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Ross Stores, Inc. (NASDAQ:ROST)
Q4 2017 Earnings Conference Call
March 6, 2018, 4:15 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon and welcome to the Ross Stores fourth quarter and fiscal year 2017 earnings release conference call. The call will begin with prepared comments by management, followed by a question-and-answer session. If you would like to ask a question during this time, press * then the number 1 on your telephone keypad. If you would like to withdraw your question, press the # key.

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 risks 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 2016 Form 10-K, and Fiscal 2017 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 O'Sullivan, President and Chief Operating Officer; Gary Crib, Executive Vice President -- Stores and Loss Prevention; John Paul, Executive Vice President -- Finance and Legal; Michael Hartshorn, Group Senior Vice President and Chief Financial Officer; and Connie Kao, Vice President Investor Relations.

We'll begin our call today with a review of our fourth quarter and 2017 performance, followed by our outlook for 2018. Afterward, we will be happy to respond to any questions you may have.

As noted in today's press release, despite our own difficult, multi-year comparisons, in a very competitive retail climate, sales and earnings were well ahead of our expectations for both the fourth quarter and the full year. We are pleased with these results, which reflect our ongoing success in delivering broad assortments of compelling bargains for today's value-driven shopper.

Earnings per share for the 14 weeks ended February 3, 2018 were $1.19, up from $0.77 in the 13 weeks ended January 28, 2017. For the 53 weeks ended February 3, 2018, earnings per share grew to $3.55, compared to $2.83 in the 52 weeks ended January 28, 2017. Both the quarter and the fiscal year include a per-share benefit of approximately $0.10 from the 53rd week and $0.21 from the recently enacted tax reform legislation.

Excluding these items, earnings per share on a 52-week basis for both the 2017 fourth quarter and fiscal year period grew 14% over the prior year. Net earnings for the 2017 fourth quarter were $451 million, up from $301 million in the prior year. Fiscal 2017 net earnings grew to $1.4 billion compared to $1.1 billion in fiscal 2016. Total sales for the 14 weeks ended February 3, 2018 grew 16% to $4.1 billion, with comparable store sales for the 13 weeks ended January 27, 2018, up 5% on top of a 4% increase in the prior year. For the 53-week fiscal year ended February 3, 2018, sales increased 10% to $14.1 billion with same-store sales for the 52 weeks ended January 27, 2018 up 4%, versus a 4% increase in 2016.

For the fourth quarter, sales trends at Ross were fairly broad-based across all major merchandise categories, with children's performing the best. Geographically, Florida was the strongest region. Our fourth quarter operating margin of 14.6% was up 95 basis points from last year. This improvement was mainly driven by strong merchandise margin and expense leverage from solid gains in same-store sales, as well as the impact of the 53rd week.

For the fiscal year, operating margin increased 50 basis points to a record 14.5%. dd's DISCOUNTS customers also continue to respond positively to its merchandise assortment, leading to another quarter and year of robust gains in both sales and operating profits.

As we ended 2017, total consolidated inventories were up 9% over the prior year, with pack-away levels at 49% of the total, similar to last year. As planned, average in-store inventories were up 1%.

As noted in today's release, we plan to make competitive wage and benefit-related investments. These include raising our minimum wage to $11.00 an hour, providing one-time bonuses for eligible hourly and store associates, and improving our paid leave program. We believe these actions will allow us to continue to attract and retain a talented and growing workforce of over 82,000 associates who have been critical to our past performance and will be key to our future success.

Further, our Board recently improved an increase in our stock repurchase authorization for 2018 to $1.75 billion, up from the previous $875 million. The Board also approved a higher quarterly cash dividend of $0.225 per share, up 41% over the prior year. The increases of our shareholder payouts for 2018 reflect the current strength of our balance sheet and our ongoing ability to generate significant amounts of cash after funding growth and other capital needs of the business.

We have repurchased stock as planned every year since 1993 and raised our cash dividend annually since its inception in 1994. This consistent record also reflects our continuing commitment to enhancing stockholder value and return. Now, Michael Hartshorn will provide further color on our 2017 results and details on our fiscal 2018 fiscal year and first quarter guidance.

