羅斯百貨 (ROST) 2004 Q2 法說會逐字稿

Good morning.

Welcome to the Ross Stores second quarter 2004 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.

At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions following the presentation.

If at any point during the conference you'd like to register your question, you may do so by pressing star 1 on your touchtone phone.

If you experience any audio difficulties, please press star 0, and an operator will assist you.

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

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

Please go ahead, 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 Lenault, Vice President of Investor Relations.

We'll begin our call today with a brief review of our second quarter performance followed by an update on our new Core Merchandising System and a review of more recent business trends.

We will also discuss our long-term plans and objectives.

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

Before we begin, I want to note that our comments on this call will contain forward-looking statements regarding expectations about future growth and financial results, the Core Merchandising System, 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 rules to differ materially from historical results or current expectations.

These risk factors are detailed in today's press release and the Company's 2003 Form 10-K on file with the SEC.

In our press release today we reported that earnings per share for the 13 weeks ended July 31st, 2004, were 22 cents compared to 35 cents for the 13 weeks ended August 2nd, 2003.

Net earnings in the second quarter of 2004 were $32.6 million compared to $54.6 million in the prior-year period.

All earnings results for the second quarter are inclusive of a previously-announced noncash charge of 7 cents per share or $11 million in net income related to the write-down of our former corporate office and distribution center in Newark, California.

These results are also consistent with our previous estimates.

Second quarter sales grew 4% to $1.9 billion, and same-store sales fell 3%.

For the 6 months ended July 31st, 2004, earnings per share were 53 cents compared to 67 cents for the 6 months ended August 2nd, 2003.

Net earnings for the 6 months ended July 31st, 2004, were $81.1 million, compared to $103.9 million for the comparable period in the prior year.

Again, results for the first 6 months of 2004 are inclusive of the previously-referenced charge.

Sales for the first 6 months of the year grew 8% to $2 billion and same-store sales were flat to the prior year.

As previously reported, we believe our business in the second quarter was affected by problems associated with our new Core Merchandising System and the resulting limitations these placed on our ability to identify and respond to changes in customer trends.

Especially in what appears recently to be a more difficult retail climate.

This situation resulted in below-plan sales and a 216 basis point contraction in operating margins before the non-cash charge of 7 cents per share to write down the Newark corporate office and distribution center.

Gross margins declined 162 basis points mainly due to an increase in the mark-down rate, higher occupancy cost as a percent of sales and higher distribution costs, which were driven primarily by productivity issues as the distribution staff learns to effectively use the new distribution center and Core Merchandising Systems.

The decline in same-store sales also resulted in a de-leveraging effect on selling, general, and administrative expenses as a percent of sales which increased 54 basis points.

As we ended the second quarter, total consolidated inventories were up 10%.

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

In-store inventories were down 3% from the prior year on a comparable store basis at the end of July.

Packaway as a percent of total inventories as quarter end was 40% compared to 42% in the prior year.

The Company's financial position at quarter end remains solid with $108 million in cash and only $50 million in long-term debt to finance the systems and equipment at our Terrace [ph], California distribution center.

Our strong cash flows continue to provide the resources to fund capital investments in new-store growth and infrastructure, as well as the Company's stock repurchase and dividend programs.

During the first 6 months of 2004, we repurchased 4.5 million shares of common stock for an aggregate of $124 million under the 2-year $350 million program authorized by our Board of Directors in early 2004.

We ended the quarter with 147.5 million shares of common stock outstanding.

Now we would like to spend some time updating you on our recent Core Merchandising System issues.

We made progress during the second quarter in resolving many of the problems we have experienced with this new system.

As previously reported, information to support the allocation function has been back to normal since early June.

We continue to make progress addressing the information requirements most important to the buying process, and believe that most of these data needs will be addressed in the next few weeks with some plan to be complete later in the third quarter.

Our top priority at present is remedying the Core Merchandising System to provide our merchants with the information they need to consistently execute our fundamental business strategy, delivering great brands at great prices every day.

