羅斯百貨 (ROST) 2003 Q4 法說會逐字稿

Good morning.

Welcome to the Ross Stores fourth quarter and fiscal 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.

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

Sir, the floor is yours.

Good morning.

Joining me on our call are Jim Peters, President and Chief Operating Officer;

Norman Ferber, Chairman of the Board;

John Call, Senior Vice President and Chief Financial Officer; and Katie Loughnot, Vice President of Investor Relations.

We'll begin our call today with a brief review of our fourth quarter and fiscal 2003 performance followed by a discussion of our more recent business trends and outlook, as well-as our long term plans and objectives.

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

Before we begin, I want to note that our comments on this call will contain forward-looking statements regarding expectations about future growth and financial results and other matters that are based on management's current forecasts or aspect 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 today's press release and the Company's 2002 Form 10-K on file with the SEC.

Fiscal 2003 represented the 10th consecutive year of uninterrupted growth in sales and earnings for Ross Stores.

For the 52 weeks ended January 31st, 2004, earnings per share increased 17% to a record $1.47 on top of a 32% increase, percent growth in 2002.

Net earnings grew 13% to $228.1 million, total sales for the fiscal year grew 11% to $3.921 billion, and same-store sales rose 1% on top of a 7% gain in the prior year.

Earnings per share for the 13 weeks ended January 31st, 2004, grew 30% to 48 cents on top of a 19% increase in the prior year.

Net earnings for the fourth quarter grew 26% to $73.7 million, total sales for the period increased 14% to $1.99 billion with same-store sales up 4%.

We are pleased with the solid sales and earnings gains we posted during the fourth quarter and fiscal 2003 which reflect our strengthening momentum as the year progressed.

The strongest geographic markets in the fourth quarter were Arizona, Texas, the Southeast, and California, all posting same-store sales gains in the mid to high single digits.

The strongest merchandise departments were home, accessories, and juniors, with comparable store sales gains in the high single digits for the quarter.

Fourth quarter results benefited from a 104 basis point expansion in operating margin to 11% reflecting our continued effective inventory and expense controls.

Gross margin increased 93 basis points, mainly due to lower markdowns while general, selling, and administrative expenses, as a percentage of sales, declined by 11 basis points, primarily due to leverage on the comparable store sales gain during the period.

As we enter the fourth quarter and the year, total consolidated inventories were up 17%.

This growth was driven mainly by an increase in the number of stores along with an increase in in-transit inventory.

As noted in prior press releases, an approximate six-state closure of our Fort Mill, South Carolina distribution center caused a temporary interruption in the flow of merchandise to our stores.

As a result, in-store inventories were down about 6% from the prior year on a comparable store basis at the end of January.

Packaway as a percent of total inventories at quarter end was 43% compared to 44% in the prior year.

We ended fiscal 2003 with over $200 million in cash and with $50 million in term debt to finance new distribution center equipment and systems.

Cash flow from operations funded capital investments in new store growth and infrastructure, as well as the Company's stock repurchase and dividend program.

We repurchased 6.9 million shares of common stock during 2003 for an aggregate purchase price of $150 million, ending the year with 151.2 million shares of common stock outstanding.

We also recently announced that our Board of Directors approved a record 48% increase in the Company's quarterly cash dividend to 4.25 cents per common share in addition to a new two-year $350 million stock repurchase program for 2004 and 2005.

These actions reflect the Board's and management's commitment to enhancing stockholder value, as well as our confidence in the Company's long-term growth prospects.

Our accelerated expansion program also remains on track.

We added a record 61 net-new stores during 2003 for a unit growth of 12%.

Expansion into new geographic markets continues with 21 of these additions in our new Southeast states.

During 2004 growth is targeted to accelerate with 70 new Ross locations planned, all in existing states.

Almost 40% of these stores will open in newer markets that we have entered since 2001.

In addition, we plan to open our first ten dd's DISCOUNTS stores in the second half of the year for total forecasted growth of 14% in 2004.

On a more recent note, on March 4th we announced our disappointment that February same-store sales were flat to the prior year versus our earlier projection of a 4 to 5% increase.

Our business in February was hurt by substantially lower than planned in-store inventories throughout the month.

As previously noted, our Fort Mill, South Carolina, distribution center was closed for six days in January.

