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Good morning. And welcome to the Ross Stores Third Quarter 2018 Earnings Release Conference Call. The call will begin with prepared comments by management followed by a question-and-answer session [Operator instructions].
Before we get started, on behalf of Ross Stores I would like to note that the comments made on this call will contain forward-looking statements regarding expectations about future growth and financial results, including sales and earnings forecasts and other matters that are based on the Company's current forecast of aspects of its future business. These forward-looking statements are subject to risk and uncertainties that could cause actual results to differ materially from historical performance or current expectations. Risk factors are included in today's press release and the Company's fiscal 2017 Form 10-K and fiscal 2018 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.
Good morning. Joining me on our call today are Michael O'Sullivan, President and Chief Operating Officer; Gary Cribb, Group Executive Vice President, Stores and Loss Prevention; John Call, Executive Vice President, Finance and Legal; Michael Hartshorn, Executive Vice President and Chief Financial Officer; and Connie Kao, VP Investor Relations. We'll begin our call today with a review of our third quarter and year-to-date performance, followed by our outlook for the remainder of the year. Afterwards, we'll be happy to respond to any questions you may have.
As noted in today's press release, both sales and earnings for the quarter were ahead of our forecast despite being up against very strong multiyear comparisons. Earnings per share for the 13 weeks ended November 3, 2018, were $0.91 up from $0.72 for the quarter ended October 28, 2017. Net earnings grew to $338 million, up from $274 million in the prior year. Our third quarter 2018 earnings results include a benefit from Tax Reform Legislation of approximately $0.16 per share. Sales of third quarter rose 7% to $3.5 billion with comparable store sales up 3% over the 13 weeks ended November 4, 2017. This compares to 4% gain in same-store sales for the prior year period ended October 28, 2017.
The Midwest and Florida were the strongest regions for the quarter, while men's was the top performing merchandise category. Though above plan, operating margin of 12.4% for the third quarter was down from last year as higher merchandise margin was more than offset by planned increases in freight and this year's wage investments. For the first nine months, earnings per share were $3.06, up from $2.36 last year.
Net earnings for $1.1 billion compared to $912 million in the prior year. The year-to-date earnings results include an approximate benefit of $0.51 per share from tax reform legislation. Sales year-to-date rose 8% to $10.9 billion with comparable store sales up 3% over the 39 weeks ended November 4, 2017. This compares to 4% gain for the nine months ended October 28, 2017.
As we enter the third quarter, total consolidated inventories were up 8% with average in store inventories up 9% compared to last year. As planned, store inventories increased due to the earlier Thanksgiving this year. Packaway as a percentage of total inventories was 41% compared to 46% last year. Similar to Ross, these discounts continue to post better than expected gains in both sales and operating profits for the period.
Turning to our expansion program, we opened 30 new Ross and 10 dd’s DISCOUNTS locations in the third quarter, completing our 2018 store opening program. We expect to end the year with 1,477 Ross and 235 dd’s DISCOUNTS stores for a net increase of 95 locations for fiscal 2018.
Now, Michael Hartshorn will provide further color on a third quarter results and details on our guides for the remainder of the year.
Thank you, Barbara. Let's start with our third quarter results. Our 3% comparable store sales gain was driven by increases in both traffic and the size of the average basket. As Barbara mentioned, third quarter operating margin of 12.4% was down from last year, though better than forecast.
Cost of goods sold for the quarter rose 60 basis points as a 20 basis point increase in merchandise margins was more than offset by 50 basis points of higher freight cost and increases of 15 basis points each from buying and distribution expenses. Occupancy costs were flat for the quarter.
Selling, general and administrative expenses during the period increased by 30 basis points due to the previously mentioned wage investments. During the quarter, we repurchased 2.9 million shares of common stock for a total purchase price of $278 million. Year-to-date, we have bought back a total of 9.4 million shares for an aggregate price of $807 million. We remain on track to buyback a total of $1.075 billion in common stock during fiscal 2018.
