羅斯百貨 (ROST) 2003 Q2 法說會逐字稿

Good morning.

Welcome to the Ross Stores second quarter 2003 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.

If at any point during the presentation, you would like to register your question, press 1, then 4, on your touch-tone phone.

Also, if at any point during the conference you need operator assistance, press star zero and an operator will assist you.

As a reminder, ladies and gentlemen, this call is being recorded.

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

Sir?

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 Loughnot, Vice President of Investor Relations.

We'll begin our call today with a brief review of our second 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 newer and longer-term future growth and financial results.

Our progress and plans in implementing distribution chain and IT infrastructure improvements 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 10K on file with the SEC.

Earnings per share for the 13 weeks ended (inaudible), 2003, grew 13% to 70 cents compared to 62 cents for the 13 weeks ended August 3, 2002.

Net earnings for the same period were $54.6 million compared to $49.7 million in the second quarter of 2002.

Current year second quarter sales rose 10% to $966 million and comparable store sales for the period were flat versus a 9% increase in the prior year.

For the six months ended August 2, 2003, earnings per share increased 10% to $1.33 from $1.21 in the prior year.

Net earnings for the first six months of 2003 totaled $103.9 million, compared to $97.4 million for the same period in 2002.

Sales for the first six months rose 9% to $1.8 billion with same-store sales down 1% versus a strong 10% gain during the first half of 2002.

We are pleased to report that sales during the second quarter performed in line with our expectations versus very strong gains in 2002.

Geographically, sales trends remain relatively broad based during the second quarter.

California's same-store sales grew 1%.

The home businesses, ladies large sizes, accessories and juniors remained a top departmental performance during the quarter.

Our ongoing ability to effectively control both inventories and more importantly expenses, contributed to solid earnings gains during the period.

Lower benefit and incentive plan costs, as a percent of sales, along with improved distribution and advertising expenses helped to offset a slight decline in merchandise margins and higher occupancy costs as a percent of sales compared to the second quarter of 2002.

As a result, operating margin for the period was relatively flat to the prior year at 9.3%.

Consistent with our long-term plan for 12% annual unit growth, we expect to add about 61 stores and end fiscal 2003 with 568 stores in 25 states. 46 of these new locations opened during the first six months of 2003, including our initial entry into the states of Tennessee and Louisiana.

As we ended the second quarter, total consolidated inventories were up 14%.

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

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

Pack away was about 42% of total inventories at the end of the second quarter, compared to 42% at this time last year.

Our balance sheet reflects our solid financial position as we ended the quarter with $177 million in cash.

During July, we replaced our existing financing for the new Paris, California distribution center.

The prior lease had a five-year term based on short-term floating interest rates.

The new lease facility carries a 10-year term at a fixed rate and is not required to be put on balance sheet.

As a result, there will be no related depreciation or amortization expense.

The Paris distribution center is expected to open, as planned, in September, 2003.

We also remained active during the quarter with our stock repurchase program.

During the first six months of 2003, we repurchased 2.1 million shares of common stock for an aggregate of $83.6 million under the two-year, $300 million program authorized by our board of directors in early 2002.

We ended the quarter with 76.1 million shares of common stock outstanding and approximately $66.4 million remaining under this repurchase authorization, which we expect to complete in fiscal 2003.

Looking ahead to the second half of the year, earlier this month we communicated our forecast for August comparable store sales to grow 2 to 3% on top of a 6% gain in the prior year.

Halfway through August, same-store sales are tracking in line with this guidance.

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

We also have communicated our forecast for third and fourth quarter comparable store sales to grow 3 to 4%.

With easier prior year comparisons, we remain optimistic that sales trends will continue to improve during the second half.

To reiterate, we estimate that third quarter earnings per share will be in the range of 64 to 66 cents versus 57 cents in the third quarter of 2002 and fourth quarter earnings per share will be in the range of 85 to 88 cents versus 74 cents in the prior year.

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.

