羅斯百貨 (ROST) 2002 Q2 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the Ross Stores 2002 Second Quarter Earnings Release Conference Call.

This call will begin with prepared comments by Michael Balmuth, Vice President and Chief Executive Officer, followed by a question-and-answer session.

At this time, all participants have been placed on listen only mode.

And the floor will be open to your questions and comments following today's presentation.

As a reminder, this call will be recorded.

At this time I would like to turn the call over to Michael Balmuth, Vice President and Chief Executive Officer.

Sir, you may begin.

Good morning.

Joining me on our call are Jim Peters, President and Chief Operating Officer, Norman Ferber, Chairman of the Board, John Call, Senior Vice President and Chief Financial Officer, and Katie Loughnot, Vice President of Investors Relations.

We will begin our call today with a brief review of our second quarter and first half performance and then talk about where we see our business headed in the back half of 2002 and into 2003.

Afterwards, we will be happy to respond to any questions you may have.

Before we begin, I want to note that our comments on this call will contain forward-looking statements regarding expectations about future growth and financial results and other matters that are based on management's current forecast of aspects of the company's future business.

These forward-looking statements are subject to risks and uncertainties that could cause our actual results to differ materially from historical results or current expectations.

These risk factors are detailed in the company's 2001 form 10-K on file with the F.C.C..

Earnings per share for the 13 weeks ended August 3rd, 2002, grew 41%, to 62 cents and net earnings increased 49% to $49.7 million.

Total sales for the period increased 21% to $877 million with same store sales up a strong 9% over the prior year.

For first six months of 2002, both net earnings and earnings per share increased 39% over the prior year period to $97.4 million and $1.21 respectively.

Total sales for the first six months grew 21% to 1 billion 697 million dollars and same store sales grew a robust 10% over the prior year period.

Our second quarter and year to day results continue to benefit from our ability to offer a wide assortment of fresh and exciting national name brand fashions at competitive discounts for the family and the home.

Ross Stores has consistent access to great closeout buys with over 200 merchants on staff sourcing a wide network of approximately 5,000 vendors and manufacturers.

As we enter the Fall season, our merchants are finding an abundance of fresh and exciting bargains for family and the home at compelling values.

Geographically, the strongest markets are in the second quarter were the mid-Atlantic, Hawaii and Texas, all with same-store sales up in the mid teens.

California, our largest market, posted a solid 7% gain in same-store sales.

Departmentally the ladies business overall remains healthy, posting a high single digit comparable store gain in line with a total company.

The strongest performer in this area remain juniors which generated same-store sales gains in the low 20% range on top of a high teen increase in the prior year.

Young men's and shoes, two other key back to school departments, delivered comparable store gains in the high single to low double digit range.

These very healthy results bode well for our third quarter back to school business.

The home area also remains vibrant same store sales up in the mid teens during the quarter on top of a low double digit increase in the prior year.

The combination of a 9% increase in same store sales, healthy new store productivity and 13% square footage growth, drove the 21% increase in total sales.

Operating margin expanded 117 basis points during the quarter to 9.3%, leveraging earnings per share growth.

Gross margin improved by 46 basis points as a slightly lower initial markup was more than offset by lower markdowns freight and occupancy costs as a percent of sales.

A 49 basis point decline in general selling and administrative expense as percent of sales was mainly driven by leverage on fixed costs resulting from the 9% increase in same store sales.

As we ended the second quarter, total consolidated inventories were up 16%.

This growth was mainly driven by a similar increase in the number of stores.

In-store inventories were up about 1% over the prior year on a comparable basis.

Pack away was 42% of total inventories, about even with the prior year.

Our expansion plans remain on track.

We targeted a net addition of 55 new stores this year or 12% unit growth.

In the first six months we opened 35 new stores including 13 locations in our Southeast markets of Georgia, North Carolina and South Carolina.

We entered this region in March of 2001 and now operate 26 stores there.

We are very encouraged by the solid performance to date of these new stores which have been posting stronger than expected volumes.

The healthy sales in both the Southeast and the Mid-Atlantic markets give us continued confidence in our ability to expand outside of the Sunbelt which is key to our long-term growth strategy.

I am pleased to announce that we expect to enter three other new states -- Alabama in the third quarter of this year and Tennessee and Louisiana in early 2003.

We believe these three states have the potential for 45 to 55 Ross locations over the next five years.

We will also continue to expand in Georgia and the Carolinas with a total of 50 stores targeted there by year-end 2005.