Michael Hartshorn -- Group Senior Vice President and Chief Financial Officer

Thank you, Barbara. Let's start with our fourth quarter results. Our 5% comparable store sales gain was driven by a combination of higher traffic and an increase in the size of the average basket. As Barbara mentioned, fourth quarter operating margin increased 95 basis points to 14.6%, which includes a 70-basis-point benefit from the 53rd week.

Cost of goods sold improved 50 basis points in the quarter, driven by 40 basis points of higher merchandise margins and occupancy costs that were lower by 45 basis points. These gains were partially offset by a 20-basis-point increase in buying costs and higher freight expenses of 15 basis points. Selling general and administrative expenses during the quarter were lower by 45 basis points, due mainly to leverage from both the 5% same-store sales gain and the impact of the 53rd week.

For the fiscal year, operating margin increased 50 basis points to a record 14.5%, which includes an approximate benefit of 20 basis points from the 53rd week. As Barbara mentioned earlier, fourth quarter and fiscal 2017 earnings-per-share results are inclusive of an approximate $0.10 benefit from the 53rd week, and $0.21 related to the recently enacted federal tax reform legislation. The tax savings amount is comprised of a one-time earnings-per-share benefit of $0.14 from a revaluation of deferred taxes, and $0.07 from a lower fourth quarter tax rate.

During the quarter, we repurchased 3 million shares of common stock for a total purchase price of $226 million. For the fiscal year, we repurchased 13.5 million shares for an aggregate price of $875 million.

Let's turn now to our outlook for 2018. Our guidance reflects the positive impact of recent tax legislation and the aforementioned competitive wage and benefit-related investments. For the 52 weeks ended February 2, 2019, we are forecasting earnings per share to be $3.86 to $4.03, up from $3.55 for the 53 weeks ending February 3, 2018. The operating statement assumptions for fiscal 2018 include the following.

Total sales are projected to grow 3 to 5% for the 52 weeks ending February 2, 2019, compared to the 53 weeks ended February 3, 2018. This year-over-year increase in total revenue is being affected by the 53rd week, which added approximately $219 million to sales in the 2017 fourth quarter and fiscal year.

Comparable store sales are expected to increase 1 to 2% on top of 4% gains in each of the past three years. We plan to add about 100 new stores this year, consisting of 75 Ross and 25 dd's DISCOUNTS locations. As usual, these numbers do not reflect our plans to close or relocate about 10 older stores.

If same-store sales are in line with our guidance of up 1 to 2%, then we project that operating margin for 2018 would be in the range of 13.3 to 13.5%, compared to 14.5% in 2017, which again benefited by 20 basis points from the 53rd week. The forecasted decline reflects our plans for relatively flat merchandise gross margin and the impact of the previously mentioned competitive wage and benefit investments.

Net interest expense is estimated to be about $600,000. Our tax rate is projected to decrease to approximately 24 to 25% due to tax reform legislation. We expect average diluted shares outstanding to be about 374 million. Capital expenditures in 2018 are projected to be approximately $475 million, and depreciation and amortization expense inclusive of stock-based amortization is forecast to be about $430 million.

Let's move now to our first quarter guidance. For the 13 weeks ending May 5, 2018, we are expecting same-store sales to be up 1 to 2%. Earnings per share for the period are forecast to be $1.03 to $1.07, compared to $0.82 in the first quarter of last year. Other assumptions that support our first quarter include the following.

Total sales are projected to increase 6 to 7%. We expect to open 23 new Ross and 6 dd's DISCOUNT locations during the quarter. First quarter operating margin is projected to be 14.6 to 14.8% versus last years 15.2%. In addition, net interest expense for the quarter is estimated to be about $600,000. Our tax rate is expected to decrease to approximately 23 to 24%, again due to tax reform legislation. Finally, weighted average diluted shares outstanding are projected to be around 378 million.

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

Barbara Rentler -- Chief Executive Officer

Thank you, Michael. Again, we are pleased with our better-than-expected sales and earnings gains for both the fourth quarter and fiscal year. As previously mentioned, these strong results were driven by our ongoing ability to deliver the best bargains possible to today's value-focused shopper. As we enter 2018, we continue to face tough multi-year comparisons and fierce competition from both online and brick-and-mortar retailers. As a result, we continue to take a prudent approach to forecasting our business, so we certainly hope to do better.