We had expected to recover quickly from this situation, but did not anticipate the full effects on distribution capacity caused by a short-term lack of flexibility at our two other distribution centers.

Our Carlisle, Pennsylvania facility has been undergoing a planned retrofit expected to be complete by the end of March and our Paris, California center was still in a ramp-up mode after opening in late 2003.

In addition, an unusually heavy snowstorm during the last week of February resulted in another two-day closure for the South Carolina facility.

With the ongoing progress of our Carlisle retrofit and the addition of a second operating shift earlier this month at our southern California center, total distribution capacity has increased significantly.

And today in-store inventories are almost fully recovered.

In addition, we are pleased to report that comparable store sales month to date in March are trending ahead of our projections and are up in the mid-single digits over the prior year compared to our forecast for a 1 to 2% gain.

Our business this month has benefited from favorable spring weather trends, especially in California.

Looking ahead, we are maintaining our forecast for April same-store sales gains of 4 to 5%.

We also continue to forecast that conservatively earnings per share will be in the range of 29 to 30 cents for the 13 weeks ended May 1st, 2004, and $1.57 to $1.63 for the 52 weeks ending January 29th, 2005.

As a reminder, these projections do not take into account the outcome of the evaluation we are conducting to determine the future use or sale of the Company's Newark headquarters and distribution center.

Our short-term operational issues have been addressed, but more importantly the long-term fundamentals of our business remain vibrant and healthy.

We remain confident in our ability to deliver forecasted low- to mid-teen percentage earnings per share growth in subsequent quarters.

Our fiscal 2004 projections for the second, third, and fourth quarters remain unchanged and assume forecasted same-store sales gains of 4 to 5, 3 to 4, and 2 to 3% respectively.

In closing, I want to reiterate that we continue to be extremely excited about the attractive growth characteristics for the off-price industry.

Ross is currently the second largest off-price company in the country.

However, with almost 600 stores we are still in only 25 states and Guam, leaving us significant room to grow.

In addition, we continue to be very enthusiastic about the development of our new off-price concept, dd's DISCOUNTS, that will target lower-income households, one of the fastest growing demographics in the country.

This new business will have similar merchandise departments and categories to that of Ross, but feature a different mix of brands consisting of mostly moderate and discount store labels at lower average price points.

The first ten locations are target to open on the West Coast during the second half of 2004 in established strip shopping centers in densely populated urban and suburban neighborhoods.

Ultimately, we believe there is potential for more than 2,000 locations. 1,500 Ross and at least 500 dd's DISCOUNTS.

To successfully reach these targets we remain intensely focused on the consistent execution of our fundamental strategy, delivering great brands at great prices every day.

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

Thank you.

The floor is now open for questions.

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

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Once again, to ask a question, please press the number one followed by four on your touch-tone phone at this time.

Our first question is coming from Paul Matlow from DSM Capital Partners.

Please go ahead with your question.

Excuse me, Mr. Matlow, your line is live.

We'll move on to the next question.

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

Please go ahead with your question.

Thank you.

Good morning and congratulations on closing a very nice year.

It sounds like you said in terms of inventory we're almost fully recovered here.

Does that mean that in-store inventories as of today are only down in the 1 to 3% range per store?

Yeah, I would say, Kimberly, we anticipated third week of the month it would be fully recovered, so we're pretty much in line with where we want to be rolling into that third week.

I'm not going to put a specific number on the down 1 to 3% but they're supporting, as Michael mentioned, mid-single digit comp increases for our company.

Okay.

John, you expect the inventory the continue to grow throughout the month, at least that's what you announced at the beginning of the month.

Is that still what you're looking for?

That's correct, and that's where we anticipate it to be.

Okay.

Great.

And then if you could just give us any sort of color on the catch-up effort that's going on down at the South Carolina DC in terms of just processing, the in-transit trailers that were, perhaps, sitting at the loading docks or whatever, is that distribution center at this point in time fully caught up?

They're still working a little bit through the backlog, which is why the inventory levels, we've said will be caught up by the end of this week, and we will be.

If we think about our distribution network, presently we're processing about 40% more units this month than we did a year ago, so the capacity in our DC's are presently fine.

Okay.

Great.

And you expect that South Carolina DC over the course of the next week or two to get fully caught up as well?

That's correct.

Great.

Thank you, and good luck here for a very nice March month to date anyway.

Thank you.

Thank you.

