羅斯百貨 (ROST) 2005 Q1 法說會逐字稿

Good morning.

Welcome to the Ross Stores first quarter 2005 earnings release conference call.

The call will begin with prepared remarks 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.

This call is being recorded. [OPERATOR INSTRUCTIONS]

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

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 will begin our call today with a brief review of our first quarter performance, including an update on our systems and supply chain issues.

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

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

Before we begin, I want to note that our comments on this call will contain forward-looking statements regarding expectations of our future growth and financial results, and other matters that are base 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 2004 Form 10-K on file with the SEC.

Today, we reported net earnings for the 13 weeks ended April 30th, 2005 of $50.1 million and earnings per share of $0.34.

For the 13 weeks ended May 1st, 2004, we generated $48.1 million in net earnings, and $0.31 in earnings per share as restated.

Sales for the first quarter ended April 30th, 2005 increased 13% to $1.124 billion.

Comparable store sales rose 3% on top of a 3% gain in the prior year.

Geographically, Florida and Texas were the strongest major markets with same-store sales up in the mid- to high-single digits.

California's same-store sales increased 1% on top of a strong 6% gain in the prior year.

The best performing merchandise categories for the first quarter were Juniors, Shoes, and Accessories, all of which posted comparable sales gains in the high single to double-digit range.

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

The weakest businesses during the period are Men's and Children's.

As expected, a combination of higher markdowns and higher Distribution Center costs contributed to lower gross margin, which declined about 75 basis points during the quarter.

Selling, general, and administrative costs as a percent of sales were approximately even with the prior year.

Distribution Center costs during quarter were higher than planned, in part due to the build-up of in-store inventories at the end of April to prepare for our Data Center move.

However, we are also pleased report that the underlying productivity trends were slightly better than expected.

As previously reported, we began implementation of engineer standards in our Distribution Centers in the first quarter.

To date, this important initiative is proceeding on track and remains on schedule for completion by the end of the first quarter of 2006.

The project consists of utilizing industrial engineers to assess each functional area of the Distribution Center operations, followed by development of new procedures.

Over time, we believe that these engineered standards ultimately will result in improved functional efficiencies and an increase in productivity levels.

As we ended the first quarter, total consolidated inventories increased about 12%, driven mainly by the growth in new stores and the planned higher levels of in-store inventories, partially offset by lower levels of pack-away inventory.

Packaway was about 34% of total inventories at the end of April 2005, compared to 39% at the same time last year.

At the end of 2004's Fall season, we purposely bought less Fall packaway to increase liquidity and flexibility during 2005.

Average in-store inventories at the end of April were up approximately 9% from the prior year on a comparable store basis.

We boosted inventory levels as we entered May in anticipation of the final two phases of our Data Center move from Newark, California to Pleasanton, California, which was scheduled to take place this month.

The migration of our Data Center involves shutting down and restarting various pieces of our systems for periods of time of up to a few days.

The planned increase in inventories is one of a number of steps we have been taking over the past few months to facilitate a smooth migration of our Data Center and to minimize the risk of interruption to our business.

We do not currently expect these higher inventories to pressure gross margin, and we are planning in-store inventories to return to more normal levels and to be relatively flat to the prior year by the end of May.

I am pleased to report that the first phase of the Data Center move in early May went smoothly and as planned, and all applications related to this move are back to normal.

The final phase of the Data Center move, which involves moving the remaining applications and related hardware, will take place during the latter part of May.

We will provide an updated status report on this final phase with the May sales release on June 2nd.

Earlier this month, with our April sales release, we provided guidance on the second quarter and updated our outlook for fiscal 2005.

As noted on our sales call, during the first quarter we were able to clear out the bulk of the residual clearance merchandise from the fourth quarter of last year.

However, in response to the modest slow down in sales during April, we recently took a more aggressive markdown posture on Spring merchandise.

As a result, Spring clearance inventory levels were higher than planned as we entered the second quarter.

Because we are on the cost method of accounting for inventory, the majority of these markdowns are expected to impact the second quarter gross margin as the related merchandise sells through.

Despite the additional clearance levels, we remain cautiously optimistic about our sales and earnings prospects for the second quarter and the balance of the year as we begin to anniversary much easier prior-year comparisons.

Last year, the problems associated with the implementation of our new merchandise information system contributed to same-store sales that declined 3% in the second and third quarters of 2004, and flat comparable store sales in the fourth quarter.

