羅斯百貨 (ROST) 2005 Q2 法說會逐字稿

Good morning.

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

The call will begin with prepared comments by Michael Balmuth, Vice Chairman, President and Chief Executive Officer, followed by a question and answer session.

[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'll begin our call today with a brief review of our second quarter and year-to-date performance followed by a discussion of our longer range plans and objectives.

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

Before we begin, I want to note that our comments on this call will contain forward-looking statements regarding expectations about future growth and financial results and other matters that are based on management's current 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 without limitation 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 July 30, 2005 of $42.3 million, and earnings per share of $0.29.

For the 13 weeks ended July 31, 2004, we generated $32.2 million in net earnings, and $0.21 in earnings per share as restated.

Prior year second quarter earnings results included a noncash after-tax charge of $11 million, or $0.07 per share related to the write-down of our former corporate headquarters and distribution center in Newark, California.

Sales for the second quarter ended July 30, 2005, increased 16% to $1.172 billion with comparable store sales up 7%.

For the six months ended July 30, 2005, earnings per share totaled $0.62 compared to $0.53 as restated for the six months ended July 31, 2004.

Net earnings for the six months ended July 30, 2005 were $92.3 million compared to $80.4 million as restated for the same period in the prior year.

Again, results for the first six months of 2004 included the charge related to the former headquarters and distribution center.

Sales for the first six months of 2005 rose 15% to $2.296 billion with same store sales up 5% over the prior year period.

Sales trends improved during the second quarter led by the strength in juniors and shoes, both of which posted comparable store sales gains in the double-digit range.

We believe this bodes well for the back-to-school season.

Same store sales in the home business also performed well with high single-digit increases for the quarter.

Men's continued to trail the rest of the store with comparable store sales up in the low single digits during the quarter.

Geographically, the southwest and Florida were the strongest major markets during the second quarter with same store sales up in the low double digits.

In our most important state, California, same store sales rose 6% over the prior year.

At the same time, operating margin continued to be affected by higher than expected markdowns combined with an increase in distribution center costs as a percent of sales.

While partially offset by leverage on occupancy and other expenses from the 7% gain in same store sales, these factors resulted in an approximate 120 basis point decline in operating margin for the second quarter of 2005.

Of the approximate 150 basis point decline in gross margin, about 130 basis points was due to lower merchandise gross margin.

And around 50 basis points came from higher distribution center costs partially offset by about 30 basis points in lower occupancy and depreciation due to leverage on the 7% increase in same store sales.

In addition, selling, general, and administrative costs improved by about 30 basis points.

All operating margin comparisons are before the nonrecurring write-down charge in the second quarter of 2004 related to our former Newark corporate office and distribution center.

Markdowns year-to-date have consistently been higher than planned.

Although residual inventory issues from 2004 and some modest volatility around actual versus planned sales had an impact on markdown activities we believe that the internal learning curve related to numerous new system processes, procedures, and information flow has also contributed to higher markdown levels.

We believe that we have addressed most of these transitional issues with various system enhancements, modifications to processes and procedures, and additional user training.

As a result, we project that their overall impact on margins should diminish going forward.

Even though distribution center costs were up during the quarter compared to the prior year, we did realize a gradual improvement in productivity during the second quarter compared to earlier this year.

In addition, distribution costs as a percent of sales were lower in the second quarter than the first quarter.

We continue to expect the year-over-year improvements in distribution center costs as a percentage of sales in the back half of 2005 and into 2006.

We began implementation of engineered standards in our distribution centers in the first quarter.

This initiative 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 a gradual increase in productivity levels.

As we ended the second quarter, average in-store inventories were up in line with plan at about 4% over the prior year on a comparable store basis.

Total consolidated inventories increased 9%, driven mainly by the growth in new stores, partially offset by lower levels of pack-away inventory.

Pack-away was about 37% of total inventories at the end of July 2005 compared to 40% at the same time last year.

At the end 2004's fall season we bought less fall pack-away to increase liquidity and flexibility during 2005.

During the quarter, we opened 19 new Ross Stores and three new dd's DISCOUNTS locations.

Sales at our new dd's stores are progressing in line with plan.

We expect to open another seven dd's stores in the third quarter.

All ten dd's openings this year are in various markets throughout California.

At midyear the balance sheet remains healthy.

