羅斯百貨 (ROST) 2002 Q3 法說會逐字稿

Good morning.

Welcome to the Ross Stores 2002 third quarter earnings release conference call.

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

As a reminder, this conference is being taped.

If, throughout the conference, you do need operator assistance, you may press star zero.

Also if you would like to ask a question during the question-and-answer portion, you may do so by pressing 1, 4, on your touchtone phone.

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

Sir, you may begin.

Good morning.

Joining me on our call today 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 Laneaux [PH], Vice President of Investor Relations.

We'll begin our call today with a brief review about third quarter and year-to-date performance and then talk about where we see our business headed in the holiday season and into 2003.

Afterwards, we'll 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 SEC.

Earnings per share for the thirteen weeks ended November 2, 2002 grew 33% to 57 cents and net earnings increased 29% to $45.1 million.

Total sales for the period increased 18% to $870 million, with same store sales up a solid 7% over the prior year.

For the first nine months of 2002, net earnings grew 36% and earnings per share increased 38% over the prior year period to $142.4 million at $1.78 per share, respectively.

Total sales for the first nine months grew 20% to $2 billion $567 million and same-store sales grew a robust 9% over the prior year period.

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

The strength of our business in the recent quarter was geographically broad based.

California, our largest market, posted a respectable 6% gain in same-store sales.

Year-to-date merchandise trends also continued with the home categories registering mid-teen gains in same-store sales for the quarter.

Ladies apparel remain healthy.

Junior sportswear, in particular, had a robust back-to-school season with a high-single digit comparable store gain on top of and over 40% increase in the prior year.

The combination of a 7% increase in same-store sales and healthy new store productivity, drove the 18% increase in total sales.

Operating margin expanded 68 basis points during the quarter to 8.5%, leveraging earnings per share growth.

Gross margins declined slightly during the third quarter, about 40 basis points, due to a combination of the deleveraging effect on occupancy costs from the start-up of our new southeast distribution center and slightly lower merchandise margins.

Our sharper pricing strategy has been an important factor in delivering more competitive values which help to drive higher-than-expected sales and lower markdowns as a percent of sales.

In addition, we realized significant improvement in our expense ratio with general selling and administrative costs as a percent of sales down 90 basis points from the prior year period.

The quarter benefited from excellent expense controls and leverage on fixed costs from the 7% increase in same-store sales as well as processing efficiencies from our new distribution center investments.

As we ended the third quarter, the total consolidated inventories were up 8%.

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

In-store inventories were about even with the prior year on a comparable basis.

Packaway was about 35% of total inventories, compared to 37% at the end of the third quarter last year.

We are maintaining open-to-buy liquidity, as we believe that the current west coast port situation could result in some terrific packaway purchasing opportunities for the fall of 2003.

We recently completed our 2002 expansion program.

By year end, we will have added 55 new locations or 12% unit growth to end 2002 with 507 stores in 23 states.

Our success in new markets has been a key driver in generating stronger increases in top-line sales over the past several quarters.

The healthy sales in both the southeast and the mid-Atlantic markets give us continued confidence in our ability to expand outside of the Sun Belt, which is key to our long-term growth strategy.

We just opened two stores in our newest state, Alabama.

And we plan to enter other new markets in Tennessee and Louisiana in 2003.

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

We will also continue to grow in Georgia, and the Carolinas, with a target of 60 stores in those three states 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 repurchase program.

During the first nine months of 2002, we repurchased 3.2 million shares of common stock for an aggregate investment of $123.4 million, ending the quarter with 77.6 million shares of common stock outstanding.

We funded these purchases along with capital for new store growth and infrastructure and systems investments with cash from operations.

We ended the quarter with $101 million in cash and long-term borrowings of $25 million, which represents the initial drawdown on the term loan for the new southwest distribution center equipment.

Our current financial position compares to $36 million in cash and $75 million in long-term debt at the end of last year's third quarter.

The 9% increase in same-store sales year-to-date is driving faster turns, resulting in fresher merchandise, and significantly boosting our accounts payable leverage.

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

We opened a new 1.3 million square-foot distribution center in June of this year near Charlotte, North Carolina, and plan to open an identical facility in southern California in the third quarter of 2003.

On a more current note, our fourth quarter forecast published at the beginning of November, was for same-store sales to increase about 3% and earnings per share to grow about 15% to 71 cents compared to the prior year.

