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Ross Stores Inc (NASDAQ:ROST)
Q2 2019 Earnings Call
Aug 22, 2019, 4:15 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to the Ross Stores' Second Quarter 2019 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, new store openings and other matters that are based on the Company's current forecast of aspects of its future business. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from historical performance or current expectations. Risk factors are included in today's press release and the Company's fiscal 2018 Form 10-K and fiscal 2019 Form 10-Q and 8-Ks on file with the SEC.

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

Barbara Rentler -- Chief Executive Officer

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

We'll begin our call today with a review of our second quarter performance, followed by our outlook for the second half and fiscal year. Afterwards, we'll be happy to respond to any questions you may have.

As noted in today's press release, we delivered respectable gains in both sales and earnings for the second quarter. Earnings per share for the period $1.14, up from $1.04 last year. Net earnings were $413 million, up from $389 million in the prior year. Total sales for the second quarter increased 6% to $4 billion. Comparable store sales rose 3% on top of last year's strongest quarterly comparison of 5%. For the second quarter the best performing merchandise performing at Ross was men, while toward the Midwest and Southeast were the top performing markets. While the ladies business continue to trail this chain, trends in this important area showed some improvement during the quarter.

We continue to believe that the actions we are taking here will lead to additional improvement as we move through the balance of the year. Operating margin of 13.7% was better than expected mainly due to favorable timing of expenses that are expected to reverse in the second half. For the first six months of fiscal 2019, earnings per share were $2.29, up from $2.15 last year.

Net earnings were $834 million, up from $808 million in the first half of 2018. Sales year-to-date rose 6%, to $7.8 billion with comparable store sales up 2% versus the 4% gain for the first half of last year. As we ended the second quarter, total consolidated inventories were up 8% over the prior year. Pack-away was 43% of total inventories compared to last year's 44%. Average in-store inventories at the end of the period were up 4% as we flowed receipts a little earlier to support the back-to-school selling period.

dd's DISCOUNTS had a another quarter of strong growth in both sales and operating profit. Turning to our Store Expansion program, we remained unscheduled with the opening of 22 new Ross and 6 dd's DISCOUNTS locations in the second quarter. We continue to project adding a total of approximately 100 location in 2019, comprised of 75 Ross and 35 dd's. As usual these numbers do not reflect our plans to close or relocate about 10 older stores.

Now Travis Marquette will provide further color on our second quarter results and details on our second half guidance.

Travis Marquette -- Group Senior Vice President, Deputy Chief Financial Officer

Thank you, Barbara. As previously mentioned, our second quarter earnings results benefited from the favorable timing of expenses that are expected to reverse in the second half. This benefit was worth approximately $0.02 to earnings per share. Now turning to the details of our Q2 results.

As noted in today's press release, we have updated our earnings guidance for the second half given the recent announcement of 10% tariff on good sourced from China, including apparel and footwear. Our projected impact is based on our present understanding of the timing of and the merchandise categories included in these additional tariffs.

Our sales forecast for the second half remains unchanged. We continue to forecast same store sales for the balance of the year to grow by 1% to 2%. If sales perform in-line with this projection, earnings per share for the third quarter are forecasted to be in the range of $0.92 to $0.96, compared to $0.91 a year ago. For the fourth quarter earnings per shares are projected to be $1.20 to $1.25, versus $1.20 in the prior year, which included a one-time per share benefit of $0.07 from the favorable resolution of a tax matter. Now I will provide some operating statement assumptions for our third-quarter EPS.

Total Sales are projected to grow 5% to 6%. We expect to open 42 new stores during the period, including 30 Ross and 12 dd's locations. Operating margin is projected to be in the range of 11.8% to 12% compared to last year's 12.4%. This forecast reflects our expectations for some pressure on merchandise gross margin from tariffs, along with de-leveraging on occupancy and other expenses if comparable sales perform in-line with our guidance.

We expect net interest income of about $3.3 million. Our tax rate is expected to be approximately 24% and weighted average diluted shares outstanding are projected to be about $360 million. Based on our first half results and second half guidance, we now project earnings per share for the full-year to be in the range of $4.41 to $4.50, compared to $4.26 in fiscal 2018 which included the previously mentioned one-time per share benefit of $0.07.

