羅斯百貨 (ROST) 2003 Q1 法說會逐字稿

Good morning.

Welcome to the Ross Stores first quarter 2003 earnings release conference call.

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

During the presentation, all lines will be placed on a listen-only mode.

If you would like to register to pose a question, please press the numbers one followed by four on your touch tone phone.

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As a reminder, this teleconference is being recorded.

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 the 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 Loughnot, Vice President of Investor Relations.

We'll begin our call today with a brief review of our first quarter 2003 performance and then talk about our outlook and plans for the balance of the year and beyond.

Afterwards we'll be happy to respond to any questions you may have.

Before we begin, I want to note that certain 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 2002 form 10-K on file with the SEC.

Earnings per share for the 13 weeks ended May 3, 2003 grew 7% to 63 cents compared to 59 cents for the 13 weeks ended May 4, 2002.

First quarter net earnings were $49.3 million up from $47.7 million in the prior year period.

Sales in the first quarter increased 7% to $879 million, same store sales declined 3% versus a 10% increase in the prior year.

Geographically, sales trends were relatively broad-based.

California same store sales declined 1%.

The weakest markets were those that were most impacted by severe winter weather during the quarter, mainly Colorado, the Southeast, Texas, and the mid-Atlantic.

The home businesses were the top departmental performance with a high single digit increase on top of a strong teen gain in the prior year.

In general, the apparel businesses, which are the most weather sensitive, underperformed.

We are pleased to report that strong inventory and expense controls, as well as the earlier than planned opening of several new stores, offset the impact of lower than expected revenue on first quarter earnings.

External issues in addition to weather that negatively affected business included the war in Iraq and the lackluster economic climate.

Despite these pressures, however, we were able to show respectable earnings per share growth.

Expense trends improved during the first quarter due mainly to lower incentive plan cost combined with better than planned store payroll and benefits and expenses.

As a result, a 48 basis point decline in general selling and administrative expenses as a percent of sales partially offset an 86 basis point decline in gross margins.

Operating margins for the first quarter was 9.2% compared to 9.6% in the prior year.

As we ended the first quarter, total consolidated inventories were up 12%.

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

In store inventories were down 3% from the prior year on a comparable store basis.

Packaway was 40% of total inventories compared with 41% in the prior year.

Consistent with our long-term plan for 12% annual unit growth, we expect to add about 62 stores in 2003.

Twenty-three of these new locations opened during the first quarter, including our initial entry into the State of Tennessee.

We ended the period with 530 stores in 24 states.

Our balance sheet reflects our solid financial position as we ended the quarter.

During the first three months of 2003, we re-purchased 1.1 million shares of common stock for a total of $40.7 million.

We ended the quarter with 76.7 million shares of common stock outstanding and approximately $109 million remaining under our current stock re-purchase authorization which we expect to complete in fiscal 2003.

We continue to fund our re-purchase program along with capital for new store growth with cash from operations.

Earlier this month, we communicated our forecast for both May and the second quarter same store sales to be flattish on top of a 10 and 9% increases, respectively in the prior year.

Halfway through May, same store sales are tracking in line with our forecasted range.

As a result, we remain comfortable with our most recent earnings guidance.

On our April sales release call, we communicated our belief that ongoing inventory and expense controls should help to mitigate the affect of our more conservative sales expectations for the second quarter.

We continue to forecast second quarter earnings per share of 66 to 70 cents or an increase of about 6 to 13% over the prior year second quarter results of 62 cents.

Looking ahead to the second half of 2003, we are maintaining our previous forecast mainly due to easier prior year comparisons.

After increasing 10% in the first half of 2002, same store sales grew just 5% in the second half of last year.

We also believe our business should strengthen as weather normalizes and economic and geopolitical situation hopefully improves.

As a result, we continue to plan same store sales gains of 3 to 4% for the third and fourth quarters of 2003.

As many of you know, we have been making several investments in supply chain, systems and infrastructure to provide a platform for profitable growth over the next several years.

I'd like to update you on our progress to date on a few of these projects.

Our plans for totally new distribution network remain on track.

Our new distribution center near Charlotte , North Carolina, opened as scheduled in the summer of 2002.

A similar 1.3 million square foot facility is under construction in Southern California and on track to open during the third quarter of this year.