Our new POS systems are forecast to be fully implemented in all stores by early 2004 and our core merchandising system is targeted for completion early next year.

Today, Ross is a fortune 500 company, approving concept that will generate almost $4 billion in revenue during 2003.

We currently only operate in 25 states and have a unique opportunity to grow into a nationwide chain.

As a result, we remain very excited about the significant expansion opportunities for Ross over the next several years.

In addition, our experienced management team and large and talented staff of over 200 off-price merchants, provide us with the resources to grow successfully.

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

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

We have been utilizing our cash flow to internally fund new store growth, to capital investments we are making in infrastructure and our stock re-purchase program.

All of this gives us great confidence in our ability to profitably grow, to about 900 stores by the end of 2007 and approximately $6.5 billion in sales, with a 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, the floor is now open to questions.

If you have a question, please press the number one followed by four on your touch-tone phone.

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

Questions will be taken in the order they are received.

We do ask that while you pose your question that you pick up your handset to provide the best sound quality.

Please hold while we poll for questions.

Thank you, our first question is coming from John Morris of Harris Nesbitt.

Sir, your line is live.

Thanks.

Good morning, can you talk a little bit more about the merchandising system that will be in place by early next year?

What are the tangible benefits you will be looking for?

And can you tell us how it will impact what's in the stores?

What we see in the stores?

Things like that.

Thanks.

Sure.

John, we will be done implementing the core merchandising system in January, end of January.

And, really, the key is that it will help us with how we allocate the product.

It will give us the ability to allocate by color and size, which we really aren't able to do today.

So, that's -- that's probably one of the biggest benefits.

It also ends up tying a lot of our systems together and ultimately it allows to put in optimization models such as markdown optimization programs, et cetera.

And -- and then just a quick follow-up for John, I guess, can you give us a sense of how you're planning SG&A spending in the back half, should we expect it to grow about in line with sales and can you give us a feel for where you see net interest expense in Q3 and Q4?

I think on -- on the G&A, we'd look for G&A, you know, kind of to be flattish to slightly up relative to comp stores.

We did a 7, I believe, last third quarter.

We've given guidance to 3 to 4.

So, maybe a little bit of deleverage in G&A, not much in those categories.

With regards to interest, I think we had, on our guidance, about $800,000 worth of interest for the third quarter out and purchased.

Okay.

And did you have have anything for Q4?

No, we don't have anything up for Q4 yet right now, other than comps of 3 to 4.

Okay, thanks.

Thank you, our next question comes from Kimberly Greenberger of Lehman Brothers.

Great.

Thank you.

Good morning.

I'm wondering if you can comment on how the new stores are performing?

And also, we've been hearing some news from other companies that benefits costs in California have been very challenging.

It sounds like you're managing them well and I just wondered if you could expand upon how you are containing those costs?

And then I'm not sure if you guys usually comment on this, but if you do, if you could give us quarter ending square footage that would be great.

New stores are performing in line with really expectation.

We continue to be happy with how the stores are opening.

As far as from a benefits standpoint, I'd say that really the pressures started back in 1999/2000, from a worker's comp standpoint.

And we really started to put programs in place to get after that.

So, from a worker's comp standpoint, our results continue to improve, which are having a positive impact on benefits.

As well, in the quarter, we had a favorable mix shift of full-time to part-time associates, which ended up resulting in a lower average wage to plan into last year, which also resulted in lower benefits costs.

So, you couple those two things and -- and we're managing through that fairly well.

Kimberly, to answer your question on square footage, really, we don't have square footage numbers, but if you take the number of stores, we added probably about 30,000 gross feet, you will get the footage you're looking for.

Selling is about 80% of what the gross footage is.

Great, thank you.

And a question on the new stores.

If you could comment on the difference in the stores that are in existing markets versus stores in new markets that would be great!

Well, our stores in new markets toned open up slightly lower from a volume standpoint than existing markets, but -- but, you know, in general, that's all planned in.

Obviously when you go into a new market it takes more time to develop that market and to build it but it's planned into our expectations.