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

Barbara Rentler -- Chief Executive Officer

Thank you, Travis. To sum up, as I mentioned earlier, we delivered respectable sales and earnings growth for the second quarter on top of our strongest quarterly comparable sales comparison from last year. While we've made progress in strengthening the ladies apparel business, we still have a way to go until we're satisfied with our performance in this important area. As we move into the fall season we'll work on our merchandising index system in ladies, and also throughout the entire store, so that we are delivering the right product and brand priced as sharply as our customers have come to expect.

We believe the additional tariffs may result in increased uncertainty in the apparel and footwear market. Historically, disruptions like this have benefited off-price. As always, our focus will continue to be offering our customers the most compelling values possible throughout our stores.

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 JP Morgan.

Matthew Boss -- JPMorgan -- Analyst

Thanks and congrats on a nice quarter. So with same store sales comparison easing in the back half of the year relative for the front half and given the sequential improvement that you spoke to, in the ladies business, anything you see constraining your ability to exceed the one to two comp guidance for the back half of the year, or maybe where do you see top opportunities to potentially outperform?

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

Matt, hi. It's Michael Hartshorn. The way we thought about the back half, first we were up against strong multi-year comparisons in both Q3 and Q4. With ladies strengthening it is a smaller part of the business in the back half, on top of that we think there's going to be continued uncertainty, given the department store performance in Q2, we expect it or could be more promotional. And on top of that, we think the tariffs are going to cause a bit of uncertainty in the back half.

So, our point of view is, we always like to be conservative and hope to be there.

Matthew Boss -- JPMorgan -- Analyst

Great. And then maybe just to follow up in larger picture, Barbara, I guess help us to think about the near-term versus intermediate term, the potential impact of tariffs maybe to the customer in the off-price sector, in your view?

Barbara Rentler -- Chief Executive Officer

Well, in the near-term, I think what we have to do is recognize that, we're not the leader in all of this, we're the follower. So, we're not going to be the leader in terms of raising prices. So, as the tariff comes on, it's early for us to know how retailers plan to manage through the costs and ultimately what the customer is going to see in terms of pricing in front of them, so we're studying that business.

So we are going to have to wait and see how retailers react to the higher cost, their approach on pricing, and then really the customers reaction to potential price inflation. So in the near-term, it's a wait and see. We have to kind of watch, what they're doing, and then see where that puts us because we're clearly not the lead on pricing.

In the intermediate -- get the word out, I think it will -- it historically would have given us an opportunity for supply and some changing markets. But I think until we understand, in near-term and intermediate being defined as a guest part of '20. Until we understand what the pricing is going to mean to the customer, I think there's going to be some challenges ahead particularly as department store business is difficult.

And so with that, we're going to wait and see and again, as I said, we're going to hold on our pricing and see where we fit in the order because the most important thing, while all of this is going on is that, we offer our customers the best values possible. And so there's going to be a lot of moving targets, I think here and so I think we need to study it.

Matthew Boss -- JPMorgan -- Analyst

That's great color. Best of luck.

Operator

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

Lorraine Hutchinson -- Bank of America Merrill Lynch -- Analyst

Thank you. Good afternoon. Just to follow up on the tariffs, can you talk about what proportion of your product is affected? And then, are there any opportunities for mitigation, as you look into 2020?

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

Sure, Lorraine. We don't disclose the specific percentage for competitive reasons. That said, as with most retailers, a good portion of our apparel and footwear comes from China. So with that said, in terms of the mitigation, so as we mentioned in the commentary, we think it was a prudent approach to make our best estimate of the potential impact, separating out what goes into effect in September and December.

And for us, our best estimate at this point is we added $0.03, or took $0.03 from EPS in the back half, but certainly hope it plays out more favorably. But that's our best shot at this point in time. And we will have to wait to see, as Barbara mentioned, how different retailers react to the higher cost or costs, their approach on pricing, as well as how the consumer would react to increase in prices. That said, historically, disruptions like this had been beneficial for off-price.

Lorraine Hutchinson -- Bank of America Merrill Lynch -- Analyst

Thank you.

Operator

Your next question comes from Mark Altschwager from Baird.

Mark Altschwager -- Baird -- Analyst

Great. Good afternoon. Thanks for taking my question. Was hoping you could give a bit more color on some of the gross margin drivers in Q2 just in terms of merch margin, freight distribution and then if you're able to quantify perhaps just the level of merch margin pressure you expect from tariffs over the back half? That'd be helpful thank you.