Our goal in all these new markets is to ultimately achieve parity and store count with our competition.

Looking at the balance sheet, the company's financial position remains very strong.

At the beginning of the current year, the company's Board of Directors approved a new two-year $300 million stock for purchase program.

During the first six months of 2002 we repurchased 2 million shares of common stock for an aggregate investment of 79.4 million dollars ending the quarter with 78.1 million shares of common stock outstanding.

We funded these purchases along with capital for new store growth with cash from operations.

To support our future growth, we have been making several investments in supply chain, systems and infrastructure.

During April we began construction of a new 1.3 million square foot distribution center in Perris, California about 70 miles southeast of Los Angeles.

This facility is expected to be complete by the third quarter of 2003.

In addition, the company's other new 1.3 million square foot distribution center near Charlotte North Carolina opened on schedule this past June.

We are gradually ramping up this new facility to target production levels by the end of the year.

We also implemented a new store refresh program this year that is currently featured in over 100 locations.

It consists of an updated in store visual communications program that utilizes consistent messaging and signage with a more exciting and contemporary look and feel to enhance our customer's shopping experience.

Early customer feedback has been favorable.

This new refresh program is targeted to be in over 260 stores by the end of this year with a chain wide rollout expected by the end of 2003.

For 2002, our current earnings per share forecast of $2.44 represents a target of 28% growth over 2001.

To recap, we are planning top line sales growth of about 18% for the year driven by 12% square footage growth and an estimated 7% increase in same store sales.

Operating margin is expected to increase about 60 basis points to 9.2% of sales up from 8.6% in 2001.

As mentioned earlier, we also announced a new two-year, $300 million stock repurchase program and expect to complete about half the authorization this year.

Our third quarter forecast was for same store sales to increase about 5% and earnings per share to grow about 21% to .52 cents compared to the prior year.

Basing our most difficult comparison of the year and the potential for unseasonably warm weather, we have forecasted August conservatively with projected comparable store sales gains of about 2% versus a 9% increase in the prior year.

We are pleased to report that business this month is currently trending ahead of plans with same-store sales up in the mid-single digits month to date.

Ross is expected to be a 3 1/2 billion company by the end of 2002 that had several distinct competitive advantages.

We have a large experienced staff of off price merchants giving us excellent accessibility to name brand closeouts on or fashions for family and the home.

We generate significant amounts of cash that allow us to both internally fund growth and buy back stock.

And our current store network is limited to only 22 states giving us significant room for future growth.

We also have a seasoned management team who will continue to improve on the execution of our merchandise and operational strategies.

And we are investing in the necessary infrastructure to implement our growth plans.

We are entering other new geographic markets and will continue to add stores in existing markets.

All of this gives us great confidence in our ability to profitably grow to over 700 stores and about 5 billion dollars in revenue by 2005 while achieving our target of 15% or higher annual earnings per share growth over the next several years.

Finally, before we open the call up for questions, I would also like to confirm that in compliance with the recent SEC order issued on June 27th requiring sworn statements from large publicly traded companies and also in compliance with the recently enacted Sarbanes Oxley act, our CFO, John Call and I, will be certifying Ross 2001 10-K , our 2002 proxy statement and the 2002 first and second quarter form 10-Qs when we file 10-Qs on or about September 16th.

At this point, we would like to open the call up to respond to any questions you may have.

Operator are there any questions?

Thank you, the floor is now open for questions.

If you have a question please the number 1 followed by the number 4 on your touch tone telephone.

If at any point your question has been answered, you may remove yourself by from the queue by pressing the pound key.

We do ask that while you pose your questions to please utilize your hand sets to provide optimum sound quality.

Once again that is 1 followed by 4 at this time.

Our first question is coming from Robby Ohmes of Morgan Stanley.

Your line is live.

Thank you.

Just a couple of quick questions.

The first question is could we get traffic versus ticket trends for the second quarter?

And also Michael, as you look to Fall and Holiday, could you talk a little bit about how maybe the assortments might be changing at all from the way they were positioned last year, will it be more of the same categories that you expected driving comps or relative shifts in strength.

And then finally, just the comment you made of August tracking ahead of trends, you had a conservative number but sounds like something changed from July as well.

Any comment on that would be great.

Thanks.

Robby, this is John Call.

I'll take that first part of the question.

The comps in the quarter were driven by traffic.

The basket was pretty flat.

