羅斯百貨 (ROST) 2004 Q4 法說會逐字稿

Good morning.

Welcome to the Ross Stores fourth quarter and fiscal 2004 earnings release conference call.

This call will begin with prepared comments by Michael Balmuth, Vice Chairman, President, 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 your questions following today's presentation.

If you should have a question, please press star 1 on your touch-tone telephone.

As a reminder, this call is being recorded.

At this time, I would like to turn the call over to Mr. Michael Balmuth.

Sir, you may begin.

Good morning.

Joining me on our call today are Norman Ferber, Chairman of the Board;

Gary Cribb, Executive Vice President and Chief Operations Officer;

Michael O'Sullivan, Executive Vice President and Chief Administrative Officer;

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 performance and the recent lease accounting adjustments followed by an update on our systems and distribution network issues.

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 for current expectations.

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

Today we reported net earnings for the 13 weeks ended January 29th, 2005 of $49.4 million, and earnings per share of $0.33.

These fourth quarter results are inclusive of a noncash lease accounting charge of $2.3 million to net earnings, or approximately $0.02 per share.

For the 13 weeks ended January 31st, 2004, we generated $71.3 million in net earnings and $0.46 in earnings per share, which reflects the expected restatement of last year's results to reduce net earnings by about $2.4 million or $0.02 per share from applying the corrective adjustment in lease accounting.

For the fiscal year ended January 29th, 2005, net earnings totalled $168.5 million, and earnings per share were $1.12, which also includes the above-referenced noncash corrective accounting adjustment of $0.02 per share.

In addition, fiscal 2004 results include a noncash charge of approximately $0.06 per share to write down the value of the Company's former headquarters and distribution center in Newark, California, to its estimated fair market value.

For the fiscal year ended January 31st, 2004, net earnings total $225.7 million and earnings per share were $1.45, again, reflecting a reduction of about $0.02 per share due to the adjustment in lease accounting.

As previously announced, in response to recent SEC communications, we have adjusted the way we account for our operating leases, including the accounting for rent holidays and tenant allowances.

We expect to report a cumulative noncash charge to earnings per share through fiscal 2002 of $0.05.

We plan to restate our financial statements for fiscal years 2003 and prior, which will be reflected in the Company's form 10k for the fiscal year ended January 29th, 2005.

Sales for the fourth quarter ended January 29th, 2005, increased 10 percent, to $1.212 billion with comparable store sales flat to the prior year.

For the fiscal 2004 year ended January 29th, 2005, sales increased 8 percent to $4.240 billion with comparable store sales down 1 percent from the prior year.

Geographic trends during the quarter were relatively broad based.

California same-store sales were even with the prior year.

The best performing merchandise categories for the fourth quarter were shoes and accessories where comparable store sales rose in the high single to low double digits.

Same-stare sales in the home businesses also performed well with mid-single digit gains for the quarter.

The weakest businesses during the period were men's and children's.

Fiscal 2004 was a very challenging year.

Difficulties associated with the implementation and integration of new information systems and distribution centers resulted in below plan sales and a contraction in profit margins.

As previously reported, by the end of fiscal 2004, we were essentially complete with the remediation of the remaining merchant reporting issues related to our core merchandising system.

The in-store merchandise imbalances that resulted from our systems and distribution problems in 2004 continue to negatively impact both sales and operating margin during the fourth quarter.

Gross margins declined about 450 basis points as a percent of sale, mainly due to higher merchandise markdowns, an increase in distribution cost, and a deleveraging effect on occupancy and buying expenses from flat same store sales during the period.

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

Other contributing factors are the implementation of higher wage rates to reduce turnover, and higher off-site storage costs.

In an effort to improve productivity and reduce distribution cost, we began rolling out engineered standards to all 3 distribution centers starting in February 2005.

This program consists of utilizing industrial engineers to assess each functional area of the distribution center operations followed by development of new procedures to improve functional efficiencies.

Full implementation of these standards is targeted to be complete in the first quarter of 2006.