Let's turn now to our fourth quarter outlook. As reported in our press release, while we hope to do better, we continue to project fourth quarter comparable store sales to increase 1% to 2% versus our strongest prior year comparable stores sales gain of 5%. We're now forecasting our earnings per share to be in the range of $1.09 to $1.14, which includes a one-time nontax benefit of approximately $0.07 per share related to the favorable resolution of a tax matter. This updated guidance compares to earnings per share for the 14 weeks ended February 3, 2018 of $1.19, which included a per share benefit of $0.14 from onetime revaluation of deferred taxes and $0.10 on the 53rd week.
The operating statement assumptions for the holiday period guidance include the following. Total sales are projected to increase 1% to 2% and operating margin is forecasted to be in the range of 12.6% to 12.8% versus 14.6% last year. This guidance reflects a negative impact from the additional week last year, which benefited sales by $219 million and operating margin by 70 basis points.
Net interest income is estimated to be about $3.6 million. Our tax rate is planned at approximately 19% to 20%, which includes the aforementioned one-time tax benefit. And we expect average diluted shares outstanding to be about $370 million. Based on our year-to-date results and projected fourth quarter guidance, we are now planning earnings per share for the full year on a 52 week basis to be in the range of $4.15 to $4.20.
Now, I'll turn the call back to Barbara for closing comments.
Thank you, Michael. Looking ahead to this year's holiday season, while we hope to do better, we believe it's prudent to maintain a somewhat conservative posture entering the fourth quarter. As previously mentioned, our projected same store sales growth of 1% to 2% is on top of robust multiyear gains. In addition, we expect another intensely competitive holiday season, both in brick and mortar and online.
Nonetheless, we remain confident in the strength of off-price and most importantly, our ability to perform well within this sector. As long as we remain focused on the careful execution of our strategies, we believe and continue to achieve solid gains in both sales and earnings as we have for some time now.
At this point, we would like to open up the call and respond to any questions you might have.
[Operator instructions] Your first question comes from Simeon Siegel from Nomura Instinet.
First off, do you have a view you could share on the health of just the broader retail channel into holiday? And then Mike, could you speak to the moving pieces you expect within gross margin for 4Q and then maybe anything to keep in mind for going forward.
View of the health of the broader retail channel?
Yes, just how you're thinking about pricing and inventory levels, the full price channel…
And this fourth quarter will be as fiercely competitive as it's been in the past. So in terms of pricing, my expectation would be is that there'll still be tremendous promotions and that's what people would use to drive the business. In terms of just the general health overall of the channel, I mean obviously, there's more money in the economy and so one would expect that consumers would be spending. But I think it remains to be seen. And again, I really believe that's going to be highly promotional again, and the AUR depends but I think it will be promotional.
On fourth quarter guidance and some of the trends, so as we mentioned in the remarks, gross margin was down 60 basis points for the quarter and that was driven by higher merchandise margin that was offset by ongoing freight cost inflation. I would expect more of the same going into the fourth quarter. Freight cost will continue to be a headwind at similar levels. We'll also continue to see wage deleverage. As a reminder, we increased our minimum wage to $11 mid-year so the impact is greater in the back half than in the front half.
And just any moving pieces within packaway that you'd expect?
No, for the quarter, packaway was relatively neutral and our guidance assumes it would be neutral in Q4.
Your next question comes from Matthew Boss from JP Morgan.
On the expense front, what was the magnitude of the wage investment in 3Q? And should we expect a similar headwind in 4Q? And then just larger picture as we move beyond this year. Is there any reason to think about a 3 comp not continuing to be the leverage point for SG&A? Just maybe any headwinds or tailwinds to think about that would make it any different?
On SG&A as we mentioned, it de-levered by about 30 basis points and that was wage investment. I'd expect similar to maybe slightly higher in Q4, Q3. We actually -- versus guidance SG&A was a bit lower as we had some good cost control there. We wouldn't comment on 2019 at this point going forward. That said, we would expect to continue to have wage and freight inflation, but we'll also be looking for efficiencies in our business to offset those costs. And we'll have more to say on that in our year-end conference call in early 2019.
Your next question comes from Kimberly Greenberger from Morgan Stanley.