Longer term, we remain very confident in the strength of our business model. Our performance over the past several years demonstrates our proven ability to achieve ongoing profitable market share gains by consistently offering the exceptional values our customers have come to expect. This remains our top priority. As we know, it will always be the key to our success.

Looking out over the next several years, we continue to believe that with the proper execution of our strategy, we can achieve average-annual-earnings-per-share gains in the low double-digit percentage range. At this point, we'd like to open up the call and respond to any questions you may have.

Questions and Answers:

Operator

At this time, I'd like to remind everyone in order to ask a question, press *1 on your telephone keypad. In order to allow everyone time for questions, we ask that you please limit yourself to one question each. We'll pause for a moment to compile the Q&A roster.

Your first question comes from Daniel Hofkin with William Blair.

Daniel Hofkin -- William Blair & Company -- Analyst

Good afternoon. Just a couple quick questions. I guess first, Barbara, per your comment about competition obviously remaining intense. Are you seeing any evidence of that becoming more intense in recent quarters, either brick-and-mortar or online, or is it just sort of a steady trend there and you don't expect it to abate? Then just a question on your longer-term store targets. I think it's been a few years since you've updated comments on those. Just wondering how you're thinking about that at this point. Thanks.

Barbara Rentler -- Chief Executive Officer

Sure, Daniel. You have a couple questions there. On the competition being intense, I think competition has been intense for a few years. I think the competition will remain intense. I think as we go forward, online department stores are doing better. I think whether it's probably promotional remains to be seen, but yes, I do think it'll be intense.

Michael O'Sullivan -- President and Chief Operating Officer

Daniel, it's Michael O'Sullivan. On the second part of your question about store potential, we believe we have the potential for about 2,500 stores between Ross and dd's -- about 2,000 Ross, 500 dd's. Right now, we're at about 1,600 stores. Each year, we open up approximately 90 net new stores. So if you just do the math on that, this isn't how we would actually open them, but if you actually do the math on that, you have about 10 years worth of growth. So at this point no, no plans to make any changes to that store potential number.

Daniel Hofkin -- William Blair & Company -- Analyst

Okay, thanks very much.

Operator

Your next question comes from Bob Drbul with Guggenheim Securities.

Andrew Abergon -- Guggenheim Securities -- Analyst

Hi, good afternoon. This is Andrew Abergon for Bob Drbul. I think you guys mentioned that Florida was one of the top-performing states. Could you quantify if any of that was a rebound from the Hurricanes in the prior quarter? Then our second question -- any color around the performance by category, whether that be cold weather or any additional color on that would be great. Thanks.

Michael Hartshorn -- Group Senior Vice President and Chief Financial Officer

Sure. On regional performance, as we mentioned in the commentary, Florida was the strongest region and some of that was a benefit somewhat from the bounce-back from the hurricanes. I'd say outside of Florida, similar to the merchandise performance as we mentioned in our commentary, was fairly broad-based. Of the major markets, California was just slightly below the chain average. Texas had a strong quarter with comps above the chain average. Then I mentioned the Midwest, which continued to perform well for us on top of many years of being the highest comping region.

Merchandise performance -- we called out children's apparel and non-apparel had similar comps than in Florida.

Barbara Rentler -- Chief Executive Officer

But specifically, as it pertains to cold weather, based on the weather, cold weather performs well.

Andrew Abergon -- Guggenheim Securities -- Analyst

Okay, great. Thank you very much.

Operator

Your next question comes from Marni Shapiro with Retail Tracker.

Marni Shapiro -- The Retail Tracker -- Analyst

Hey, guys. Congratulations. Can you hear me OK?

Barbara Rentler -- Chief Executive Officer

Yeah, thank you.

Marni Shapiro -- The Retail Tracker -- Analyst

Congrats. It was a fantastic quarter. Could you talk a little bit, Barbara, just one question for you and then one real estate question. But can you tell me if there are any segments that you are missing in your stores or that are underdeveloped in the stores? Then can you talk a little bit about real estate because you've been pretty consistent with the store openings. But have you changed the size or the thought as to where you're opening the stores over the last year or so?