Although we expect sales to begin to gradually improve once these system's issues have been remedied we anticipate that there will be a residual impact to sales and earnings throughout the second half of 2004 as we cycle through merchandise imbalances that resulted from this situation.

It is difficult to predict the precise level or duration of this residual effect because the same systems problems that hurt us operationally are also handicapping our ability to forecast as well, as well as we would like.

Earlier this month we projected that same-store sales would be down 1 to 4% in the third quarter and flat to down 3% in the fourth quarter.

We also projected earnings per share to be in the range of 25 to 30 cents for the third quarter compared to 33 cents in the prior year, and 44 to 49 cents for the fourth quarter compared to 48 cents in the prior year.

We expected August to be the weakest month of the quarter with same-store sales planned down 3 to 6% from the prior year.

We are disappointed to report that month-to-date August business is weaker than expected with same-store sales down 10%.

This obviously puts pressure on our forecasted results.

However, we are only 2 weeks into the quarter.

So although we remain cautious in our outlook due to the recent weakness in sales and the reduced visibility caused by our systems, we are not making any change at this time to our prior earnings guidance on the third quarter.

We will be in a better position to make a judgment in this regard when we report August sales on September 2nd.

On another topic, we are pleased to announce that the first 3 of 10 planned initial dd's DISCOUNTS grand opened last week in Northern California.

These stores are conveniently located in smaller neighborhood shopping centers in more densely populated urban and suburban areas in the Oakland, Sacramento, and Fresno markets.

The 25,000-square-foot dd's DISCOUNTS stores carry apparel, footwear and accessories for men, ladies, juniors and children all at everyday discounts of 20 to 70%.

The stores also feature terrific bargains on a wide assortment of fashions and necessities for the home.

The dd's DISCOUNTS concept targets lower-income consumers, one of the fastest growing demographics in the country.

Household incomes are in the range of $30,000 to $40,000, which is generally lower than the targeted Ross shopper.

At dd's DISCOUNTS our mission is to deliver terrific bargains on moderate department and national discount store brands in a convenient, accessible, easy-to-shop environment.

Although the value focus is similar, the majority of labels in these new stores will be different from the brands featured at our Ross Stores.

With the potential of at least 500 locations we believe dd's DISCOUNTS has the ability to significantly enhance our growth prospects over the next 5 to 10 years.

The challenges we have encountered during 2004 have been frustrating and we are working hard to address them.

These issues notwithstanding, the long-term fundamentals of our business model remain attractive and healthy.

Our strong balance sheet and financial position provide a platform for growth.

We expect to open 80 net locations in 2004 to end year with 648 stores in only 26 states and Guam, or square footage expansion of 14%.

Ross occupies a unique niche in retail.

With 22 years of history we are the second largest off-price retail company in the country.

Despite our recent problems, Ross remains a mature and proven concept with strong cash flows and competitive returns, and yet we are also a growth retailer operating in an industry that continues to expand and take market share.

We have the potential to more than triple our existing store base over the next several years to over 2,000 Ross and dd's stores combined.

We believe these compelling growth opportunities, along with our history of effectively executing our off-price strategies will enable us over the long term to achieve our target of 15% or better annual earnings per share growth.

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.

If you do have a question, please press star 1 on your touchtone phone.

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

We do ask that when you pose your question that you please pick up the handset to provide optimum sound quality.

Once again, ladies and gentlemen, that is star 1 to ask a question.

Thank you.

Our first question is coming from Jeff Klinefelter of Piper Jaffray.

Yes, a couple of questions actually.

One would be in terms of the current weakness in August, is there any particular category that seems to be standing out right now where you might have particular inventory issues or there just seems to be a change versus plan in consumer demand for those products?

Then I guess a follow-up just a little bit more broadly, is anything changing in terms of the dynamics between pricing -- your pricing and, you know, regular and promotional pricing and some of the other retailers, kind of moderate department stores, is there any incremental pressure coming as that moderate, you know, the Kohl's, Penney's, et cetera start to expand, and is that putting pressure on what you're able to deliver in terms of your traditional value below department store prices?

