羅斯百貨 (ROST) 2004 Q3 法說會逐字稿

Good morning.

Welcome to the Ross Stores third 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. [Caller Instructions] As a reminder, this conference is being recorded.

At this time, I'd 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 Loughnot, Vice President of Investor Relations.

We'll begin our call today with a brief review of our third quarter performance followed by an update on our 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 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 today's press release and the Company's 2003 form 10-K on file with the SEC.

In our press release today, we reported earnings per share for the 13 weeks ended October 30, 2004 of 26 cents compared to 33 cents for the 13 weeks ended November 1, 2003.

Net earnings in the third quarter of 2004 were $38.1 million compared to $50.5 million in the prior year period.

Third quarter sales grew 5% to $1 billion, 28 million dollars and same-store sales fell 3% from the prior year.

For the nine months ended October 30, 2004, earnings per share were 79 cents, compared to 99 cents for the 9 months ended November 1, 2003.

Net earnings for the nine months ended October 30, 2004 were $119.2 million compared to $154.4 million for the comparable period in the prior year.

Year-to-date sales grew 7% to $3 billion, 28 million and same-store sales fell 1% from the prior year.

All earnings results for the year-to-date period in 2004 are inclusive of a previously-announced noncash charge related to the writedown of our former corporate office and distribution center in Newark, California of 6 cents per share.

This writedown is net of a 1 cent per share gain on the sale of the property during the third quarter that also is included in today's results.

The net proceeds from the sale of the Newark facility were approximately $17 million.

We continue to make progress during the third quarter in remedying the remaining merchant reporting issues related to our core merchandising system and we currently are on track with our target of completing this work by the end of the fiscal year.

As previously reported, since the end of August our merchants have been receiving the information and trend data we consider most important to the buying process.

The strongest major market during the third quarter was California, where same-store sales rose 1%.

Florida and the southeast, which were impacted by the hurricane activity in August and September, were the weakest regions.

Comparable store sales there were down in the high single digits during the quarter.

The best performing merchandise categories for the third quarter were shoes and juniors with comparable store sales gains in the low to mid-single digits.

Same-store sales in the home businesses were down in the mid-single digits.

The merchandise and balances that resulted from our system problems negatively impacted both sales and operating margin during the third quarter.

Gross margin declined about 350 basis points mainly due to an increase in distribution costs, higher markdowns and the deleveraging effect on occupancy and buying expenses from the client and same-store sales.

Distribution costs are being pressured mainly by lower than expected productivity, as our associates are taking longer than planned to become more proficient in utilizing the new technology.

The lower gross margin was partially offset by an approximate 100 basis point decline in selling, general & administrative costs as a percent of sales, as lower incentive plans cost during the period more than offset the deleveraging effect on store payroll and other expenses.

As we ended the third quarter, total consolidated inventories were up 15%.

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

In-store inventories were relatively flat to the prior year on a comparable store basis at the end of October, packaway as a percent of total inventories at quarter-end was 35% compared to 37% in the prior year.

The Company's financial position at quarter-end remains solid with $58 million in cash and $50 million in long-term debt to finance the systems and equipment at our Paris, California distribution center.

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 nine months of 2004, we repurchased 5.6 million shares of common stock for an aggregate of $150 million under the two-year, $350 million program authorized by our board of directors in early 2004.

We ended the quarter with 147 million shares of common stock outstanding.

Earlier this month, we projected that same-store sales would be down 1 to 4% for November, compared to a 5% gain in the prior year.

We also projected that comparable store sales would be down 1 to 4% for the fourth quarter on top of a 4% gain in the prior year and that earnings per share were expected to be in the range of 31 to 37 cents for the fourth quarter, compared to 48 cents in the prior year.

Month-to-date, November same-store sales are down 3% from the prior year.

The Halloween holiday calendar shift had a positive effect on October sales, but a negative impact on sales in the first week of November.

In addition, we are up against tough comparisons in California, which last year realized a strong rebound in November as weather cooled and the southern part of the state recovered from the wildfires in October.

Based on the trend month-to-date, we currently expect same-store sales in November to be in line with our current forecast of a 1 to 4% decline.

On another topic: Our new concept dd's DISCOUNTS grand opened during the third quarter with an initial 10 locations in California.

We are pleased to report that to date these stores have been performing in line with our expectations.