In early 2004, we plan to retro fit our existing Carlisle, Pennsylvania distribution center.

Once complete, all of these centers will feature state of the art materials handling equipment and warehouse management systems.

We also expect to begin the process of rolling out new POS systems later this year, which will feature debit and gift card capabilities as well as a more scheduling component to more effectively schedule store hours and improve customer service.

Another major project under way is our new core merchandising system, which is expected to be complete in early 2004.

As mentioned before, we believe this technology will improve our ability to plan, buy and allocate merchandise more precisely.

All of these investments are expected to improve both sales and earnings beginning in 2004 and beyond.

Today, Ross is a $3.5 billion company that has several distinct competitive advantages.

Our biggest opportunity is room to grow in both existing and new markets.

With the current store network that is located in only 24 states, we have significant expansion potential over the next several years.

We have an experienced management team and a large and talented staff of over 200 off-price merchants.

About 90% of our merchandise organization is located in the heart of Manhattan's garment district giving us consistent access, year in and year out giving us recognizable name brands at great values.

Finally, we have a highly profitable store model that has been generating significant amounts of cash.

We have been using our cash flow to internally fund new store growth, the capital investments we are making in infrastructure and our stock repurchase program.

All of this gives us great confidence in our ability to profitably grow to about 900 stores and approximately $6.5 billion in revenue by 2007 while achieving our target of 15% or higher annual 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, sir.

The floor is now open for questions.

Once again, if you do have a question, please press the numbers one followed by four on your touch tone telephone.

We do ask if you're on a speaker phone please utilize your handset to provide optimum sound quality.

If your question has already been answered, you may remove yourself from the queue by pressing the pound sign.

Our first question is coming from John Morris of Gerard Klauer, sir, your line is live.

Thanks.

Good morning, everyone.

Congratulations in a difficult environment.

I have a question for John, if you could give us details on cost control there in the quarter?

Could you tell us a little bit more where it was coming from and the benefit expenses, where specifically in store payroll, and are we likely to see the same kind of leverage that you were able to achieve in the first quarter, 50 basis points, that same kind of order of magnitude on a go-forward basis for Q2 throughQ4?

Thanks.

Sure.

Responding to that, John.

As Michael mentioned operating margin contracted about 40 basis points on a negative 3 comp versus the 10 comp we had last year, merchant marketing was down 60 basis points of gross margin of 86 basis points fall off on that line item.

Twenty-six basis points was deleveraged from a combination of store occupancy and other costs, we did get favorable leverage in terms of the D.C.'s.

For the cost component of the business, about 40 basis points related to the management incentive program, again on a negative 3 we didn't have the accrual we did last year when we were up 10.

Our store payroll and benefits were better than planned, although deleveraged about 20 basis points or so.

We believe we have those costs contained.

We believe that in the store environment, we are doing things with full time and part time components, and so we believe that from a comp perspective, we have pretty good control of that area.

Do you think we get the same kind of, I guess, degree of leverage?

Obviously it depends on your comp assumption, but 50 basis points, 30 to 50, can you give us any kind of feel for Q2?

As we look to Q2, I think as Michael mentioned, we're trending in the range, the sales range, that we projected for the quarter, down one to up one.

I think in that environment we can obtain similar leverage.

Okay.

Great.

Thanks.

Thank you.

Our next question is coming from Kimberly Greenberger of Lehman Brothers.

Great.

Thank you.

Good morning.

I'd like to add my congratulations as well to a nicely managed quarter in a tough environment.

Wondering if you can talk a little bit about your new store productivity.

You mentioned there was a revenue pickup in the first quarter, some stores that opened a little bit earlier.

Is there also -- has there also been improvement in new store productivity and do you look at new store productivity in new markets versus existing markets?

Yeah, hi, this is Jim.

The pickup in new stores was really that we opened them sooner than planned, so we were able to get additional revenue earlier.

As far as our new store productivity goes, we're pleased with the stores that have opened in the first quarter.

I think what's important here is we opened 23 stores in the first quarter, 37% of all the stores we're going to open this year were open in the first quarter, which should bode well for us as the year progresses.

Okay.

Great, Jim.

Do you have any comment or any color around how the new stores are performing in new markets versus existing markets?