The lower gross margin in the fourth quarter was partially offset by a 55 basis points decline in selling general and administrative costs as a percent of sales, mainly due to lower incentive plan costs during the period.

As we enter the fiscal year, in-store inventories on a comparable store basis were up 5 percent and in-line with plan, compared to a 6 percent decline in the prior year.

Total consolidated inventories were up about 1 percent on top of a 17 percent increase at the end of January 2004.

Pack away was about 43 percent of total inventory, which was even with the prior year on a percentage basis.

The year-over-year change in consolidated inventories is the result of increased in-store inventories, partially offset by declines in both pack away on a per store basis and in transit inventory compared to the prior year.

In January 2004, we experienced an interruption in supply chain caused by a roof collapse at our Fort Mill, South Carolina distribution center that resulted in lower than planned in store inventories and much higher than normal levels of in-transit inventories as we entered fiscal 2004.

The Company's financial position at year end remained solid, with $183 million in cash and short-term investments, and $50 million in long-term debt.

Strong operating cash flows continue to provide the resources to fund capital investments in new store growth and infrastructure, as well as the Company stock purchase and dividend programs.

During fiscal 2004, $147 million in capital expenditures supported the addition of 71 net new Ross locations and 10 dd's DISCOUNT Stores, along with continued investments in infrastructure.

We also repurchased 6.5 million shares of common stock during the year, for an aggregate purchase of $175 million, under the two-year, $350 million program authorized by our board of directors in early 2004.

In addition, our board recently approved an 18 percent increase in the quarterly cash dividend.

Looking ahead to 2005, we continue to project same-store sales gains for the year in the range of 4 to 5 percent and forecast earnings per share to be in the range of $1.40 to $1.50 for the fiscal year ending January 28th, 2006, excluding any impact from stock option expensing in 2005.

Earlier this month, we reported that same-store sales in February performed in line with our guidance at up 6 percent compared to flat same-store sales in the prior year period.

We also maintained our prior forecast for same-store sales to be flat to up 1 percent in March on top of a strong 7 percent gain in the prior year.

Last year's strength in March was driven by the combination of a strong bounce back, once inventories were covered from the distribution center roof collapse in January, and double digit same-store sales gains in California to the very favorable spring weather.

For April 2005, we continue to forecast same-store sales gains of 2 to 3 percent.

These projections take into account the Easter holiday shift, with Easter moving from the second Sunday in April 2004 to the last Sunday in March 2005.

Month to date, March sales are performing slightly ahead of plan, benefiting from good sale-through a fresh spring receipts.

However, residual clearance inventories resulting from the systems and distribution issues in 2004, is taking longer than expected to sell.

Although this is putting some pressure on gross margin, our forecast of earnings per share for the 13 weeks ending April 30th, 2005, ranging from $0.33 to $0.36 remains unchanged.

On another topic, our new concept, dd's DISCOUNTS, grand opened during the third quarter of 2004 with an initial 10 locations in California.

Although it is too early to reach any definitive conclusions, to date these stores have been performing slightly better than 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 percent.

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

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

As I noted earlier, we faced a number of difficulties in 2004.

Although we have more work to do, especially with our distribution network, the long-term fundamentals of our business model remain healthy.

As a result, we continue to be optimistic about our future prospects.

Ross occupies an attractive niche in retail.

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

We have a mature, improving 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.

With just over 650 stores in 26 states today, we believe our growth opportunities, along with our long term history of successfully executing the off-price concept, will enable us to achieve our target of at least 15 percent average annual earnings per share growth over the next several years.

At this point, we would like to open up the call and respond to any questions you may have.

[Operator Instructions].

Tim Guyer [ph], Piper Jaffray.

Hi, guys.

Congratulations on the quarter.

A few questions for you.

First of all, the home furnishings sector was weak throughout the holiday season.

And I was wondering if this provided you with some opportunity regarding product availability and if there were any specific categories that you saw more opportunity in?

And I also have a follow-up question.

Really, there was not an unusual amount of home product available.

We took advantage of some, but nothing -- nothing that I would elaborate on.

It was nothing that meaningful.

Okay.

