羅斯百貨 (ROST) 2003 Q3 法說會逐字稿

Please remain on the line.

The Ross Stores teleconference will begin shortly.

Thank you.

Good morning and welcome to the Ross Stores third quarter earnings release conference call.

This 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 call is being recorded.

If you happen to experience any audio difficulties throughout this teleconference, please press star then 0 on your touch tone phone.

If you would like to ask a question, please press the numbers 1 followed by 4 on your touch tone telephone.

At this time, I would like to turn the call over to Mr. 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 Loughnot, Vice President of Investor Relations.

We'll begin our call today with a brief review of our third 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.

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 November 1, 2003, grew 14% to 65 cents.

These results were on top of 33% growth in earnings per share during the third quarter of 2002.

Net earnings for the same period increased 12% to $50.5 million from $45.1 million in the prior year.

Current year third quarter sales rose 12% to $977 million on top of 18% growth in the prior year.

Comparable store sales for the period rose 2% on top of a solid 7% gain in 2002.

For the 39 weeks ended November 1, 2003, earnings per share increased 12% to $1.99 on top of 38% growth in earnings per share for the same year-to-date period in 2002.

Net earnings for the first nine months of 2003 increased 8% to $154.4 million.

Fiscal 2003 year-to-date sales rose 10% to $2,822,000,000 on top of 20% growth in the prior year.

Comparable store sales for the first nine months of 2003 were flat versus a robust 9% gain in 2002.

The strongest markets during the third quarter were Florida, the southeast and Texas, all up in the mid-single digits.

California same-store sales, which were negatively impacted by unseasonably warm weather and the wildfires in October, grew 1%.

Business during the quarter benefited from strong sales gains in our home departments and the back-to-school categories of juniors, shoes and accessories.

Continued effective controls of both inventories and expenses contributed to relatively stable profit margins and healthy earnings gains during the period.

A slight decline in gross margin was partially offset by a similar improvement in selling, general and administrative costs as a percent of sales.

Operating margin remained flat to the prior year third quarter at 8.5%.

As we ended the third quarter, total consolidated inventories were up 15% compared to the prior year.

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

In-store inventories were down about 2% from the prior year on a comparable store basis.

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

Our merchants have been taking advantage of very favorable opportunities in the market for name brand goods which we believe bodes well for the balance of 2003 and 2004 spring season.

The balance sheet at quarter end reflects our solid financial position.

We ended the period with $117.7 million in cash after repurchasing a total of 3 million shares of our common stock for about $125 million during the first nine months of the year.

We ended the quarter with 75.7 million shares of common stock outstanding and approximately $25 million remaining under this repurchase authorization, which we expect to complete this year.

During the third quarter, we opened an additional 20 stores for a total of 66 new locations in 2003.

After closing five older stores in January, 2004, as planned, we expect to end the current year with 568 stores in 25 states.

We also recently announced the development of Dee Dee's Discounts, a new concept targeted to serve the needs of lower income households, the fastest growing demographic market in the country.

As previously reported, our goal is to open 10 initial Dee Dee's Discounts locations on the west coast during the second half of 2004.

Looking ahead to the fourth quarter, earlier this month we communicated our forecast for November comparable store sales to grow 3 to 4%.

Half way through the month, same-store sales are trending in line with our plan.

As a result, we remain comfortable with our most recent forecast for fourth quarter comparable store sales to grow 3 to 4% on top of a 3% gain in the prior year.

We also continued to estimate that fourth quarter 2003 earnings per share will be in the range of 85 to 88 cents for a projected 15 to 19% gain versus the 74 cents in earnings per share we reported for the fourth quarter of 2002.

Ross is a proven concept that will generate almost $4 billion in revenue during 2003.

We expect to end this year with 568 stores in only 25 states.

With a potential for 1500 Ross locations, and if successful, at least 500 Dee Dee's Discount stores, we have a unique and compelling growth opportunity over the next several years.

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, please press the numbers 1 followed by 4 on your touch tone telephone.

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

Questions will be taken in the order that they are received and we do ask that while posing your question, you please pick up your handset to ensure proper sound quality.

Once again, if you have a question at this time, please press 1 followed by 4 on your touch tone telephone.

And our first question today is coming from Kimberly Greenberger of Lehman Brothers.