They are performing essentially right where we expect them to perform.

We expect a new store to operate -- to generate sales at about 85% of an existing store.

And we're right in line with that right now .

Okay.

Great.

Just one other question.

I think the FASB has said, maybe given to Congress at this point a proposal, that sometime that they expect to require companies to expense options sometime next year, but there's some kind of a transition rule as well.

Obviously Congress has the option to strike this down.

But have you guys given any thought to potentially expensing options?

Or how do you look at that?

If you could comment, that would be great.

Obviously aware of FASB's agreement with the international standards board to expense options.

We don't know what form that will take place.

As we look competitively at what others are doing and what we're doing internally, our view is all the information is there in the footnotes.

You can apply that to earnings if you choose.

Until the industry moves in that direction, we're a little bit reticent to blaze the trail.

Okay.Great.

Thanks.

Thank you.

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

Thanks very much.

I should say your key competitor noted some great opportunities out there on the merchandise side.

Just wondering -- that played into apparently a significantly higher than expected inventory number at the end of the first quarter for them.

What are you seeing on the inventory side as far as merchandise that is out there, and what might you say on that front?

This is Michael.

What I would say on it is it is definitely a buyer's market right now.

There's some very good opportunities out there.

And we are very liquid in both in-store inventories and packaway inventories and taking advantage of it.

It's a very good market right now.

And looking at the second quarter, again, kind of on the same topic, we've gotten a lot of retailers out there with a good amount of inventory on the books here.

What do you think from a competitive standpoint you're looking at in the second quarter, is that all reflected in your expectations of pretty intense promotional environment in the second quarter?

Yeah.

I would say that's accurate.

We've priced our goods accordingly and make the appropriate buys.

We've been anticipating a difficult second quarter.

Thanks, Michael.

Thank you, our next question from Dawn Stoner of Pacific Growth Equity.

Thank you.

I just wanted to follow up on some earlier comments.

First, John, you indicated that the merchandise margin was down 60 basis points in the quarter.

I was just wondering if you could break that down for us in terms of initial markups versus markdown rates?

Yeah.

I think that obviously with down three our markdowns aren't going to hold as well as they did against an up 10.

We also delevered occupancy in that -- in gross margin as well.

Okay.

I guess the one thing I was looking for in past quarters you've talked about your initial markups declining due to sharper pricing.

I'm wondering if that's continuing?

Yeah, that's continuing.

And where would you see that sort of stabilizing?

I'd expect it to be stabilizing in the back half.

Okay.

And then also a follow-up on new store performance.

I was wondering if you could share with us first your sales volumes on the new stores and the operating margin?

Yeah, again, from a first year sales volume, it depends on the market whether it's in a large market, new market, existing market, and our new store volumes, you know, they range all over.

And again, we tend to plan them at about 85% of an existing store.

And we expect contributions from new stores to be in the 12 to 14% range.

And they are still tracking in that range?

Yes, they are .

Great.

Just quickly back on the gross margin, I think the biggest issue there was deleverage and occupancy from new stores in the down three comp.

Lastly, with respect to what you're seeing in May, have you noticed any pickup in terms of consumer demand on the apparel side as weather has improved?

You know, really, we normally don't comment mid month, okay, but obviously where it's warmest you'd expect apparel to be doing the best.

It's a little early in the month.

Okay.

Good enough.

Thanks very much.

Thank you.

Our next question is coming from Richard Baum of Credit Suisse First Boston.

Good morning, everybody.

Congratulations on another fine quarter, regardless of the environment it seems.

Again, Michael, in May, since you did let the horse out of the barn a little bit, are you seeing anything different in terms of Southern California with Kohl's than in April where you indicated Southern California was doing at least as good as the chain?

In Southern California and Kohl's, our stores in Southern California performed better than the company.

The trend is continuing where we're at our slightly better than the company in Southern California.

The impact is negligible, if anything.

Okay.

Just a follow up on the inventory question relating to the, you know, good buys that are out there.

Are there any areas that you're seeing, you know, more attractive buys than other areas that would be apparel in those?

I lost something you said.

Apparel versus what?

Within home.

Are there parts of the business --

I'd say it's broad-based apparel.

Broad-based apparel?

Yeah.