Also then with last year, there was a -- very strong trends in both denim and the preppie trend.

Taking that into consideration, how do you feel about your inventory going forward for the upcoming year and where do you see your biggest comp opportunities?

I feel very good about position in denim.

Preppie product, we buy as we go.

And it's a pretty understandable trend for the customers.

So that's not a bad thing for retailers.

It's an understandable trend.

What was the second part of your question?

I was just wondering what category you think you have the biggest comp opportunities in?

Probably -- probably shoes.

Okay.

Thanks a lot, guys.

Jeff Black, Lehman Brothers.

Hi.

Good afternoon.

Couple question, too.

I wondered if you could just add a little color on March sales and where you see the strength coming from.

And on the residual merchandise, where is this?

Is it primarily in pack away and in what categories and when might we see whatever residual inventory we have that needs to be cleared cleared?

Is that in the first quarter or could we see some of this extend into the second quarter?

Thanks.

Elaborating on March sales, we really don't do that at this call.

We just really give some directional -- directional overall trend information.

And relative to the residual inventory, it's kind of hard to say.

We -- after our systems conversion and our DC warehouse conversion, these things could pop up.

We think we're in okay shape, but it's -- we're obviously watching it very closely, and we think we're okay.

Just a quick follow-up on the new -- the new DC team there.

How is that proceeding?

Are you satisfied with the progress you've seen thus far?

And any kinks to be aware of at this stage of the game?

Well, it's very early.

The new team was in place on February 7th.

So it really isn't that much time.

I'm very satisfied with the progress.

And, no.

No new kinks have emerged.

Great.

Good luck.

Thanks.

Paul Lens [ph], Credit Suisse First Boston.

Hey, guys.

Paul Lejuez.

Can you talk a little bit about how you're thinking about consolidation in the department store industry?

How you anticipate that changing, the vendor community behavior and how that might translate into your business?

Sure.

Well, look, it's very speculative.

My opinion would be very speculative on it, but the consolidation of the department store sector has -- it's a double edged sword.

There could be some short-term bumps as stores close across -- or get rebranded across the department store industry, and there could be supply opportunities, short term and long term, out of it.

Overall, I think it's good for the sector.

In what way?

Well, I think on an overall basis, we become more important to suppliers and also it takes some promotional aspect out of the environment.

I think the less people who are out there, the less they're fighting with each other.

Less people in the war.

Got you.

And can you also quantify the cost of the engineered standards you're putting in place and how that might trend throughout '05?

Relative to that, Paul, so we're putting engineer standards in.

I don't really want to put a bracket around that, but it pretty well -- the improvements you'll see this year pretty well pay for themselves in this year.

So relative to the year, it's not putting pressure on the year because we're getting it back in a little bit of back end productivity in the fourth quarter.

Okay.

Great.

Thanks, guys.

Good luck.

Kimberly Greenberger, Smith Barney.

Great.

Thank you.

Good morning.

John, I was wondering if you could quantify for us the impact of this 3 factors in gross margins that Michael talked about, the increase in markdowns, the increased DC costs, and the deleveraging impact in the fourth quarter.

And if you could also help us out with understanding what were the components of the 290 basis point decrease in gross margin for the year, that would be great.

Sure.

So for the quarter, as Michael mentioned gross margin was off 450 basis points.

The drivers were a 290 basis point falloff in merchant margin, which was principally markdowns.

We had 110 basis points fall off in supply chain costs as we mentioned due to productivity issues in the labor force.

And then the occupancy and buying cost delevered by about 50 basis points.

That was offset by about 55 basis points of pickup in G&A and most of that's attributable to the fact that there was no incentive bonus this year.

And then for the full year on gross margin?

So, for the full year on gross margin it's pretty much the same trend.

So margin was off 100 basis points for the year.

Total we delevered by about 250 basis points and the DC supply chain costs were up by about 125 basis points.

125 for the DC?

Correct.

So 125 for the DC, 100 in margin, and then we delevered in the other cost lines, offset by G&A.

Okay.