Please pose your question.

Great.

Thank you.

Good morning and congratulations on a nice quarter.

Michael, I'm wondering if you can talk to us a little bit about your outlook for the holiday season in terms of, you know, what you're seeing from a -- from customer -- from a customer health perspective?

And another way I guess to get at that is: Are you seeing any pressure on the average unit retail prices in your stores?

Or have your comps been more driven by increases in traffic?

If that makes sense.

And then secondarily, now that you guys are close to completing your share repurchase authorization, would you consider moderating future share repurchases to allow you room to increase the dividend?

In other words, try to return shareholder value in both ways instead of so heavily weighted toward the share repurchase?

Thank you.

Okay.

This is Michael.

We're seeing increased traffic in our stores and we're not really seeing any significant pressure on average retail at all.

And so -- which I think is fairly healthy.

And so I think the outlook looks okay.

And from a share repurchase versus stock buyback, we really come out in January with the plans for the following year and that's when we'll be communicating what 2004 plans relating to that will be.

Okay.

Thank you.

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

Please pose your question.

Good morning.

Can you talk a little bit more about Dee Dee's Discounts, management team, product?

How do you expect it to be different than Ross?

And what kind of margin opportunities do you see there versus the core concept?

Thank you.

Sure, Dana.

You know, we think there's an existing opportunity to target a different and very fast-growing demographic, one of lower household income of around $30,000.

For Ross today at around $50,000.

We think the merchandise departments and categories will be similar to that of a Ross store, however, it will be mostly moderate department store brands and discount store labels.

We think our stores will be slightly smaller, probably around 25,000 square feet, located in smaller shopping centers and in more densely-populated, lower-income urban and suburban neighborhoods.

As far as the management team, we're starting to put that in place, both on the merchant and store operating side.

We will probably -- we will -- we will have separate organizations from a merchant standpoint and field organization and then we'll share services in the corporate office as it relates to departments like IT, finance, human resources so, we will build on some of those synergies.

With that, you know, there is more to come and more information as it relates to margin and price points next year and really at this point, that's -- that's the information that we're communicating.

Okay.

And CapEx for 2004, what are you looking at?

And what's Dee Dee's of that?

And when do you expect Dee Dee's to break even or contribute to earnings?

Is that three years away?

Or how do you look at it?

We're looking at CapEx next year probably in the $135 million range and, you know, we're not breaking out for you yet, again, the difference between a Ross and Dee Dee's and all of that will come at the beginning of next year as we lay out plans for 2004.

Thank you.

The next question is coming from Paul Debass of Value Line.

Please pose your question.

Hi.

I just wanted to know how come the tax rate hasn't declined as you get a smaller proportion of sales from California.

Why the tax rate hasn't declined as we get a smaller portion of sales from California?

Is that the question?

Yes.

Our tax rate has been pretty stable at 39.1.

There are other factors going into the tax rate.

It's not only California phenomenon.

We've been able to keep our state rate pretty -- pretty flat, but there's other contributing factors and they're numerous.

Okay.

Would you expect to remain at 39.1% for at least next year?

Yes, that would be our expectation, to keep that rate flat.

Okay.

Thank you.

Your next question is from David Mann of Johnson Rice.

Please pose your question.

Hi, yes, good morning.

Can you talk a little bit about the factors that affected gross margins?

Specifically your distribution cost trends?

Yes, David, we levered margin -- or delevered margin by about 9 basis points.

Merchant margin was up slightly.

We got a little bit of help from interest rates in the distribution center from -- from a Lee standpoint.

They were offset by store occupancy as we brought newer stores on line.

So all in, about 9 basis points of deleverage.

So, gross margin was up, a little help from -- from the BCs offset by store occupancy.

And you expect the DC in Southern California opening and operating to start affecting you in the fourth quarter?

The DC in Southern California has started processing units about 45 days ago and we're in the process of shutting down our existing distribution center in Northern California, which we have -- which will operate through probably the end of December.

And, David, to your point, yes, we do think that that will put some pressure on margins in the fourth quarter.

And when do you think the distribution center pressure would -- would relieve, you know, would that be into the first quarter?

You know, I think what you have is through next year.

Keep in mind what we've done with our network strategy, we're in the process of opening a brand new distribution center in Paris, California.