Thank you.

In current August, business issues are very broad-based.

Okay.

And relative to price -- relative to pricing pressure it's a little promotional out there, but really the issue really that's affecting our business is our inability to have the visibility we need to run our business right now.

That's the primary cause of it.

Thank you.

Our next question is coming from Brian Tunick of J.P. Morgan.

Hi, yes, thanks.

Just a question on the inventory deliveries.

You know, is that obviously a main contributor to the August shortfall?

When do you think you'll be in the right inventory position?

Obviously going into the holiday when do you think we'll start to see receipts start to get closer to your plans?

Well, from a inventory standpoint, obviously, we haven't had the visibility to forecast the way we'd like and it has created imbalances throughout the chain which is clearly continuing to impact our business.

As far as the fall, you know, as we cycle through this we'll have a better handle on exactly when we'll be out of this but right now, you know, we're just focusing our efforts on remedying the situation and correcting every bit of it.

And then just secondly, as far as visibility, how much do you think of the issues are macro versus, you know, internal issues you think you can fix?

Because we're certainly hearing some other issues on the low-end side.

Just curious, are you starting to think that's part of the issue as well?

Look, I don't think the environment is perfect, but, you know, I do think the majority of what we are looking at is internal.

And that's our perspective.

We're clearly operating with considerably less visibility than we ever have in the past.

And as a merchant you have to be able to see these things to be able to make the appropriate decisions as you move through the buying process.

Okay.

Thanks very much.

Thank you.

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

Thanks.

Couple of quickies.

First of all, with respect to the weakness that you're seeing in August, can you give us a little bit more clarification on a regional basis, specifically, you know, geographically, where you're seeing that weakness?

Any kind of color there?

Then a couple of follow-ups.

I really say it is broad-based.

Outside of a couple of weather situations that we all know about, it's broad-based.

Okay.

And then also, if you could talk a little bit about, I guess a little bit more in terms of the systems issues that you referenced before, what are the capabilities that you do not have currently that you used to have, not that you would expect to have under the new system, but what is it specifically that you're not able to do in terms of buying, forecasting, if you can be as, I guess, specific as you can that would be very helpful.

It's hard for us to be very specific on that issue for competitive reasons, but we are missing some vendor information that, you know, we use on a day in/day out basis and some other information that helps us control the manner in which we run our business.

But the specific reports and type of reports, I'm not comfortable discussing.

And then I guess a question for John.

Can you give us a sense of what we should be thinking about for SG&A in the third and fourth quarter, you know, specifically with respect to some of these costs associated with some of the systems issues and how your accounting for them?

Well, the systems issues, the investment we made is all capitalized, and that will obviously show up through depreciation over the next 5 years or so.

With regards to the back half in SG&A, we put some guidance out earlier this month.

As Michael referenced, we're not in a position now to change that.

We're 2 weeks into August and I think we've got to -- let's see how things develop and we'll be in a better position next month to update y'all on that.

Okay.

That's very helpful.

In terms of, finally, sort of final follow-up, in terms of the inventory that you have on hand now, the quality of it, how much of it is, you know, seasonal, you know, give us a sense of what you have on hand and how you've got it planned on into the back half in terms of, I guess, the quality of the inventory that you've got.

Well, as we said, we don't have full visibility, but we've addressed our seasonal issues coming out of spring, we feel we've dealt with that, and we're going to run tight inventories, obviously, in this environment for the remainder of the fall.

So the quality of the inventory, you know, certain piece of our business we start up seasons, we'll be starting up this season as the season gets moving with packaway merchandise that was purchased a long time ago, which we felt good about when we purchased, so I have no reason to have issues with that, but we're going to run very conservatively.

Okay, thanks.

Thank you.

Our next question is coming from Kimberly Greenberger of Smith Barney.

Great.

Thank you.

Good morning.

Did I detect a slight push-back in the timing of the resolution of some of your IT issues to later in the third quarter?

I guess maybe I had erroneously assumed that the balance of the issues you were having would be resolved by the end of August.