The 25,000-square foot stores have similar departments to Ross: apparel, footwear and accessories for men, ladies, juniors and children; as well as fashions for the home, all at everyday discounts of 20 to 70%.

Although the value focus is similar to Ross, the brand content at dd is different, with mostly moderate department store and national discount store brands.

With a 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.

Fiscal 2004 has been a very challenging year as we work to identify and remedy the problems associated with the implementation of our new core merchandising system.

I am pleased to note, however, that we have made significant progress since the system was turned on in early April.

Our allocated put that visibility into in-store inventories in June and the merchants have been receiving the information and trend data we consider most important to the buying process since the end of August.

We are currently on track with our target of remedying the remaining merchant reporting issues by the end of the fiscal year.

More importantly, 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 85 to 90 net new locations in 2005, including another 10 dd's locations in the second half of next year.

We remain on target to end 2008 with about 1,000 stores.

Ross occupies an attractive niche in retail.

We are the second largest off-price retail company in the country.

We have 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 successfully executing the off-price concept, 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. [Caller Instructions] Jeff Klinefelter, Piper Jaffray.

Yes, quick question in terms of the holiday outlook.

Can you talk a little bit more about where you see opportunities for outperform, considering the trends coming out of back-to-school and how your inventory positions are in those categories?

And then any sort of underlying challenges, vis-a-vis comparisons last year or the inventory situation coming out of your systems issue?

Thank you.

I think our holiday outlook, we're conservative in how we position the Company for holiday.

Certainly our apparel business, which has been trending better than other parts of the Company, gives us more confidence there.

Our home business, which is important to the holiday, has struggled.

And we think we're getting more in line there, but we thought that would be the slowest thing to come around coming out of our systems issues.

On an overall, we're comfortable our inventory levels going into the holiday period.

Kimberly Greenberger, Smith Barney.

I have a question about the in-store inventory levels.

You've been operating now basically with -- with full view, at least from a reporting perspective for about 2.5 months.

Any improvement that you've seen in your in-store inventory and balances at all?

And secondarily, what do you anticipate could be the impact as we move into spring, 2005 from any of these systems issues or do you really expect the impact to be limited to 2004 and be done with it by, hopefully, the end of the fourth quarter?

We are seeing some improvement in the imbalances that we saw earlier and, as we have commented on, we expected the seasonal product to get balanced quicker and the more basic and less seasonal product to take longer and that is what we're seeing.

And relative to the second part of your question, which is how we are moving -- how we're viewing these imbalances as we go forward, we think most of them will be behind us as we come out of this year, but there'll probably be some residual issues as we move into '05 and they should be moved further away from us as we move further through that year.

Michael, what do you think the nature of the imbalances, as we move into '05, might be?

Where do you expect to have some challenges?

You know, I'm really not sure where there might be imbalances.

I just suspect with anything, a project of this size, there may be something that pops up along the way that we haven't anticipated.

Thank you.

Jeff Black, Lehman Brothers.

So, maybe I missed it, but the fourth quarter guidance of 31 to 37 cents, you're holding with that?

That's correct.

And Mike, take us through next year, you know, you mentioned on--on the question before me that you think there could be some ancillary issues.

But what, in terms of the operating margin, can you recover by the end of next year?

If you say your operating margins end around let's say 7% this year?

Jeff, I think as we look to next year, we're right in the throes in the middle of putting an operating plan together.

As we look at where we suffered this year, obviously with--throughout the P&L and margin G&A, DC cuts, et cetera, I think we'll be in a better position and we will give guidance on '05 when we report January sales.

And turning to, I guess -- that's fine.

Turning to the home area, you know, do you continue to see softness there?

Do we see some improvements?

And if home is still a little soft, as you implied, you know, are there plans to change that?

Or opportunities to change that as a -- as a percent of the mix for -- for 4Q and, more importantly, in the first quarter?

Actually, we'd obviously like to see some improvement home, but it really -- it's a slower turning business for us and it just takes a little more time to get ourselves back in balance by class, by store, because of its low turning.

But we're very confident on strategies in home and we don't see any need to change those.

Thank you.

Richard Baum, Credit Suisse First Boston.

Good morning, everybody.

I've got two areas I want to ask about.

One is on the month-to-date numbers that you talked about, could you just go into a little more detail about differences that you're seeing in merchandise categories and/or geography at this point?