And -- and we are happy with both new stores and existing and new markets.

So, do those newer markets, as they sort of mature, do they tend to comp a little bit better?

You know it really depends on how you open the new market.

As an example, in Georgia, we ended 2002 with about 21 stores and -- and, you know, in 2000, we didn't have any stores, so, it's hard to look at the comp because you're building market share.

And you tend to cannibalize a little bit of the new growth early on.

Ultimately, those stores will comp at a -- or should comp at a greater rate than the existing chain.

Great.

Thanks.

Thank you.

Our next question is coming from Dawn Stoner of Pacific Growth equity.

Yes, good morning.

Thanks.

I was just curious if you could update us on new store opening plans for '04?

And if you anticipate any new markets for next year?

Our expectation is to grow our store base by about 12% in 2004.

And at this point, we don't believe we will enter any new markets next year.

Great.

Thanks very much.

Thank you.

Our next question is coming from Patrick McKeever of SunTrust Robinson and Humphrey.

Thank you.

Question on gross margin, just given what we saw elsewhere, what we've seen so far from some other apparel retailers that reported in the second quarter, a lot of gross margin pressure pretty much across-the-board and you did a great job maintaining or saw a slight decline in merchandise margins.

How did you pull that one off?

Well, essentially, we went into the year with very conservative inventory plans, we able to buy during the year, we pulled back -- when we saw that we needed.

To and so it's one -- it's one of the advantages of being an opportunistic-type buying organization.

And that's how we were able to do it.

Okay.

And that was certainly a great performance.

Square -- sales per square foot in the -- in the past, you've given a breakdown by region.

California is here, et cetera, can you perhaps, John or Michael, provide those numbers for the quarter?

Again, you know, we -- we really update the sales per square foot more on an annual basis and we continue to see sales growth in the mid Atlantic and it continues to improve.

It's still lagging behind where the company is, but we continue to make appropriate growth inroads there.

Okay.

I think the way you look at it is the company ended 2002 at about $310 per square foot and the mid-Atlantic was in about the $275 range.

Okay.

And just one final one.

I think the -- the northwest states were the focus or have been the focus of micro merchandise this year, I wondered if you could provide any comments on that one?

Well, it -- you know, state of Washington actually ended up being in the second quarter, slightly ahead of the company from a comp standpoint.

And -- and as a region, we continue to perform fine there.

Okay.

Thank you very much.

Thank you.

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

Hello, good morning, everybody.

Congratulations on another great quarter.

Just a couple of housekeeping questions and then one non-housekeeping.

In terms of -- this is a question for John, payables were up significantly, so was cash as a reflection of timing?

Were you making particularly good buys late in the quarter?

Or something else?

Just timing, Richard, I think, you know, last year we finished the quarter about 55%.

Payables leverage this year were about 57.

So, two points better.

Really tough to predict in time.

I think it's just a nuance of timing.

We've gotten better aging on some of the goods, but not enough to really move it significantly.

And on the stock repurchase side, second quarter, you provided what it was first six months, but can you, without making me go back and do the work, provide what it was for the second quarter?

We will follow-up and give you specifics, but it's pretty metered throughout the first six months.

Okay.

Average price -- average ticket, how did those change during the second quarter?

Actually, pretty flat.

Continued, you know, we don't really see a lot of variations in average price or total basket.

Basket was flat for the quarter.

And a fast forwarding the tape to '04 and beyond, have you been able to -- or will you -- can you quantify the impact in terms of -- from all the new systems you're putting in, in terms of either improvement in inventory turns that you're expecting or improvement in merchandise margins?

As a result of fewer markdowns?

Yeah, Richard, we obviously -- you know, when we -- when we undertook the system changes, you know, went through a pretty extensive analysis to understand what the payback would be.

Internally, we have a pretty good understanding as to what we think we're going to get, but we haven't commented and at this point, are not going to as to what we think that will be, until we really start fine-tuning all of the infrastructure investments that we've made.

Okay.

Great.

Thank you.