And then secondarily, are you continuing to buy for packaway, and/or if you are do you think that could have an impact on your sales as we get into 2005?

Thanks.

From a systems standpoint we have a very comprehensive plan in place that is essentially being delivered to, and the basic information that's needed for our merchant group, you know, is essentially on track, you know, something may slip a week or 2, but for, you know, the way we're looking at it, the plan we're putting together is being delivered to and is on track.

The issue is as they get the information, it's going to take some time to digest it, look at it, make the appropriate changes and have that flow through a 600-store chain.

And relative to packaway we are still buying packaway and we think we're buying it smartly.

And I don't think how we're purchasing packaway will have a meaningful impact on the negative side in '05.

Are there pieces of information that you're missing that you normally have when you buy product for packaway?

There's, you know, the key thing in buying packaway is really having style performance, and we have that.

Okay.

So the key piece of information to buy packaway you have, and so you feel comfortable with those decisions?

For the most part.

But, again, we don't have full visibility, but at this point sitting here I am comfortable.

Okay.

Thank you.

Thank you.

Our next question is coming from Mark Montania of Wells Fargo Securities.

Just a couple questions about the Core Merchandising System expenses.

You have certain cost overruns that are being capitalized.

That's going to impact your D&A over the next few of years.

Do you have an -- can you give us an estimate as to how much that's going to impact EPS for next year?

I can tell you when we brought Accenture in that would -- that cost we estimate's between about $10 to 15 million, and that cost is being amortized over a 5-year period so it's a couple million bucks a year.

Okay.

And then looking out to next year, do you expect to have increase in your SG&A related to some of the systems installations that you expected for this year which will perhaps fall into next year instead?

No, I don't see that happening.

The issue is one of capital and how much the systems are costing us to install.

Okay.

Thank you.

Thank you.

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

Good morning.

Can you talk a little about in August so far, even in July, how the trends on traffic versus ticket, can you break it out between the 2?

And what's been the vendor response to the issues going on, and have there been any adjustments taking place in merchants?

Is there any merchant turnover, and any reduced institutional advertising that you're planning on doing given that the stores aren't up to the standards that you'd like?

Thank you.

Dana, relative to the average ticket, the average ticket is pretty flat, the average basket is flat, so the fall-off in sales is really a function of traffic.

Okay.

And the vendor response?

The vendor response has really been supportive.

We have very strong relationships and most of our markets, most of our large resources have gone through systems conversions themselves, so that has been fine.

There -- that's been a nonissue.

Turnover, there's been none.

Okay?

And relative to our advertising, we have an advertising program we've been running for years that we're going to continue to run.

You know, as you bring up a question on turnover, it just -- this Company has been through situations in terms of correcting business issues, and having been in difficult situations and turned it around effectively.

We do have a group of people who are -- who do have the knowledge on how to turn around a difficult situation and don't run away from it.

So I'm very comfortable this organization has the resiliency to bounce back as fast as possible.

And the -- are you looking for a new CIO now or how do you want the department to be organized after this incident?

Obviously, we brought some people in from Accenture who are helping run the functional area of our systems department.

Ultimately, we will engage in a search for a new CIO.

At this point, though, we're completely focused on getting the situation taken care of, and ultimately we'll go out and start some search, or starting search, but right now we're totally focused on getting the situation resolved and thinking about moving forward the new CIO at a later date.

And we have the people in from Accenture who can functionally manage the department with my and Michael's extensive involvement.

Thank you.

Thank you.

Our next question is coming from Jeff Stinson of FTN Midwest Research.

Hey.

Question for John.

Historically you guys have been very conservative in the expectations that you've laid out, and obviously the systems have complicated your ability to financially forecast the business.

At what point in time here over the next 3 months do you get back to where you were previously as far as your ability to financially forecast the results for the Company?

Yeah, I think, Jeff, it is tied in to visibility, and I think once the merchants have the information they need and are confident in that information that our ability to forecast gets better from a top-line and margin perspective, so I think it's all integrated into making sure the systems are where they need to be.