Barbara Rentler -- Chief Executive Officer

Marni, in terms of merchandise segments, I don't really think there are whole segments that we're missing. We're always looking to enhance the treasure hunt and add different products and classifications to the assortment. So underdeveloped businesses often start as a couple of things you try and then they grow out into different businesses. But again, overall, don't feel like anything particularly is missing. We continue to try new areas to grow.

Michael O'Sullivan -- President and Chief Operating Officer

Then Marni, on your real estate question. As you know, over the last several years, we've opened up at a fairly steady pace, about 90 new stores a year. In 2018, it'll be closer to 100, which is more of a factor of timing and opportunity in terms of finding additional locations. In terms of anything that's changing, I would say for some time now, we've been fairly flexible in terms of new store openings in terms of size and also in terms of the type of location that we're moving into. That's partly been driven by the fact as other retailers have gone out of business, that's created some opportunities for us to move into existing buildings. That's basically triggered the need to be more flexible. But other than that flexibility, no other additional changes that I would call out.

Marni Shapiro -- The Retail Tracker -- Analyst

Fantastic. Best of luck in the spring season.

Operator

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

Lorraine Hutchinson -- Bank of America -- Analyst

Thank you, good afternoon. My first question is on the higher basket that you mentioned. Have you seen any progress on AUR flattening out? I know that's been a headwind for a while.

Michael Hartshorn -- Group Senior Vice President and Chief Financial Officer

Sure, Lorraine. As we mentioned in the remarks, the 5% comp was driven by higher traffic and an increase in the basket. The basket was driven by higher units per transaction and AUR was very similar to the trend throughout the year. It was down slightly. That decrease was really a function of the mix of business.

Lorraine Hutchinson -- Bank of America -- Analyst

Okay, and then just following up on the $11.00 wage increase, are you seeing tightness in labor in your markets right now? I guess maybe just a little bit of the why behind the decision to go to $11.00.

Michael O'Sullivan -- President and Chief Operating Officer

The direct answer to your question, Lorraine, is no, we're not seeing tightness across the board. There are always individual markets, whether it's tight labor market and where we have to respond, but across the board, we're pretty happy with the candidate pool that we're seeing for new hires and with our retention level of existing associates. With that answer, let me give you a couple of reasons for why we're raising the minimum entry wage rate, why we're paying the one-time bonuses, and improving the benefits program.

Firstly, as I say, although we're currently happy with the hiring pipeline and our ability to retain existing associates, we recognize the labor market is pretty dynamic and competitive. There's no doubt with the strengthening economy, as well as the effects of tax reform, that those things are going to continue to push up wage rates. It's important for us to keep pace with those changes. Secondly, we've been pretty successful over a long period of time. With that success, our associates have been able to benefit from competitive wages and benefits, as well as career advancement opportunities over time. We think with our continued success and with the tax rate changes, now is a good time to further recognize and reward our associates who help drive that success.

I guess the bottom line answer to your question is we're happy with our ability to hire and retain associates today, but we want to keep it that way and that's why we're making the changes that we have been making.

Lorraine Hutchinson -- Bank of America -- Analyst

Thank you.

Operator

Your next question comes from Ike Boruchow with Wells Fargo.

Ike Boruchow -- Wells Fargo -- Senior Analyst

Hey, thanks. Good afternoon, everyone. I'll piggyback on the wage question. I guess, Michael, could you maybe help us out? What percentage of the store associates you have are already at $11.00 an hour wage versus the increase you're going to give to everyone else? Then I was wondering if maybe you could just help us with the EPS or the margin impact that's embedded in your guidance for the year from the higher wage?

Michael Hartshorn -- Group Senior Vice President and Chief Financial Officer

Sure, Ike. We wouldn't say specifically, for competitive reasons, both on the question of how many of the associates are already at the minimum wage. I would call out that California is already at $11.00, so that's 20%, 25% of our store base. As far as guidance for the year, we didn't provide a specific wage and benefit impact. But just to reiterate, we're showing EBIT down 105 to 125 basis points. That includes 20 basis points from the 53rd-week comparison. We would also expect the leverage on a 1 to 2 comp. So beyond those factors, our guidance includes the impact of these competitive wage and benefit investments and also I would call out we expect freight costs to be a headwind this year.

Ike Boruchow -- Wells Fargo -- Senior Analyst

Got it. Thanks, Michael.