Due to the calendar shift that eliminated seven post-Thanksgiving shopping days from fiscal November compared to last year, we had told investors we were planning same-store sales to be flat in November, followed by a 3 to 4% increase in December and a 4% gain in January.

Business month to date is currently trending in line with our expectations.

In closing, I'd like to highlight some of the key investment characteristics for Ross Stores.

We are a company that is targeting rapid but controlled store growth of 12% annually over the next several years.

At this rate, we expect to have about 900 locations by the end of 2007, compared to just over 500 stores as we end 2002.

We are in only 23 states today with plans for nationwide rollout.

Our financial results, over the past several years, show that we have a highly profitable store model that generates significant amounts of cash, allowing us to sell fund growth.

We have a large and experienced off-price merchant organization that gives us broad market coverage, ensuring consistent access to quality name brands.

And we have an experienced management team.

All of these resources give us great confidence in our ability to achieve our goals of consistently delivering 12% unit growth and 15% or better earnings per share growth over the long term.

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

Thank you.

The floor is now open for questions.

If you do have a question or a comment, you could press 1, followed by 4 on your touch-tone phone.

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

Once again, that's 1 followed by 4 on your touchtone phone.

Our first question comes from Robin Olms of Morgan Stanley.

Your line is live.

Thanks.

It's Robbie Olms at Morgan Stanley.

Two quick questions.

First question is the lower price point strategy.

Can you just remind us when it was implemented and how you see that evolving going forward and how big an impact that can have on gross margin?

And then the second question is , I might have missed it, but can you give out, you know, how the mid-Atlantic has been comping and how you expect it to comp going forward?

Thanks.

The more -- the sharper pricing strategy is something we have been working on through the course of the year and felt -- we expected the fall season to be promotional.

So we have been working on it for a while and this is just a continuation of it.

The -- I'm going to answer the mid-Atlantic question, and then I'm going to turn over the next question to John.

The mid-Atlantic is performing very well and was up seven for the quarter.

And we're very pleased with the progress we're making there.

And also on the mid-Atlantic, Robbie, that seven is on top of the 17 in the prior year.

Great.

And then, you know, if you foresaw sort of a promotional environment for fall, can you talk a little bit about maybe how you're thinking about holiday and spring?

Well, I think holiday will be actively promoted because we have a shorter calendar.

I think people are going to promote pretty aggressively.

And I think spring, things will quiet down a bit.

Great.

Thank you very much.

Thank you.

Our next question comes from Marcia Aaron from Pacific Growth Equity.

Your line is live.

Yes.

Good morning.

Can you talk about the negative leverage on the southeast distribution center?

When would you anticipate that to subside?

And I guess a follow-up to that would be should we expect the same thing when the west coast DC comes on live?

And then finally, Michael, can you talk just a little bit about the merchandising organization, what's happening in terms of size?

I noticed you're -- you've been advertising for some new buyers.

Marcia, yeah, this is Jim.

On the leverage and distribution center, we did see some negative leverage from an occupancy standpoint.

But it was more than offset through unit productivity gains there.

So, you know, as the company continues to grow in volume, the occupancy there should flatten out but should be more than taken care of from the productivity gains that we achieved both in the southeast DC and ultimately in our new southwest DC.

I would say that, you know, we feel okay about how we've offset that leverage, and it's still early, so we should continue to improve there.

So, if DC was only in one line, you know, in only one area on the income statement, would it be a net neutral, or would you actually have been more -- would you have gotten leverage from the DC?

Actually would have achieved some leverage.

Great.

In terms of the merchant organization, it will -- it's going to grow modestly going forward.

Not a dramatic thing like we've done in the past.

But there are some businesses we're going to segment a little further.

That's all.

Okay.

Thank you.

Thank you.

Our next question comes from David Yalamoto of Wedbush Morgan Securities.

Your line if live.

Good morning and congratulations on a fine quarter.

Two questions.

First, your sales in your home department have been quite strong this year.

Can you tell us some of the initiatives that are driving the strength in that area?

The initiatives are really continuing things we put in place over the last several years.

But we've put a little more -- we've put a little more organization in there, so we have been able to segment businesses a little further.

And we think we are just improving our execution.

There is no major change to our strategy in any way there.

Anything going on in terms of pricing?

At home?

Yes.

Are we seeing slightly higher prices?

Flat?

Can you give me some idea?

I think the cost basis for us at home is really not materially changed?