If you look at getting back to where you were historically, is that something we see take place over the next couple of weeks so when you release the August comps you'll have better visibility on where the business may be heading?

I think as Jim alluded to, Michael as well, we'll have the major components that the merchants need in the next several weeks, but then there's some additional follow-ons and the institutionalization of those reports back into the business and that takes some time, so I would not say at the end of August we'll be completely confident in our forecasting ability.

And then secondly, if you look at merchandising, buying opportunities, anything that you're seeing out there in the market as far as more buying opportunities or less buying opportunities than what you've seen historically?

I think it's a fairly typical environment for buying right now.

I mean it's, you know, you're at the beginning of the season, so fall is just starting to come our way, but for this stage for being here at this point in August it's a normal purchasing environment.

Thank you.

Thank you.

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

Good morning, everybody.

I've got 2 questions.

The first is for John.

Now you're treating these additional systems expenses capital.

Can you just remind us what the CapEx expenditures are expected to be now for this year, whether they've changed as a result of the extra systems expenses and also what's your preliminary CapEx number is for next year?

Yeah, this year we went into the year thinking there would be about 135 million, with the additional expenses on the system we've taken that up to 145 million, and rolling into next year we're still putting our plans together, but we believe coming off this number a bit is probably appropriate since we don't have the extent of the systems expenses.

So you're saying --?

I'm saying, you know, 135ish, 140 next year, although it's too early, and I'm saying 145 for '04.

Okay.

And then secondly, perhaps also for John, your guidance for the second half of the year is pretty broad in terms of EPS there's a 5-cent range.

And just based on what you're seeing so far in August, do you feel that the range that you have put out there contemplates the kind of performance that you've seen so far in August, and that it would put you at the bottom end of the range, or do you believe now that the range that you have put out is at risk?

You know, Richard, what I'd say is the same system problems that have hurt us operationally are also handicapping our ability to forecast.

And, you know, there will be more information out in the next, you know, about 3 weeks when we release August sales.

Okay.

Thank you.

Thank you.

Our next question is coming from Jim Fullman of Omega Advisors.

Hello.

Good morning.

Why wouldn't someone -- things that you intend to launch a new concept signal a bit of a maturation of your flagship retail stores?

Could you repeat the question?

Sure.

Why wouldn't someone seeing your launching a new concept, dd's DISCOUNTS stores, at the time when you seem to have some problems at your flagship stores, why wouldn't someone try to interpret that as a negative signal seeing a maturation of your Ross Stores?

Well, essentially, you know, we've been working a couple of years on implementing the concept of dd's, and what we're doing is including you baiting a concept that we'll be able to deliver incremental growth to the Company from an earnings standpoint 5 years or so down the road.

We don't think there is a saturation issue with our Ross Stores as we're only in 26 states at this point and we think there's an enormous opportunity from a growth standpoint domestically for Ross Stores as well.

Do you think -- I'm also talking about priorities as well.

Wouldn't it be more prudent right now to focus on fixing growth stores first and then potentially delay relaunch of dd's DISCOUNTS stores?

Yeah.

Again, we've been working on dd's for a couple of years, we've only opened 10 stores and the issue we believe with Ross fundamentally is a system issue that goes back to a conversion issue that we did not do a very good job with back in April.

We believe we're making progress on the system issues and once that's happened we'll be able then to move forward with getting back on track as to where we were.

Yeah, and let me just add, we don't think there's an issue with the Ross model at all, and we think this business issue we've had over the last several months is directly related to a systems issue that we are in the progress of remedying.

So, you know, I just want to be clear, we don't think there is an issue at all in the Ross model.

Thank you.

Thank you.

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

Hey, guys.

Also on dd's, could you talk about -- congratulations on opening the first stores, by the way.

Could you talk a little bit -- I know it's early, but any early reads, any response from the clients, customers coming in?

And could you compare and contrast a dd's store to a Ross store on a merchandise base entirely?