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

On merch margin piece, we wouldn't disclose the margin impact but the $0.03 that we included in the guidance is largely merchandise margin.

Travis Marquette -- Group Senior Vice President, Deputy Chief Financial Officer

And then let me just provide a little bit more detail. So during the period, cost of goods sold increased 10 basis points, higher merchandise margin and lower distribution costs of 10 basis points each were offset by freight costs that rose 20 basis points. And occupancy de-leverage of 10 basis points. Buying expenses were flat versus last year. Selling and general administrative expenses for the quarter increased 5 basis points largely due to higher wage costs.

Mark Altschwager -- Baird -- Analyst

Thank you. And best of luck.

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

Thank you.

Operator

Your next question comes from Kimberly Greenberger, from Morgan Stanley.

Kimberly Greenberger -- Morgan Stanley -- Analyst

Great, thank you. I wanted to explore SG&A little bit more. Wages are obviously still growing here in the second quarter. If you could give us any sort of order of magnitude on the wage growth headwind to SG&A here in Q2, that would be helpful. And will that change as we look out to the back half of the year and on the cost -- the SG&A cost shift out of Q2, do you have -- I think you said that was $0.02, benefit to the second quarter. If you could give us the SG&A dollars benefiting Q2 and if that's expected to come in Q3 or Q4, just any color on that would be helpful? Thanks.

Travis Marquette -- Group Senior Vice President, Deputy Chief Financial Officer

Kimberly, as you may recall, we increased wages across the board last year to $11. So, we are just now anniversarying that in the second quarter. When we entered the year, despite wage growth, our own $11 increase, and the minimum wage increases in states like California, we guided the year for SG&A to leverage at the normal 3%.

So we've been able to offset those costs. In terms of the $0.02 timing, that wasn't all in SG&A some of that gross margin, and we wouldn't break out that specific and as a reminder the $0.02 timing benefit was first is our original guidance, not versus last year.

Kimberly Greenberger -- Morgan Stanley -- Analyst

Okay, thanks so much for that.

Operator

Your next question comes from Omar Saad from Evercore ISI.

Omar Saad -- Evercore ISI -- Analyst

Thanks for taking my question. Could you talk about some of the women's apparel trends? I know it's improved a little bit, but still kind of lingering issues there. Is that more external fashion trends or external factors related to the category and environment or internal execution issues that you think you can address? And I also, I would love to get your thoughts on some of the lower freight rates we're hearing about, this year and then next year, if that's material to you guys? Thanks.

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

I'll start with the freight. So generally for us freight has played out much as we expected at the beginning of the year. What we saw was 35 basis point deleverage in Q1, 20 basis points deleverage in Q2, and our guidance assumes that it will abate further in the back half.

Barbara Rentler -- Chief Executive Officer

And as it pertains to the women's apparel trends. Externally there isn't any one major big trend driving ladies apparel. I mean, I think that's the first thing but with that our issues in ladies apparel really related to our own execution issues, for our assortments below our normal standards. So we feel like we've been working through those issues, we feel like we've made some progress. Still trailing the chain. And as I said before in my comments, we feel like as the year goes on that the business will continue to improve.

Omar Saad -- Evercore ISI -- Analyst

Thanks.

Operator

Your next question comes from Michael Binetti from Credit Suisse.

Michael Binetti -- Credit Suisse -- Analyst

Hey, guys. Thanks. Congrats on a nice quarter. Thanks for taking all our questions here.

Just Michael, a question on your comments on the near-term. I think you mentioned that the growth in inventory for back to school earlier to maybe some color on whether you think that strategy seeing successful in the early days. And then even you did make a comment on observing department store trends lately and your hunch that we could see promotion stepping up, maybe just a little more color about how you're looking at the landscape and what you're planning, your business for given the competitive set that you expect in the back half? And I have a follow up.

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

Sure, Michael, we wouldn't comment on kind of inter quarter trends, at this point. We would do that in at the end of Q3. And my comments really on the department stores is based on their earnings performance. So they obviously -- the comps were certainly below the off-price and value performers plus and on top of that their gross margins which suggests they were more promotional and that could continue into Q3.

Michael Binetti -- Credit Suisse -- Analyst

Okay, and I hate asking those basic questions, but maybe a little color on inventories you're seeing available, are you seeing things that excite you and more importantly maybe why is it better brands, new categories opening up? I'm a little surprised pack-away with lower year-over-year what we're -- given what we're seeing in the market and the rush to get product in before the tariffs this year. So I'm wondering if -- you are plan includes -- are we going to see that total inventory number build in the 3Q, maybe any thoughts on that?