Thank you.

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

Good morning, everybody.

Can you talk a little bit about merchandise categories, what have been seeing out there?

We've been hearing that some of the urban brands and things like that are becoming popular in the offline channel of distribution.

Have you been seeing that?

And what have you been seeing in juniors and career?

As we move forward in the southeast, anything we should be watching for in those stores?

And with the merchandising system, what categories work better in the southeast than do in some of the other areas of the country?

Thank you.

Okay.

Urban product has been in the channel for a -- a while.

And it continues to be.

So, you know, availability there is, you know, probably not significantly different than we're seeing across all markets with -- markets, which is a tally with cutbacks in inventory in department stores.

Inventory has been fairly prevalent.

Categories that -- the junior -- the junior business was building as we were moving through the second quarter.

Actually, I would say ladies apparel was improving throughout the second quarter and special sizes in juniors really led the way.

Your next part of that --

on the southeast -- southeastern portion of the country, with the merchandising system, is that merchandise being recognized?

And what's the differences?

The differences we see in the southeast, really were consist to what our expectations were, which was really more traditional products.

You know, an example would be a button-down shirt, dress shirt, versus a spread collar dress shirt, is more prevalent in the southeast and is more successful in our stores.

It is a strong urban market, relating to your first question.

But it's primarily a traditional versus nontraditional and there are some weather timing issues that we've been adjusting to.

And with the new PLS system that you're rolling out, how is that working?

When does it start?

It ends in the beginning of 2004 -- at the beginning of 2004.

Are the debit and gift card capabilities, are you seeing more debit card purchases?

We're actually in the pilot phase now of POS.

It's only in a handful of stores.

We will start aggressively rolling it out mid-September timeframe and it will be in all stores by the end of the year.

So, it's really next year that we'll start to see that -- those types of changes if they happen.

And just lastly, you mentioned that for 2004, did t sounds like the southeast continues to remain the new market focus.

Does the Midwest ever get in there?

When do you see the next new market? 2005, 2006?

How are you looking at it?

We're not going to comment on our next new market, but we believe we will be able to open up 12% unit growth in the 25 states that we're in presently and we will continue to build out the markets that we're in.

Thank you.

Thank you.

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

Yes, good morning.

On the last conference call, in terms of expenses, I think you suggested that you would get about a 50 basis point leverage of G&A given flat comp.

Were you able to achieve that?

Or, you know, was the whole difference depreciation?

Substantially was depreciation, David, we've got 8 basis points of leveraging G&A.

We have controlled, we believe, from an expense standpoint, was mentioned with payroll and worker's comp areas, specifically and believe we controlled inventory very well and were able to provide a very nice return on flat comps.

So, you know, we're pretty happy with how we were able to manage the P&L for the quarter.

Given your comp outlook for the back half, why would you not expect to be leveraging G&A in the back half.

Given that you just did so well with the flat comp?

As we noted earlier, some were in the worker's comp and benefits area and we start to anniversary some of the savings which began last third quarter, third quarter 2002.

So, we're rolling over the more aggressive savings in those area.

That would be one reason we wouldn't leverage as much in the G&A area.

Okay, and in terms of the new D.C., how should we expect that opening to affect your inventory levels and costs in the back half?

It's -- it's baked into all the plans that we have at this point.

So, you know, we'll be relocating -- we'll be closing down the existing D.C. over the third and fourth quarter and start processing in the new D.C. in Southern California on a -- on a fairly small basis, but in September and ramping up from there.

That's baked into all of the guidance that we've given.

And maybe this last question is rhetorical, but Michael, given that you were conservative on inventory purchases earlier in the year, should we assume that you're -- you're willing to be more aggressive given your outlook?

Yeah.

But how we manage inventory, remember, we're -- we're opportunistic buyers, so, we don't need to lay it out there very far in advance.

Okay.

And the way we run the model is very much managing the liquidity and open positions that the company has and we're very comfortable with how we're positioned going into the back half.

Okay.

Thank you.