And on the accrual, the lack of the bonus or incentive comp accrual here in 4Q, was the entire benefit just the lack of an accrual in the fourth quarter, or were there any prior quarter accruals that you ended up having to reverse here at year end?

It was only -- we reversed those in the third quarter.

So it was only the fourth quarter accrual that we reversed.

And that was about 45 of the 55 basis points of savings in G&A.

Okay.

Great.

Thanks so much.

Richard Jaffe, Legg Mason.

Thanks very much.

Could you discuss your inventory plans, that is, say, increases first quarter foot [ph] for the next 3 quarters.

How you see this quarter ending and the outlook for the rest of the season?

Yes.

We like our inventory position.

We're staying plenty liquid, I think from a pack away standpoint.

We'd want to make sure that we have plenty of liquidity there.

So, Richard, I would, going forward, plan about the same inventory level per foot in stores.

So we don't -- we don't see that changing meaningfully.

In pack away we think there's some opportunity to remain a little more liquid there.

So, in-store inventory is basically flat year-over-year for the next 3 quarters?

Yes, I think that -- that would be the overall plan.

Okay.

Thank you.

John Morris, Harris Nesbitt.

Thanks.

Congratulations on a great quarter.

Michael maybe first if you can elaborate a little bit more why you see the shoes -- shoe category as an opportunity for this year?

And are there any other categories you want to highlight as well?

Maybe particularly mention what was behind the weakness in the men's and the children's category, and what you would be doing offset that?

Okay.

We've got some good things going on in shoes.

And there's some trended -- trends going on.

And we've got a very good position in pack away in the shoe area.

So we feel very confident about current trend and also what we own.

There's a lot of trend in accessories.

Nationally, I feel good about accessories.

For us, we've been performing well there.

And I feel good about our home businesses going forward.

Those would be the strongest businesses.

And I probably would say the junior business has a national trend as well as a trend inside Ross.

The second part of the question was?

Men's and children's, what you would be doing to maybe turn those around.

Those were -- okay.

My comment on why they underperformed was essentially executional issues.

And what we're doing is we've gone back in and done a deep dive and we think we've got those issues that we executed poorly over our recent past corrected.

It really isn't a market condition or -- it's usually in off-price when something goes wrong it's executional.

Our values went over what they should have been.

And the shoes, what is the approximate percent of the mix and how do you see that changing?

And is it in all stores?

This is all stores where -- I don't see -- I think our business -- our business will -- our mix will not change dramatically.

It's going to kind of grow.

Be a little more emphasis in ladies, but beyond that for competitive reasons I wouldn't elaborate.

Okay.

And then John maybe a couple quick questions for you.

With respect to the guidance, the full-year 2005 guidance that the Company's given, are you assuming anything at all for the buy -- for continued buy back? 'Cause I know you've given -- I think the outstanding share count would be holding right around 148 million, I think you said.

So I'm wondering, it kind of looks like maybe you're not assuming any buy back next year, although that's obviously a possibility.

Yes.

I think, John, you may be looking at actual versus the diluted shares.

So we have planned to execute $175 million buy back this year.

So if you look at the shares on average basis, year-over-year, they're probably coming in at 150 or so million to 148 million.

Maybe a decline in shares of 1 to 2 percent.

Okay.

So the $1.40 to $1.50 guidance assumes use of the balance of the buy back program.

That's correct.

And then also, just interest expense assumption for next year as you've laid it out.

It looks like it's going up quite a bit.

I'm just wondering if you can detail the assumptions behind that and what accounts for the change?

Sure.

Mainly it relates to the fact that we had planned to acquire a off-site distribution warehouse.

And so the interest increase relates to that aspect.

So when you look at where cash will peak during the year, we had no outstanding borrowing for the year in '04.

We expect some outstanding borrowings based on acquiring that DC this year.

Great.

That's very helpful.

Thank you.

David Mann, Johnson Rice.

Yes.

Good morning.

John, can you comment a little bit on dd's in terms of the drag you saw in '04 and how that might progress in '05 in terms of your assumptions?

In '04, dd's drag was about 35 basis points.