Operator

Your next question comes from Kimberly Greenberger with Morgan Stanley.

Kimberly Greenberger -- Morgan Stanley -- Analyst

Great. Thank you so much. Could you tell us when the $11.00-per-hour wage will be worked into the system so that we know if it's fully impacting Q1 or perhaps not until Q2? Then secondarily, I'm wondering if you can just talk about the freight and/or trucking headwinds that you're seeing? I think you've been experiencing some freight headwinds now for the last few years. They've generally been modest, sort of in this range. Are you seeing any acceleration in those pressures and how are you looking to manage that expense? Thanks so much.

Michael Hartshorn -- Group Senior Vice President and Chief Financial Officer

Sure, Kimberly. On the timing, the wage and benefit investments will have a larger impact past the first quarter. That said, the first quarter does have things like California that are already at the $11.00. In terms of freight cost, the increase in freight cost that we've seen is driven by higher market rates, which is a function of tight capacity. That appears to us to be a combination of an improving economy, regulatory impacts, and driver shortages. In addition, at least in Q4, diesel prices were at a 3-year high.

Our expectation is we would continue to see, I would say, similar pressure to what we saw in 2017 and we built that into our guidance.

Kimberley Greenberger -- Morgan Stanley -- Analyst

Okay, Michael. Can you remind us for 2017, was that a 15 basis points headwind for the fiscal year as well for the fourth quarter?

Michael Hartshorn -- Group Senior Vice President and Chief Financial Officer

For 2017, the impact due to freight cost was for the fourth quarter, it was 15 basis points and the full year it was 25 basis points.

Kimberley Greenberger -- Morgan Stanley -- Analyst

Great, thanks. Congratulations on a great way to finish the year. Thanks.

Operator

Your next question comes from Adrienne Yih with Wolfe Research.

Adrienne Yih -- Wolfe Research -- Analyst

Good afternoon. Let me add my congratulations on a great holiday. My question is on the ability to pass through some of these cost increases, be they freight or some of this wage increases. As the front line distribution channel sort of cleans up their inventory and attempts to get a little bit more pricing discipline, as they kind of move up their price points, does that give you some ability to pass through some of these expense increases through your AUR? Thank you very much.

Barbara Rentler -- Chief Executive Officer

Sure, Adrienne. Really what we look at as it goes to the AUR in pricing is our business is built off of great branded values bargains. So we're in a price differential business with department stores and specialty stores. Our focus is one two things: having that meaningful price differential and offering the right values that our customer comes to expect. So I don't think it's a straight pass through on to the customer because the customer absolutely wants certain types of values so I don't think it's passed through to the customer, no.

Michael O'Sullivan -- President and Chief Operating Officer

If I could just add into what Barbara just said, AUR is not where we would look to try and offset some of these expenses. If you look at our pattern over the last few years, the wage inflation piece is not new going back over the last three or four years now. We've been steadily taking up wages. Despite taking up wages, we've been able to at the same time actually improve our operating margin and that's really been driven by two things. No. 1, a very strong internal focus on managing expenses and No. 2, our sales comp has been very strong and that's helped us to leverage some of these expenses.

So I think if you look on a go-forward basis, what we're going to try and do is make sure that both of those two factors are still important. No. 1, managing down the cost, and No. 2, the sales growth. The final point I'd make about some of these cost increases is that they're being driven largely by a stronger economy. That should be positive to retail. To the extent that our customer ends up having more money in their pocket, that should help the top line, which goes back to that point about using sales to leverage expenses.

Adrienne Yih -- Wolfe Research -- Analyst

Very helpful. Thank you very much and best of luck.

Operator

Your next question comes from Simeon Segel with Nomura Instinet.

Simeon Segal -- Nomura Instinet -- Analyst

Thanks. Good afternoon and congrats on the strong end to the year. Sorry if I missed it, but what are your expectations for the Q1 gross margins? Then, Barbara, has there been any change in the concentration of your top vendors versus prior years and would you expect anything to change going forward? Thanks.

Michael Hartshorn -- Group Senior Vice President and Chief Financial Officer

Simeon, we didn't provide first quarter, only for the fiscal year.

