. Hartshorn — Group President and Chief Operating Officer

At the time of our Q2 call in early August, we had begun to see some stabilization in those markets in our larger markets in California, Florida, Texas and Arizona. But tourist and border locations continue to significantly underperform the rest of the chain. For the quarter, California performed above the chain average, while Florida and Texas continue to be impacted by their higher concentration of border and tourist locations. And then, on the month-to-date trend, we wouldn’t get into the details of inter-quarter trends other than to say, the current trend is down mid-single digits.

Kate Fitzsimons — RBC Capital Markets LLC — Analyst

Great. Thanks very much.

Operator

Your next question comes from the line of Paul Lejuez from Citi. Please go ahead.

Paul Lejuez — Citi — Analyst

Hey. Thanks, guys. Curious, if there’s anything within your supply chain that’s not functioning as you would hope at this point, whether it’d be your ability to buy the items, you want to buy or getting the product to the DCs and out to the stores. Is there anything that you’re not happy with where you think there’s room to improve in the fourth quarter and beyond? And then, just bigger picture. Curious, if the current situation makes you think any different about growth at dd’s over the next few years, either faster or slower?

Michael J. Hartshorn — Group President and Chief Operating Officer

Paul, on supply chain, if you recall, at the end of the second quarter, we had some staffing challenges, but we took a number of wage — both wage and incentive actions in Q3, and actually feel really good about our staffing levels as we move into Q4. Throughput has improved, and we also feel good about our receipt flow to the stores. If there’s one thing I would say about the supply chain is, there has been and continues to be port congestion, like you’ve seen across retail. That is causing product delays in certain areas, but with our flexible business model, our overall inventory levels are positioned in line with our plans coming into the quarter. That congestion, not only in the port but across transportation modes means that we are seeing cost pressures due to the higher rates to move freight across the U.S. On dd’s growth, I think it’s too early to talk about dd’s growth. We’ll be in a better position to do that on our year-end conference call in March.

Paul Lejuez — Citi — Analyst

Thanks, Michael. And just one follow-up, any quantification of the number of new vendors that you’ve added this year, and where do you stand now in terms of total vendor count?

Barbara Rentler — Chief Executive Officer

Well, during the course of the year, we’ve added hundreds of vendors, pretty broad-based across all areas. In terms of our total vendor count at this moment, I don’t know if I can answer that exact number at this moment. In our Annual Report, we had — I think it was 7,500.

Michael J. Hartshorn — Group President and Chief Operating Officer

Yeah, a little over — we’re a little over 8,000 now, Paul. So it’s about a 5% increase that we’ve seen since COVID.

Paul Lejuez — Citi — Analyst

Got it. Thank you, guys. Good luck.

Operator

Your next question comes from the line of Kimberly Greenberger from Morgan Stanley. Please go ahead.

Kimberly Greenberger — Morgan Stanley — Analyst

Great. Thank you so much. The inventory level still looks obviously very, very lean. But it sounds like you’re quite happy with the inventory that you’ve got. I’m wondering if you can help us understand what you have packed away for spring and summer that you could bring out in early 2021 to help kick off that season? Is it similar to what you would have had last year or is it leaner, just thinking about the first half of the year next year? And you talked about some port delays and some challenges that vendors have relayed to you, I think, just with moving goods. Does that, in any way, create opportunities for Ross or on the other hand, are you experiencing some delivery delays to your stores that could be slightly holding back sales trends?

Michael J. Hartshorn — Group President and Chief Operating Officer

I’ll answer your second question, first, and then turn it over to Barbara on packaway. Historically, any time there’s disruptions like these it has always created supply opportunities for off-price. And I don’t think this will be any different. There’s — with the port delays, there’ll be missed holiday dates, and we’d expect there to be inventory opportunities. For us, there could be some risk in the fourth quarter. But again, with our — we have a lot of flexibility to move goods in and out. We have to make sure, obviously, we have the right assortments for the customer, but coming into the quarter, we feel good about our inventory levels.

Barbara Rentler — Chief Executive Officer

And in terms of spring packaway, Kimberly, I think it’s similar to every year. It moves based on what you find in the market. And I don’t think its consistent year-to-year. I would say, overall, that it’s slightly less than what we had the year before because we flowed a lot of goods into the third quarter. That’s pretty much where we are today. And then in terms of the port and disruptions at the port, you would think disruption for us equals supply. So what goes on in the first quarter, depending upon how long the ports are jammed up, we might wind up even getting some spring supply earlier. We’ll have to wait and see what happens.