So, in '05, you probably have -- relative to '03, you probably have about that, the same drag.

So it's flat '04 to '05.

Is that off of a higher sales base for the Company?

Does that mean we should see a higher loss from it?

Yes.

We're adding -- we're adding twice as many stores.

So you'd see, again, a little bit higher loss, but we think -- we think flat year-over-year relative to for what it is '04, '05.

On the 35 basis points, you mean?

Correct.

Okay.

And then Michael, if you can just talk a little bit about the new management structure that you've put in place.

How that, in light of Jim Peter's departure, how you see that helping or changing the way the Company's managed?

Well, I think the new management structure will be more efficient, and what -- the key thing it will do is we've got a tighter focus.

It's obviously a tighter span of control in the operating curve, with Gary Cribb having store line and distribution centers, and Michael O'Sullivan having finance, legal strategy and human resources.

And so I think it will give greater focus to those areas of responsibility, as well as -- as well as just run the business more efficiently.

Okay, great.

Thank you.

Mark Montagna, Wells Fargo.

Hi.

Just a question towards the distribution centers.

It sounds like you're going to get some improvement in the fourth quarter of this year.

And I just wanted to make sure I understood that.

And then by the end of '06, you expect to be fully ramped up and gaining all the efficiencies that you had originally expected.

Is that the case?

No.

I think what we're going through is a process right now of putting standard incentives in, we've increased wages a bit to slow some of the turnover.

As we roll through '05, we're expecting flat to 10 basis points of leverage in the DCs, and relative to how it looks in '06, we're working through that.

We'd expect it to get incrementally better.

What we're not saying is prior to getting that work done and rolling through it, saying we're going to get it all back.

I think it's going to be incremental over a period of time.

Okay.

Thank you.

Dana Telsey, Bear Stearns.

Good morning, everyone.

Can you talk about the data center move from Newark to the new corporate offices in Pleasanton?

How's that going?

When will it be completed?

I think you had earlier talked about distribution expenses increasing in the first half of '05 and then improving in the back half of the year.

By what magnitude, and is it still on track to be completed that way?

And then just lastly, have you seen anything in terms of quota and imports in early 2005 on the supply of goods so far?

Thank you.

Yeah.

This is Michael O'Sullivan.

Let me respond on the data center question.

We've been planning the data center move for some months.

And what I would say at this point is we're pretty happy with that planning.

We've taken quite a detailed approach, and we're feeling pretty comfortable with the plans we have in place.

So, Dana, relative to the DCs, I think directionally you're correct.

We haven't come out with specific guidance on that, but we think there'll be a little deleverage in the DCs in the first half and we should pick it back up in the second half as standard incentives kick in.

For the year, we're saying flat to 10 basis points of leverage.

Relative to your last question, Dana.

It's Michael.

Hi.

The supply of goods right now is -- it's a buyer's market.

It's a very good supply level.

We can't tell if the supply is because of quota or because of other issues that are dynamics in the industry.

But, my feeling is that we're seeing some, but the biggest bang on this, we anticipate will be later in the year.

And then just lastly, I think you're putting in a new plan of engineered standards to all 3 distribution centers.

What exactly are you doing, and how is it different than what you had before?

Well, we partnered with KSA.

And it's actually the same company that we partnered with in the -- in the late '90s.

We saw lot of success with them with that partnership.

So essentially, we're going to be doing the same thing.

We'll have them come in, take a look at how our associates are working.

Then really document the best procedures.

And once those procedures have taken hold, then we'll put incentive plans to make sure that they're executed and have staying power.

So, Dana, relative to what you're doing before, once we put the new DC infrastructure in place, the standards and incentives, and the old process and procedures were lost, if you will, we need to implement the new technology, the new process and procedures, get those nailed out and then put incentives on top of that.

And that's the process we're going through.

Thank you.

Marni Shapiro, Merrill Lynch.

Hey, guys.

Just 2 questions.

Can you give a little bit more color to -- you made a comment that it's taking a little bit longer to get proficient with the system.

Is that at the buying level or allocation, or is it at the store level?