Barbara Rentler -- Chief Executive Officer

In terms of our mix of top vendors, obviously, we do business with over 8,000 resources. We wouldn't comment on the specifics of our mix of vendors. But no one vendor represents more than 3% of our sales.

Simeon Segal -- Nomura Instinet -- Analyst

I guess more just talking about not the specific vendors, but the concentration of top vendors. Does that change?

Barbara Rentler -- Chief Executive Officer

No.

Simeon Segal -- Nomura Instinet -- Analyst

Okay, great. Thanks a lot, guys. Best of luck for the year.

Operator

Your next question comes from Matthew Boss with JP Morgan.

Matthew Boss -- JP Morgan -- Analyst

Thanks. I just had a larger picture question. As we think about the close-out availability, do you see an expansion of e-commerce as creating an incremental opportunity or maybe just the best way to think about it? Then secondly, on the department stores, if they were to maintain a leaner inventory positioning and promotions were pared back over time, how do you think this impacts your business as well? So just e-commerce and department stores -- any impact, positive or negative as we think about off-price in your business?

Barbara Rentler -- Chief Executive Officer

First of all, there has been plenty of availability in the marketplace, so we haven't seen any supply issues. In terms of goods coming from e-commerce or coming from department stores, it's hard to differentiate where the availability is coming from. In terms of department stores, if they keep their inventories in line and they promote less, they would be promoting less because their business is better. And if their business is better, what usually goes hand-in-hand with that is that the vendor community has more confidence to go out and produce more goods.

So, typically, that's where supply would come from. If their business gets better, the supply should be better for us.

Matthew Boss -- JP Morgan -- Analyst

That's great.

Operator

Your next question comes from Paul Lejuez with Citi.

Paul Lejuez -- Citi -- Analyst

Hey, guys. Can you give any color on your store openings this year, maybe by region? Talk about California, Florida, Texas, what percent those states make up of the openings this year and how do you think about that in Ross versus dd's. Then just second, curious about CapEx. Can you talk about the breakdown CapEx spend this year versus last year, what that looks like? Thanks.

Michael Hartshorn -- Group Senior Vice President and Chief Financial Officer

Sure, Paul. I'll start with the capital question. About 30% of the $475 million is new stores. 30% is for, I'll call it maintenance capital and store refreshes. 15% for supply chain related investments. Then 25% is technology and other G&A. The technology is focused on refreshing some of our enterprise systems and also information security. Then in terms of store rollout, we typically don't provide state-level details. I'll say that we're focused again on about a third in the new market and then a third, you saw a quarter is dd's store openings and the rest is in our existing market.

Paul Lejuez -- Citi -- Analyst

Then how are you guys thinking about next time we'll see you guys during new market for Ross?

Michael O'Sullivan -- President and Chief Operating Officer

We, at the moment, well, for the last 5 years, our major new region, if you like, has been the Midwest. So for us, that's really the focus of new market openings. If I adjust the question slightly to when will we start opening outside of the Midwest, it's going to be several years. So certainly for the next few years, new markets for us are going to be in the Midwest. The other point I would make is out of the 90 net new store openings, so 100 gross, only about a quarter of those are in our new region. The other three-quarters are in existing markets we're already in.

Paul Lejuez -- Citi -- Analyst

Gotcha. Thanks. Good luck, guys.

Operator

Your next question comes from Jamie Merriman with Bernstein.

Jamie Merriman -- Bernstein -- Analyst

Thanks very much. Good afternoon. You've alluded a couple times about the wage increase and maybe more broadly in the impact that you're seeing on the economy. Do you think you're seeing any evidence of what's happening more broadly in the market in terms of wage increase starting to benefit the business yet or is your expectation that's still to come? Thanks.

Michael O'Sullivan -- President and Chief Operating Officer

There are so many factors, Jamie, that go into the sales line. So many things that can affect our sales and our comp. It's hard to isolate one individual factor. For example, to split out the impact of wage rate increases versus reductions in unemployment versus other factors that may be driving sales. So conceptually, it's pretty easy to see that if the customer has more money in their pockets because of wages or because of lower taxes, that should help us. But as I say, it's pretty hard for us to isolate and evaluate the contribution that's making to sales.