Thank you.

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

Hi, guys, congratulations.

Can you update me, you talked about the store fleet and plan to be done by back-to-school.

Is that still on plan?

And also for back-to-school, the fall season, any other early reads for fall other than the start of the junior business?

Yeah, we've completed our store refresh program.

It's -- it's -- it's been a -- you know, every store in the chain has been updated at this point.

And the only thing I would say that we saw in July performance in back-to-school across the store was that denim was very important and we were very pleased with how it was performing.

Great, good luck with the rest of the season.

Thanks.

Thank you.

Our next question is coming from Jason Glass of circle T partners.

Hi, guys, how are you?

A quick question for you, I noticed originally you gave guidance for the year to be $2.80 to 2.90.

In July, you backed off a little bit.

Is there anything you're a little cautious on?

Are you seeing, you know, you talk about like the better categories.

What are the categories that are maybe underperforming?

And what are you doing exactly to preserve your market share in California and other markets where you have new competition such as Kohl's moving in there?

We started the year at $2.80-2.90.

As we the year progressed, we didn't reach the sales levels we anticipated.

We were able to reach the earnings we had forecast.

And as we move through the year, we contracted that range to now where we're talking about $2.82-$2.87.

So, that's changing as we go through.

I think from a Kohl's standpoint and, you know, market share, Southern California had a comp increase in the second quarter of 2% where the chain was flat.

So, you know, we've been saying all along that we performed fine in markets where we exist with Kohl's and I think this just continues to show that -- whether it's been Houston or -- or Texas or Atlanta or now Southern California, you know, the concern about how we perform against Kohl's should just go away.

Uh-huh.

Last question was I -- I noticed in the press release you talked about your merchandise margins, you know, coming under a little bit of pressure and to offset that, you cut some of your advertising spending.

My question is, you know, going forward, what are your plans as far as what you're budgeting for advertising?

And why are the merchandise margins starting to face a little pressure?

It's just -- just to correct what was said in the press release, we said we did have some leverage in advertising.

We didn't necessarily cut advertising, we think we've managed it pretty well.

It was production costs.

Right.

In savings.

It wasn't any media spend, is where that reduction came in.

So, relative to our outlook for the back half of the year, we really haven't adjusted our changed our advertising calendar at all.

Thank you.

Thank you.

Our next question is coming from Gary Holdsworth of Wedbush Morgan.

Hi.

Last question was just asked on advertising, but I did want to talk a little bit about the men’s categories and they're among the lower performers.

Is there any initiative to turn that business?

Well, the men’s business is suffering nationally and it is one of our weaker performers and what we're doing, we have a very conservative plan in men’s, we're managing it to try and be opportunistic and we've invested in the categories for holiday that we think are more gift-giving within the men’s sector and that's how we're managing it.

Okay, thank you.

Thank you.

Our next question is coming from Marie Driscoll of Standard and Poors.

Hi, thank you.

Good job.

I have a few questions.

Can you talk little bit about the competitive environment that you're seeing out there?

Are you see any changes in the average level of opportunistic buying that you can achieve?

And you mentioned that occupancy expenses have risen.

Was that a function of lack of leverage or something else?

Thanks.

Yeah, from an occupancy standpoint, it's really just based on the number of new stores that we're opening and -- and, you know, we had 46 stores open in the first half of the year.

So, it's -- it's new stores and -- and sales ramp.

Okay.

From a competitive environment, my assessment is department stores are managing their inventory much tighter coming out of the second quarter and -- which bodes well in we expect a promotional and clear-out kind of environment we saw throughout spring, not really to exist in fall and also with their cutback in inventories, it's been a buyer's market.

So, hopefully we've done a good job and the opportunities look as good when they're in our stores, but it's been a very good buyer's market.

Okay, thanks.

Thank you.

Our next question is coming from Eric Mace of credited Suisse asset management.

I want to follow up on the margin question, you mostly answered it here, but the comments you made on SG&A, I guess, imply that you expect merchandise margins to be up in the back half.