And then can you also give a little bit more color as to what is starting to sell for spring.

The trends and -- you're not specifically, but is it home, is it women's fashion?

Is it jewelry and accessories?

And are you seeing any rebound at all in men's or kid's?

System -- the system part, I'm going to give it to John.

But essentially, it relates to the distribution centers.

I think, Marni, the buyers have the essential reports that they need to run their business.

There is still obviously some learning that takes place with the new reporting, etc, as buyers get used to that.

So, there's a piece there that we're pretty satisfied that they have the information they need.

In the DCs there's a lot more learning around systems married with process, so how you deal with exceptions, how you flow merchandise, how you reconcile any exceptions you see.

And those -- that systematically is what we're working on now to make sure that those processes are burned in and institutionalized in the distribution centers.

So the buying is not necessarily the issue.

It's once it's coming into the DC, kind of getting them up to speed to where you're happy with their distribution abilities and getting it through the DC?

That's what we're referring to in the comment.

We had a lot of system integration here last year.

Yes.

Early.

We're working through it everywhere.

We're happy where -- the progress we've made.

But again, I just want to say it's early in a lot of different aspects of it.

Oh, yes.

These things always take longer than expected anyway.

And then just on the spring selling?

Spring -- the color I will -- that I would add is that first, men's and children's are making significant progress, and some of the things we put in place are taking hold, so we're happy with the progress there.

Certainly across the store, the color -- actually color continues to be the driver in all the fashion areas of the business and it really is the biggest issue by far in what's going on across the store, our store and every store right now.

And in the home business, are the trends remaining?

Because you came out of the holiday season with a nice rebound in home.

Are you still seeing that?

The home business continues to be strong.

And really, the strongest aspect in homes has been housewares and domestics.

Great.

Good luck, guys, with spring and '05.

Hopefully it's a lot better than '04 for you guys.

Thank you.

Margaret Mager, Goldman Sachs.

Hi.

I have 2 topics I want to ask about.

One is on the comments about you're still working through clearance in the first quarter and it's selling a little bit slower than you might have hoped, pressuring gross margin.

Last year in the first quarter, gross margin was down from the previous year.

Would it be down -- expected to be down again in '05 based on those -- in the first quarter of '05 based on those comments?

Margaret, based on that, so February sales were at the high end of the range.

As Michael commented, March sales are trending a little bit higher than our guidance out there right now.

I think the comment relative to margins, we are seeing residual markdowns based off of some systems problems we had.

We thought that this might happen back in Q2, Q3 last year.

And so the expectation to some extent was there.

Relative to -- relative to margins, overall margin as we commented before, DCs are putting pressure on the gross margin as well, in the first quarter.

Okay.

So I just want to make sure I understand your perspective on your inventory.

Because it sounds like on one hand, you're happy with where it is.

But on the other hand, you still have residual clearance that's a little bit slow selling.

So, can you reconcile those 2 -- those 2 points of view?

Like, how much is this and when will it be cleared up?

What kind of overhang is this residual inventory comment?

We think the residual inventory, the comment of the clearance overhang will be taken care of in the first quarter.

We entered the quarter with a little bit more residual.

It's taken a little longer to sell.

Michael's comment relative to sell through of spring products is very good.

And being happy about our inventory position as we went into the year, wanting to be more liquid, based on a lot of dynamics going in the industry.

One, we wanted to be a little lighter in pack away, and we've accomplished both of those things.

We're in a very liquid, fluid position as a company.

And we'll see what's out there.

Okay.

Thank you.

The other thing I'd like to ask about -- hello?

Hello.

Sorry.

Hello.

Hi.

Can I ask about dd?

Can you talk a little bit about the launch strategy or the -- specifically to marketing?

Like what are you doing to market that business to raise awareness that you have a whole new concept out there addressing a somewhat different customer with different merchandise?

And then, also, related to that, dd, could you just outline who would be the high-end of the vendor spectrum for that business?

So, like, what brand would represent the most desirable brand that would drive traffic into the concept?

Okay.

Two things.