Kimberly Greenberger — Morgan Stanley — Analyst

Great. Thank you, Barbara. And then just given the really materially improved financial position of the business, I’m wondering how you’re thinking about the dividend and when you would expect to reevaluate potentially reinstating that dividend.

Michael J. Hartshorn — Group President and Chief Operating Officer

Kimberly, our near-term focus is — continues to be preserving liquidity, especially given the current upsurge in the virus and potential impact of additional government restrictions could have on consumer demand during the holidays. So we’ll wait and see how holiday pans out. But based on that, it’s too early to comment on future payouts. So we’d expect to have commentary in our year-end earnings conference call.

Kimberly Greenberger — Morgan Stanley — Analyst

Great. Thank you so much.

Operator

[Operator Instructions] Your next question comes from the line of Ike Boruchow from Wells Fargo. Please go ahead.

Ike Boruchow — Wells Fargo — Analyst

Hey. How are you guys doing? Travis, just for you on the SG&A side. Could you possibly quantify the COVID costs that you guys are incurring right now? And if there’s anything, any color you can add on what you mean when you say it should — the cost should accelerate into Q4? And then just big picture on that topic, should we consider those to be onetime, assuming if there is a vaccine and life goes back to normal by the time you start lapping these results come next year? Thank you.

Travis Marquette — Group Senior Vice President and Chief Financial Officer

Yeah, sure. I think as we mentioned the cost for the third quarter — sort of net COVID cost is how we’ve been talking about it were about $25 million. So that’s some pluses and then some savings and minuses that get to that number. In terms of the fourth quarter again, we expect the cost to be significantly higher in Q4, really related to a couple of things within stores, we expect higher costs related to ongoing investments for personal protective equipment and other payroll and incentive actions. And then in the supply chain, again we’re forecasting higher costs due to COVID-related labor actions as well as cost to respond to industry wide supply chain capacity constraints. On your question around COVID and are they one time? Generally speaking, yeah, we would expect that as the pandemic ends that these costs would start to fade out of the business.

Ike Boruchow — Wells Fargo — Analyst

Got it. Thank you.

Operator

Your next question comes from the line of Michael Binetti from Credit Suisse. Please go ahead.

Michael Binetti — Credit Suisse — Analyst

Hey guys. Great quarter. Thanks for taking our question. On the real estate outlook as you look at 2021, should we think that that’s like a normal year 90 stores per year like you were doing roughly before COVID or is it — is there some catch up next year or is it a slower year as you kind of restart operations? Just trying to think if it’s an above or below normal year?

Michael J. Hartshorn — Group President and Chief Operating Officer

Sure. At this point, it’s too early to say what our plans are for next year, but we’ll be in a position to discuss in March at our yearend conference call.

Michael Binetti — Credit Suisse — Analyst

Okay. And then I guess. Thanks for that. Is there any consideration about the Northeast has been out there as a market that you guys haven’t been in for a while. I know some good thinking has been on the value we offer the AURs like what can they support the rents, that are a little bit higher in that market, is this a more attractive time for you to look at that market?

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Michael J. Hartshorn — Group President and Chief Operating Officer

Yeah. I mean, I think we’re going to see opportunities across the U.S., including most especially in the existing markets that we’re in and also in our newer markets, so certainly over the next couple of years that will continue to be our priority. At some point, we’ll get to the Northeast.

Michael Binetti — Credit Suisse — Analyst

And Michael as you look at — we’ve had a bunch of brands that have commented on pulling back from off price as much as possible. I’m not sure that they stuck to the discipline on it or not, they seem to be a bit of a renewed focus but as you look at that and they’re all — everything going on and think about packaway versus at once and closeout. Do you think a little differently about how you want the mix of that to look going forward than in the past or is there anything structural that you’re looking at that might be a little bit different going forward that we should think about?

Barbara Rentler — Chief Executive Officer

Well actually, let’s talk about brands first. Brand strategies fluctuate from year-to-year, so different brands are doing different things as the world keeps evolving. In terms of packaway versus closeouts versus flowing upfront all the mixes of it, really, we don’t see a major material change, our main thing is that what we want to deliver are really being able to deliver the best branded bargains possible to the customer. And so, that comes through different buying strategies, and we don’t really see that mix as of today changing that much.

Michael Binetti — Credit Suisse — Analyst

Okay. Thanks.

Operator

Your next question comes from the line of Janine Stichter from Jefferies. Please go ahead.