As a result, when we reported April sales on May 5th, we provided guidance for the second quarter ending July 30th, 2005 that projected same-store sales would increase 6 to 7% and that earnings per share would be in the range of $0.30 to $0.32 compared to $0.21 as restated for the second quarter ended May 1st, 2004.

The prior-year results are inclusive of a writedown of $0.07 per share related to our former Corporate Office and Distribution Center in Newark, California.

Detailed operating statement assumptions supporting this forecast are available on our website at rossstores.com, in the written transcript of our April sales release recorded comments.

On May 5th, we also projected that same-store sales in May would increase in the 6 to 7% range.

Assuming that sales perform in line with plans for the balance of the month, we remain comfortable with this prior forecast.

Looking ahead to the second half of the year, we are projecting same-store sales to increase 6 to 7% in the third quarter, compared to a 3% decline in the prior year, and 2 to 3% in the fourth quarter versus flat same-store sales in the prior year.

We are also planning significant recovery in merchandise gross margin during the second half versus prior-year declines of about 110 and 290 basis points respectively in the third and fourth quarters of 2004.

Distribution costs in the second half are also forecasted to gradually improve over the prior year.

All of these assumptions combined are expected to drive significant double-digit earnings per share growth in both the third and fourth quarters.

As a result of the timing of year-over-year comparisons and incentive plan costs, operating margin recovery and earnings per share growth are expected to be the strongest in the fourth quarter.

For the year, based on the first quarter results we announced today and our current outlook for the balance of 2005, we continue to project earnings per share for the 52 weeks ended January 22nd, 2006 to be in the range of $1.40 to $1.48.

As most of you are aware, 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 longer-term prospect.

Although it is early, we are pleased to report that our new dd's DISCOUNTS stores are performing slightly better than our expectations.

The ten California locations we opened last year during the third quarter averaged 26,000 gross square feet.

They also have similar departments to Ross, apparel, footwear and accessories for Men's, Ladies, Juniors and Children, as well as fashions for home all at everyday discounts of 20 to 70%.

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.

In closing, we want to emphasize that our business model remains healthy and our growth opportunities continue to be attractive.

Ross and dd's combined currently operate just over 670 stores in 26 states.

We have a long-term history of successfully executing the off-price concept which makes us optimistic about our ability to achieve our target of about 15% 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.

Thank you.

The floor is now open for questions. [OPERATOR INSTRUCTIONS] Your first question is from Jeff Black of Lehman Brothers.

Mr. Black, your line is live.

Please proceed with your question.

Hi, this is his associate, Jody Sukerman calling for Jeff Black, and we were hoping that you might be able to comment a little bit further on dd's, in terms of any drag you saw on the margins in the first quarter and how that might affect the assumptions in 2005?

Yes, this is John Call.

Regarding dd's and the operating margin drag it has on the Company, it will be similar to where we were in 2004 about 35 basis points in the 2005.

That is pretty consistent over the year.

And I know you have said that you reduced your packaway.

And we were just wondering if you could talk about the more macro environment.

If you were seeing some opportunities in the marketplace right now?

We've heard that, obviously, from some of your competitors, and we were just hoping to get a bit more color on that.

This is Michael Balmuth.

The market conditions are favorable, okay.

What exactly is driving it, whether it is changes in quota, changes that are upcoming because of mergers, it is hard to tell, but it is a very favorable environment, and we are having no difficulty finding quality-branded products.

And do you still see the Data Center move will be completed towards the end of the month and you said you will give us a further update on the call on June 2nd?

Yes, this is Michael O'Sullivan.

Yes, we expect Data Center move to be complete by the end the month.

We are really going into the final phase of it, so we will be done by end of month.

Great.

Thank you very much.

Thank you.

Your next question is from Jeff Klinefelter of Piper Jaffray.

Yes, Michael, could you talk a little bit about the performance of the key sort of denim category out there, in terms of how that is translating into trends and pricing for your customer?

And, also today, given the trend, given the strength that you saw in Juniors, Accessories, and Shoes, are you finding that -- what is sort of the best kind of brand availability out there now in terms of the categories?

Are you finding good availability of the most sought-after brands within some of those key trends?

Okay.

The first part of your question was on denim.

Denim has been strong across the entire store and availability is fine, and there is some good trends in denim going on.

Whether it is embellished, five-pocket business is very strong.

So the denim business across every category is good and that bodes well for the future going into Fall.

And on our key businesses -- and I obviously can't mention brands on a call like this.