One, on marketing, similar to Ross, we really don't do a lot of marketing, okay?

It's really we're marketing our brand dd's.

We're doing some local marketing in the communities.

We've taken one market and done a little television where we had a few more stores.

But for the most part, this is not going to be a big marketing-intensive business.

Secondly, relative to brands that would be the high end, we wouldn't comment on that.

Okay?

You'd have to really go into the store.

We wouldn't comment in a forum like this.

Okay.

I just -- I guess my -- I just wonder how aspirational and motivational moderate brands are to drive traffic.

That's really the essence of it.

Maybe you have a view on that.

There's a couple of issues.

Really, this is more of a fashion-driven customer than a traditional brand customer.

There are certain brands that are more significant, such as urban brands, to this customer.

So, I think that's about as far as I can go in this kind of situation.

Okay.

Patrick McKeever, Sun Trust Robinson.

Okay.

Thank you very much.

In some of the distribution issues that you've been dealing with, have you reviewed your -- and I'm sure you do on a regular basis.

But your source-based distributor your DCs ship to all of your stores.

Has that in any way exacerbated some of the distribution center issues that you've had in terms of just on the expense side?

That would be my first question.

I think the answer to that, Patrick, would be no.

We're source-based because it makes economic sense relative to our business.

We're trying to make sure the DCs are places closest to the source because in our business you don't really know it -- based on the way we purchase opportunistically, you don't really know when and what and where the product will be shipped.

So I would say, no, relative to the kind of economic pressure. and the other part of your question was?

And my second question is all on dd's.

When should we expect that business to break even?

I know it's early and all, but when should we expect that business to break even and what might we think about as a longer term margin potential for that business?

Would it be a bit below the core Ross Stores margin, operating margin?

Yes, again, dd's is 10 stores, so we actually want to go to an operating cycle so we understand those dynamics.

And we haven't really been publicly gone out and talked about that overall involvement and what it would do.

So, I think what I'd say is let's give it some time to really see what we have.

Okay.

Thanks.

Kim Galle, Pioneer Investments.

Good morning.

I was wondering if we could just drill down a little bit more on this inventory issue.

I was under the impression that the inventory would be pretty much at least marked down if not actually physically out of the stores by the end of the -- by the end of the fourth quarter.

And I guess my original glance at the balance sheet suggests inventory was in great shape because it's up 1.4 percent, your square footage is up 14 to 15 percent.

Could you just kind of fill us in and give us a little more color on why there's still an inventory issue?

The inventories at the end of January, you're correct.

They were actually -- didn't parallel the growth in stores.

When you compare to it the prior year number, we had a roof collapse in one of our DC, so there's a lot of in-transit in inventory that took that baseline balance up.

Okay?

So, if you roll through to February, we're pretty pleased with our balances in February.

So if you attack from that into March.

I think the comment, we like where our inventory position is.

We just have more clearance based on the residual markdowns that we're dealing it, and we're going to inhale in the first quarter.

Having said that, we reaffirmed our $0.33 to $0.36 guidance, though.

So why wouldn't you just take the markdowns in the fourth quarter?

Because we're on the comp basis for markdowns as opposed to retail.

There's a timing difference in all that.

And some of the things were really not fully visible.

To be clear.

Okay.

So, if they weren't fully visible, what's your guess as to any further, perhaps, invisible inventory problems that might crop up in the future?

We think it's a first quarter issue, okay?

But as I think I said earlier, with all this kind of systems conversion, something could pop up along the way, but we think this is really a first quarter issue.

Okay, great.

And just as a bookkeeping question, could you tell us what the square footage was at the end of the quarter?

Yeah.

Let's get back to you on that one.

Okay.

Thank you.

Marie Driscoll, Standard & Poor's.

Thank you.

I'd like a little clarity on the invisible inventory, too.

But if you can't elaborate further on that, it sounds like there's a lot of changes going on at the buying offices and the DC offices.

I'm wondering in the stores as well.

So I'm wondering how -- how your employees are responding to the fact that they didn't have incentive bonuses.

You're asking them to learn new processes and procedures.