Are you doing anything with regards to your inventory management to take advantage of what may be unusually attractive goods, or is it pretty much consistent with what you've seen in the past?

I'm not sure.

Richard, give me that again.

I'm not sure what you're driving at.

Your competitor indicated that some of these buys were so attractive that they just simply couldn't pass them up, and they needed to take them and take the goods in when they were offered.

They said vendors were coming to them earlier in the season than they had before with closeout goods.

I guess the question is, are you seeing the same thing?

We're seeing the same thing.

We just positioned ourselves probably differently with liquidity different than they did, I guess.

We're very liquid.

Okay.

Thank you.

Thank you.

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

Good morning everybody, could you talk about the store refresh program?

I think last time you mentioned the remainder of the stores would be completed by '03.

How is that going, have the refurbishments been effective in driving incremental sales and traffic?

Also in the southern stores you've opened in the last few years are you noticing any difference there in merchandising patterns versus what they would prefer than other parts of the country and how are those stores tracking?

Thank you.

The store refresh program is on track.

We'll be done with the entire chain in the June/July time frame of this year.

Obviously we're real pleased with it.

The consumer is real pleased with it, and it's been a nice update to the chain.

As far as our stores in the southeast, there tends to be a little bit more of a traditional buyer down there.

But again, we're real pleased with what's happening with the stores.

We like the way they are opening from a sales standpoint and the way they are tracking to plan.

Okay.

Just lastly, can you talk about the mix of home and apparel merchandise and how home is performing relative to apparel?

What have you noticed there in apparel men's and juniors in particular?

Home is performing far better than apparel.

And within apparel, men's would be the lagger.

The junior business, which has developed dramatically over the last couple of years has leveled off a bit.

I think -- it's hard to tell, though, really in apparel until you really get a good weather break.

Thank you.

Thank you.

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

Hi, guys.

Congratulations on surviving a miserable first quarter.

Can you just talk a little bit about the weather impact that we had in the first quarter?

You guys tend to have a buy now, wear now consumer.

Have you looked into the plans for the early fall season where you have the next hit of transitional weather, August through October, and share with us any merchandising plans you have for that?

And could you highlight any apparel segments that did work in the smaller segments that are still growing, things like that?

Okay.

In terms of any strategies we have for the third quarter, frankly, we wouldn't share them in a forum like this.

Okay.

And that's the first part.

The second part of your question was?

Was there anything that did stand out in the quarter that worked in apparel in the quarter?

Actually the special sized businesses were really the strongest part of apparel.

And frankly, consistent with poor weather, outer wear.

That makes sense.

Great.

Thanks, guys.

Good luck on the second quarter.

Thank you.

Our next question is coming from David Yamamoto with Wedbush Morgan Securities.

Good morning, just wanted to follow up on the SG&A question.

As I recall, last year in the first quarter I believe bonus accruals resulted in an 80 basis point swing to the SG&A.

It appears that was more of a first quarter issue last year.

So will -- you mentioned about having improved SG&A expense transit to Q2, can you just elaborate on that, please?

Yeah, as I mentioned in the first quarter we picked up 40 basis points of leverage over last year's intended plan accrual.

Having said that, we are tracking better than planned against store payroll an benefits costs.

And we believe those trends will continue in the second quarter and that's what I spoke to.

Okay, so mainly the payroll and benefits.

Correct.

Great.

My second question has to do with home.

The home categories, as you know, it's been very strong and one of the primary drivers of your comp sales results.

We've noticed larger ticket items, such as accent furniture in the stores.

Does this category still have legs, and if so, how do you arrive at that assessment?

I think the category still has legs.

And, basically how we arrive at it is the consumers have been voting on it consistently for several years and they seem to be voting on it currently.

That's the primary way we look at things.

So, are you seeing in that category increases in both traffic as well as average ticket?

Yeah.

The average ticket would be up -- yeah, traffic is up.

Great.

Thank you very much .

Thank you.

Our next question is coming from Richard Jaffe of UBS.

Thanks very much.

Michael if you could just follow on with the home.

Obviously the home is doing terrific while assortments improve do you see shift or opportunity to expand square footage or inventory dollars dedicated?

I guess the question is how high is up by your estimation?

Okay.

We continue to modestly move inventory dollars and allocate floor space.