That's correct?

Yeah, on relative terms, we're, you know, from where we are today, we're looking at a flat comp in the second quarter and saying 3 to 4 in the third quarter, so, naturally we think we can do a little better job on the markdowns rates.

And how much of that is because of the comparisons versus -- versus last year?

And, you know, relative to expectations for improving environment in the back half.

Because obviously you had sharp prices in the back half last year, which hit the merchandising margins.

It's hard to quantify that.

I don't think we could quantify that.

Okay?

It's a mix.

And one follow-up on your comment on early August.

Could -- could you go into a little more mixed detail over, you know, how much of that might be kind of earlyish back-to-school, versus more late summer carryover.

Yeah, we're two weeks into the month and as Michael said, we're on plan and that's about as far as we will take it.

Okay.

Thank you.

Thank you.

Our next question is coming from David.

Good morning.

I wanted to ask if you could provide more color.

Typically you to provide more color on the categories, what the comp levels were beyond the rough comments you made in the beginning of the call for us.

We can -- you know, we can talk about the ladies business, which was -- which was slightly up, you know, the home businesses were up kind of mid-singles.

Men’s was flat.

Young men’s was down slightly.

You know, juniors, juniors for the second quarter was up kind of mid-single.

So...

Okay.

And kind of baked into the 3 to 4% plan in the back, can you just tell us same -- same kind of deal with a little more quantification what you expect from those categories?

As we move into the back half of the year, okay, we expect the ladies business to be pretty good.

We expect -- we expect the home business to be very strong, we expect the accessory business to be strong.

More typically gift-giving businesses for holiday.

Those businesses inside our store have been performing well all year.

So, obviously we would position them -- position them well for -- for the back half.

The only thing that John said that I'd like to adjust is the men’s business was slightly below the company.

Uh-huh.

And as it's been for a little while.

And when you DU when you refer to ladies being pretty good in the back half and home very strong in the back half, does that imply a pickup from where they've been in the past few months?

Well, yeah it does, I mean we expect more of the whole store and these are important parts of our fourth quarter strategies.

Yeah.

Okay.

Thank you.

Thank you.

Our next question is coming from Don Trot of Jeffries and Company.

Good morning.

With respect to some of these new initiatives that you have here, the new D.C., new POS, new merchandise system are there meaningful transitional expenses this year, which then disappear next year?

You know, again, I think that everything is baked into what our guidance is this year.

As we put plans together for 2004, you know, that will all work out.

Okay.

Thank you.

Thank you.

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

Great!

Just a follow-up on the gross margin, if I could.

If you could talk about -- you talk about sort of directionally what was going on with merchandise margin and occupancy and distribution.

Is it possible to quantify the -- the up or down in basis points?

Or is it just closer to flat and so it's not even worth really talking about?

You know, I will tell you that the -- the occupancy de-leverage was offset by improvements in the distribution chain, so, they net out.

What you have is the result of merchant margin.

Okay.

And then, Michael, you commented on department store inventories appeared sort of better controlled.

I know it's, you know, really early in the fall season, but are you seeing sort of encouraging signs in terms of an easing up of -- of just, you know, the aggressive promotional environment we've seen really in the first half of the year?

As you said, it is early,.

Expectation is -- my expectation is as I've seen large department store groups over the years, when they've gone through this kind of cycle.

And from what I've read and from the people I've spoken with, it will be consistent this time is after they've gone through a cycle of too much inventory, they get it well under control and I'm seeing the signs of that, okay?

Which usually bodes to a more controlled promotional environment.

We will see.

And if it is a more controlled promotional environment that would clearly be a positive for you guys, is that the proper read on that?

It has in the past.

Okay.

Great.

Thank you.

Once again, if you do is have a question, please press the 1 followed by 4 on your touch-tone phone.

Gentlemen, I'm showing no more questions at this time.

Thank you all, have a very good day.

Thank you.

This does conclude today's teleconference.

Please disconnect your lines and have a wonderful day.