So what's the morale like?

Actually, I think morale is pretty good.

We came off a very difficult year.

We have an organization that's very focused.

I think people understand what happened.

We've met with most of organization.

I don't think morale is an issue at all.

Turnover has not been an issue.

So, I think from that end, I think most of the changes, okay, in terms of systems changes are behind us.

The hardest year in terms of adaption and getting through something is behind us.

Okay.

So, I think from all that end we're fine.

Can -- John had gone through the impact of the supply chain costs on the fourth quarter and the full year of 110, 125 basis points.

Is that what you're talking about going forward through 2006 on the distribution?

Is that the same problem?

Let me answer that question.

So we had 125 basis points falloff in our fiscal '04, which ended January '05.

We have said we believed that in the fiscal year we're currently in, '05, that we can get 10 basis points of lever in the supply chain cost.

So that means there's going to be a swing factor of about 120 basis points?

Relative to '03, that's correct, but 10 basis points relative to '04.

Okay, so if -- maybe what we ought to do.

Call us back and we'll be more than happy to walk you through those numbers.

Okay, great.

Thank you.

[Operator Instructions].

Kimberly Greenberger, Smith Barney.

Thank you.

As we look at your operating margin decline in '04 of 100 basis points, can you talk about the opportunities to recover that in 2005, and what are the specifics around getting that merchandise margin back?

Is it as simple as clearing out the remaining leftover inventory here in the first quarter and then having better comps and still solid inventory control in '05?

I think, Kimberly, you mentioned operating margin.

I think you're talking about gross margin, and the 100 basis point fall off in gross margin?

Right, exactly, from the merchandise margin pressure -- or the markdowns, right.

So that was really markdown pressure based on systems implementation issues, and as we have '05 planned, we expect -- we expect some leverage in those areas.

We're expecting gross margin to improve 70, 90 basis points in the year.

That's the guidance that we put out, and that guidance is on our website as part of our January sales comments.

John, why wouldn't we see all 100 come back here in 2005?

As you look at that, there's 2 components.

Markdowns and markups, and it's just a balance of those 2 as we go through -- as we go through our process.

So if we do better than the 70, 90, we'll see it.

But I think we have a reasonable plan going in.

Okay.

Thanks.

Kim Galle, Pioneer Investments.

I'm not meaning to beat a dead horse here, but just back on inventory, I guess the drift of what I -- the answer to my last question was that inventory was up kind of abnormally last year, and so this year's improvement or relative rise should be less impressive.

But I note last year it was only up 17 percent which, given the sales growth and the store growth, doesn't seem really out of line.

So -- so two things as we ended inventory.

So pack away, although 43 percent this year versus 43 percent last year.

If you normalize the '03 number, it was basically 3 points.

If you normalize it for the in-transit inventory.

So that I think was the biggest piece.

And also, as we're going in this year, we're maintaining more liquidity, especially in the pack away balances.

So, as we exited February, consolidated inventories were up 8, and in-stores are up 10 on a decline of 5 in the prior year, based on the disruption in supply chain.

And pack way levels were down 4 points, 38 to 42.

In February --

So what I would do is I would take February as the rate, not January because of the disruption that we had because of the roof collapse an the comparative year.

Okay.

And so what's the February inventory versus February last year then?

February inventory consolidated is up 8.

Okay.

It's just that we can only get the dollar amount of the inventory of January, so that's kind of what we -- what we tend to worry about.

Again, if you go to the website and get the February comments, I think we go through the inventory in some detail.

Okay.

So this is a fairly minor problem, then, and it should be -- I mean, you said by the end of the quarter.

I mean, could one reasonably infer that, in fact, it might even be flushed out in the next couple of weeks?

The comment we referred to was the clearance inventory in place and the markdowns we'll be taking on that clearance inventory to move it, which will put some pressure on gross margin, albeit on higher sales.

Okay, great.

Thank you.

Thank you.

There appears to be no further questions at this time.

I'll turn the floor back over to you for any further closing remarks.

Okay.

Well, thank you all 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 wonderful day.