We are operating the existing distribution center that we are closing in Northern California, we're in the process of retrofitting another distribution center in Carlisle, Pennsylvania.

So, what I'd say is we're doing a good job of managing those expenses with all of that retrofitting going on and I think it will be, you know, later in the year until we really start seeing some productivity improvement.

Thank you.

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

Please pose your question, sir.

Good morning, everybody.

Good morning.

I've got two questions.

The first is related to your holiday marketing plans.

Could you talk about how they line up this year versus last year?

And then my second question relates to Dee Dee's.

Your comments on not so much differentiation versus your core concept, but how do you think it will compare to AJ Wright?

On a marketing plans for fourth quarter, you know, our marking plans really haven't changed much over the last half a dozen years and I really wouldn't get into any specifics going into this fourth quarter for competitive reasons.

And as far as Dee Dee's to AJ Wright, we're really focused at this point on Dee Dee's and what we're doing.

Again, you know, I think we've communicated at a high level, how we're going to go after this customer and income levels, et cetera.

I think, you know, you got to go look at what AJ Wright is doing and compare that on your own.

Do you guys do that?

Excuse me?

Excuse us?

Do you guys do that?

Compare to what your concept is to what AJ Wright is doing.

Richard, we really look at every retailer in the universe and AJ Wright being one of them.

I think for competitive reasons, we're not going to comment on AJ Wright and what they're doing.

Okay.

Thank you.

The next question is coming from Richard Jaffe of UBS.

Please pose your question, sir.

Thanks very much.

I just -- if we go back to the great merchandise buys you guys are seeing out there, I wonder if there's margin opportunity going forward in the fourth quarter and into spring?

David, we usually pass the bargains onto our customer, okay?

We feel very comfortable with the plans we have out there and probably as deeply as I would go on it.

It's a buyer's market as it's been for a while and we feel good about what we're seeing.

And just a follow up on Dee Dee's.

Average price point that you anticipate for Dee Dee's Discount versus Ross Stores?

And the gross margin potential for Dee Dee's versus Ross Stores?

Yeah, again, I think for competitive reasons we're not ready to give you that information.

I believe as we get into next year there will be more information to come.

Keep in mind we're only talking about opening 10 stores and although it adds 2% to the unit growth next year, it's 10 stores on presently abasive over 560.

So, we don't anticipate it to be meaningful to the overall company for at least, you know, three to five years down the road.

Okay.

And just one more question.

With the DCs all in transition, when it's all said and done, do you anticipate seeing a faster inventory turnover?

Will you seek to turn your goods more quickly through the DC and then through the stores?

Will there be a material change to anticipate?

You know, we will see some process time improvement, but keep in mind the way we manage our inventory with packaway.

You really can't look at us from an inventory turns standpoint like you might a traditional retailer as we store some goods away.

So we will get more productive with our processing, however, from an inventory turn standpoint I wouldn't anticipate anything too material.

Thank you.

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

Please pose your question, sir.

Hi.

A few quick housekeeping and then another one on Dee Dee's.

Your accounts receivable was actually down on a year-over-year basis versus sales up 12.

Could you explain the variance there?

Sure, accounts receivable is really a credit card clearings.

So, it is it is a matter of timing of a number of days on when the credit cards clear.

Okay.

Do you have your accounts payable as a stand-alone?

Yes, accounts payable as a stand-alone was about 51, 52% of inventories, down a point or two from where it was last year.

All right.

And then on Dee Dee's, when you looked strategically at that -- at that customer and that opportunity to serve that customer, you know, you realize they may be a high-growth demographic but also more prone to, you know, economic stress.

They're more disproportionately impacted by stresses in the economy.

And how did that fit into your thinking about going after that customer?

You know, obviously we looked at -- we looked at a significant number of variables as we developed the strategy to go after this market.

That being said, you know, we are really excited about the opportunity with Dee Dee's, however, what we've stated is really all we want to comment at this point.

It's nine months away.

We've -- for competitive reasons, we think that's all the information we'd like to share.

Okay.

Thank you.

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

Please pose your question.

Hey, guys.

If I forget to tell you, good luck with the holiday season.

Could you -- a couple of questions.