Michael, as I look at the rest of fall, the category shifts versus a year ago are not dramatically different.

Any shifts are very subtle and not worth mentioning.

It is really the same approach and hopefully our execution will continue to be strong.

Your third question was on August traffic --

Sure.

It sounds like things may be have improved August versus July.

What has changed?

Do you feel traffic has picked up or are you getting a better response, weather --

It is hard to say.

It is early in the quarter.

We are pleased with how we are doing, but it is hard to say what is driving it.

Great, thanks lot.

Our next question coming from John Evans of Coker and Palmer.

Can you talk a little bit about the back half, the opportunity for market expansion, is that going to be determined primarily on mix or is it just absorption here from the standpoint of comp stores?

In the back half really, relative to gross margin, we look for merchandise margins to be relatively flat.

We are going to have pressure from occupancies as we bring the new Southeast distribution center on line.

The rent expense will flow through the gross margin line.

How much do you expect I guess the DC to cause -- or extra expenses through the gross margin line and when will we that happen?

We see that in the back half.

The other expenses in the business more than offset the pressure on the gross margin line from that DC.

And one last question.

Initial markup, I guess can you talk about your expectation for that in the back half, will it be lower, higher?

Probably will be modestly lower.

And is that because of the mix of the goods?

It is consistent with where it has been tracking for most of the year.

Thank you.

Our next question is coming from David Mann from Johnson Rice.

I have a couple of questions, first of all, on the store refresh program can you provide any color on the impact is having on the sales of first group of stores?

Yeah, actually, David, it is really too early to tell.

We have put in 100 stores over the last six weeks or so and aren't anticipating a large sales lift from this.

It is really more about a refresh inside the store, giving better communication and messaging to our customers.

And we are not really building any type of sales list into the plan for this.

And then secondly, on your micromerchandising initiative, given the success in the Mid-Atlantic region can you give an update on how that is going and the rest of the country where -- just an update on the roll out there.

Essentially every department is on it going into the fall season.

We are pleased with the result.

It is a national program not just Mid-Atlantic program and our results I think are somewhat impacted by it, and we are pleased.

But but the real test on micromerchandising for us comes in the fall season.

So we will see how it goes as we expand it into -- we expanded into the cold west and see how it does over the next couple of months.

Thank you.

Our next question is coming from Dana Telsey from Bear Stearns.

Good morning.

Can you comment a little bit in terms of the Southeast and the properties that are becoming available, whether it is Ames or K-mart locations, what are you seeing real estate wise and on the SG&A side any impact of the benefit costs you seeing in terms of increased benefit cost over the quarter and year as impacted on SG&A.

From the Southeast standpoint we continue to find good real estate and our new market strategy is going as planned.

We are pleased with what is happening from a sales standpoint.

There is a lot of real estate opportunity out there.

You mentioned a couple of retailers, you know, there is a reason some of those retailers are closing stores and doesn't mean because they had great real estate.

So there is just an abundance of opportunity out there for us.

As far as benefits, we have been managing our benefits from a very aggressive standpoint and you know, had there should not be any impact on the back half of year of benefits rate versus what we have been seeing in the first half of the year and we believe we will be managing through that appropriately next year as well.

Thank you.

Our next question from Maura Burn from Salomon Smith Barney.

Good morning.

One your apparel performance was very strong in the first half versus one of your closest competitors.

Any comments about the strength of apparel and then outlook for second half.

Also, if you could break down the gross margin to IMU, better mark downs and any occupancy leverage.

Third question, accountable payable were up about 45% over last year.

Any color on the big step up there.

On the apparel performance, frankly, I think we have been executing better this year than last year.

And I think that is driving it.

I don't think it is anymore complicated than that for us.

Relative to the gross margin, most of the margin lift was on the merchant margin line.

We did get a bit of lift from occupancy, but most of it was from merchant line.

As Michael mentioned, IMU was down off that by lower markdown.

Relative to leverage on the balance sheet with the freshness of the goods in the stores are payable leverage is up, actually abnormally up.

We typically see the levels in the mid-40s and at the end of the quarter we are about 55%, which is really reflective of the freshness of the goods in the store.

And the apparel, the back half, you still have opportunity for that to be -- to draw same store sales in the third and fourth quarter?

We feel good about how our position in apparel for back half.

Thank you.

Our next question from Richard Baum of CSFB.

Good morning everybody.

Congratulations on a wonderful quarter again.

Two questions, Michael, you talked about the categories that perform particularly well.