Michael, could you look back at the freight inflation, which I know has been going on here for a couple of years. I think it really picked up this year and I can't remember if it inflected in the second quarter or really more here in Q3. I'm just wondering how to think about the magnitude of potential pressure in out years. I know you are not providing 2019 guidance. But any help on the cadence of freight would be great? And then I wanted to ask about the overall retail environment. I think there was a department store largely in the Midwest that shut operations. Are you seeing any benefit to the stores in your -- where you've got co-location or -- whether or not you do have co-location with that retailer? And do you think that may give you additional opportunities to develop new brands or acquire inventory here over the upcoming year? Thank you.
On freight cost, Kimberly, it's hard to say like all markets, at some point, we'll reach some equilibrium. It's hard to predict when that will be. As you know, there are number of things driving freight costs this year; very tight capacity, higher rates driven by Trucker and driver shortages; the improved economy is obviously impacting capacity; regulations around electronically monitoring drivers; and then diesel costs aren't helping that, that are 20% -- up 20% year-over-year and in the third quarter, which is at three year highs. So we'll wait to see what happens next year but at this point, we'd expect Q4 to look a lot like Q3.
And then Kimberly on your question about some store closures at other retailers. In general, I would say when another retailer closes it tends to help tend to help the whole -- the remaining retailer. That business has to go somewhere. So you'd expect the remaining retailers to benefit to some degree. So as other retailer close stores or as other retailers liquidate, we'd expect to win some of that business. It's hard to quantify the precise impact in any given year it's not likely to be material. But over the long term we think that's beneficial.
And in terms of supply, usually store closures generate some form of supply.
Your next question comes from Brian Tunick from Royal Bank of Canada.
I guess two questions, one curious Michael about in-store inventories, I guess up 9%. Curious what they would have been ex the Thanksgiving timing and how you're thinking about in-store inventory levels maybe from here heading into next year from a philosophy perspective. And then maybe Barbara, do you want to talk about as you lap last year's very healthy 5% comp in the fourth quarter, maybe what are two or three things that the organization is doing differently this year, whether it's marketing, product flow, mix et cetera, to lap last year's strong performance. Thank you very much.
Brian on the inventory, as we mentioned in our remarks, Thanksgiving is a week earlier this year so we did slow inventory without -- so in-store inventory was up about 8%. Without that inventories would have been relatively flat. And as far as expectations for running the business, going forward beyond this 53rd week comparison year, we'd expect inventory levels to be relatively flat.
In terms of things we're doing to be up against the strong comparison, we're really building out what works out for us. In the past, we've had many years of robust gains in the fourth quarter. So this isn't the first time we're up against the strong number. And really what we were building on is further opportunities and gift giving, because that really is what drives sales in the fourth quarter and we view that as something that goes on in the entire box, obviously, home is the place where there's always strong gift giving opportunities. But we feel last year we were successful in other areas in gift giving and so we're building upon that.
Your next question comes from Lorraine Hutchinson from Bank for America Merrill Lynch.
Thank you. Good afternoon. I wanted to just follow up on the packaway numbers, which were down for the second quarter in a wow as a percentage of inventory. Is there anything going on with what you're seeing in the market or what you're deciding to hold in packaway versus flow immediately?
No, actually there's still strong availability in the market. So we haven't we haven't seen availability drop off. But the packaway can fluctuate from quarter-to-quarter month-to-month based on what's out there. No, I wouldn't say that -- I think what we're putting in packaway is appropriate. There’s lot of criteria about what we put in packaway, you have to feel as good about it as it comes out when it comes out. So I wouldn't say there's any shift in our thinking as it pertains to packaway. And then obviously this quarter, as Michael said, we slowed parkaway earlier this year Thanksgiving is a week earlier, so that's really part of the shift that you're seeing right now.
Your next question comes from Paul Trussell from Deutsche Bank.
On the 3% comp in 3Q, very solid against tough compares, I know you said men's lagged. Just curious of any other takeaways or details on the top line in 3Q, especially as it relates to beauty and home efforts and kids and outerwear. Just curious what you're seeing on those fronts? And also just on the merchandise margins being up, if you can just talk about the drivers of sustainability potential for additional gains ahead?