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

Please go ahead with your question.

Okay, thank you very much.

My question is on the new core merchandise management system.

Just wondering if you could give us just a quick update on, I think you're either about to turn that on or fully implement it or maybe have done so already.

And then just on a related note, I'm wondering if you're planning any benefit to gross margin from the new core merchandise management system in your fiscal year 2004 guidance.

We anticipate turning the core merchandising system on the first part of April.

And as we've said before it should give us more accurate on hand, better visibility to in-transit of our product, allow us ultimately to do cycle counts and what have you.

However, keep in mind the main driver of the system and implementing it was so we could fully integrate all of our systems and it really removed barriers that we had to growth.

So that was the main platform for putting it in.

Ultimately, we should get some efficiencies from the system, but they are really not baked into 2004 numbers.

Okay.

And then my second question is on the distribution glitch earlier in the quarter.

My question is, I know your distribution system processes are source-based, and I'm just wondering, obviously that adds a little bit of risk when something goes wrong like this at one DC given the fact that your DCs ship to all stores, so my question is going forward from here, is there any thought to maybe doing something a little differently to minimize any potential risk from one DC going down?

Not presently.

Keep in mind that the real problem we had in January was we had a distribution center go down at the same time that we were retrofitting an existing distribution center and ramping up our other distribution center.

So when our Southeast DC went down, we just didn't have the capacity to flex up in the other two distribution centers because of stage that they were in.

Since then, the retrofit in our Carlisle distribution center will be done by the end of this month and actually they're processing about two times the number of units today that they were in late January, and our Southwest distribution center is ramping up very nicely.

It's actually producing about 65% more units today than our Southeast distribution center did at the same point in their lifecycle 18 months ago.

So the real issue was at the time of the roof collapse we didn't have capacity to flex up in the other two DC's, and, six weeks later we've essentially taken care of that issue.

Okay.

Thanks, Jim.

That's very helpful.

Thank you.

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

Please go ahead with your question.

Thanks for taking the call.

I wanted to ask a little bit of clarification on the dd's DISCOUNTS and if you flushed out mainly in regards to the customer, you talked about a large growing population there, underserved, perhaps, but also more economically sensitive than perhaps your core Ross customer.

How do you intend to reach out to that customer in any differentiation besides just the brands to help serve that customer?

Well, actually, certainly we'd be reaching out with a different merchandise assortment, but our marketing really wouldn't discuss in this forum how we would market to that customer.

I mean, certainly it will be lower-priced merchandise but the marking aspect of it is not the appropriate place for us to discuss that, for competitive reasons.

Sure.

But at the same time you are addressing the unique characteristics.

You would say yes to that right?

Yeah, yeah.

Very good.

Thanks.

Okay.

Thank you.

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

Please go ahead with your question.

Good morning, everyone.

Can you talk a little bit about the real estate opportunities that may be opening up for many of the store closures that we've heard from -- whether it's potential Mervyn's, whether it's Kids R Us, or anything like that, what you're seeing?

And the markets for new store openings in 2004, how much will be in Southeast versus California or sun belt?

Thank you.

From what's going on with Mervyn's and what have you, we don't really see that impacting us from a real-estate standpoint.

We've looked at them over time, and it just doesn't make really a lot of sense for us.

As far as where our markets, we're not entering any new markets this year.

Approximately, 35 to 40% of our stores will open in the Georgia, North and South Carolina area, and approximately the same number of stores will actually open in California, Texas, and Florida this year, so that's where the bulk of our new-store growth will be.

I really think that speaks to the amount of growth the Company has going forward, that you can think of about six or seven or eight states and we can get 70 to 80% of this year's store growth out of those and we still have 25 states to go where we haven't even entered yet.

Michael, can you just give us any update on product categories?

You mentioned home accessories and juniors.

How did those do compared to last year, and are there any new emerging categories, whether it's jewelry or anything like that?

Thank you.

Okay.

Home, accessories and shoes all performed very well to last year, okay, they were all mid- to high-single digits at a minimum in the fourth quarter.

As we moved into spring, the ladies business is performing well, and that's probably the biggest switch.

Accessories had a very good 2003 and it's continued into '04, and shoes has continued to get stronger as we came out of fourth quarter, and that continues also.

Thank you.

Thank you.

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

Please go ahead with your question.

Thank you.