I suppose the other categories -- could you talk about categories that were below average?

I would suppose nothing did really poorly since you did a 9 comp.

And then I have a follow-up question about merchandise availability.

Okay.

The categories that performed a little below were children's and men's and they were different then in years in the past I don't think there were problems, they just performed a little below the curve.

As some businesses are going to.

Your second part of the question was --

I haven't asked it yet.

Oh, okay.

I'm sorry.

That's okay.

You almost clairvoyant but not quite.

The question for Johnny Carson here is there has been a lot of discussion the availability of good quality goods from good brand name vendors, historically has not been an issue for the off price segment but we did have some comments a couple of weeks ago from - particularly from Ralph Lauren where they indicated they were going to be much tighter on their inventory management, not take back goods from department stores and the like.

The question is are you seeing anything different in the availability from the really key prestige vendors as you call them, Ralph, Tommy, Nautica, Liz, without being - don't be specific about names, which I know you won't be anyway, but just generally from the top five or 10 vendors that you do business with.

In aggregate no difference.

At any given time as you know at off price, there could be more or less from a particular vendor.

In aggregate we are not having any difficulty filling our pipeline at all.

And actually, the pipeline looks pretty good.

And I guess, just to follow-up to that, because you know, we have heard from all of these vendors that they are managing their inventories more tightly and so the question is there seems to be some inconsistency between what they are saying and what you seeing.

Is there any way from your perspective that you can explain why there continues to be excellent availability but the vendors continue to talk about -- and the numbers show that they are managing inventories better?

I say the only thing I could add to it is that the unpredictable situation that a lot of mainstream retailers find themselves in that creates additional supply that no one is anticipating.

The trends in the department store sector have been at best unpredictable.

Do you rely -- how much of your business do you do in terms of actually taking down production time, you know, using fabric that vendors have that they can cut for you supposed to being purely opportunistic.

Cut up business is a small percentage of our business.

I don't have the number off the top of my head, but it is really a very small number for us.

Okay.

Well, keep on truckin.

Okay.

Our next question is coming from Marny Shapiro of Merrill Lynch.

Congratulations.

Michael, is it now a year since you put improved merchandise into the stores.

At this point, what segments do you feel you can focus on most from improvement going forward, any changes we should expect and in the women's business specifically, can you talk to career versus casual.

I'm sorry, career versus casual?

Um-hmm, in womens.

You know, I guess it is more than a year when we identified problems that we had in merchandising and really, our going forward is really in our business and always will be the continued execution of off price formula which is brands for less.

And when we strayed we got hurt.

So we are just going to continue to emphasize that.

There will be small expansions in home as we go.

But there is no major category introduction.

Now it is a the matter of how good we are at executing our business.

And now I think we have improved.

That was the first part.

What is the second part?

Just within women's specifically can you talk about career versus casual because you had ups and downs within the balance of that segment.

Yeah, actually for Spring I was pleased with the balance we had.

And I was actually -- I was very happy in a different career environment, nationally we performed pretty well.

The Fall segment of the career starts as we move into September.

But I'm happy with how we are positioned and I'm comfortable that our strategy is working there.

Congratulations.

Good luck with the fall season.

Thanks.

Our next question with Andy Graves from Compass Point.

Thank you.

As we move into the Fall, most of my questions have been answered, but as we move into the Fall, would there be any significant initiatives on the men's side which may allow you to expand your mix in either men's or men's accessories?

Thank you.

I'm sorry.

Some of that I couldn't hear if you could repeat that.

Certainly.

I'm wondering if you wouldn't mind detailing for us as we move into the Fall an ability to expand your mix in men's or men's accessories.

You know men's nationally is not a business that trending very well.

So, I think as I look at the Fall, I'm happy with the level we have it positioned at but I would not be thinking about intensifying it today.

Okay.

It is not just exactly where the customer has been spending their money.

What about --

If I'm understanding the question.

Yes, what about say the children's area which has seen relative strength over the last four two six quarters nationally.

I would invest more there?

Yes.

Possibly.

When we invest, sometimes it is strategic, meaning like what we did at home, and other times it is opportunistic based on the availability of product and drives an expansion within the season.

We will see how the season unfolds and some of that leads to where we intensify our investments.

Okay.

Thank you.

Our next question from Richard Jaffey of UBS Warburg.

Thanks very much.

Two questions.

One is marketing and marking initiatives to the Fall, do you look to step that up, to reach out to your customers more, through the electronic mediums or other means and then I'll follow-up with a second question?