On the performance -- comp performance during the quarter, as we mentioned in our remarks; men's was a top performer for our; shoes and accessories also performed above the chain average; home was relatively in line; and then in terms of apparel versus non-apparel, they were relatively similar for the quarter. As we mentioned on merchandise margins, it was up about 20 basis points that was driven by being able to chase the business and above plan sales and also better buying. Our strategy has always been to go in with a more conservative comp and if we can chase the business, we can also drive merchandise margin. So that's the way we would think about it going forward.
Your next question comes from Jay Sole from UBS.
My question is about you talked about how it's going to be pretty emotional 4Q environment. Do you see that more in relation to the bulk price competitors or more from the off price competitors? And secondly, how much would you be willing to trade and merchandise margin, which has been very strong in exchange for better sales?
Well, the promotional environment, I think, in full price, it's historically been promotional. I think it will be promotional. I think we're watching to get it more promotional in the last few weeks. In terms of the off prices, I mean they're putting out their values the way we were putting out our values I don't know if I consider that the same thing nobody promotes, nobody -- there's no POS. So I think we feel that we have very strong values going out on the floor and we feel good about that comparison. Obviously, I'm not going to compare it to my other two off-price competitors. And what was the second part of your question?
If you felt like you wanted to drive sales, how much could you try to trade merchandise margin for sales?
Actually, I don't think we need to trade merchandise margin for sales. I think, the merchants -- we have the large merchant team and a big vendor base and they are out getting really strong values every day of the week. And so I think there's always that fine line that's the art not a science of deciding how much money versus what the retailers where you're offering the customer compelling bargain that you can. And so I think that's what we do every day of the week. And I think the merchants are very, very attuned to that.
So I don't think that they have the direct line of if I just -- to say we'll tighten up the IMU or just something there's a direct line to that, because I think the merchants really are out there getting best possible values. And they are out, competitive shopping, looking at what bulk price stores are doing, looking at what the other off prices are doing. So we're in the value gains to each other and that's really our strategy. And I don't think that would be a strategy we would use going forward.
Your next question comes from Paul Lejuez from Citi.
Curious if you could talk about the sales cadence during the quarter, and I’m not sure if you mentioned whether or not the weather helped or hurt you? If you can make any comment on weather during 3Q. And I am also curious just near-term, any impact from the fires out west, how many stores are impacted? And do you expect that to be any material impact to 4Q sales? Thanks.
Paul, just on the fires, we wouldn’t comment on fourth quarter impact at this point. In terms of weather in the third quarter, it did not have a meaningful impact and obviously, a lot of moving parts with two major hurricanes last year and then a bounce back afterwards and then the southeast hurricane this year. In terms of trend, so overall weather neutral for the quarter and then trends during the quarter, comps were stronger earlier in the quarter. Late in Q3 were up against the bounce back from the two major hurricanes last year.
Your next question comes from Michael Binetti from Credit Suisse.
I know you talked about some of the cost drivers. I want to look at a little bit further than just fourth quarter though. As we look into next year, do you guys have an impact from the changes in lease accounting that we need to think about next year? I think a competitor mentioned that also put it on the radar? And then related to tariffs, I’m just wondering if you can help us think about what the behavior in the industry is. If there’s an analogy period you could point to for your own business to help us think about how tariffs impact the business like any past global macro events like that that can help us think about how players in the industry build inventories and how you guys think about what the inventory situation could look like if we have some issues at the border here?
On lease accounting next year, yes, there is some impact. Its non-cash related. It’s purely accounting. And again, we would look to find areas in the business to offset those additional costs.
And on tariffs, Michael, I don’t think there’s anything -- there’s any historic event that we could point to that would be a good analogy on tariffs. Other than saying, in general, the tariff situation in terms of will there be tariffs, which things will have tariffs on them? How long will tariffs last? Well, it all creates uncertainty. And in an uncertain environment, off-price tends to do comparatively well in that environment but really no historical event that we could point to as a comparison.
Your next question comes from Alexander Walvis from Goldman Sachs.