But we are -- the Juniors, Accessories, and Shoes, there is really a reasonable amount of availability, and reasonable to me is, we are very comfortable that we can fill our open to buy with quality brands, of which I can't elaborate who they are.

Okay.

A follow-up on the denim question.

Are you seeing an opportunity here to see -- to see your price point mix go higher?

We are hearing a lot of the embellished denim in particular is creating some upward movements in AUR for retailers right now.

Are you seeing that and are you also seeing opportunities for your own brand or private label product?

We have no private label product.

So I see no opportunity for us considering doing that, certainly in the denim area where there is plenty of product.

The price points are probably slightly higher, but not materially.

Really what has happened is the trend is so hot, the supply becomes a little more plentiful, so the prices come down because of the suppliership [ph].

Thank you.

Thank you.

Your next question is from Brian Tunick of J.P. Morgan.

Thanks.

I guess, Michael, two questions for you.

First on your second-half comp guidance.

Do you really think it is going to be driven by supply, ie, better inventories or demands on the consumer side versus last year?

And then just secondly on dd's versus Ross, what you are seeing in average ticket versus the two chains, and what the UPTs look like between the two chains.

Thanks very much.

Brian, just give me the first part of that question again?

Yes, I am just trying to get my arms around your optimism on the second-half comps.

Do you think it's going to be you're going to have better in-stock inventories?

Do you think you're going to have better AURs?

Or do you think the consumer demand versus last year is going to be stronger?

Okay.

I think we had so many internal issues last year that we are up against, as we said earlier, much easier comparisons.

We were totally in the dark last year on second quarter and we were [inaudible] across the Company.

So I think our issue -- our issue might be different than others in that regard.

In terms of dd's versus Ross in terms of price?

Yes, average ticket or UPT.

Just give us an idea what you think -- what you have seen so far in the stores that have been open and as you look out further, what's going to be the delta between what Ross and dd's looks like from a customer or like I said average price?

Brian, this is John.

The average basket is pretty similar to Ross, obviously there's a little more retail, a few more units are going in the basket, but pretty pleased with the overall transaction sizes in dd's today.

We only have ten stores open and we are still learning about this business, so it is hard for me to say where it will go.

If I had to make a call today, I would probably say it won't be very different from where it is today.

Again, with ten stores open it is very premature for me to tell you really where we're going with it in that regard.

When you guys sit down and hear that one of your largest competitors is struggling with their low-end chain and cutting back on the number of stores they are opening, does that make you worried at all?

Or do you think that that's just more opportunity for you guys?

No, it doesn't concern me really.

I think we are running different businesses and what issues they have inside their four walls I am not fully aware of.

We are comfortable with the progress we are making there and I think that is the way we have to proceed in evaluating it.

If someone was to ask you what you think those differences are between your competitor and dd's, what would you call out as one or two main differences?

For competitive reasons, I really don't want to respond to that.

Okay.

On a call like this.

Okay.

Thanks, guys.

Good luck.

Thanks.

Thank you.

Your next question is from David Mann of Johnson Rice.

Hi, yes, good morning, everyone.

My question is on the excess clearance you have coming out of the first quarter.

Can you just talk about in any detail how much you have, the time you expect it will take to clear that, and any specifics by category or region where you are having it?

David, this is John.

Relative to clearance balances, I won't comment on the exact amounts.

Obviously it is putting a little pressure on margins into the second quarter, but we believe relative to the $0.30 to $0.32 guidance out there right now, it delves into that number, we are able to offset that with some -- kind of slightly above-plan performance at our Distribution Center network, so we are just kind of dialed in to the $0.30 to $0.32.

And there do not seem to be any regional or category issues where it's concentrated?

No, ours is pretty widespread, David.

Okay.

Following up on the earlier question about the favorability of product that's out there.

Are you saying, just to clarify, favorable pricing as well?

And is that already in your guidance?

We are seeing what we expected.

We went into this year much more fluid than we have been even in prior years, and so we are not really seeing surprises.

So it is planned into how our guidance, it is planned into our models for the year.

But pricing is a little more favorable as well?

In parts and in pockets.

Not everywhere, but in pockets.

Okay.

One last sort of bigger question for you, Michael.

It sounds like you are definitely feeling more comfortable with how you are doing coming off of last year.

Can you give us some sense on your feelings about the ability to return towards a historical EBIT margin, sort of that 9.5% you did a couple of years ago.