Good morning, everybody.

Couple of questions here.

First, on the merchandise system that you're going to turn on, on April 1st, can you talk about whether other systems will be affected by this?

That is, are you going to have to turn off and then turn on some other systems, and, I guess, what steps you've taken to make sure that that transition is very smooth.

Yeah, we've obviously been working on this for a couple of years, and there's been a significant amount of work in the planning of when we actually turn the system on.

It does entail turning off our old systems, and moving the information to the new system.

And, all I'd say, Richard, is we have a large number of backup plans to ensure that it goes well.

We've been in a test mode for the last 60 to 90 days with the systems, ensuring that it will go smoothly.

Okay.

A little different question on -- or a little bit different take on the Mervyn's question that Dana asked a minute ago.

And that is, acknowledging that there's no real real-estate opportunities here because the stores are so much bigger, what sort of impact either positively or negatively do you see on your business from the fact that Mervyn's is now on the block, they're not likely to perform all that well, at least until some disposition?

I kind of say it would be speculative.

I don't know how they'll perform during this time frame.

It's a question I couldn't answer, Richard.

Okay?

It's not a negative.

That's about as much as I can tell you.

Do you have any data, any market research data that shows kind of a percentage of your customer base, might be a hard-core Mervyn's customer as opposed to a hard-core department store customer?

Not specifics, no.

Then lastly, on dd's, I know you indicated second half openings, again, could you be more specific here about when and where you're expecting the first stores to open?

It will be late summer, August, September time frame, probably when we'll be opening our first stores.

They will be in the Northern California area, and, I think that's about all the information we'll give at this point.

Great.

Thank you.

Thank you.

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

Please go ahead with your question.

Hey, guys.

Congratulations on a year well done.

Could you give a little bit more color to dd's DISCOUNTS and what opportunities you see there that would be different than Ross Stores, whether it's families, ethnicity, sizes, things like that?

And if you can talk about any updates on the evaluation of the Newark headquarters?

And, finally, square footage at the end of the year if you have that.

On dd's DISCOUNTS, the customer is a little different.

There's more renters rather than homeowners, they move a lot, so the businesses that will be expanded that serve that aspect of it.

They have more children, so, we will be taking advantage of certain aspects of that within our parallel frame.

Essentially it's the same businesses in the store, mixed a little differently, based on the information I just told you.

Okay.

And there is, with the customer base, it is fairly ethnic, there are size differentials that we'll be addressing also within our mix.

Great.

The other question related to the Newark campus.

We are currently studying alternatives to the disposition or future use of the property.

A decision hasn't been made.

Clearly real-estate values in Silicon Valley are pretty severely depressed.

We are on the edge of Silicon Valley, so at this point in time, a long-term decision as to this property has not been made.

Great.

Then just square footage at the end of the quarter if you have that?

Ross will grow 12% stores, so that's about 12% footage growth and we plan ten dd's stores.

What was the actual square footage at the end of the year, though?

Could I call you back with that, Marni?

Sure.

We don't have that with us right now, but I have that back in the office.

Great.

Thanks, you guys.

Thank you.

Our next question is coming from David Yamamoto of WR Hambrecht.

Please go ahead with your question.

Thank you.

Congratulations on a fine year.

First, can you discuss the availability of merchandise for the dd's DISCOUNTS concept versus the availability of merchandise for the Ross chain?

I could.

We don't see today any difference, okay, in many ways it deals with people we know, and in other places we're getting to know some suppliers that we didn't have relationships with.

Okay.

Second, can you please discuss the trends you're seeing in Workers' Compensation and the outlook for '04?

Again, Workers' Compensation, actually about 24, 36 months ago we peaked relative to expense related to Workers' Comp.

We'll put some programs in place both in the DC's and stores.

We've actually seen our results normalize, and don't see that being a risk, unduly burden some risk going forward.

Great.

Thank you so much.

Thank you.

Our next question is from David Mann of Johnson Rice.

Please go ahead with your question.

Yes, good morning.

John, can you break out a little bit what the start-up cost related to dd's were in the fourth quarter and the year and how you expect dd's to impact the P&L in '05?

I think what we had said in fiscal '04 is that the dd's start-up costs would be about 30 basis points and that's currently where we are.

Quite frankly, that was to some extent the impact on the fourth quarter as well.

And so for the first half of the year should we expect it to be about that level as well?