Okay.

You know, I would just say as we get bigger, we should expect more volume discounts there.

Okay.

Great.

And my second question, Kohl's will be opening up 28 stores in southern California in spring of 2003, what type of impact do you think that will have on your stores?

You know, we've competed with Kohl's in many markets.

When we went into Atlanta, Kohl's went in at the same time, and we're very pleased with how we're operating in our business in Atlanta.

We operated with them in Dallas and Colorado.

They went into Houston about this time last year.

And you know, we've dealt and performed well in those markets.

By the time they enter southern California, approximately 15% of our store base will be in southern California.

And, you know, we think that although anybody that sells apparel, you know, has some impact on us, we think we'll deal with it very well.

We've competed with them in the same market with them, you know, over the last number of years.

And anticipate that, you know, the impact will be minimal.

Great.

Thank you very much.

Thanks.

Next question comes from John Moors of Girard [INAUDIBLE].

Your line if live.

Thanks.

Congratulations on a good quarter.

Two quick questions.

One is about Packaway, I see that over the course of the last quarter, I guess, from the beginning of the quarter to the end of the quarter, it's receded from about 44% to 35%.

I know that's only down a little bit from last year.

I guess over the course of the quarter sequentially, that's down more than I recall.

What -- I guess what's you're thinking there, what's your strategy?

When would you step up and use more fire power on the open to buy?

When would we actually start to see the advantages that you would take strategically with the disruption of the west coast port situation?

Would that come sooner and about when?

And what's your thinking about all of that?

You know, in some ways, we're in unchartered territories.

It's a little speculative for me to know when it would come up.

But you know, I assume it would be an holiday and early spring product and whenever the resources feel they want to move on it.

So, sometime over the next four to five months.

But hard to say, hard to say.

Do -- you know, with packaway at 35% right now, is that typical historically as you enter the fourth quarter?

And how do you feel about the inventory levels going in here?

Well, last year at this point it was at 37%.

So, I think the difference is, you know, marginal.

And I feel fine about the inventory we have in there.

In fact, I feel very good about the inventory we have in there.

And then a quick follow-up for John, I guess.

The company would be going up against tougher comps next year.

Can you give us a sense of what you might be planning for in terms of comps and for next year, sort of preliminary sort of outline and also the extent to which you could get leverage on SG&A under that assumption.

For next year, I -- you know, we have a model that Mike alluded to at the end of his comments, where we can grow stores at 12%, you know, a pretty, you know, kind of single -- low single level digit comp level and achieve 50% of every PF and that's a model that will be under, you know, for the next several years.

And, we don't see '03 being any different from that.

Okay.

Great.

Good luck for holiday.

Thank you.

Thank you.

Our next question comes from Richard Baum of CSFB.

Your line is live.

Good morning, everybody.

Congratulations on a really great quarter yet again.

But my question is a little bit longer term.

As you -- you know, as you grow your units at 12% and you talk about a national rollout, can you give us some sense of how long it would be before you have to -- before you're planning to open in states that are not Sun Belt.

In other words, you know, the states that you're talking about that you've gone into, North Carolina, South Carolina, you're going to go in Alabama, Tennessee, Louisiana, they're still Sun Belt states.

At what point do you think you have to move into what are some of the more serious, should we call it the cold-weather states, Michael?

Yeah, Richard.

This is Jim.

I think there's plenty of opportunity for us to continue to fill out the markets that we're in.

If you think of just Georgia north and South Carolina, yeah, we're saying we can have as many as 60 stores there in the next couple of years.

About 18% of the stores we opened this year actually were in the state of California.

So, it tells us that we can still continue to infill markets that we're pretty densely populated in right now.

That being said, you know, at some point we will continue to move up into the midwest.

We will continue to build out the mid-Atlantic.

Where we are operating and certainly as a strategy, we are planning and executing right now greater penetration in the mid-Atlantic.

So, you know, we look at 900 stores over the next four or five years to have a total of 900 stores.

And, you know, we're a couple of years away from having to enter some of those larger markets.

Do you think -- you said a couple -- I thought maybe you were going to say you think you can get to, you know, 8 or 9 -- maybe get to 800 stores without having to enter those other midwestern states.

No.

And you know, we're not -- we're not talking about the next, you know, market or new markets or states that we're going into in 2004 or 2005 at this point.

But, there is significant opportunity with the markets that we're operating in.