Solid cash flows year-to-date have continued to fund capital investments in new store growth and infrastructure as well as the Company's stock repurchase and dividend programs.

During the first six months of 2005, we repurchased 3.2 million shares of common stock for an aggregate of $89 million and ended the quarter with 146.2 million shares of common stock outstanding.

Approximately $86 million remains available under the current stock repurchase authorization, which we expect to complete by the end of fiscal 2005.

Now we'd like to review our outlook and guidance for the third quarter and the second half of 2005.

As previously disclosed, we ended the second quarter with higher clearance levels.

Because we're on the cost method of accounting, markdowns hit the gross margin when the item sells.

The higher clearance levels as we entered the third quarter, combined with higher forecasted freight expense in the second half, are projected to hurt earnings per share in the back half by about $0.05.

As noted in today's press release, for the third quarter ending October 29, 2005, we expect same store sales to increase 6 to 7% on top of a 3% decline in the prior year, and are forecasting earnings per share to be in the range of $0.28 to $0.30 compared to $0.25 as restated in the third quarter ended October 30, 2004.

For the fourth quarter ending January 28, 2006, we expect same store sales to increase 2 to 3% on top of flat comparable store sales in the prior year, and are forecasting earnings per share to be in the range of $0.45 to $0.48, compared to $0.35 as restated in the fourth quarter ended January 29, 2005.

These quarterly ranges equate to an updated annual forecasted earnings per share range for fiscal 2005 of $1.35 to $1.40 compared to $1.19 as restated for fiscal 2000 -- for fiscal 2004 before the net charge related to the write-down of the Newark property.

Following are more detailed assumptions that support our earnings per share projections for the 13 weeks ending October 29, 2005.

Total sales are expected to grow about 16 to 18%.

We are forecasting a net addition of about 40 new stores during the third quarter, comprised of 33 Ross locations and seven new dd's DISCOUNTS stores.

As mentioned earlier, same store sales are forecasted to increase 6 to 7% in the third quarter.

By month we are forecasting same store sales to be up 10 to 11% in August; up 6 to 7% in September; and up 3 to 4% in October.

Same store sales declined 8 and 5% respectively in August and September of 2004 and rose 4% in October last year.

We are pleased to report that month-to-date same store sales in August 2005 are up 14% versus a 10% decline for the same period in the prior year.

Operating margin is projected to be in the range of 5.8 to 6.1% compared to 5.9% for the same period in the prior year.

A projected combination of flattish merchandise margins, forecasted improvement in distribution costs and leverage on occupancy and other expenses, is expected to be offset by higher incentive plan costs.

Interest costs are estimated to be about $500,000.

Our tax rate is expected to be around 39%.

And we estimate weighted average diluted shares outstanding of about 147 million.

We are expecting a healthy recovery in merchandise gross margin during the fourth quarter versus a prior year decline of about 290 basis points along with continued improvement in distribution center productivity.

As a result, even with more modest sales assumptions during the holiday period, we continue to forecast strong double-digit earnings per share growth in the fourth quarter.

Now I'd like to review some of our longer range plans, but first to put things in perspective let's take a look at our recent past.

During the three-year period from 2001 to 2004 we replaced virtually every system is in our business while also investing in an entirely new distribution center network.

At the same time, we accelerated our annual unit growth into the low to mid-teen range.

In hindsight we took on too much in terms of infrastructure initiatives and growth.

We felt that 2005 probably would be a transitional year following the major systems and distribution center challenges of 2004.

Recent sales trends are certainly encouraging, although gross margin recovery has lagged expectations mainly due to higher markdown.

Again, to get markdown activity back to normal, we have implemented various system enhancements, modifications to processes and procedures, and additional user training that we believe should help to mitigate these pressures going forward.

In addition, we have begun to take an in-depth look at new store productivity especially in newer markets.

Although improved over 2004 levels, new store productivity in our newer markets is underperforming both our expectations and the new store productivity in markets with more longevity.

As a result, we are currently doing some detailed long-range planning and analysis that looks at every component of the financial model, including new store productivity and contribution, new market performance, and opportunities to recover operating margins.

The objective of this exercise is to identify the optimal expansion strategy that balances growth with operating margin recovery and a proven return on equity and assets over the longer term.

We are also focused on making sure that we have a solid foundation in place with the necessary resources to effectively execute that expansion strategy.