Janine Stichter — Jefferies & Co. — Analyst

Hi. Thanks for taking my question. Want to ask a little bit about the complexion of the comp, it seems like the improvement in 3Q versus 2Q is mostly traffic driven, but I’m curious, if you’re seeing anything change in terms of either basket or conversion? Thank you.

Travis Marquette — Group Senior Vice President and Chief Financial Officer

Yeah, sure. You’re correct. The biggest change from Q2 to Q3 was on the traffic, number of transaction side for us. There was not a — yeah, that was the biggest driver.

Michael J. Hartshorn — Group President and Chief Operating Officer

So not a significant change.

Travis Marquette — Group Senior Vice President and Chief Financial Officer

Yeah.

Janine Stichter — Jefferies & Co. — Analyst

Okay. Thank you. And then just a follow-up, I apologize if I missed it, but I think on the last call you talked about, overall inventory availability being very strong but there being some gaps in the assortment and some of the hotter categories. Are you still seeing that or do you feel like on a category basis, the availability is where you’d like it to be?

Barbara Rentler — Chief Executive Officer

I think there’s some small inconsistencies now. Not the way it was before. I think it’s more broad based now. But this, yeah, in certain categories but in every season, there are some in certain categories, so.

Janine Stichter — Jefferies & Co. — Analyst

Okay. Thank you very much.

Operator

Your next question comes from the line of Paul Trussell from Deutsche Bank. Please go ahead.

Paul Trussell — Deutsche Bank — Analyst

Good afternoon, and good quarter. Just be looking for, maybe just overall comments on the balance sheet and where we stand today, comments maybe on debt position, potential timetables and thought process around dividend and return to the buyback. And then separately, just curious if you have any gauge or guess, just on what percent of your core customers have returned to shop in the stores over the past few months?

Travis Marquette — Group Senior Vice President and Chief Financial Officer

Yeah, I’ll start with the balance sheet. Again, we feel very good with our financial position, as I mentioned in the comments, $4.4 billion of unrestricted cash, about $5.2 billion in liquidity. So we feel very good about that. We talked about the debt actions that we took. During the quarter we refinanced a portion of our senior notes to significantly reduce the overall long-term cost of that. We feel good about that. I think, as we talked about a little bit earlier on the call in terms of go forward, and dividends, and buybacks and whatnot. Again, our current focus remains on preservation of cash and liquidity. There’s just a tremendous amount of uncertainty regarding the virus and how that will progress and.

Michael J. Hartshorn — Group President and Chief Operating Officer

Paul on the consumer. We obviously speak to our customers often through survey work. I would say at this point we don’t have a comprehensive information to share at this time but we know that she continues to prioritize value when deciding where to shop. And given, as I mentioned earlier, the large number of retail closures that mean she has fewer places to shop now and that’s benefited us.

Paul Trussell — Deutsche Bank — Analyst

Thank you. Best of luck.

Operator

Your next question comes from the lineup Lorraine Hutchinson from Bank of America. Please go ahead.

Lorraine Hutchinson — Bank of America Merrill Lynch — Analyst

Thanks. Good afternoon. It looks like once we’re in a post vaccine environment many of these COVID costs will fall off, but is there any reason why some of the gains you’ve seen in merchandise margins would necessarily fall off? I guess, what I’m asking is, could margins over the long-term exceed your prior peaks coming out of this?

Barbara Rentler — Chief Executive Officer

A part of — Lorraine, I think a big piece of the margin that we’re seeing in the off-price sector right now is with the availability of goods and the chase back into Q3. I think over time as supply levels, and vendors are more proactive, I think in managing through different sectors of inventory in stores, I think it’s — I think the supply will become more normalized. And I think with that, the margins will become thick. I’m not saying they couldn’t be better than then they were historically, but I think versus where they stand today I just don’t see that holding.

Lorraine Hutchinson — Bank of America Merrill Lynch — Analyst

Thanks.

Operator

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

Marni Shapiro — The Retail Tracker — Analyst

Hey, guys. Congrats and best of luck for the holiday season. I forgot to add that at the end. Travis, I just wanted to clarify one thing you said about shrink. I think you said that the value was down, but that was due to the fact that, I guess, went missing was already marked down. So if you can clarify that? And then, Barbara, I’m just curious at a high level, are you seeing sales also very strong? I think you called out home, but other — what people are calling COVID categories like kids, beauty and active?