We had a question on home, thanks for the color on some of the category drivers of the comp, just the home was in line with some of the other categories this quarter, having outperformed for the rest of the business for some time. Is there anything specific that you can talk to there or any change to the strategy of increasing penetration across the business? Thank you.
Home was up against its very solid results last few years. And so the performance relatively in line with the chain -- above planned chain sales for the quarter felt okay. In terms of looking at future, looking at assortments, we’re always looking to grow new businesses and look within our four walls to improve the assortment. So in terms of specifics, I wouldn’t go into specifics but we do think home is the growth area. It’s very broad based but a large amount of different products are conglomerate into there. So we do feel good about it and again always looking to improve it.
Your next question comes from Ike Boruchow from Wells Fargo.
But I guess to start to the team, just curious if you guys have looked into the tax dynamics for your consumer, mainly in early ‘19. It seems like the low end consumer could have a very favorable cycle ahead of them. So just curious wanted to ask if you guys have dug into that at all or had any thoughts.
I guess we have looked at it. And obviously, that would have an impact on the first quarter but we'll have more to say about that going into next year. The tax rebate cycle has changed pretty dramatically over the next couple years, so we'll have to see what we build into our expectations when we give our year end results at the beginning of next year.
Your next question comes from Janine Stichter from Jefferies.
I just wanted to ask about the composition of the basket. I think in the past, you've called it out as being you featured in. Just one another -- I think the call out in terms of AUR tickets? Thank you.
As we mentioned 3% comp was driven by higher traffic and an increase of the average basket. The basket was all driven by units per transaction. AUR was relatively flat for the quarter.
Your next question comes from Laura Champine from Loop Capital.
I'm wondering, Barbara, to the extent that you can tell. Do you think that Ross gained share or just held share in the apparel market overall? And the context we’re asking the question, I'm sure you can surmise is that Ross's comp although it was good, was well below what we perceived as its nearest competitor this quarter.
In terms of our performance, I mean, obviously, I'm not going to comment on our competitor. But on a one, two, and three basis, we were up against a 3, a 4 in 2017 and 7 in 2016. So in terms of our comp performance, overall, it was 14. So in terms of gaining share in apparel versus our competitor, I think it's very hard for us to measure the share of apparel that we're gaining quarter-to-quarter or year-to-year. But I would say is that apparel has grown significantly over the years as our comps have grown over the years. So I think it's hard for us to compare back to one of our competitors now would I really compare back to that but apparel obviously continues to grow.
Your next question comes from Bob Drbul from Guggenheim Securities.
Just a couple category questions. Can you talk about what you're seeing in the toy category and just your expectations there, especially into the holiday? And I was wondering if you could maybe talk about your footwear business, men's shoes, women's shoes and boots and just the opportunities that you see in that category as well.
In terms of toys, we obviously see some opportunity in toys with all the recent bankruptcies and closures. But toys is overall a small percentage of our business so historically toys does get bigger for up during bigger part of our mix holiday and will be again this year. But in terms of a grand total for the Ross, it's still a small business but yes, again some opportunity. In terms of our footwear business, our footwear business has outperformed the chain average in the third quarter it's very broad based between the three businesses. And in terms of the mix itself, again, it's pretty broad. I mean boot business with the weather -- I'm sure, boot businesses the boot business has been good for a few years now. So I think overall it's strong execution in our business and maximizing some key opportunities.
And just question on the wages, with the investments that you've made. Do you feel like you're ahead of the curve just keeping up in terms of the competitiveness? And are you seeing any challenges to filling your new store openings with employees?
So we feel good about where we are with the workforce today. Obviously, we've raised wages and that's good news for the people that we're looking to hire. And store-by-store, we really haven't seen issues in filling our new stores.
Your next question comes from Chethan Mallela from Barclays.
So I just wanted to follow-up on the tariff situation and I know it's hard to give a precise estimate, particularly with close outs. But can you just frame how much your product inventory or maybe how many of your 8,000 vendors are based in China? And then how you think about the impact of the tariffs that have been announced to-date versus what the impact would look like if there's more sizable prevention?