About that level for the first half of the year is right.

And in terms of the last question about merchandise availability for dd's, should we assume that you've started to buy inventory for that division?

We are in the process.

Yes, we have started.

And then one last question, in terms of sales productivity.

Can you give us a sense as to where sales productivity is in California versus non-California markets, and then perhaps also give us a sense on where the Mid-Atlantic is relative to those numbers and perhaps also from a more new markets, like in Atlanta, how that's trending.

The Company finished last year with sales per square foot of around $312, essentially flat from the previous year.

California was actually up and slightly over $350 per square foot at the end of 2003.

And the Mid-Atlantic is around $265 per square foot.

It's still hard to put a sales per square foot number on Georgia and our Southern states just because we have so many stores opening and the newness of the market, what I will say is that our stores in those markets are performing at or slightly better than what our real-estate pro forma had them at when we approved the sites.

And then, Jim, just in terms of the Mid-Atlantic, is that now in line with non-California markets, or is there still some gap between them?

There's still some gap there.

There's still some opportunity, and, again what I'd say is if you look at how productive we are in California, we look at that as encouraging as we look at the rest of the country, an opportunity for us to get better.

And in general are Texas and Florida above the company average?

Florida is slightly better than Texas.

And relative to that 312?

Texas would be below, and Florida would be above.

Okay.

Great.

Thank you very much.

Thank you.

Our next question is coming from Karen Young of Allstate.

Please go ahead with your question.

Good morning.

I'm wondering, given the sense seems to be that fashion trends are stronger this year than they have been in a few years.

I'm wondering if that would impact your percentage of inventory that's pre-bought versus bought closer to need.

Would it impact it?

Would you consider changing that, which is run -- pre-pack is more like 43%?

No, we're comfortable with the balance the way we're doing it and we still feel we're very flexible that we have enough open to buy to react to fashion trends as they happen.

Okay.

And secondly, just on the cash flow, deferred income taxes was a benefit of about $32 million, up from $17 million a year ago.

Do you expect the benefit to cash flow from deferred taxes to stay at this level or should it taper off, and what's driving it?

Is it the double depreciation that ends in '05?

I'm just trying to get an understanding of what's driving that item.

Yeah, it is a double depreciation that's driving that number in '05, so we would see that benefit through that period.

Should it reverse?

Over a period of time, depending on the speed that we add Capex, in a growing business, I don't see it reversing.

Okay.

Thank you.

As a reminder, to ask a question, please press the number one followed by four on your touch-tone phone at this time.

Our next question is coming from Richard Jaffe of UBS.

Please go ahead with your question.

Sure.

Thanks very much.

Couple of follow-up questions.

On dd's DISCOUNTS, are you experimenting with store size or do you have a pretty good idea what the stores will be?

Store size, no, we're opening our stores at about 25,000 square feet.

And that seems -- well, I guess time will tell if it's the right number or if you want to be larger or smaller.

Are you open-minded on that?

Of course.

We think that that's the right size, and as you say, time will tell.

Okay.

First quarter, you were a little bit concerned about earnings and about markdown pressure.

How's that shaping up?

Sounds like things are a little bit ahead of plan or outpacing in sales.

Is the same true for the markdown rate in the quarter to date?

Richard, relative to where we see the first quarter coming in, we haven't changed our guidance of 29 to 30 cents.

Clearly, there is some incremental DC cost and some markdown costs that are going to impact the numbers so, again, as we get further into the quarter we'll be able to give further guidance.

Okay.

And last question, the days of merchandise, the number of days packaway -- merchandise spends in packaway, just on average do you have a feel for that and if it's changed year-over-year?

Hasn't really changed year-over-year.

It will spend anywhere between three to six months in packaway.

Okay.

Thanks very much.

Thank you.

Our next question is a follow-up question coming from Gary Holdsworth of Wedbush Morgan.

Please go ahead with your question.

Hi.

Just following up on the Capex, what you expect to spend in '04.

We're looking at about $135 million in '04 compared to the $147 million we spent in '03.

That includes the IT systems and all that?

That's correct.

Okay.

Thanks.

At this time, there appear to be no further questions in the queue.

I'd like to turn the floor back over to the presenters for any closing remarks.

Thank you all for attending.

Have a good day.

Thank you.

Thank you.

That does conclude today's teleconference.

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