Jamie Merriman -- Bernstein -- Analyst

Okay. Then just thinking through the comp guidance, it seems like there's still maybe more to play for if you start to see more of that come through. Is that the right way to think about it?

Michael O'Sullivan -- President and Chief Operating Officer

Certainly. We always hope that on the comp line that we'll do better. Yeah, when we put together our guidance, we try and weight these factors, the positives, and the negatives. On the positive side, the growing economy, the lower tax rate, the higher wage rate. But on the negative side, there are some reasons for caution too. Whether it's the strong economy might drive inflation in the cost of living or improved results from some retailers may not be sustainable and may cause a more promotional environment.

There are positives and negatives that went into our guidance, but certainly, we always hope to do better than our guidance. I think we've demonstrated, certainly over the last few years, that if the business is there, we can shape it. So even if we guide for 1 to 2 and manage the business as if we're going to go to 1 to 2, we'll always chase if the business exists and overachieve that guidance.

Jamie Merriman -- Bernstein -- Analyst

Great. Thanks very much.

Operator

Your next question comes from Omar Saad with Evercore ISI.

Omar Saad -- Evercore ISI -- Analyst

Hey, thanks. Great quarter. I want to ask you a slightly philosophical question. If we are coming off a period where there was a lot of excess inventory in play in this intermediation in the rise of digital and we are entering a period where brands are a little bit more careful, the department store as an industry as a whole is a little more careful planning inventory, help us think about historically but with a better macro economic backdrop, maybe help us think historically about how the business model has performed in those periods where the economy maybe is healthier, consumer demand is healthier but the inventory availability maybe not as robust as it has been the couple years. Thanks.

Michael O'Sullivan -- President and Chief Operating Officer

Sure, Omar. I think if we look back historically at our performance, we've done well as a business when the economy is doing poorly and we've done well as a business when the economy is doing well. The drivers of our performance do change based on how the economy is doing. So when the economy is doing well, typically what happens is the price differentiation between us and the department stores and other competitors actually increases. So we actually offer even better value and that drives business to the store.

The other thing that tends to happen in an improving economy is the vendors tend to make more product. So that could also help us to fuel those sales. Obviously, in a negative economy, you end up with the flip side happening. You end up with the market becoming more commercial, which makes life difficult. But you also end up with supply because obviously some of the sales expectations of the department stores and other retailers aren't met. So I feel like if you look at the history, we've done well in both types of economy. It's not clear to us in an improving economy that we would face any serious problems.

Omar Saad -- Evercore ISI -- Analyst

Point blank, do you prefer one to the other? Or are you indifferent?

Barbara Rentler -- Chief Executive Officer

We're flexible.

Michael O'Sullivan -- President and Chief Operating Officer

Yeah, that's right.

Omar Saad -- Evercore ISI -- Analyst

Got it. Thank you.

Operator

Your next question comes from Dana Telsey with Telsey Advisory.

Dana Telsey -- Telsey Advisory -- Chief Research Officer

Hi, good afternoon and congratulations on the results and the outlook. As you think about occupancy costs, which sounds like it's improved in the fourth quarter, what are you seeing in terms of new store occupancy costs and how those are faring versus renewal of existing leases? Also, as you think about the online business, just from online-only entities gaining some share, are you benefiting from the returns? Are they showing up in off-price in terms of the returns? How does that margin compare to your traditional margin? Thank you.

Michael Hartshorn -- Group Senior Vice President and Chief Financial Officer

Sure, Dana. I'll start with occupancy costs. I'll answer the question more generally. What we've seen is that rent has stabilized and occupancy costs have stabilized, both in new rentals and renegotiation of things that are coming up for lease renewal. This year, we're actually able to lever occupancy costs at below our historical 4% comp level. Going forward, we see occupancy costs right around the 4% in 2018.

Michael O'Sullivan -- President and Chief Operating Officer

Then, Dana, on your question about online returns, it's possible that returned merchandise, if it's high-quality and unspoiled, could be finding its way into the off-price channel. As long as it represents great value, we'd be interested in that product. That could be, I underline the word "could," one of the additional things that's contributing to the abundant availability that we're seeing. As Barbara mentioned in an earlier answer, it's hard for us to separate out and identify where specific product was originally intended for. All we see at the end of the day is first quality, unspoiled merchandise that's available for say and as I say, if it represents a good bargain, we're interested in it.