And I think probably we've been working to get more efficient in floor space rather than just expand we've seen areas that we could do better in in that regard.

How high is up in home?

You know, I would expect it to be in the low to mid-20s over time, as a percent of our total.

Where is it now?

Probably in the high -- just under 20.

A follow-up question regarding the D.C.'s.

With the DC conversion nearly complete, what should we look for both quantitative and qualitative in terms of benefit?

Should inventory turn increase, should freshness in stores be visible to the consumer and the dollar savings as you start to leverage these new facilities?

I think from a distribution standpoint obviously as we re-work the network there will be efficiencies from a productivity standpoint.

We have a pretty good idea what to what we think we will get from them.

Until we have all three up and running and at the productivity level we want, we're really not going to come out with what that expectation should be.

That being said, we believe that the accuracy of our inventory should increase and, you know, there will be less miss ships in the amount of product we get to the store and the right store will continue to improve.

In terms of timing or turnaround time would that increase as well or speed up ?

You know, I think that our in store inventories should essentially stay the same at this point.

I think once we get the core merchandising system turned on and we learn how to use the core merchandising system, then we should look at turns potentially changing.

I think that's at least 24 months down the road.

First the core system, then the DC, as an accessory to that?

First the distribution network turned on, then the core merchandising system.

The distribution network completed, then the core merchandising system turned on.

All of that really comes to fruition around the first quarter of 2004.

I think it takes the organization some period of time to learn how to use the core merchandising system and utilize the new information that we have.

Got it, thanks very much.

Thank you.

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

Yes, good morning.

Michael, a couple years ago, I guess, or almost three years now you had some trouble in which you responded with certain changes in strategy.

When you look at the hiccup you've seen in the first quarter, can you just comment on your comfort level with the mix you have, the brand content, pricing, what have you, and any changes you may be contemplating to that?

Okay.

I don't think we're at all in a situation like we were a couple of years ago.

I think for the most part, you know, I'd say in first quarter I would have seen some pricing issues that we've corrected.

But nothing gigantic.

We're working through the normal assortment issues you do at the beginning of any season or the beginning of a year.

But no major strategic issues like we had a few years ago at all.

Okay.

Great.

And then John, if you can comment, if you will, on the synthetic lease, any progress on how you may treat that or any change there, if at all?

Yeah, we actually have two leases.

And for the lease in the Southeast DC, that lease does remain on the balance sheet.

For Southwest D.C., if it stays in its current form, I'm looking at the form right now, that would go on balance sheet and cost about $2.3 million on an annual basis in depreciation.

But as I said, we're looking at -- we're looking at that right now.

And you'll decide that in the third quarter?

Is that still the timetable?

That's correct.

That's correct.

Thank you .

Thank you.

Our next question is coming from David Costal of Georgian Management.

Good morning.

I just had a couple of questions, really a follow-up about your comments on apparel in the warm weather markets.

I was wondering if you could provide some quantification whether it is from the California markets or warmer weather markets as a whole, just some number that indicates how apparel has been doing versus those markets that are not the beneficiaries of better weather.

That's the first question and I have a follow up.

Quantification in the first quarter pretty much apparel -- I don't have an exact number for you.

Apparel did a little better in the markets that had better weather.

Is there some -- has there been a change in trend versus previous quarters, you see when I'm getting?

No.

What are you getting at?

So I can try and answer it.

You have a breakdown for the whole chain in apparel versus home comps.

And I was basically asking if there was any number you could give us this first quarter versus previous periods, as to how apparel and the warmer markets compared to the home comps?

We'd have to get back to you.

I don't have that information in my head.

Then the follow-up question is in terms of the micro merchandising effort, is any part of that micro merchandising effort related to adding home as a percent of the mix in some of these more volatile weather markets?

No.

Home increases in markets based on its performance in that market.

And that really is a micro merchandising issue.

There's subsets within home that can be stronger region by region.

We fund those more aggressively where they perform better by region.

You're telling me that if home is performing better in some markets than others, that's going to drive home as a greater percent of the mix, that would imply that-- I would imagine in those more volatile weather markets, those are the kind of markets where home is out performing apparel and they would get a higher percent of the mix dedicated to the home.

You said it very eloquently, I would agree.

Okay.