We expect this work to be complete by early fourth quarter and plan to have more information to share on the third quarter conference call on November 16.

Looking ahead, we continue to be excited and optimistic about our longer range prospects.

We still believe that Ross and dd's combined can approach 1,000 store locations by the end of fiscal 2008 with plenty of additional room for growth in subsequent years as well.

Today Ross occupies a unique and attractive niche in retail with 23 years of history, we are the second largest off-price retailer in the country.

A mature and proven concept with healthy cash flows and returns.

We also operate in an industry that continues to expand and take market share.

As a result, with the current total of 695 locations in 26 states our long-term growth potential remains compelling.

More importantly, we believe the work we are doing to improve the profitability and returns of our business will further enhance our ability to deliver annual earnings per share growth of about 15% over the next several years.

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

Thank you.

Ladies and gentlemen, the floor is now open for questions. [OPERATOR INSTRUCTIONS] Our first question is coming from Jeff Black with Lehman Brothers.

Thank you.

Good afternoon.

I guess I just wanted to drill down on the gross margin issue, and reconcile what appears to be pretty solid inventory management with a gross margin weakness.

I guess my question is, we've seen margins coming down in sync with pack-away getting a little better, and is that where the problem is, in pack-away that was bought last year on the margin side?

And if it's not there, can you shed some light on what categories we're having more or less difficulty with?

And I guess it really relates to, are we having problems with stuff that you're buying currently, or are we having problems with stuff that was purchased when we were having all the difficulties last year?

Thank you.

I think it's kind of hard to say in that regard.

Our problems in margin have really been broad-based, and so we wouldn't isolate it to pack-away or flow-through merchandise.

It's really been a myriad of things as we discussed in the call, in the prepared statement.

And if you had to target categories, are we -- is it more women's, men's?

Are there areas that -- ?

It's across the board in the markdown area.

It really is and -- it's a function of a host of things, some of which are systems related, some of which were DC system related, some of it was some purchasing that obviously the customer said "no" to, that was just natural markdown, so it was a mix of a whole lot of things and it's hard to separate how much is each bucket.

But the most important thing is that it's behind us, we think we've solved these issues, and we think we're in much better shape going forward.

Okay.

Thanks a lot.

Thank you.

Our next question is coming from Brian Tunick with JP Morgan.

Hi.

Thanks.

Two questions, I guess.

Mike, on the higher incentive costs for the back half, is that based on EPS or net income targets?

And then the second, just on the new store productivity issues, we'd just love to hear a little more of your thoughts there.

Does that change your view on 2006 new markets that you might enter?

I'll take the first piece.

This is John.

On the incentive costs, it's really a function of comparing to last year where we had no incentive costs accrued.

We reversed the incentive costs.

We paid no bonus last year, and so the difference in the back half really relates to that Brian.

Right.

But is is that assuming that you hit the EPS numbers that you gave today, or is that net income numbers?

Obviously you guys can buy back stock to make the EPS numbers.

Yes, so it's really on an EBIT line, is where we pay bonuses, that's what it's set on, on operating performance.

Okay.

And then just comment on new store productivity, what you think might be some early issues or gut for next year, new market openings.

We're actually working ourselves -- working our way through that in a very detailed manner now.

And new markets, and that sort of thing, we'd really -- we'd rather discuss in November after we've gone through all our work.

Clearly we're not happy with some things that have transpired in some of the newer stores and newer markets, and we're working diligently to assess it and then discuss with it you in November.

Okay.

Thanks.

Thank you.

Our next question is coming from Kimberly Greenberger with Citigroup.

Great.

Thank you.

Good morning.

On the distribution center cost increase here in second quarter, could you help us understand how after DC costs were 60 basis points higher last year, how we're seeing an additional 50 basis points of increase this year?

Were there -- was there something that's happened in the second quarter that we should understand on that?

And then with markdowns, it would seem that the issue that you're talking about it is a relates to the new system would have been present in first quarter as well.

So I'm just wondering if you could help us understand why we're see a sequential acceleration in markdown from first to second quarter on the same system.

And then lastly, Michael, if you could address your view, on a long-term basis, where do you see pack-away inventory going?

Is it -- is the new strategy maybe to take it from historical 40% of inventory down to 20 or 10, or is this a temporary reduction in your pack-away strategy until you work through your system challenges?