We are continuing to expand in additional and new markets like the, you know, Tennessee, Alabama, Louisiana, and continuing to fill in the markets that we've got.

And you know, we've got a lot of time.

And I think there's a great opportunity for just significant growth as we march our way up into the midwest and march across the mid-Atlantic.

Okay.

All right.

That's fine.

Let me just ask one other follow-up.

Michael, on the merchandise that ought to be available from the west coast as a result of the work stoppage out there, I guess I'm a little surprised that you're not seeing merchandise now, because I would have thought that, you know, a lot of the merchandise that's sitting out there, not being processed or just being processed is kind of past the cancellation date.

And I guess I'd love any comments about why you're not -- why you don't think you're seeing it now or if -- could you elaborate on what you're seeing there?

Yeah.

Simply we don't know.

There's plenty of goods in the market.

It's a very good buyer's market right now.

But we don't necessarily know this is port merchandise versus nonport merchandise.

So we're having a good time in the market these days.

So, I would assume part of the reason we're having a good time in the market is from the port.

Some of it is already -- you're saying it is just not identified as such.

Yeah.

It really doesn't matter to us if it came because of a port situation on flow-through or not.

We're just happy to buy name-brand merchandise at the right discounts.

Great.

Thanks.

Have a good holiday.

Thank you.

Thank you.

Our next question comes from Patrick McKeever of Sun Trust Robinson Humphrey.

Your line is live.

Thanks, good morning.

Michael, just to question also on the port situation and all, what happens if January comes around -- January rolls around and we're back to square one as far as progress and this whole thing is concerned and there is no agreement.

Where do you see yourselves positioned relative to some of your competitors who are out there trying to get some of the same merchandise and that sort of thing or even relative to specialty apparel retailers and department stores in terms of the overall pecking order supply chainwise.

You're saying if there's another strike?

Well, yeah.

Exactly.

Okay.

I think we're positioned most because of our pack order.

We're considered better -- positioned better than most because of our level of packaway, that we can sustain a situation longer than most who don't really have packaway and, you know, depend on private label for their merchandise.

So, I think we'd be positioned okay on a relative basis.

Certainly, ultimately we'd have a problem because a lot of our merchandise comes through the ports.

Okay.

And I know it's pretty early in your store refresh program with the new signage package and all.

But, how many stores have you rolled that out to.

Can you give us any idea as to -- I know it's early again, but what you're seeing there with that?

We've rolled out about half the chain with the new store sign program.

We should be done with the entire chain before summer of next year.

And again, you know, the feedback we get is very positive, both from customers and associates and people like the new package.

It's helped brighten up the store and we believe it's helped with the shopping experience.

And just one final quick one.

Where does your return on new store investment currently stand on an annualized basis?

And what's the year-ago comparison?

Patrick, I'm not sure I understand the question.

You're asking what returns are on new stores?

Exactly.

As far as contribution levels?

What -- I don't understand the question.

Yeah.

Return on initial investment.

I think -- you've broken that out before.

You've said that it takes --

Yes, it's very consistent with the model we've broken out before where we, you know, our cash-on-cash investment pays back in about between 15 and 18 months.

And we're right in that area right now.

On a relative basis, we've seen roughly little change on the dynamics of that store investment.

Okay.

Thanks, John.

Thank you.

Our next question comes from Marnie Shapiro of Merrill Lynch.

Your line is live.

Hey, guys.

Congratulations.

Can you break down in a little bit more detail some of the merchandise trends you're seeing in men's, specifically young men's, and if you could talk about in women's, your casual apparel, and again trends in large size and petites and then finally also in the home area, if you could talk a little more specifically about linens versus the best segment, versus gift or seasonal?

That's a seven- or eight-parter.

Well it's under the merchandise umbrella.

Okay.

Merchandise trends.

Our young men's business has been pretty healthy throughout the course of the year.

Urban product has been pretty significant and important there.

And the trends seem to be continuing.

Okay, for us?

In ladies apparel, the casual business is stronger.

Certainly we would expect that at this time of the year.

Then the career business, the career business is performing actually pretty well, but our investments at this time of the year in career, really become much less than they are any other point in the year.

In special sizes, we're seeing a lot of success coming out of women's world, large sizes, and a lot of that being driven by junior plus, which is a significant portion of the business, that the key business is healthy.

No unique trends going on within the petite business, but in terms of total special sizes, the large sized business is much more powerful than we teach.