Travis Marquette — Group Senior Vice President and Chief Financial Officer

Yeah, sure. On shrink, you have it about right. So because of the significant markdowns that we took earlier in the year, that reduced the retail value of the items that we recorded in shrink during the quarter, which gave us a benefit. As I mentioned, if you look at it on a sort of unit basis compared to last year, it was relatively similar.

Marni Shapiro — The Retail Tracker — Analyst

Okay.

Barbara Rentler — Chief Executive Officer

And in terms of the classification, Marni, those other classifications are strong also. Beauty continues to be strong. Kids are strong as well as Home.

Marni Shapiro — The Retail Tracker — Analyst

Fantastic. Thanks, guys.

Operator

Your next question comes from the line of Jay Sole from UBS. Please go ahead.

Jay Sole — UBS — Analyst

Great. Thank you so much. My question is about in-store inventory levels. How did you feel about the in-store inventory levels in the quarter? Did you feel like there was enough inventory in the store to capture all the demand or could have been opportunities to do even more sales had there been even more inventory in the store?

Michael J. Hartshorn — Group President and Chief Operating Officer

Hi. On inventory, as you know, historically, we’ve managed our in-store inventory levels very conservatively, and that’s not going to change going forward. I’d say we got inventory levels to where we wanted them during the quarter. We’re obviously trying to manage the business very conservatively. I’m sure there’s pockets of inventory or areas of the store where if we had more, we could have turned faster. But overall, we were pleased with the inventory levels.

Barbara Rentler — Chief Executive Officer

I think the way we should think about it is or the way we think about it is because we chase the sales to above plan, we drove a lot of fresh receipts into the store. So the customer could come every week and see something new and something different. And so every business might not have been positioned exactly the way — I’m not even sure the way I’d say we’d want it to because I think the off-price customers are used to coming into a store and seeing variances and inventory levels and products. But I think the thing that helped to drive the quarter sales was really the fresh receipt and the fact that she could come in every week into the treasure hunt and find something different.

Jay Sole — UBS — Analyst

Got it. Thank you so much.

Operator

Your next question comes from the line of Simeon Siegel from BMO Capital Markets. Please go ahead.

Simeon Siegel — BMO Capital Markets — Analyst

Thanks. Good evening. Sorry if I missed it. How was AUR this quarter? And then, Barbara, do you have a view on the industry-wide promotional cadence for holiday? And how you see your AUR opportunity for holiday and into next year? Thanks.

Travis Marquette — Group Senior Vice President and Chief Financial Officer

Yeah, sure. AUR was down. It was down during the quarter.

Simeon Siegel — BMO Capital Markets — Analyst

Any thoughts on just — yeah, I’m sorry.

Barbara Rentler — Chief Executive Officer

Go ahead. Go ahead.

Simeon Siegel — BMO Capital Markets — Analyst

No, I was just going to ask about the holiday, just how you’re viewing the broad promotion?

Barbara Rentler — Chief Executive Officer

Yeah. Well, we think it’s going to be a very promotional holiday season. I mean it’s been promotional for a number of years, and I don’t expect this year to be any different. I think the most important thing for us to do is to be able to deliver really compelling bargains to the customer. And if we do that, we’ll do fine. In terms of the AUR, the AUR moved a lot with the deals that you get based on the values you put on the floor, and we are highly focused on value because that’s what the customer is focused on and also the AUR also can move around within the total box based on the businesses that you’re driving. So in terms of as we go forward, we are going to buy and to drive into the businesses of the customers is responding too, and the AUR will move with that.

Simeon Siegel — BMO Capital Markets — Analyst

Great. Thanks a lot. Best of luck for holiday.

Operator

Your next question comes from the line of Laura Champine from Loop Capital. Please go ahead.

Laura Champine — Loop Capital — Analyst

Thanks for taking my question. When you were contemplating your inventory plan for this holiday period, how are you thinking about the potential for store closures, capacity limitations? And how quickly can you adjust, assuming there are adjustments needed given the congestion? Do you think that you run the risk of missing out on sales because inventories are just too light?

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Michael J. Hartshorn — Group President and Chief Operating Officer

Yeah, I mean, the way we approach the holiday season is very cautiously. Especially with the recent upsurge in restrictions, we’re going to balance sales with managing the business, managing our liquidity and managing inventory. So, there is a chance that we could miss some sales, but we’re going to take a very cautious approach and make sure we’re positioned well to react to what’s in front of us.

Laura Champine — Loop Capital — Analyst

Understood. Thank you.