Could you run through in the quarter the strongest comp segments, juniors, homes, shoes, accessories, what the comps are for the quarter versus last year?

And can you also talk about any changes in merchandising efforts, Q3 versus Q2, or is everything pretty much status quo?

And then finally, one last one on Dee Dee's.

Have you guys talked all about when the staffing-up, et cetera, would start to hit the expense line?

And what kind of impact you would expect?

Okay, your first question was really what were the strongest businesses in the store in the third quarter?

What were the comps this year versus last year for the full quarter in those segments.

Juniors, juniors was up 8.

The home business was up low double digits, okay?

And they would have been -- and accessories would have been up low double digits and lingerie high singles.

And what about shoes?

Shoes would have been up low doubles.

And could you just refresh my memory, was shoes versus an easy comparison last year or it was was it two years ago?

It was two years ago.

Okay.

Thank you.

You know, from an expense standpoint, some of the Dee Dee's expenses are already starting to hit.

They're already baked into our present plan and our future plans.

And no estimate on approximately by quarter or by year what that would amount to?

At this point, again, we aren't commenting.

All right.

And then finally, any changes to merchandising '03 versus '02 for holiday that stand out in your mind?

No.

Nothing of major significance.

Awesome.

Great.

Good luck again.

Thanks.

The next question is coming from John Morris of Harris Nesbitt.

Please pose your question.

Thanks.

Good morning.

John, if you would go through for us what your preliminary thoughts are for store openings for '04, if you can give it to us by quarter since we have the Dee Dee's coming into the back half.

And then just sort of preliminary thoughts on SG&A, growth, year-over-year, would it be about in line with sales?

And -- and in that -- are you like seeing any like particular pressures from health care and benefits, et cetera?

Thanks.

You know, it's too early for us to break out store openings by quarter.

We will grow our Ross store base next year by about 12%.

Approximately 68 stores.

It's split pretty evenly between what we would call new markets and existing markets and we will not be entering any major new markets next year, which we -- we think really speaks well to the growth and the growth opportunities that we have as we build out the existing markets.

The second question was?

The second question is just relating to where you are thinking SG&A might be trending next year on a year-over-year basis.

Should we think about it being in line with sales growth?

And as part of that, are you seeing any kind of pressures from the benefits category?

Yeah, relative (inaudible) we're putting the plans together currently and looking at that, we will have more information probably around January, February time frame, to give -- to give you all better guidance in terms of where that will be.

Relative to health care and the benefits, we've done things proactively in the company to try to mitigate some of the increases, and so I don't see that as a real expense threat next year.

Okay.

Thanks.

The next question is coming from Karen Young of Allstate.

Please pose your question.

Yeah, just a clarification.

What -- what was the share count at the end of the quarter?

I think you said it, but I missed it.

Shares outstanding at the end of the quarter were 75.7 million.

Is that fully diluted?

No.

What's fully diluted?

That's just outstanding.

So, the average shares outstanding fully diluted outstanding was 77.2 million.

Okay.

Secondly, did you say that the expense, you know, of the month -- the expense pressures from the retrofitting of the DC and the running of concurrent DCs will abate in the fourth quarter of next year?

Or did you say this year?

Now it will put pressure on the fourth quarter of this year.

Okay.

But then it abates thereafter?

It abates thereafter over a period of time.

Okay.

Okay, great.

Thank you very much.

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

Please pose your question.

Okay.

Thanks.

Just wanted maybe a quick update on the new core merchandise management system as far as the timing.

I think you've been saying early next year.

And then when it all comes together.

And then when we might see the benefits of that, just sort of broadly speaking.

Yeah, you know, we're anticipating completing the implementation and integration of core merchandising, early part of next year, sometime probably first, you know, in the first quarter, late first quarter.

And we anticipate, you know, there is a fair amount of change that goes with that, so, from training our people how to use it and how to get the most out of it.

I would anticipate that next year will be a learning curve on how to utilize the new system and we should look for '05 to get any meaningful productivity improvement from it.

Okay.

And just a real quick one.

Who is Dee Dee?

Or maybe I should say what is Dee Dee?

It's the name of our new concept.

What does it stand for?

It -- it -- it doesn't stand for anything.

It's Dee Dee's Discounts.

Okay.

Well, it's catchy.

Thanks.