Thanks.

Kimberly this is John.

On the DC question, we're getting sequentially better.

As we mentioned productivity is better in the second quarter than it was in the first quarter so it's a function of the comparable numbers.

Actually DC performance was -- kind of peaked -- or that difference peaked in the third quarter last year.

So, I think we're making progress.

We have the right programs in place.

And we think we'll get it back going forward over a longer period of time.

On markdown, this is Michael, year-to-date there's been a myriad of learning curve issues that have cropped up, none of which we thought were really noteworthy enough to talk about in a forum like this.

As we look at it now, cumulatively (ph) we now know they've had an impact.

I think the most important thing on it is that we believe it's behind us, we believe we have our arms all around all of it.

There was a systems conversion and things do pop up and we think we have our arms around it as I said.

Regarding pack-away, we don't have a -- I don't have long-term view that we're going to take a softer position on pack-away.

We cut down on pack-away for this period of time, strategically based on external condition, and if buying opportunities are appropriate, pack-away will crop up at times.

If buying opportunities aren't, it could shrink down a little.

But we don't have a strategic change in position on how to utilize pack-away.

Okay.

Thanks, that's very helpful.

Could I just ask one follow-up question on your merchandise margin in the second quarter.

The -- you indicated, Michael, I think that merchandise margin was down 130 basis points.

Could you split out for us what -- your IMU trend was in the quarter versus your markdown rate?

Yes, actually, all of that 130 is a markdown rate, Kimberly.

Okay.

So IMU roughly flattish?

We typically don't break it out, but if it's all in markdown, that's where it was.

Okay.

Thanks.

Thank you.

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

Thanks.

Just another question about markdowns.

Michael, you've continued to talk about a number of internal factors that have contributed to the higher than expected markdowns this year.

Is there anything going on externally that's contributing to markdowns, or do you think this really is all internal?

There was -- we went through a couple of periods during the season where we were off our sales plan.

And whether that was internal mistakes or an external change in a promotional piece for a second or two, but I think it's primarily what we've talked about, internal issues.

You don't see any change in, let's say, your ability to effectively source the kind of merchandise that you're looking for?

Not at all.

Okay.

Thank you.

Thank you.

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

Good morning.

Can you give us an update on what's happening with payroll costs, the consultants for systems, are they still on the payroll and where you stand there?

And getting back to the historical operating margin of 9 to 10% -- do you believe that the infrastructure of the business, does it allow for that to get back to those levels?

How do you see it trending in the future?

And just lastly, the new management reorganization that you underwent a few -- like two quarters ago, what tweaks have been made to the process and how is it all running?

Thank you.

I'll take the first piece, Dana, which was how are payroll costs running and what are we paying the consultants, etc.

The expense ratios are actually better during the quarter, so I think we're managing that line item pretty effectively.

The consultants were actually a part of the project and the implementation fixing the system which were more capitalized, so they don't run through the P&L.

Okay.

On your second question, about potential operating margin.

Dana, this has been a year where we have been fully focused on getting ourselves back on track.

And for to us achieve those margins, certainly DC costs would have to improve, our margin would have to -- our gross margin would to have get back on track and our average store volumes would have to move along.

So, it's speculative for me to go further.

There's some pieces that have to be improved for us to get back there, and we're working diligently on it.

So that's about all I could really say on that.

Our model hasn't really materially changed.

We have some issues we're dealing with and how quickly we can get back there or if we can get back there.

The question for us really a little further down the road.

Okay.

The new management team is working well.

So, tweaks on -- we haven't tweaked our structure, our structure is intact as we outlined it in February.

I think it's a smoother structure for the Company to operate in.

It's much more efficient for decision-making and all the reasons why we went to this structure are turning out to be just the way we expected them to turn out.

If that's what you wanted me -- where you wanted me to go on it.

Yes.

And just inventory at the end of the third quarter, what are you looking for inventory to be?

On a comp basis, I'm going to say it's going to be in the flattish range.

Okay.

Thank you very much.

Thank you.

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

Hi, guys.

Michael, could you talk a little bit about what type of training or what you've done to help get the systems moving in the right direction a little bit faster that gives you the confidence that all this gross margin pressure is more or less behind us?

And then can you also just give a little bit more color on the misses business?

Because there didn't seem to be any real call-out there, I'm just curious as to how that's trending.