Our marketing is television based and very institutional, reinforcing our brands for less, that we carry brands for less, and I think you would expect a market similar to what we have done last year for fall and we really don't change it much seasonally.

As you shift into new markets and grow the business in the five states you listed, can you afford to advertise on TV there or is that something that will come over time as you expand the business?

It varies by market, but we in general can afford to do it.

You mentioned that you hope to achieve parity with your competition.

Is there a unique competition in those markets?

How large is their presence, is it similar to the 50 store goal you had for Southeast and 45 stores 55 stores in Alabama, Tennessee and Louisiana?

Yeah, the competition you know we have listed 50 stores for Georgia, North and South Carolina our two closest competitors, our closest competitor has approximately the same number of stores.

With Alabama, Tennessee and Louisiana, we are saying we can open between 45 and 50 stores and our competitor has approximately 55 stores in those markets.

Now, if I understand there is a number of unique or regional off price retailers in the Southeast.

Do you see them as sort of compounding your challenges, Bells, Dots, Stein Mart being several that come to mind.

They are very good retailer, but basically we are facing them where we are today and we are happy how we are performing in those markets.

We face them in many of our Florida markets.

Basically if we execute well and understand the market going in, meaning what the customer wants, we will do fine.

Regardless of who our competition is.

If we don't understand the customer well enough down there, we will get hurt.

And that is the nature of off price.

Thank you.

Our next question is coming from David Yamamoto of Wedbush Morgan, your line is live.

Good morning, congratulations.

I have two questions.

First is a follow-up on marketing and advertising.

Did you leverage advertising in the second quarter and if so by how much.

My second question, I recall you also implemented a new merchandise refund policy.

Has this policy helped net sales and if so by how much.

From an advertising standpoint we were basically flat with last year on a quarter to quarter basis as a percentage of sales.

And I'm sorry the second question?

Regarding your merchandise refund policy, has this policy helped net sales and if so by how much?

You know, it has been pretty negligible from a total sales impact.

It has helped with fraudulent refunds and with our return percentage of goods.

But it is a very, very small percentage.

Great, thank you.

Our next question is coming from Tom Ogner from Strong Capital.

Hi, my question has been answered.

Our next question from John Goldberg from Hahn Capital Management.

Actually Jeff Doinoff.

You highlighted Texas.

Can you provide anymore color within Texas as to maybe where the strength is coming from and then some have talked about just given fact that back to school was pushed back one week that the tax free weekend in Texas was not as strong as prior years, did you see any evidence of that any any of your markets there in Texas?

Thank you.

The Texas performance for us has been broad based.

And as relative to the tax-free weekend, we didn't see any major, you know, major effect.

Once again, any further questions or comments you may press the number 1 followed by the 4 on your telephone key pad.

Our next question from Maura Burn of Salomon Smith Barney.

Two follow-ups, you mentioned sales trending a little bit above planned early August, does the August comparison get easier as you move through month or tougher and then availability by merchandise category, are there -- while you wouldn't want to mention brands, is there a variance between the quality of merchandise in terms of major categories men's, women's, home, children's.

Okay.

Give me the first one again.

August, do trends --

Oh, okay.

I think what we are up against is relatively consistent or about the same across the month on a week by week on average.

And the quality of what's available, actually, it has not been compromised, I don't see the offerings across the board are absolutely to the standard that we want to be moving towards.

And the quantity of availability that meets your standards, does it vary much by men's, women's children's?

It varies by hour, by day.

So in general, we have been able to fill our pipelines in all our business.

We haven't had to contract the business in any way shape or form based on supply line.

Within the vendor groupings that we want to be carrying.

Did that answer your question?

Yes, it did.

Thank you.

Our next question from Paul Debbas of Value Line.

Hi.

How are you doing in the nonapparel areas?

Very well.

We are pleased across the board in nonapparel.

All our center core are performing well and our home business is performing well.

How about jewelry and where do you stand with that expansion?

Jewelry is -- we are actually very pleased with how that is performing also.

It is not -- it is a business that will be expanding very aggressively as we move forward.

We feel very good about its performance at this point and the progress we have made in our assortment, so we are a little more bullish than it than we have been.

Thank you.

There are no further questions at this time.

I turn floor back over to you for any closing remarks.

Thank you for attending, and have a good day.

Thank you, this concludes the teleconference.

You may disconnect your lines at this time.