Meaning misses is X% of a Ross store, X% of a dd's store, and do you have a junior segment in this store, is kids a bigger portion or a smaller portion compared to a Ross store and what about the home and the gift area.

And then 2 more quick questions on dd's, will you use packaways there?

And what systems are you using for dd's?

Are they already on these systems, but have they started on them and so it's running smoother?

Okay.

It's way too early for us to give you early -- to give you reads.

It's only been open -- it's not even a full week yet.

Okay.

The businesses have all the businesses that are in Ross.

They are percentaged out differently, and we will be using packaway to a lesser degree, and -- than we do in Ross, but we'll be using it.

So, you know, the percentages we've got are laid out.

We really have these first few stores going to be up and running.

They're going to move around, so we really need to spend, get through the fall season, see exactly how the customer is responding by business, and then I really, at that point, feel more comfortable elaborating as to how we see the differences.

It's a different customer than our core customer.

There are going to be definitive differences in how we invest by business than Ross.

But I'd rather just wait a little longer.

From a systems standpoint, they are on similar systems, there is a difference in that from a Ross standpoint we've been operating essentially for the last 4, almost 5 months, with very limited information and as that information is coming available the dd's people have that in a basic format, you know, from the start.

So they've been on board from the start with these systems?

Yes.

Yes.

Then I guess as you open these first stores, I would assume you would tinker with them as you went along, but from a packaway standpoint, are you starting with a less aggressive stance there because you don't really know what the reaction is from the customer, then perhaps it increases as time goes on and you know them better?

That's part of it.

And also we think, for this number of stores.

Good point.

And then last, on dd's, as you're opening a couple of stores in California, are you doing anything on the marketing side?

Are you grand opening the stores, things like that?

Yeah, we are doing grand opening things and we're actually testing a whole different series of marketing tools for these stores, but we're certainly grand opening them and we'll have a better picture over the next 6 months of how we want to market the chain, hopefully, but we're experimenting now.

Great.

Good luck with the new concept and getting through the system changes, guys.

Thank you.

Our next question is from David Mann of Johnson Rice.

Yes, good morning.

It looks like your new store productivity has been going down similar with the comp stores on a relative basis.

Can you talk a little bit about any possibility of delaying or deferring openings until you get some better visibility?

We have seen a little drop in new store productivity.

New stores directionally tend to follow where our comps are as a company on a broader standpoint.

At this point, though, again as Michael said, there's nothing wrong with the Ross model.

We're continuing to move forward with our store growth program.

Keep in mind that from a new store standpoint, you know, most of these leases and sites and what have you, have been working on for 18 months in arrears and our 2005 program continues to look strong and, you know, as we get these issues taken care of, the growth plan remains the same, the model remains the same.

If I could clarify a little bit it sounds like the timetable on the systems would be that you'd have the better visibility by the end of the quarter.

Is that correct?

We anticipate that being accurate.

Okay.

And given that, Michael, before you talked about some historical references to other times when you've had some problems with merchandising, can you just give us a sense on how long it takes you to -- or it has taken you in the past to work through some of those merchandise issues so we can think about it in terms of what's going on now?

You know, each situation would be different.

I could better answer that once we're fully live with our information now, and we assess fully where we're at.

You know, in 2000, I don't know -- I don't recall exactly.

I think it was months.

Okay?

It wasn't weeks, and it wasn't years.

Okay?

It was in months, but I don't remember exactly.

But I think as we come on-line -- as I said, as we come on-line with all our information then I could make a judgment of what this will take.

We're at imbalance and we'll get in balance, we're a 600-store chain and probably points of reference from times in the past would have been when we were smaller too.

So depending on the degrees of the issues we find we'll be able to time-line it at that point.

I think that's a better way for me to answer you, David.

And I think on the last call you suggested because of the terms -- in terms of apparel which turns faster that you would expect that to recover faster.

Absolutely.

And are you seeing -- it sounds like you're not seeing any differences between apparel and home right now, but that may be something we should think about once we get visibility, that that may linger for a little while?

Exactly.