Dana Telsey -- Telsey Advisory -- Chief Research Officer

Thank you.

Operator

Your next question comes from Oliver Chen with Cowen & Company.

Courtney Wilson -- Cowen & Company -- Analyst

Hi, this is Courtney Wilson on for Oliver today. Thanks for taking our question. We just had a question on marketing in 2018. Are you anticipating any changes to the strategy as you continue to build out your store base or if you're planning any change in the spend versus historical levels? Then as you do open new stores, are you anticipating 2018 new store productivity to remain at similar levels to 2017? Thanks.

Michael O'Sullivan -- President and Chief Operating Officer

Courtney, on your marketing question, our marketing strategy and message over the years has been very consistent. The message is that we offer the best value in apparel and home fashion. That message will not change in our marketing programs. The communication will not change. That said, we will look for ways, and we always do look for ways to make the message more effective, whether that's in terms of the creative or the media strategy. But the underlying message to the customer that we offer greater value will be consistent.

Michael Hartshorn -- Group Senior Vice President and Chief Financial Officer

Then on the new store productivity, given that our focus on new stores is in a similar approach over the last couple years, the new store productivity has been pretty consistent, around 60 to 65% for Ross.

Courtney Wilson -- Cowen & Company -- Analyst

Okay, great. Thank you.

Operator

Your next question comes from Brian Tunic with RBC.

Brian Tunic -- RBC -- Analyst

Great, thanks. I'll add my congrats as well on the strong year. I guess maybe Barbara, for you, can you maybe talk about what categories might have lagged the company in 2017 and maybe what do you think are the biggest opportunities in 2018 and then on top of that maybe talk about the home business. Do you have any longer-term goals of what you think home could grow as a percentage of the company? Then maybe Michael on the traffic side, just curious any anecdotal estimates on how much competitors, bankruptcies, or store closings might have aided your traffic gains this past year? Thanks again.

Barbara Rentler -- Chief Executive Officer

Sure, Brian. In terms of categories that lagged the company throughout the year, I would say the biggest category that lagged was accessories, although as the year went on, in the fourth quarter improved but in terms of the total company, clearly accessories were the business that lagged the most. Opportunities for 2018 we're feeling is very broad-based, both apparel and home. We feel good about our apparel business. It's moving in the right direction. Always has more work to do, particularly in ladies, but it is moving in the right direction.

In terms of our home business growing as a percent of the company, home has had good business for a number of years now. We see that continuing to grow. We don't have a particular percent of the company in mind. Just that we know it's a growth area and we fill good about it.

Michael Hartshorn -- Group Senior Vice President and Chief Financial Officer

Brian, then on the impact of store closures. We are seeing a benefit to stores in proximity to the closed stores, but given the number of stores, the lift is not meaningful to either our overall comp or traffic statistics.

Brian Tunic -- RBC -- Analyst

Great, thanks very much and good luck.

Operator

There are no further questions at this time. I will turn the call back over to the presenters.

Barbara Rentler -- Chief Executive Officer

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

Operator

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

Duration: 44 minutes

Call participants:

Barbara Rentler -- Chief Executive Officer

Michael J. Hartshorn -- Chief Financial Officer and Chief Operating Officer

Michael O'Sullivan -- President and Chief Operating Officer

Daniel Hofkin -- William Blair & Company -- Analyst

Andrew Abergon -- Guggenheim Securities -- Analyst

Marni Shapiro -- The Retail Tracker -- Analyst

Lorraine Hutchinson -- Bank of America -- Analyst

Ike Boruchow -- Wells Fargo -- Senior Analyst

Kimberly Greenberger -- Morgan Stanley -- Analyst

Adrienne Yih -- Wolfe Research -- Analyst

Simeon Segal -- Nomura Instinet -- Analyst

Matthew Boss -- JP Morgan -- Analyst

Paul Lejuez -- Citi -- Analyst

Jamie Merriman -- Bernstein -- Analyst

Omar Saad -- Evercore ISI -- Analyst

Dana Telsey -- Telsey Advisory -- Chief Research Officer

Courtney Wilson -- Cowen & Company -- Analyst

Brian Tunic -- RBC -- Analyst

More ROST analysis

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