And in home, the year has been running pretty similarly in our increases in bed and bath and gifts.

So that's what you wanted in home, how that breaks out?

Exactly.

And are you planning anything seasonally different for the home area this fourth quarter versus last year?

We're probably invested more in holiday merchandise -- pure holiday merchandise than we were a year ago.

That's the most significant [INAUDIBLE].

Great.

Congratulations and have a good fourth quarter.

Thanks.

Thank you.

Our next question comes from John Valoskis of Mountain Peak Advisors.

Your line is live.

My question has been answered, thanks.

Thank you.

Our next question comes from Richard Jaffey of UBS.

You r line is live.

Thanks very much.

I guess just a couple of just mundane questions.

Number of shares on the quarter, if you could.

And is that a number so I could come back offline on that?

You can come back offline.

As Michael mentioned in his comments we're over 3 million for the year.

Come back and I'll give you those specifically for the quarter.

No problem.

I guess, to follow-up on Richard Baum's thoughts about expansion beyond the Sun Belt and opportunity, you know, it seems that, you know, both the northeast and the northern midwest beckons, the northeast being almost 30% of apparel sales in America, the midwest at somewhere between 12 and 15%, at some point you need to get there and obviously it would be better sooner than later to test.

Any sense of, you know, how soon you go beyond the Tennessee, Alabama, Louisiana, North Carolina, South Carolina, Georgia, southeast spilling in and breaking into a materially new market?

Is there a sense of timing?

Or, for that matter, is there a sense of urgency to test half a dozen stores in a totally new market?

Well, couple of things.

One, we continue to enter totally new markets.

You know, they just don't happen to be up in the northern midwest.

You know, I mentioned 18% of the stores we opened this year were in California. 40% of all the new stores we opened this year were in three states, California, Florida, and Texas.

Which I think just continues to speak to the huge opportunity we have in the existing markets, continuing to build out our store network, which gives us great leverage from an advertising standpoint, a distribution standpoint and a field operations and management standpoint.

And that being said, we are in the mid-Atlantic right now and we are continuing to expand up there as well.

And you know, over time, you'll continue to see us operate and open more stores in the mid-Atlantic.

And as we move through some of the new contiguous states that we continue to open new markets in, you'll see us push north.

And over time, you know, we'll move from the mid-Atlantic west and from the Sun Belt north, and you know, we'll come together at some point.

I guess, you know, I'd be thrilled if you could get to 900 without going beyond Florida, Texas, and California.

Just help me with the numbers?

Can you add another 100 stores in Florida, Texas, and California each and that would get you there?

Or is it much more finite than that?

You know we're -- Richard, we will, as we have, continue to update everybody on the new markets that we are going into and when.

And as we get closer to entering those markets, you know, we'll let everybody know.

Okay.

The suspense is killing me, but I'll just have to wait.

Thanks a lot.

Once again, ladies and gentlemen, if you do have a question or comment, if you could press the 1 followed by 4 on your touchtone phone.

Our next question comes from David Mann of Johnson Rice.

Your line is live.

Yes, good morning.

We're just happy you're coming to Louisiana finally.

In terms of real estate, can you comment on the pipeline you have and what kind of availability you're seeing out there and how that sort of compares to what you've seen over the last couple of years?

Sure, you know, I think there's a plethora of opportunities from a real estate standpoint.

There is lots of good opportunities and quite frankly, there is a lot of stuff that, you know, is available that you don't want.

Obviously, we said we would open 12% new stores this year.

We did.

We are on track to do that for next year.

Obviously, we have been working on our 2003 program since, you know, late last year and anticipate being able to achieve that 12% growth next year as well.

And can you also give a little bit of an update on some of the systems initiatives, you know, in terms of the core merchandising system, how that's working for you?

Yeah, well, you know, we're continuing to implement or start relating implementation integration of the core merchandising system.

We won't be turning it on until around August of next year.

When we do, that will be a test slash pilot mode of approximately 20% of the Company, and it will take us through the end of next year before we really have it completely turned on and integrated.

So we should expect to start to see some benefits of that in 2004.

Great.

Thank you.

Mr. Balmuth, I'm showing no further questions at this time.

I would like to hand the floor back over to yourself for any closing comments.

Well, thank you, all, for attending and have a good day.

Thank you.

This does conclude today's teleconference.

Please disconnect your lines at this time and have a wonderful day.