I would say, Richard, it's -- it's early, you know we're into the month, 15 days.

A big piece of the month happens right after Thanksgiving, so I'd reserve comment until we get through that period.

Okay.

Well, just FYI, one of your competitors just indicated that sales of holiday motif merchandise was actually pretty weak, are you experiencing the same thing?

You know, we're not -- Richard, we're just not going to comment at this point on holiday motif merchandise.

We will give more color fully at the end of the month, Richard.

Okay, let me just ask you about dd's.

You know, again, you don't have a lot of experience -- a lot of traction here, experience yet, but Michael, could you clarify when you say the competition are moderate department stores exactly who you're considering to be the principal competitors there?

And also, could you just talk about any surprises or learnings positive or negative?

I know it's on plan, but that's an average and certainly there must be things that have, you know, delighted you on the upside and disappointed you on the down side, even though it's still early, if you could comment on that.

Okay.

First -- first part of that question, Richard, give me the first part of the question again?

When you said moderate department stores --

Oh, yeah, okay, I'm sorry.

The moderate department stores are really the mid-tier sector, it would be really more Kohl's vendors, Penney's vendors and discount stores, which are the obvious big two; really form the basis of the vendor structure in there that -- that -- that you asked about.

Okay.

In terms of commenting about things within the store, it's a little early for us, I'd rather give more information a little further down the road.

It really -- you know, for competitive reasons, you know, I'd rather also hold back right now.

We're very new, our reads are very early.

We'll share some information a little further down the road.

But it's running as we expected pretty much.

It has all the same businesses as we have in Ross, mixed differently as proportioned to the total; and it's running pretty much how we anticipated it to run.

Thank you.

Dana Telsey, Bear Stearns.

Good morning, everyone.

Wanted to catch -- just on your increased distribution costs, when you do you begin leveraging your increased distribution costs?

Is it a year from when the DC opened this year?

How do you see that?

And on the IT department, how do you envision that department functioning next year after you get through these issues and the consultants go away?

How will it be different in terms of how it's structured from what it was previously?

And just lastly on gross margin, the gross margin eroded a little over 300 basis points this quarter.

Do you see that lessening as you move forward given that the systems will have improved as you move forward in time?

Dana, I'll take the first two questions.

On distribution costs, you know, obviously we opened a new distribution center late last year, early this year in Southern California.

We retrofitted a distribution center in Carlisle, Pennsylvania and we upgraded the management system of our southeast DC at the same time, at the beginning of 2004.

All DCs are operating on the same system right now, really for the first time throughout the course of this year.

Obviously productivity is not where we planned it.

As all three DCs really have a learning curve as to how to use the new systems, the new equipment, new procedures and new processes.

We would anticipate rolling in to our DCs next year engineered standards and getting improvement, you know, after we roll in the engineered standards throughout our DCs.

From an IT department, obviously we'll be bringing on new leadership, as the consultants go away and I would anticipate, from an organizational standpoint, we'll operate in a very similar fashion going forward as we have in the past.

And, Dana, the last part of your question, related to gross margin and the falloff and profitability around gross margin, as we're looking to the fourth quarter, in the 31 to 37-cent guidance we have out there, we have roughly similar falloff in gross margins.

So that's anticipating the guidance.

Thank you.

Patrick McKeever, SunTrust Robinson Humphrey.

Thanks, I think I got an answer to one of my questions anyway in the last answer that you gave.

But for the distribution -- the productivity issues that you're facing at the distribution centers, it sounds like that problem will remedy itself gradually, there's no real quick fix there either, is that true?

Yeah, I think that's correct.

And maybe, could you just describe maybe in a little bit more detail some of the productivity issues?

Is it a handling at the DCs, is it a handling issue?

Is it an incremental labor hours issue?

What kind of issue is it?

Really it's -- you've got new technology, new material handling equipment, new warehouse management systems in the DCs and it's new for all of our people and at the same time, you have to implement new processes and new procedures for people to follow; and then on top of that now, we need to go layer in engineered standards which will drive the productivity improvement enhancements.

So, it's getting our people to learn and understand all of the newness and then going in and putting in the appropriate standards from an engineering standpoint which will drive that productivity.

And then just lastly on the same topic, Jim, is there a way to quantify the affect that this issue had on gross margin in the quarter?