Great.

Thank you guys.

Our next question is coming from Eric Leiss from Credit Suisse Asset Management.

Hi, guys, thanks.

Could you go back -- sounds like there weren't really changes to the guidance you did when you did the April comp call.

Given what you've heard from competitors in their earnings reports, relative inventory positions, I don't want to blow Kohl's out of proportion here but their comment about more aggressive pricing, in components of your guidance, what kind of flex is there in terms of your market plan?

You can reiterate that guide looking for 66 to 70 cents in earnings.

And based on obviously volumes and marketing and expenses, we're comfortable within that range.

Has that incorporated a shift in over the past month or so, based on what you've heard about the competitive environment and what you've seen in th components of what's going on in the top line and bottom line?

We'll take that into consideration, we'll take how we're tracking through the quarter and try to look at that.

There's a meaningful amount of flex then given in that 4 cent range is basically what it comes down to, right?

We believe we've given guidance in comps in terms of flattish, which is plus one to minus one, earnings of 66 to 70 cents we're comfortable with.

I wanted to ask one other --

The other issue is Kohl's is typically very promotional, you know, all the time.

I realize, for them to be aggressive on pricing is not a new scenario for anybody in the industry.

But let me move on, I had one SG&A question as well.

The payroll and benefits improvements that you've enjoyed, could you go back over a little bit how much of that you view as more of a permanent issue versus something temporary?

I mean, if you're passing benefits costs onto employees, I don't know if that would be considered something more permanent as opposed to temporary?

I think that we should continue to be efficient going forward.

A lot of the benefits save have been improvement through workers' compensation at the store level.

As we continue to improve on that, we should continue to see saves there.

Really from a payroll standpoint it's a better mix of full time and part time associates and we don't see that reverting back and going in the opposite direction going forward.

Okay.

Thank you.

Thank you.

Our next question is coming from Margaret Marger at Goldman Sachs.

Hello.

It's Margaret Major at Goldman Sachs.

How are you today?

Hi, Margaret.

Hi.

I wanted to ask in terms of the home versus non home mix, a mix shift coming there, over what time frame would you expect it to move from the teens into the low 20s, and are there any gross margin implications or SG&A implications from that?

I'd expect it to move into the low 20s over the next couple of years and home runs a higher margin and slightly higher expense and I expect it would neutralize itself in that regard.

Let's see, in your up front discussion about your system changes, one of the things you talked about on your point of sale system is that you would get further payroll management benefits.

Could you talk about at all what those would be?

Really, as we roll out the point of sale system, at the same time we'd be rolling out a new labor scheduling system which will take away or allow us to really staff our stores based on actual transactions during particular hours, where right now you really have store management scheduling based on what they think or feel, and the labor schedule will dictate number of cashiers you have on the front end based on transactions over, you know, a period of time, number of people we should have in the receiving area based on number of cartons they received, et cetera.

It should make us much more efficient as to how we staff our stores and it should allow us to do a better job of having cashiers at the registers during peak times and really at the time the customer is there.

And when will that be rolled out?

We start rolling it out in the third quarter.

It won't be complete until really think about the beginning of 2004.

Okay.

And is payroll your single biggest cost item of, say, leases?

Other than inventory, yes, and real estate.

Okay.

All right.

That's very helpful.

If I could ask an inventory management question.

On the T. J. call they were talking about future buys, that they would make commitments out another three to six months that would not necessarily be captured in the inventory at the end of a quarter.

Do you do that as well and if you could talk to that, if you do?

I don't know exactly what they said.

Do we buy some merchandise 30, 60, 90 days out, that's in our on order but not in our inventory, the answer is yes.

Right.

That's what they are talking about.

That's in an on order position, rather than an inventory position here an everywhere in retail.

And how does that on order position look for you this year at this time versus last year at this time?

We look at this in terms of how liquid we are, which is how much open do we have going forward.

We feel very good that we're in a much better buying position this year than we were last year in terms of our liquidity.

I think we're in a position to take advantage -- I'm very pleased with the position we're in to take advantage of the strong buying opportunities I see in the market.

Right.

But as an analyst or an investor, we have no way to understand how -- what level of commitment exists in that on order position.

I say that -- tell me I'm going to say that is correct.