Barbara Rentler -- Chief Executive Officer

So, in terms of supply, supply is very plentiful, it is broad across most classifications of business. In terms of the level of pack-away, pack-away fluctuates and the merchants buy that the way they see it, in terms of the product, the timing, the pricing of those goods. And so, it's still in the 40s range, which is pretty average for us, but the merchants have to make that decision.

So as the season goes on, we will continue to see the additional goods, this departments for business. If it continues to be difficult, you would expect that they would be more supply in the shorter term and, we're liquid and ready to take advantage of those opportunities. Once the merchants feel that it's at the right price and the right value, as we're anticipating it being a very promotional fourth quarter.

Michael Binetti -- Credit Suisse -- Analyst

Got it. Thanks a lot. Best of luck.

Operator

Your next question comes from Alex Walvis from Goldman Sachs.

Alexandra Walvis -- Goldman Sachs -- Analyst

Good morning. Good evening, rather. Thanks for the question. First question that I had is whether you can help us out with the break-down of comp between traffic where you are and the basket? Second question was a follow up on the inventory -- in-store inventory growth? Can you talk about the drivers of the decision to flow receipts earlier is that, all of the reasons for the slightly higher in-store inventory or is there anything else going on there?

Travis Marquette -- Group Senior Vice President, Deputy Chief Financial Officer

This is Travis, in terms of the components of sales, the 3% comp was driven by slightly higher traffic, and an increase in the size of the average basket, the higher basket was driven by higher units per transaction, with AUR was down just a bit for the quarter.

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

And on inventory, it was a function of flowing receipts early, within our plan at the beginning of the year and so that was strategic.

Alexandra Walvis -- Goldman Sachs -- Analyst

Great, thanks so much. One follow up if I may, the men's business has been strong for some time. Can you talk about what's working there, and where the continued strength is coming from?

Barbara Rentler -- Chief Executive Officer

Sure, I would probably say the reason the men's business is good is because we have a solid strategy, that the merchants have done a very good job of executing on. So our level of execution there has been very consistent. And again, as has the strategy. So there's not one particular thing that's really driving it.

Alexandra Walvis -- Goldman Sachs -- Analyst

Great, thank you. Appreciate all the color.

Operator

Your next question comes from Daniel Hofkin from William Blair.

Daniel Hofkin -- William Blair -- Analyst

Good afternoon. Just a couple of quick questions. And I apologize, I missed a little bit. So if you've already answered that, no worries. But as it relates to the -- you talked a little bit about, it was SG&A and gross margin both had a little bit of timing of expenses. I was just curious, did the inventory flow timing affect the gross margin? And if so, was that -- how much roughly was that? And then just if you haven't already given it, some additional color by region and category beyond just sort of a main ones, if you have that? Thanks.

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

Dan on the inventory flow, it just happened at the end of the quarter. So no, it did not have an impact on margins. Margin for the quarter was up 10 basis points, that was a little lower than the benefit that we saw in Q3, that was somewhat impacted by the tariffs that went into effect in June. But we were able to offset that with strong expense control. And then --

And then by -- in terms of color, geographic region, as we mentioned, in our commentary, the Midwest and Southeast were the strongest regions. Our other major markets, California and Florida were slightly below the chain, while Texas and the Southwest were a bit better than the chain average. In terms of merchandise categories, we mentioned men's was the strongest category and children's was also pretty strong.

Daniel Hofkin -- William Blair -- Analyst

Okay, great. Thank you very much. Best of luck.

Operator

Your next question comes from John Morris from DA Davidson

John Morris -- D.A. Davison -- Analyst

Thank you. Congratulations on a nice quarter as well. Barbara, maybe can you give us a little bit more color on dd's and the progress you're making there and what you're particularly pleased with? And sort of how you're benchmarking it?

And then two other kind of quick housekeeping questions. One is, we talked a little bit about inventory in the plan. But can you give us a sense of where inventory at the end of Q3 might be related to sales? I mean, same kind of, growth about in-line, I'm assuming? And I don't know if you would answer this or not, I'm just kind of curious. We've talked a lot about freight. It's just a kind of quick one. Does freight contracts when you're negotiating terms is that an annual event with somebody or is it kind of a continuous thing, it's just kind of helps us understand how it should flow through? Thanks.