Operator

Your next question comes from the line of Bob Drbul from Guggenheim. Please go ahead.

Bob Drbul — Guggenheim Securities — Analyst

Hi. Good afternoon. Just a couple of quick questions. On the Home category, can you maybe — I think you called it out as strong. I’m just wondering if you can maybe give us a little more color in terms of really what you’re seeing in home and maybe even inventory availability around the home? And also separately, just wage rates, I think you talked about higher wages and some of the staffing levels throughout the supply chain. Just generally, in terms of what you’re seeing overall throughout the staff would be very helpful in the stores. Thanks very much.

Barbara Rentler — Chief Executive Officer

In terms of the Home business, the business is healthy across all classifications. I think as the customer is home and they’re not going to work and they’re working from home. I think every classification is good. I mean maybe with the exception of probably the weakest business would be travel as it would make sense because people aren’t really traveling, but it’s very broad-based. In terms of availability, part of the Home business is a direct import business. So some lead times have gotten longer in some of those businesses for future. And then for shorter term, we did — the merchants did a very good job of getting closeouts, some closeouts in the third quarter, which we were pleased with. But that business is really much more of an upfront business and it’s laid further out.

Michael J. Hartshorn — Group President and Chief Operating Officer

On wages, where we’re seeing the most market pressure, as I mentioned is in our distribution centers and supply chain. And as I mentioned, we did make base wage increases. We also have COVID incentive for the DC associates. And in stores, both stores and DCs, we’re very happy with our staffing levels and have been able to staff up for holiday in both areas.

Bob Drbul — Guggenheim Securities — Analyst

Great. Thank you.

Operator

Your next question comes from the line of Alexandra Walvis from Goldman Sachs. Please go ahead.

Alexandra Walvis — Goldman Sachs — Analyst

Good evening. Thanks very much for taking my question. I had a question also on categories. You mentioned outperformance of home and active and underperformance elsewhere. As you move through the quarter and you saw the improvement in the comp, did that improvement come from incremental strength in the strong categories or a little bit of recovery in some of those weaker categories? And then, second question is any thoughts on freight costs as you head into next year?

Barbara Rentler — Chief Executive Officer

In terms of the comp and the trending businesses, as the quarter went on those businesses got stronger as we chased after them more aggressively when we saw the customers’ trend. And so those businesses, obviously, best — home was our best-performing business. So those businesses help to drive the comp forward.

Michael J. Hartshorn — Group President and Chief Operating Officer

On transportation and freight charges, obviously, the significant, both import and domestic congestion is driving up freight costs now. We’re paying surcharges to make sure we can get freight through the supply chain and on to the stores. Our expectation would be that that would continue likely through the first quarter, because that’s the expectation for congestion. We’ll have more to say on the full year impact in our year-end conference call.

Alexandra Walvis — Goldman Sachs — Analyst

Great. Thank you so much.

Operator

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

Jamie Merriman — Sanford C. Bernstein — Analyst

Thanks very much. Can you just update us on where home is now as a percentage of the mix? And whether you see any limit on that as a category? Could it get to 40% of sales at some point or would you view that as too big? And then, in terms of store planning, I appreciate it’s too early to say what your plan is for 2021. But can you remind us how you’ve thought historically about what your sort of capacity constraint is around opening new stores faster? Thank you.

Barbara Rentler — Chief Executive Officer

Sure. In terms of home, the home business escalates in the fourth quarter and gets much closer to 30% mark, 31% mark. It’s traditionally around 25%, 26% for us. It comes up. As we go forward, our expectation is that business will continue to grow at a faster rate than the rest of the company, because that’s what the customer is after. And also, there is a lot of businesses in home that you can drive.

Michael J. Hartshorn — Group President and Chief Operating Officer

Could you repeat your question on the store growth?

Jamie Merriman — Sanford C. Bernstein — Analyst

Sure. So historically, when you’ve talked about how you think about the pace of store openings, I think you’ve talked about wanting to have management attention around number of stores that you’re opening. Can you just remind us what the sort of capacity constraints are as a business in terms of ability to accelerate store openings to the extent that there are far more opportunities in 2021 or 2022?

Michael J. Hartshorn — Group President and Chief Operating Officer

Yes. I would — for us our historical level of store openings is around 100 per year, typically, 80% Ross, 20% dd’s. That’s a level that we’re comfortable with. We like our ability to execute at that level, both in getting the right site and also open the stores successfully from a store operations standpoint. So I’d say that’s a level that we’re comfortable with.