In terms of our 8,000 vendors, you have to remember the bulk of our business is a closeout business. So -- and we're buying close-outs, we're not tracking country of origin. The manufacturer of manufacturing goods wherever they manufacturer them and we're buying them. So in terms of answering your question about what percentage of the 8,000 vendors would impact, I really don't have that information. In terms of just tariff impact, in total, I think there is certain classification of business. Obviously, home has most impacted and some parts of accessories but really home. And I would say that the trade tensions have left a lot of uncertainty in the marketplace.
And it could lead to supply as we go down the road but impacts like to-date as of this minute, I think everyone's in the process of assessing what actions to take as it pertains to the tariffs. I don't really think -- we're not leave with a follow-of when it comes to something like this. And there is no clear vendor strategy, I don't think the vendors -- each vendor has their own strategy. So I think we are doing what we can do to assess our actions of what's appropriate for us. And then in terms of direct exposure for us to tariff, it really is for us in the home area and we don't disclose that percentage but is a relatively small piece of our total mix of sale. So I think there's just a lot of moving parts as it pertains to tariffs at this point in time.
Again, the vendor community I think doesn't necessarily have -- it's a vendor by vendor strategy. There's no comprehensive strategy, because I think there's just so much unknown. If the tariff were to move on to -- tariff were move on to apparel then obviously that's a much larger scale issue for everyone. Inflation in apparel, we haven't seen in many, many, many years. So I think there's certainly challenges attached to that and we'll cross that bridge when we get there.
Your next question comes from Dana Telsey from Telsey Advisory Group.
As you think about real estate, while I think occupancy was flat this quarter as compared to the leverage of 15 basis points last quarter. What are you seeing on renewals of leases and negotiations? And with the Sears boxes now available, does that provide you with locations that you may want either 4 dd’s or even part of it or four Ross? Thank you.
Dana, I would say that in general we’re happy with the availability of the implications we’re seeing. We have a great real estate team and they’ve done a great job over the last several years, finding locations for our store expansion. Certainly, store closures in terms of closures by other retailers have helped and contributed to that availability. But it depends on a specific retail. I mean some retailers are more based and that really isn’t location we'd be interest in whereas you know we're respectable retailers. So I would say overall, we’re pretty happy. But when you’re looking at specific retailers and the impact that they have it really depends on what real estate prices they have.
And the fact that occupancy was flat this quarter. Is there opportunity to get leverage again or how do you think about it?
So Dana on the leverage point for the year for occupancy is 3%. Historically, that’s been 4%. So we are in a better position this year. Remember that the comp sales and fiscal sales are two different metrics this year, because of the week shift. You got more leverage in the first half of the year, because fiscal sales were higher than comp sales and that reverse in the back half. But for the year, we think occupancy costs -- our leverage points around 3%.
Your next question comes from Daniel Hofkin from William Blair.
Just a quick clarification again on the topic of the retail environment, I know the question has been asked. But you guys are typically conservative. You’ve talked about every year being a little bit more promotional more intense. Do you see that trajectory steepening or is it just a continuation of that? That’s my first question. And then my second question is as it relates to port bottlenecks related to tariffs. Are there any categories where even if you’re not directly importing where you’re seeing maybe some full price retailers have more disruption?
Well on the retail environment, I think obviously, we think it’s promotional every year. So I think it’s that different from Q3 to Q4. I think we might see some movement between Q3 and Q4. But again every year is promotional, so that will vary by retailer based on their performance and their business model -- so I think in their performance. So I think we will see -- I think we will see more of that. In terms of the port bottlenecks and supply, I don’t think we’ve seen any one particular place that has port bottleneck as it's led completely to supply. So one, you’re saying is it one product. I think the port bottlenecks because everyone brought in goods many manufacturers bringing goods from China because of the tariffs and they’re trying to get them into the country earlier, it has I think affected everyone. But we haven’t seen it one pure classification of business that we'd say that’s where it’s going to be. I think if there's supply that’s the result of the bottleneck, it'll be broad based.
Your next question comes from John Morris from D.A. Davidson.