So therefore, could you tell us how firm are those on order commitments?

Can you easily adjust them, because they are actually not physically in your inventory, obviously.

You know, an order is an order, okay.

So if we bought merchandise, we honor its contract.

What we have is buy a lot of merchandise from our sales and packaway where we have immense flexibility.

The key component here is what you don't buy and how much you don't spend of your future receipt potential.

And that's what we manage and that's what we're in a very good position.

Is there any metric or guidance you can give people, other than "trust me"?

No.

It's not a metric -- it's not a metric we would disclose, frankly.

I think you could look at our historical control of inventories.

Yeah, we're doing that.

We just want to understand how these things are communicated and understood.

Okay.

Well, I do appreciate your help, and look forward to seeing you soon.

The one thing I would add to this is our competitors do a lot of private label merchandise which is probably the commitments they are talking about.

I'm only guessing that's what they talk about.

And we really don't do any.

Those commitments they make are probably 90 days to six months out.

I don't know.

I'm just conjecturing.

You probably have to ask them.

We don't do any private label.

That's a helpful comment.

I appreciate that.

Thank you.

Thank you, our next question is coming from Ashleigh Keller of Clipper Capital.

Hi.

Congratulations on the quarter.

I have a question on your second half guidance.

I noticed in your prepared comments you were hoping for a better consumer and a better economic environment.

And in prior conversations and calls you sort of explicitly stated that your guidance doesn't depend on any improvement in the macro economic conditions or anything outside of your control.

Does this represent, perhaps, a change from that or are you basing your guidance on a little bit of a stronger economy?

Maybe I didn't understand the question where the guidance, it's not dependent on external events?

Is that what you saying?

I guess you said in the opening that for the second half you were hoping to maybe benefit from a stronger consumer and a better economy.

And in prior conversations I believe you said, you know, your guidance doesn't depend on any improvement in the economy, sort of the same economic conditions we're seeing now, the same sort of level of consumer confidence we're seeing now that's what you're basing your assumptions on for guidance.

Is that changing for the second half?

We believe we should do well in good times and or bad.

I think the comment is hopefully the comment has improved.

If it has, that bodes well.

We believe based on the guidance we've given, we should be able to deliver regardless and, you know, come up against some easier comparisons, which should help.

Right.

Just to be clear.

If the economy were exactly as it is today in the third and the fourth quarter, you have confidence in your guidance?

Yes.

Okay.

Thanks.

Good luck.

Thank you.

Once again, if you do have a question, please press the numbers one followed by four on your touch tone telephone.

We do have a follow-up question coming from Kimberly Greenberger with Lehman Brothers.

Thank you.

Michael, I just have a follow-up on your comments regarding the promotional environment and the fact that you had planned sort of for a challenging second quarter.

Can you share with us how you all monitor the way your pricing looks from consumer's perspective, relative to various competitors, either other off-price competitors or a Kohl's or department stores at the mall?

Sure.

Our merchandise is audited.

We audit it and every other retailer and compare prices where they are.

From that, we make informed estimates of where we think people are going, second quarter, third quarter, things like, that based on our experience level of merchandising.

Okay.

Great.

Thank you .

Thank you.

Our next question is coming from Richard Fiori from Delphi Management.

Good morning.

Can you tell me how you've been impacted by SARS and how you're planning for that?

Sure.

We don't think we've been impacted by SARS.

Again, we really do virtually no private label merchandise, so we're not sending teams of people into the Orient and not developing our own lines and products as a vertical retailer or manufacturer would.

So where we would be less involved, less affected, really, than a traditional retailer or vertical retailer or manufacturer.

Thank you, very much.

Thank you.

And our last question is a follow-up coming from Dana Telsey of Bear Stearns.

Can you comment just on the balance sheet.

I saw that $50 million of debt was added this quarter.

What should we be expecting for the debt position going forward and what is that being used for?

Thank you.

Dana, it's actually $25 million from this quarter.

We ended the year with it $25 million.

That's financing for the Southwest distribution center equipment.

Okay.

Thank you.

Thank you.

There are no further questions.

Are there any closing remarks?

No.

Thank you all and have a very good day.

Thank you.

Thank you all for your participation.

That does conclude your teleconference, you may disconnect your lines at this time.

Have a great day.