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

Sure. So to go through those, we don't give forward looking guidance on inventory levels. And on freight, for us, we have already gone through our annual renewals. We did that earlier this year. So we have some pretty good visibility at this point.

Barbara Rentler -- Chief Executive Officer

And as it pertains to dd's, as I said before, we've had strong growth both in sales and profits. But for competitive reasons, we don't really get more specific than that. Other than to say that dd's had a similar favorable profit margins to Ross.

John Morris -- D.A. Davison -- Analyst

Great, thanks.

Operator

Your next question comes from Paul Trussell from Deutsche Bank.

Paul Trussell -- Deutsche Bank -- Analyst

Good afternoon. I'm curious to hear what you are seeing in terms of new store performance both on the Ross and dd side?

Travis Marquette -- Group Senior Vice President, Deputy Chief Financial Officer

Yes, this is Travis. Our new store performance is pretty consistent with our historical averages of between 60% and 65%, excuse me, of an average comp. It fluctuates a little bit quarter-to-quarter depending on where the new stores are located. But overall, the performance is pretty consistent.

Paul Trussell -- Deutsche Bank -- Analyst

Thank you, and just sort of -- just a bigger picture, just curious if there is any thoughts around e-commerce, as you look, in the years ahead?

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

On e-commerce, our view on e-commerce has not changed. We think in the moderate off-price business, the economics are just not sustainable. Over many years now, we've posted comp sales at the high end of retail benchmarks, and we've done this without e-commerce. So rather than being distracted by what we view is unsustainable business, we'd rather focused ourselves on what's proven and proven to be very profitable opportunity in front of us.

Paul Trussell -- Deutsche Bank -- Analyst

Thank you, and congratulations on recent promotions.

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

Thank you, Paul.

Operator

Your next question comes from [Indecipherable] from Wells Fargo.

Unidentified Participant

Hey, good afternoon. Just on the CapEx spend, I think you guys guided it to $600 million this year. I'm just curious, is that still the right number? And then I think there's a new DC build out embedded in there. I'm just trying to understand what maybe the run rate of CapEx should be into next year and then, to whoever wants to answer it, should there be some kind of supply chain pressure on margin at some point? I'm not sure if you're already seeing that or maybe something we should keep in mind for our models next year? Any color on that? Thank you.

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

So the DC, I'll let Travis cover the capital, but on the DC, next couple years, so we would expect to open. So we would not expect any impact of that new DC as we move into 2020.

Travis Marquette -- Group Senior Vice President, Deputy Chief Financial Officer

In terms of total capital spend, it hasn't changed, we're still expecting to spend around $600 million this year. About a third of that is related to distribution center, build outs and et cetera. In terms of going forward, again, I think we've said in the past, we expect total capital spending to be elevated for a couple of years.

Unidentified Participant

Thanks.

Operator

Your next question comes from Jay Sole from UBS.

Jay Sole -- UBS -- Analyst

Great, thank you. I have a question about the $0.03 impact from tariffs. Is that a net number? Meaning is there sort of like a $0.06 headwind is being offset with $0.03 of cost cutting or other mitigation factors? Or is it just $0.03 is what the actual impact of the tariff is?

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

Yeah, on that question, so, obviously we had the tariffs -- we started the year with 10% tariffs on Tranche-3 which is -- was mainly in categories like home, cosmetics and accessories. That expanded to 25% in June. We were able to mitigate those tariff impacts with tightening our belts on cost. With this $0.03 is our best estimate on what the margin could impact -- margin impact could be. And at this point, I don't think we can offset that with cost reduction. Hope it plays out more favorably from this.

Jay Sole -- UBS -- Analyst

Right. And then Barbara, I wanted to ask you is, if apparel is a category is a little bit slower and there's some opportunities to do more business in categories like pet supplies or auto parts or food or some of the newer categories in the store. How did those -- what's the interplay like between those categories and some of your more traditional categories like apparel and footwear? How has the customer experience changed, if they're coming in to buy apparel, if they're also kind of looking at auto parts, and pet supplies, and toys, food and other things that maybe they're not used to seeing at the store?