Jamie Merriman — Sanford C. Bernstein — Analyst

Thank you.

Operator

Your next question comes from the line of Dana Telsey from Telsey Advisory Group. Please go ahead.

Dana Telsey — Telsey Advisory Group — Analyst

Hello. Hello.

Operator

Dana Telsey, your line is open.

Dana Telsey — Telsey Advisory Group — Analyst

Hi. Wanted to get some color on how you’re thinking about occupancy costs and the ability given lease renegotiations to leverage those costs. Is that an SG&A tailwind for you going into 2021? And are you at all thinking about any adjustments in store size or the structure of the store in 2021 and beyond for Ross or dd’s? And how you’re seeing the real estate landscape? Thank you.

Michael J. Hartshorn — Group President and Chief Operating Officer

Sure, Dana. I think it’s too early to predict what’s going to happen in the — in terms of occupancy costs. Just — the occupancy for us is in cost of goods sold not in the SG&A line. But I think it’s too early to predict what’s going to happen. Obviously, with the store closures, there’s going to be — we think there’s going to be plenty of opportunities. So I think it’s too early to call at this point.

Dana Telsey — Telsey Advisory Group — Analyst

Got it. And just when you’re thinking about the buying for next year and planning for Easter or the other holidays going forward, how do you see the overall change in inventory levels compared to what you have now? Are you seeing differences in vendor assortments? Are you seeing differences in terms of what you’ll be able to get your hands on for goods in the first half of 2021?

Barbara Rentler — Chief Executive Officer

Sure. So buying for Easter, obviously, Q1 is normally a tough quarter. And with the unknown of what will happen with the virus and the pandemic, I would envision us having a very conservative plan in Q1, particularly inventory since we don’t know really how things will be playing out. Buying for Easter, I think that Easter, if people really can’t go out and celebrate holidays still at that point, I think Easter will not be quite as big as it normally historically has been. So that whole first quarter period, I think, is just a conservative period that we’ll have to see how big we want that to be. In terms of vendor assortments — look, we have a very large merchant team. We have really very strong relationships in the market. We’ve tried to be very good partners during this period of time. And I see the assortment for 2021 being pretty balanced in terms of a good, better, best and the brands that we want. There’ll always be in a vendor assortment there will always be certain things you don’t have. There’ll always be certain times you don’t have it and all of that, but I don’t see any major shift in the brands and the values that we can offer the customer.

Dana Telsey — Telsey Advisory Group — Analyst

Thank you.

Operator

Your next question comes from the line of Chuck Grom from Gordon Haskett. Please go ahead.

Chuck Grom — Gordon Haskett — Analyst

Hey. Thanks. Great recovery on the business. A quick one for me. Just you spoke to longer hours of operation as one of the drivers of the sales recovery as the quarter progressed. Curious if you’re back to normal hours at this point in time or if that’s still a potential tailwind to come? Thanks.

Michael J. Hartshorn — Group President and Chief Operating Officer

Sure. Yeah, during the third quarter, we returned to normal operating hours. Going into the holiday season, we historically have extended them further. We plan to do the same this holiday season. We’re allowed to do so.

Operator

Your last question comes from the line of Roxanne Meyer from MKM Partners. Please go ahead.

Roxanne Meyer — MKM Partners LLC — Analyst

Great. Thanks for taking my question, and congrats on the improvement you saw. Kind of building off of that, I wanted to see how good do you feel about your ability to process traffic you do get, assuming the pandemic doesn’t disrupt that? I imagine that you’re putting incremental safeguards in your stores, logistics to move people through the store. But how should we think about the overall capacity and that you’re able to get — process people through that want to get in your store?

Michael J. Hartshorn — Group President and Chief Operating Officer

Yeah. It’s a good question, Roxanne. I’d say store capacity limits are changing on a daily basis. It’s very dynamic based on local restrictions. A 25% occupancy is pretty common, but we feel good about the changes we made. We’re certainly going to invest in front-end cash hearing to make sure we move people through the lines, but there is peak days and peak hours during the days where we expect to have lines, and we’ll do our best to move people through. That’s mainly in high-volume stores and again on peak days, but we feel good about the strategies we put in place during the holidays.

Roxanne Meyer — MKM Partners LLC — Analyst

Great. Thanks and best of luck.

Operator

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 all of you and your families a happy, healthy and safe holiday season.

Operator

[Operator Closing Remarks]

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