Once we get full visibility, I expect apparel to recover first.

Okay, great.

Thank you.

Thank you.

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

Couple more questions on dd's.

First off, how are you going to know that you're getting the target customer in your stores?

Well, we will do a lot of consumer research.

Okay?

Organized statistical consumer research once these stores have been open a little while.

And as far as when you get to the point where you're -- you've in the past talked about the competition in that segment, and maybe underrepresented or underserved that customer base.

But you do have, you know, the discounters, the dollar stores, the close-out, the independents.

There are a number of different types of customers even the if the off-price channel may be fairly underrepresented.

Your comments on the level of competition there?

I think it's a very competitive environment, but we think being in neighborhood centers we can serve -- we can fill a niche that really isn't fully served by, or isn't really served in our kind of format, okay?

That couples apparel, sizable amounts of apparel and apparel-related products in addition to a healthy amount of hard goods, okay?

Because a lot of the people in these areas are much more general retail services, and more hard products rather than the blend that we have.

And you don't make anything of T.J.

Maxx -- or TJX opening 4 stores in California of their A.J.

Wright concept?

You welcome that competition?

Yeah, they're a fine competitor.

We do well.

We've done well in the primary businesses, both companies head to head.

If it turned out that way that we were head to head, okay.

Thank you.

Finally on the buyback, you mentioned I think, year-to-date you've spent 125 million. 350 million authorization, is that approximate?

Yeah, we have a $350 million authorization, year-to-date -- over 2 years.

And year-to-date we've spent 124 million.

Okay.

Thanks.

Thank you.

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

Okay.

Thanks very much.

Michael, when you think about the imbalances of inventory at the store level, are there any areas where it would be more pronounced than other areas or would you say it's pretty broad-based?

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

We do a lot of detailed regional planning and it affects apparel.

We do a lot of class and subclass classification planning that effects the basic businesses, so in different ways it's broad-based.

One of the things I've noticed recently in some store visits is it doesn't seem as if you're heavy enough in some key back-to-school categories.

I know it's not a big business for you relative to some other apparel retailers, but nonetheless, can you talk to that at all?

Is that a valid sort of observation?

I think it's reasonable.

It's all part and parcel of this.

We're not where we should be or not where we've historically been.

I think your observation is good.

And then on the hurricane Charley in Florida, you've got a lot of stores in Florida.

Does that have a material effect on your business?

Yeah, we think it turned about 1% of the 10 that we'll sell so far in August.

I think we had 50 or so stores closed in Florida on the hurricane.

On the good side, everyone's safe and we didn't have any extensive property damage.

Okay.

Great.

Thanks a lot.

Thank you.

Our next question is coming from Kim Galley of Pioneer Investments.

Good morning.

You all mentioned earlier in the call your comp month to date was primarily due to traffic, that your basket size and the average unit revenue was holding off.

I'm just wondering if you have any sense of if that's really customers not visiting the stores or if it's an issue of conversion, where they're coming in and just not finding what they want?

It's hard to tell.

Obviously, though, we don't like what we have in the stores based on the imbalances from an inventory standpoint, so we would -- based on our sales you'd have to say the customer can't find what they're looking for.

Could you perhaps also put that into some context in terms of the mix of more basic product versus more fashion or trend product?

I think that -- could you rephrase that?

Maybe I could --.

I guess I'm just getting a sense of if you're going into a Ross to buy T-shirts or underwear or stockings or something that's a little more basic, obviously if you don't have it the customer can't buy it, but that also seems like the kind of thing that shouldn't really be that affected by your systems issues.

I think everything is affected by systems issues, every piece of merchandise in our store.

Okay.

My second question is, your inventory on a per square foot basis is down a little bit and your comps are obviously down worse, but I'm just wondering, philosophically, it's not flying blind obviously having trouble getting the information you need to optimally manage the business.

When you're buying inventory, are you thinking more a about avoiding mark-down risks or are you really concerned with sort of starving the stores of stuff for people to buy?

Are we buying inventory to avoid mark-down risk?