Barbara Rentler -- Chief Executive Officer

Well, I do think the customer likes because it enhances the treasure hunt, right? So I come in, thinking I'm going to buy something in ladies today, and I go to ladies, and I look at ladies, and this customer likes to touch and feel, like to see new things and something that they didn't see the last time they were in the store. Average customer shops in the store more than three times a month. So we think it's exciting, and the customer enjoys having something new. The challenge is to keep continually adding new things to make the treasure hunt -- make her come back again and again, with exciting new products.

Jay Sole -- UBS -- Analyst

Got it. Thank you.

Operator

Your next question comes from John Kernan from Cowen.

John Kernan -- Cowen & Company -- Analyst

Good afternoon, everybody. Thanks for taking my question.

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

Good afternoon.

John Kernan -- Cowen & Company -- Analyst

Can you talk about any emerging competitive threat from the growth of resale? There's been some industry chatter about it recently, there's been some executives within that channel talking about the share that they're stealing from off-price. Have you seen any effects of that? Do you think that this is any type of a long-term competitive threat? Then I have one quick follow up. Thank you.

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

I would say over the long term we've competed with -- against many different types of retail concepts, brands, department stores, specialty stores, and have done extremely well. So we don't see it as a long-term competitive threat.

John Kernan -- Cowen & Company -- Analyst

Got it. And maybe can you just talk about the performance of Home, it feels like that's the category in general has become a little bit more competitive recently? Can you talk about your specific performance? Thank you.

Barbara Rentler -- Chief Executive Officer

Sure. Home for the quarter performed in-line with the chain. We still continue to see this long-term growth opportunity, because, it's obviously a wide assortment of products. But, in performance along with the chain, we're never fully satisfied with any part of our business. So, we would like to continue expand and to grow that business. But, for competitive reasons, I wouldn't talk more about the specifics of that.

[Speech Overlap]

John Kernan -- Cowen & Company -- Analyst

Thank you.

Operator

Your next question comes from Janine Stichter from Jefferies.

Janine Stichter -- Jefferies -- Analyst

Hi. Just had a quick follow up on the tariff, just for modeling purposes. Is there any major variation we should think about in terms of how the tariff go through and which comes through into September versus what flows through in December? Thank you.

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

We -- because we haven't given fourth quarter guidance at this point, it's hard to say other than we have embedded the $0.03 into the back half guidance. I think if you looked at the -- it doesn't start till September. And I think if you look at the industry, I would say that there's more of the apparel and shoes in the September tranche than in the December tranche. So that's the color I'd add to that.

Janine Stichter -- Jefferies -- Analyst

Great, thank you.

Operator

Your next question comes from Laura Champine from Loop Capital.

Laura Champine -- Loop Capital -- Analyst

Thanks for taking my question. It's about the mechanics of getting to the $0.03 impact from tariffs, since you've got such an open -- significant open to buy. I'm wondering whether you just calculated that by looking at what you bought year ago period from China?

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

Well, remember our business. So there is a small portion of our business where we directly import there is -- our thought is the over the majority of the goods that we procure in apparel and shoes is -- was originally sourced from China. That said, it's hard to know what's going to happen at this point. I mean, it just was announced several weeks ago in the markets. What I would say is, the majority of our business is close-outs. So if you look at what we have left to buy year-over-year, we would normally have a lot of close-outs in our listing plan for the remainder of the year.

Laura Champine -- Loop Capital -- Analyst

And because you use pack-away inventory so extensively, would that potentially delay any impact of tariff related inflation beyond the time horizon when it would have hit some of your competitors?

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

Certainly a benefit for us.

Laura Champine -- Loop Capital -- Analyst

Got it. Thank you.

Operator

Your next question comes from Dana Telsey from Telsey Advisory Group

Dana Telsey -- Telsey Advisory Group -- Analyst

Good afternoon, everyone. As you think about the expense timing shifts that went on, how much should go in each quarter as you think about in the third and the fourth quarter and is there anything in particular that shifted from the second quarter to the back half? And just lastly, how you're thinking of marketing for the back half of the year, any changes in what you're spending or what you're doing? Thank you.

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

In terms of the timing, I just want to reiterate the timing difference is versus our original guidance, so that $0.02 flows into our back half guidance. And so, we wouldn't break that out between Q3 and Q4. On marketing, our marketing strategy and message has been very consistent over the years and hasn't changed for us. The message is we offer the best values in apparel and home fashions. We think frankly that marketing can help support our business but what really drives our business is great bargains in the store. If we have great assortments then marketing can help support that trend.