Yeah it was -- in the quarter it was almost 160 basis points of delevering.

So, obviously it had a big impact on our results this quarter and, you know, we anticipate ultimately that we will get production out of our distribution centers.

Thank you.

Marni Shapiro, Merrill Lynch.

As we look forward to spring '05 and, as you're looking forward to spring '05, could you put on a level, say, do you feel like the buying from a systems basis is 50% of par where it should be? 70%, 90%?

And then on a different level, how about the confidence of the buyers as they're looking forward to spring '05.

Is there confidence 50% of where it should be, 70% of where it should be?

And kind give us an idea if it's two different parts of the same story.

Okay.

As you look at spring '05, it's hard to give you a percentage, but I would say the buyers, the whole merchant organizations, will pretty much have the systems information they need to really run the business.

So, you know, it will be extremely high, extremely high.

You know, I don't have a percentage.

For the buyer confidence level, I think it's been building as we've gone through the process and it is at a pretty high level today and so I think as we move into '05, the buyer confidence will be pretty much back to where it was.

Excellent.

And could you follow up the buyers and the merchants?

How have you been incenting store people and managers and merchants any differently through the process and how might that change back to the way it was?

Or has it changed at all?

There's really been no change.

Thank you.

David Mann, Johnson Rice & Co.

Can you elaborate a little bit on the SG&A line, in particular, in terms of the bonus?

What was the magnitude last year?

Will there be any bonus accrual this year in the third quarter?

And should we expect leveraging in the fourth quarter?

Yeah, David, what we had in the third quarter was a reversal of the accruals for the first couple of quarters and we benefited G&A by about 150 basis points in the quarter.

So, that offset some of the deleverage we saw on the store line and some of the occupancy lines.

In the fourth quarter, we'll get a little bit, but not to the extent that we got in the third quarter from a leverage perspective.

So we should expect deleveraging in the fourth quarter?

In -- in G&A?

Yes.

In G&A I think we're still going to have -- we're going to still have some bonus that was accrued last year that we won't be against this year so we should see a bit of leverage in the G&A line.

Okay.

And then in terms of new store performance, perhaps you could talk a little bit about how they're -- how the new stores have been affected by some of the systems issues?

It looks like you're seeing a slower ramp there, are you getting any improvement in terms of the ramp as you've gotten better information?

Yeah, actually, you know, as we plan our new stores, we typically plan them at about 80 to 82% of an existing Ross store from a sales base standpoint and obviously as our -- our existing stores have underperformed this year, so have our new stores underperformed.

Historically when stores that are already opened more than a year fall short of plan, our new stores tend to also fall short.

So, it's been obviously a tough year from a sales standpoint in total and the new stores have fallen short of where we had planned them at the beginning of the year, as well.

And then one last question, you know, over the last four or six weeks, as you've gotten some of the better information for your buyers and been able to use that, how have your relationship of regular price selling to mark, you know, markdown or discounted merchandise, have you seen any improvement in that trend that might indicate that you're getting more in front of the customer with what they want?

I'd say we've seen some modest improvements there.

But we are selling a lot of markdown.

Thank you.

Kim Galley, Pioneer Investments.

I'm sorry, I didn't quite catch the bonus accrual number and wanted to ask if you could elaborate on that a little bit.

How much would you have expected to accrue for bonus accrual for the third quarter had you made your original plan?

And then how much was the reversal that you mentioned earlier.

As I mentioned, the reversal was 150 basis points, so, you'd say kind of initially you'd accrue in line with what you did last year.

It was an even accrual throughout the year and, obviously, with the performance this year, we won't hit the targets that would require that payment.

So, I don't know, for the year the bonus runs about 50 to 60 basis points.

And how much was it in the third quarter last year?

We didn't disclose that number relative to the third quarter last year.

If you take 50 or 60 basis points for the year, typically it's spread pretty evenly throughout the year.

So, you had actually a pretty wide swing because you essentially had 150 basis point credit versus what might have been a 50 basis point charge normally?

That's correct.

Thank you.

Richard Jaffe, Legg Mason.

If we could go just back to dd's for a second, a couple of questions comparing it to Ross Stores.

Average price for the two businesses and -- and price per -- or dollars per transaction and units per transaction, could you compare it to Ross Stores and how you see it developing?