You all have done a really good job managing expenses with the headwinds at freight and labor, and using offsets to help mitigate that. Wondering if you can give us a little bit more color on those offsets. What areas they're coming in from so we can get a magnitude feel for that and the categories? And then also second question would be your holiday initiatives with respect to marketing spending this year versus last year. Is it about the same in terms of that spend or maybe any color there? Thanks.
On offset there is no silver bullet on the offsets. I mean there's -- we look throughout the company whether its payroll related in DCs and the stores and how we become more efficient. It is -- we have a strategic sourcing group that looks on how we procure either products or services. And when I say products I mean non-merchant related -- merchandising related products. So we're always looking for efficiencies in our business. And it's a death by a 1,000 paper cuts and so lot of different things. And we have groups that try to stay ahead of the inflation curve and we'll continue to do that going into next year and beyond.
So second part of your question on marketing, no material changes in the amount of marketing spend in the fourth quarter.
Your next question comes from John Kernan from Cowen.
So just given the dynamic with freight, do you foresee any additional investments you might need to make around the store, D.C. network to maybe increasing efficiencies?
On the DC Network, our investments there certainly with higher wages, it presents as an opportunity to invest in automation and we'll do that over time for efficiencies. The next reason to invest in the network is capacity related. Right now, we think we have the capacity and would start the next distribution center over the next couple of years.
And just one quick follow up. Have you seen any noticeable benefit from stores that are co-located with some of the recent bankruptcies? And certainly these don't seem like -- feel like it's going to be the end of some of the bankruptcies. So I'm just wondering if you are noticing any increase in traffic or any benefit from selling disclosures.
Typically, I would say this is as a general observation. As a store is closing as it's going through out of business or going out of business period, we might actually see a bit of a negative in the local stores. But then once it's gone out of business, we typically see an uptick. And I think as I said earlier, in general store closures of competitors tend to be good for our business. But we typically don't have a material impact in any given year it's just over the long run store closures accumulate we tend to see -- that tends to be a tailwind for us.
Your next question comes from Omar Saad from Evercore ISI.
Barbara, wanted to ask you to dig in a little bit deeper on your earlier comments around your expectations that the holiday season will be -- continue to be very promotional holiday season. And we're hearing from a lot of retailers, the inventories are clean, you're seeing merchant margins rise and broadly speaking in this offline space, yourself included. Maybe give me a little color, gives us a little bit more color around what gives you that sense that it's going to be pretty promotional again? And then any update or color on new marketing strategy. I know you talked about the marketing spend being flat. But are you trying any new marketing strategies, digital or social that you care to share with us? Thanks.
In terms of the holiday season, traditionally, the holiday season is promotional. And although, inventories might be leaner, we have the 53rd week, things are moving faster. And I think if we really look at it between online and brick-and-mortar, as online gets more aggressive and gets aggressive early, in the fourth quarter brick-and-mortar stores, we'll have to get more aggressive also. Plus I don't think all performances have been created equal in Q3 based on department store. So some department stores may promote more, some departments are may promote less. But overall, I would be very surprised if we come out of the quarter without it being promotional, especially the last week to 10 days as -- while the customer shopping. Thanksgiving is already -- it's here, it feels are always.
But again we've been walking -- there has been some more promotional increases in the last few weeks as people raise the POS. And so I put those pieces together and I recognize that there are potentially less inventory. But if you're trying to drive sales, ultimately at the end that's the drive sales and that's what history tells us. So that's where it came to that conclusion.
And Omar your question about marketing, I would split it into two pieces. I think first of all in terms of marketing strategy and the marketing message, I think that’s been very consistent over time, the message being that we offer the best values in apparel and from fashions that message isn't going to change. But what has changed is that the channels that we're using to reach the customer to get that message out have evolved. So we've always recognize that the best marketing for us is word of mouth marketing. And over the last few years, we have been experimenting and investing in various new forms of marketing, social media, et cetera. And we find that those tools represent a modern day version of word of mouth marketing. So I'd still describe some of the things we're getting there at certain stage, so definitely it's -- that's the direction our marketing is moving in.
That was our last question. I will turn the call back over Barbara Rentler for closing remarks.
Thank you for joining us today and for your interest in Ross Stores. Have a good day.
This concludes today's conference call. You may now disconnect.