No, no, I'm just saying, you're having problems with the systems right now which is making it difficult to buy the kind of inventory you'd like, so I'm wondering are you erring on the side of caution in the sense of buying less than you might?

We're being very conservative.

You're being very conservative.

So to the extent then that you've got a sales issue, some of that could be due to just inventory levels versus tours of inventory.

I wouldn't -- look, we went into the month at minus 3 in inventory, and we're minus 10 today.

We don't know.

We don't know.

We think it really is more driven by out of balances across the Company than an inventory issue, but we don't know.

We think for sure -- I should qualify that we don't know.

My instinct says strongly that this is a systems-related issue, not in total, an inventory issue.

You could go into any one of our stores at any given time now and we'd be considerably more out of balance in total inventory and what you see within each specific rack.

So that's how I would answer.

Okay.

And the Company has made a lot of other changes in systems in the last year.

I'm wondering if you could just give us a little update in terms of how the other systems are functioning and how they might ought to be alleviating or contributing to the problem.

The reality is all the systems infrastructure work we've done, the implementations have gone fine they're work, up and operating, this has really been a problem with the Core Merchandising System and the integration of it.

Okay.

You made a comment earlier in the call about your new distribution center, perhaps not being quite up to fully smooth operation.

Is that something that would you expect to be over with by the end of the year?

Yeah, I think what would you see is another quarter or 2 of de-leverage in our DC cost and would anticipate that flattening out to becoming more productive for us in '05.

Great.

Thank you very much.

As a reminder, ladies and gentlemen, to ask a question, please press star 1 on your touchtone phone at this time.

Our next question is coming from Vladimir Velkoff of Freedom Capital.

Hi everyone.

If you know that the systems, as you are well aware and investors as well, that the systems are not in good shape, why wouldn't you take the opportunity and buy in assets that you really know well, that's undervalued, if it is, and buy your own stock way more than you are buying it now in view of completely underleveraged balance sheet?

If you look we've bought 2/3 of our year's --.

2/3 of this year, about 1/3 of the total authorization, correct.

With all due respect, the shares you've bought are minimal versus these shares outstanding.

Why wouldn't you lever up $250 million and buy back that amount right now as opposed to buying it when hopefully the systems are back in order?

It's been our position to use excess cash to buy back stock, and at this point, you know, we're taking a conservative approach and we don't believe we should take on debt to buy back our stock and that's the approach that we're taking.

Is it because you don't see the light at the end of the tunnel on the merchandising system remake?

No, it's really because our position over the years and continues to be that we don't take on debt to buy back stock, we're really not market timers.

We took a little more aggressive approach in the first half of this year than normal.

That's the extent of what we see in any circumstance in our Company's history and the way we manage stock buyback.

What are you planning for the rest of the year on the share repurchase?

To keep up the current level?

We'd anticipate that we'd complete the 175 million that we had contemplated this year and that under the current set of scenarios that we're looking at we'd end the year with positive cash on the balance sheet.

Okay.

And lastly, if you could just run through the time-line one more time in terms of what are the sign posts we should be looking at as to how the systems will be performing or what's the timetable that Accenture has given you?

Well, there's a very detailed plan, and, again, we believe the remaining information that's most important to the buying function should be available by the end of August and at that point they will be able to dive into the reports and start making all the decisions we need to make to right-size the imbalances that we have out there.

Okay.

Thank you.

Our next question is a follow-up coming from Richard Baum of Credit Suisse First Boston.

Yes, this is just a -- kind of a factual financial question for John.

Prepaid expenses were up 72%, looks like to 54 million versus 31 million last year.

Yeah.

We reclassed the Newark distribution center and corporate office and we took that write-down.

That is now sitting in current assets of DP&A [ph].

That should have basically correct itself?

Yes.

Once that property is sold it will correct itself.

Sir, there are no further questions.

I would like to turn the floor back over to Mr. Balmuth for any closing comments.

Thank you all for attending, and have a good day.

Thank you.

This does conclude today's teleconference.

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

Thank you.