Yeah, let me answer that, again, you know, as -- as we see dd's developing, we're through grand opening periods and we're kind of not in a position to talk about the average transaction per se because we don't want to have the kind of markdown cadence we did on a normalized basis.

We do see average retails in dd's lower than Ross, kind of in the 7 to $8 range and that's been consistent where we thought we'd have it planned in.

So I think we need a couple more months before we come out and really --once we get through the markdown case, et cetera, we can compare a basket and an average transaction.

And average price of Ross is about 12, is that right?

About 10.

10.

9 to 10, yeah.

[Caller Instructions] Patrick Stowe, Priority Capital.

Good morning, just hoping to get maybe some updated macro thoughts from you guys on the supply side of the business.

Are you seeing any increased pressure there from manufacturers and retailers alike?

The supply lines are plentiful and -- and I also think there really hasn't been a significant supply chain availability year-over-year, I would say.

And the second part of the question was relative to supply chain for retailers?

No, no, just asking in general, has there been any change or increased pressure in -- in the supply line?

Sounds like there's not?

No, no, the answer would be no.

No increased pressure.

[Caller Instructions] Robert Samuels, J.P. Morgan.

Thanks, it's Brian Tunick.

Three quick questions, I guess.

Can you talk about, you know it's early, but your new store plans for next year, you know, existing versus new markets?

Can you break out what you're thinking there?

Second question on marketing, can you talk about the percentage you're planning to spend here in the fourth quarter versus fourth quarter last year?

Do you think, you know, you need to reach out to that customer a little more and tell them hey, you know, we do have your products here?

And then lastly, can you talk about your view on quota regarding availability of product or potential gains on your IMU?

Sure.

From a new store plan standpoint, you know, at this point we're still planning on expanding the Ross Store base by about 12%.

And, although we're not ready to tell where yet, you know, we will enter a new market later in 2005 and continue to grow our store base from that standpoint

Brian, relative to the advertising question, the marketing question, I think we're about 100 basis points in the fourth quarter plan to spend and that's about what we did last year about, -- around that 100 basis point spend.

Yeah, our marketing is very vanilla and just supportive of our brand, we don't run sales.

So, it's a constant and there's really no change.

Relative to quota, you know, it's a bit of a wait and see for everybody on what's really going to -- how this is really going to play out with the change in quota.

There might be some supply advantages for our channels distribution, but we really have to see.

And it's not across every category, it's across some categories and how this will all play out will take us a little time as we move into '05 to understand?

Okay.

And I guess if I could ask just one more, you commented on how the beginning of how November has started.

Relative to last year, I guess the first week was tough.

Can you just comment on how the next three weeks sort of trended last year; as we got closer, obviously, to Black Friday?

You know last year, I think, in November we reported six pretty constant, quite frankly, throughout the month.

I mean it's pretty even in terms of the bounceback.

So, we didn't see a progression or deceleration of any great magnitude.

Thank you.

David Yamamoto, WR Hambrecht.

First, can you quantify the components of the gross margin pressure in the third quarter?

And then secondly, what type of merchandising initiatives do you have in store for '05?

And are you flexing any selling space within the store?

Relative to gross margin, 115 basis points is due mainly to higher markdowns.

As Jim mentioned, we had 160 basis point falloff in distribution.

The remaining 75 basis point decline was due to the deleveraging effect on buying and occupancy.

Okay.

And was there any effect from dd's DISCOUNTS?

You know, margin, we're looking at dd's for the year, it's probably 30 to 35 basis points in terms of deleverage for the year.

And in terms of changes to our merchandise strategies for next year, there are no major changes that I would have to report.

Thank you.

Kimberly Greenberger, Smith Barney.

Thank you, I just wanted to know if you could give us your comp metrics for third quarter in terms of the drivers behind the 3% comp decrease between traffic and average transaction size?

Kimberly, for the -- for the quarter the average basket was down about a point as well as the average price per SKU was down about a point.

Relative to November, again, we'd like to get through the month, there's so much to do, you know, in the Thanksgiving week that we can-- when we report next time on earnings, we can go through those numbers.

Our basket's been pretty consistent and prices pretty consistent historically.

So, John, does that mean that for the third quarter the traffic or the number of transactions in an average store was down about 2%?

Yes, that's how the math would work.

There are no further questions.

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

Thank you all for attending and have a very 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.