Is that possible?

And how long might it take to get there?

It's an interesting thing.

We -- we've come off a traumatic year, and the focus of our Company has really been to get back -- the Company back on track and we seem to be moving in the right direction.

So I think going into when and if we can be back at different levels of profitability.

I think it's speculative at this point, and I think -- I think we right now our focus is what I said, just moving this business and getting back to the fundamentals of driving the business the way we have been, and that's -- any further on it , I don't think I can go at it at this point.

Okay.

Thank you very much.

Thank you.

Your next question is from Margaret Mager of Goldman Sachs.

Hi.

I have a couple of questions.

First, I wanted to ask about incentive comp coming up in the fourth quarter.

Can you just remind us how you do your incentive comp, and how you expect it to grow in '05, vis-a-vis, producing a much stronger fourth quarter in earnings per share.

And then, could you talk a little bit about the Men's and Kid's businesses and what you think are the challenges in that space.

And lastly, if you could clarify on the 35 basis points on -- pressure on EBIT margin for dd's.

Is that in the quarter or the year?

I wasn't really clear.

Thanks.

Margaret, on -- this is John again.

On the incentive comp, for the year -- at least last year, we reported around 50 basis points, kind of -- that we gained last year from not having incentive comp.

In the first quarter of last year, we accrued incentive comp.

We didn't really run into problems until the second quarter, and then we started accruing less, and obviously, reversed it all out in the third and fourth quarter.

Regarding -- I will get back to Michael in a minute, on your second question.

But on the third question related to dd's, it is 35 basis points for the year.

Okay.

The second question, Margaret, was --

Then I was asking about Men's and Kid's, before you go off the incentive comp, so this year you expect to have incentive comp in the third and fourth quarter whereas last year you -- you stopped accruing it or reversed your accrual.

So even with that -- that change, you are still looking for a very strong recovery in all of your margins in the second half of this year?

That's correct.

The strength in the back half, that's correct.

Including income.

And would it be -- is that what it generally runs around 50 basis points for --?

Typically, that's what base we're talking about [ph].

On an annual basis?

Yes.

Okay, that's helpful, thanks.

And then my question was, the Men's and Kid's, just wondering what you see -- what are the challenges there?

Why is it --?

Men's -- there's two separate issues.

Men's has really been a national issue over the last several years, and although as one of the lowest-performing businesses in the store, I think we have made considerable progress there.

But it's just a sluggish business nationally, and so we also have some execution businesses probably in one segment of that that compounded that.

In Kid's, I do believe it was a Ross -- combination of Ross execution that hurt us, and there was some promotional aspects of the business competitively that I don't think we prepared for as well as we should have, and we have corrected those going forward.

So you think Kid's will be good for back to school?

I think it will be considerably better than how it performed for us in the first quarter.

Okay.

While I have you, one last question on just a general -- general question.

A number of the retailers in the May -- the April comp report indicated that the West Coast was one of the weaker -- weaker-performing areas, I think it was largely cited because last year it was so strong.

But given your vantage point, is there anything that you would highlight about the West Coast in terms of the economy there that may be a bit different than the rest the U.S.?

No.

There is nothing I've highlighted.

I am not in economist.

I would be speculating.

I think the West Coast for the first quarter had some very, very unusual weather, and I don't think it is a lot more complex than that.

So it was poor this year?

It was cold and wet.

And last year it was good.

Yes.

Okay, that's helpful.

Good luck.

Take care.

Thanks.

Thank you.

Your next question is from Richard Jaffe of Legg Mason.

Thank you very much, guys.

I guess, a question, with less packaway this Spring, will that have an impact on gross margin this Spring?

I know packaway has been a source of late gross margins for you guys.

Do you see an impact or do you think you can recoup that in the market opportunistically?

Our strategy is that we'd recoup it as what we have in our forecast, and we feel comfortable with that.

Can you just repeat your comments on trends to date.

I didn't pick them up.

We're trending at least thus far in March about on plan.

So we feel good so far.

Again, it is early in the quarter, but trends are good.

Great, thank you very much.

Thank you.

Your next question is from Marni Shapiro of Merrill Lynch.

Hi, guys.

Can you give us an update on the regional merchandising?

Anything that has really been working well, best regions that you have seen a follow-through and any plans for Fall where you think it could be very useful.

And then just a follow-up on the Men's and the Kid's business.

Was it consistently weak through the quarter or did you see an improvement as the quarter trended into summer.