The next question is coming from Farrel Wheeler of Johnson Rice.

Please pose your question.

Yes.

Can you comment anything on the markets for Kohl's, who has recently expanded, and any potential impact from their heightened promotional activity lately?

You know, we've competed with Kohl's for many years on lots of different markets.

We continue to do very well in Southern California where they recently opened and, in general, they typically don't have any meaningful impact negatively or positively to our business.

Thank you.

I'm sorry, go ahead.

You asked something about promotional at Kohl's?

Yes, has there been any impact from heightened promotional activity recently?

I know I've seen more heads down here.

Not that we can see.

Thank you.

Once again, if you do have a question, please press 1, followed by 4 on your touch tone telephone at this time.

The next question is coming from Frank Alonzo of T. Rowe Price.

Please pose your question.

Hi, guys.

Good quarter.

Just a quick question, John, on the D&A line.

Can you break out for us what the depreciation was versus the amortization line, year-to-date?

Yeah, Frank.

I will get back to you on that.

It's in the cash flow that we attach to the release and I don't have the breakout here.

Well, in the release you left it as one big line.

Exactly.

It was $54.7 million for the nine months.

Okay, thanks.

Once again, if you have a question at this time, press 1, followed by 4 on your touch tone telephone.

We do have a question coming from Marie Driscoll of Standard and Poors.

Please pose your question.

Hi, you delineated some of the categories that comped very strongly, juniors, homes, accessories, lingerie and shoes.

Can you delineate, I guess the categories that offset that, leading to the 2% comp?

Can I delete them?

Look, I think -- to answer your question, the toughest businesses in the store were really men's and dresses.

Uh-huh.

Okay?

And the businesses that are suffering nationally and, you know, we're having some issues with them internally, too.

Those would have been the weakest businesses.

Okay.

Thanks.

The next question is coming from Michael Hidalgo of (inaudible) Capital.

Please pose your question.

Hi.

Can you give us a little bit more detail on how many days you think you lost with the Southern California fires?

Any sort of impact there?

I said comps were up 1%.

I think it's hard to quantify, you know, certainly we were affected by it but we really don't have a qualification on it.

Okay.

So you don't -- I mean it wasn't like sales were off 70%, 90% on any given day relative to the way they were in a previous month?

You know, there were stores with those kinds of numbers existed, but in the total state, we operate a whole lot of stores, so, we really haven't quantified its full impact to our total.

We're fine, you know, we're fine going in and we're all right now.

Right.

Can you give me a sense, just refresh my memory on how many stores you have in the Southern California markets?

San Diego, Los Angeles...

Yeah, we're a little over 100 stores in Southern California and San Diego.

Okay.

Thank you.

The next question is coming from Robert Daniels of J.P. Morgan.

Please pose your question, sir.

Hi.

It's Brian Tunick from J.P. Morgan.

Listening to you talk about next year's store opening plans, sounds like a lot of them will be in existing markets.

How does that affect, you know, next year's store, maybe the new store sales contribution?

I mean what kind of, you know, potential four-wall profitability increases could we see, you know, with stores opening up in existing markets to give you that leverage?

You know, there really won't be a significant change.

I mean we'll certainly get some leverage from a field management standpoint and, you know, we'll be very effective from a marketing standpoint as we won't be using dollars in, you know, a major new market.

But, in general, it's just continuing to build out our existing market where there's plenty of opportunity and it will probably be the following year we will go into another new market.

So, could we expect next year's stores open closer to maturity rather than the 80 or 85% we typically see of a new store?

No, we're still opening new stores, and even in an existing market it opens as a new store.

Okay.

So even with the brand awareness is there, you still don't think you're going to get that lift?

We're not talking about new markets, Brian, we're talking about some markets, for example, Louisiana and Tennessee, some of those markets where we're new this year and where we're still working on the brand awareness in those markets.

So, we don't see that significant of a trade off.

Okay, thanks very much.

Once again, if you do have a question at this time, please press the numbers 1, followed by 4 on your your touch tone telephone.

Gentlemen, there appear to be no further questions at this time.

Do you have any closing comments?

Thank you all for attending.

Have a good day.

Thank you for your participation.

That does conclude this morning's teleconference.

You may disconnect your lines at this time and have a great day.

Thank you.