Dana Telsey -- Telsey Advisory Group -- Analyst

Thank you.

Operator

Your next question comes from Roxanne Meyer from MKM partners.

Roxanne Meyer -- MKM Partners -- Managing Director & Softlines Retail Analyst

Thank you. Good afternoon, and thanks for taking my question. I wanted to ask two things, one about AUR, wondering if it was down slightly on mix or pricing? And then secondly, I'm wondering just in the context of the plentiful inventory availability, so far this year and going forward, if you are looking to change your mix or have the opportunity to change your mix, if you so desire between good, better and best product? Thanks a lot.

Travis Marquette -- Group Senior Vice President, Deputy Chief Financial Officer

In terms of AUR, the decline was primarily driven by the change in mix of sell-through within categories.

Barbara Rentler -- Chief Executive Officer

In terms the availability and the changing of our mix, we want to take advantage of whatever we think the best deals are out there, we don't go in there and say I want X amount of purchases to be good to be better and to the best. We go out to see what the best possible deals and values are for the customer and that's how we purchase it. So you know the merchants are out buying it the way they see it. It's not as much top-down as you might think. It's really more of bottom-up based on the deals, based on the value that they can deliver.

Roxanne Meyer -- MKM Partners -- Managing Director & Softlines Retail Analyst

Okay, great. Thanks a lot.

Operator

And your last question comes from Paul Lejuez from Citi.

Paul Lejuez -- Citigroup -- Managing Director & Analyst

Hey. Thanks, guys. Just going back to the ladies apparel, I think you said it's still performing below the chain, I guess something always has to be below average, so there any color you can give on the comp ex that ladies business and how that has changed, to try to get a sense of the drag from that piece over the last couple of quarters that it has underperformed. And then second, in the first quarter you talked about SG&A timing and as well and I'm just curious if this is the timing shift that we're talking about out of 2Q, are we talking about the same expenses that keep getting pushed out or we talking different expense buckets, if you could be maybe a little bit more specific about what's moving around?

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

Yeah, Paul, so we always like to start the year with guidance. And then as we move through the year, make sure we update you on how that impacts. So, for the second quarter, for instance, we were $0.03 above the high end of the range, but we only flowed $0.01 of that through to the full-year. And no, those weren't the same types of expenses, we have things, quarterly timing differences on projects that may be delayed, or we may make decisions that delay projects until later in the year. So that's all we're calling out in the guidance.

Paul Lejuez -- Citigroup -- Managing Director & Analyst

In terms of ladies comp you wouldn't get into specifics of that. In terms of providing specifics?

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

What I would say on the comp though, obviously we were up against -- we went from a two to three but we're up against the five so on a multi-year basis, there was acceleration across the division.

Paul Lejuez -- Citigroup -- Managing Director & Analyst

Got it. And then can you just remind us, the issue of ladies is that a dd's issue as well or just Ross?

Barbara Rentler -- Chief Executive Officer

Just Ross.

Paul Lejuez -- Citigroup -- Managing Director & Analyst

Got you. Thanks. Good luck, guys.

Operator

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

Barbara Rentler -- Chief Executive Officer

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

Operator

[Operator Closing Remarks]

Duration: 39 minutes

Call participants:

Barbara Rentler -- Chief Executive Officer

Travis Marquette -- Group Senior Vice President, Deputy Chief Financial Officer

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

Matthew Boss -- JPMorgan -- Analyst

Lorraine Hutchinson -- Bank of America Merrill Lynch -- Analyst

Mark Altschwager -- Baird -- Analyst

Kimberly Greenberger -- Morgan Stanley -- Analyst

Omar Saad -- Evercore ISI -- Analyst

Michael Binetti -- Credit Suisse -- Analyst

Alexandra Walvis -- Goldman Sachs -- Analyst

Daniel Hofkin -- William Blair -- Analyst

John Morris -- D.A. Davison -- Analyst

Paul Trussell -- Deutsche Bank -- Analyst

Unidentified Participant

Jay Sole -- UBS -- Analyst

John Kernan -- Cowen & Company -- Analyst

Janine Stichter -- Jefferies -- Analyst

Laura Champine -- Loop Capital -- Analyst

Dana Telsey -- Telsey Advisory Group -- Analyst

Roxanne Meyer -- MKM Partners -- Managing Director & Softlines Retail Analyst

Paul Lejuez -- Citigroup -- Managing Director & Analyst

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