Our regional merchandising, it's an interesting year for us so far.

We are really up against flawed information from a year ago, so I think across the board, it is a very valuable tool.

We are getting back to using it the way we were using it before we had our systems issues.

So I think that is the best way I can answer it and I will give you more news later in the year, on the tool, because some of our prior-year information is flawed now.

Men's and Kid's, Men's business improved as the quarter progressed and Kid's pretty much stayed the same.

Great.

Thanks, guys

Next question is from Dana Telsey from Bear Stearns.

Good morning, everyone.

Can you talk a little bit about -- the core merchandising system now fully operational, how has your merchandise offering changed?

And are you influencing planning and allocation so you are getting regional assortments in different places.

When does that begin to occur?

And do you see that benefiting the gross margin outlook in the long term.

And just lastly on the home business.

Can you talk about the home business and the opportunities you see there, and what you see on that front?

Thank you.

That's it?

That's it for now.

Okay.

The -- let's break this down for one -- each segment of the question, Dana.

Give me the first one again and I will answer each one independently.

Okay.

Core merchandising system, how has your offering changed given that it is operational?

Well, really the biggest difference right now is we are able to plan again at the regional level and we're able to deliver the product that we are intending to region by region.

And we have been missing that for a while.

So certainly as the year progresses, we think that will help us more and more.

And is the new distribution network influencing planning and allocation to the degree that you want?

Or is there still more opportunity there?

There is still more opportunity.

There is still more opportunity and it will take us a little while to fully get it.

And the home business, what do you see there?

Actually the home business, the trends have been pretty good.

I think we are going -- our strategy at the moment is not going to dramatically change.

We're having our biggest success there is really our -- has been in domestics and housewares in the recent past, and we are very pleased with the progress we are making there.

Thank you.

Thank you. [OPERATOR INSTRUCTIONS] Your next question is coming from Kim Galle of Pioneer Investment.

Good morning.

I just was hoping that maybe you could fill in a little bit more detail on Richard Jaffe's question.

You may want to be specific.

But in terms of the packaway, I guess you get a margin benefit from packing away, ie, get paid to store merchandise.

And while we realize it is built into your guidance, can you just give us a sense of maybe in '06 versus '05 when you are sort of back to normal packaways, like how much of a delta that might provide?

Actually, we don't know what our '06 packaway levels will be at this point in time.

So I think relative to '06, I couldn't give you a delta at this point.

I mean, it is interesting that TJ doesn't packaway at all and they buy pretty much close to need.

And I am wondering if you are finding, given that you have packed away less, if, in fact, you might have less need for packaway in the future?

I wouldn't count on that.

I wouldn't count on that.

And I don't think your information is fully accurate that they don't packaway at all.

Okay, but certainly fairly little?

I don't know what level.

I know they do packaway though.

Okay.

I mean, is -- is the change in packaway a very significant part of the margin change year-over-year for this year?

No.

I would say no.

No?

Great, Thank you.

Thank you.

Your next question is from Paul Lejuez of CFSB.

Hey, guys.

Paul Lejuez.

On the packaway as well, can you maybe just provide a little detail with what items you have cut back on, what has come out of packaway relative to last year?

Where those dollars have flowed as far as merchandise in the store?

And also, I am wondering if you could review with us where your '05 store openings will be in as much detail as you can provide.

Thanks.

On where we have cut back in packaway, Paul.

I wouldn't get into that here for competitive reasons.

But I think you probably could say we have cut back -- we cut back a bit everywhere, and some pockets more.

I just won't elaborate on the deeper pockets.

Paul, relative to the store openings, kind of -- kind of broad-based, Texas, Florida, the Southeast, some in California.

So I would say not really focussed in one specific area, but fairly broad across our current market.

Can you throw any numbers on any of those states or region?

No, because quite frankly, Paul, they change.

But we have signed leases, they kind of move around a bit, but that's really where we are focussed.

Got you.

Any comments on new store productivity that you are seeing?

We had a tough read on our '04 new stores.

We do have some markets that we are concerned about, and we are watching them closely.

We are seeing slight improvement.

But as I said, we are continuing to watch them closely.

Which are those?

For competitive reasons, I don't think we want to go into that.

Got you.

Thanks.

I am showing no further questions and would like to turn the floor back over to management for any further or closing comments.

Just thank you all for attending and have a good day.

Thank you.

This does conclude today's teleconference.

You may now disconnect your lines and have a wonderful day.