This is Michael O'Sullivan.

I'll take the first of those questions Marni, on training.

We've actually done a couple of things.

One is, tried to make sure that the data is more visible in the system, particularly when the buyers are taking markdowns.

And secondly, we've just started a retraining program for the buyers on how to use the markdown tool.

So it's most specifically around the markdown tool?

It's not about the other merchandising portions of the business?

The focus is on the markdown tool.

And would you say you're comfortable with where the merchants are as far as buying and where the allocating stuff like -- and that portion of it?

[inaudible] That's fine.

Excellent.

Great And then just the misses business.

Misses for the quarter, slightly trailed the Company.

Actually, it's a business I feel very comfortable with how we're positioned for the fall season.

And it got a little stronger as the quarter moved on.

So I feel pretty good about.

Thanks, guys.

Thank you.

Our next question is coming from Richard Jaffe with Legg Mason.

Hi.

Thanks very much.

Just a quick follow-up on one of your comments, Michael.

The goal for 1,000 stores that's, at this point not concrete because you're holding off on expansion plans until after third quarter, is that correct?

Or can you give us some more color on the growth?

I'd say our view on the 1,000 stores hasn't changed.

It's a matter of when, so I think the potential is absolutely still there and I dont think our position's changed on that.

Okay.

So the comment, 1,000 stores in 2008 was not that -- not meant to be that specific?

No, no.

It was approximately that for -- things -- any market can move one season to another season, so it's an approximate number for end-of-year 2008.

And with more color to follow in November.

Okay.

So it's reasonable to plan roughly 100 stores in '06, 7, and 8, between the dd's business and Ross Stores?

Again, Richard, that's -- we're deferring comment on that until we get through our planning efforts and we'll give you color on that in November.

Thank you.

Thank you.

Our next question is coming from Ben Strom with Variant Research.

Hi.

Thanks.

What kind of comp is it that you need to leverage SG&A in the back half of the year including the incentive costs and whatnot?

We think probably around a 4.

4.

And are there any other nonrecurring-type expenses in the quarter here that you can point to?

I mean, with all the training programs and consultants you had in there -- I think -- did the data center move?

Did that fall into the second quarter?

Yes, that did fall into the second quarter.

What's the magnitude of those -- of all those costs that we wouldn't see again?

As they ran through the P&L for the data center, less -- clearly less than $0.01, so they weren't of any magnitude to call out is as one-timers during the quarter.

Okay.

Thank you.

Thank you.

Our next question is coming from Margaret Mager with Goldman Sachs.

I just wanted to ask about the new store productivity point that you were making.

Because I think you said that they're coming in at higher levels of productivity, new stores in the past, but it's below your internal expectations.

Is that correct?

No, that would be not correct.

Okay.

New market -- new stores, new markets are underperforming our expectations.

New stores, existing markets, we have no issue.

Right.

Okay.

So the new stores, new markets, below your expectations, are those stores less productive in an absolute sense as well?

Versus prior new stores?

Yes.

Okay.

Can you just talk about how many stores are we talking about here on your 625 store base?

How many fall into this bucket of new stores that aren't meeting expectations?

Give us a second to compute.

Okay.

Rough numbers are fine.

I just want a sense of it.

Between 50 and 60.

Okay.

All right.

Can you just talk about what markets are we talking about?

In, again high level, whatever you want it -- states, or anything that would be helpful to understand this a little bit better?

Actually for competitive reasons it's hard for to us go into that here.

Okay.

Do you think that it's because of the competition in these new markets that they're not -- that it's not meeting your expectations?

Is that your assessment of it at this juncture?

At this juncture what I would say, is it wouldn't be competition, it would be things that we're doing, and we need to figure that out.

Okay.

All right.

That puts a little more color on it.

That helps.

Thank you.

Thank you.

Our next question is coming from Ken Fullman (ph) with Omega Advisors.

It seems that your inventory is in very good shape.

And at the same time, we observe that there is more and more inventory accumulating at specialty stores and some department stores.

Do you think you are well positioned to take advantage of that situation given your business model?

I would say that we're in very good -- if there are overages that show up in -- through other stores, through the market, through third-party resources, we're in very good inventory shape.

We're have a lot of open to buy, we're very fluid, in flow-through merchandise and pack-away.

Michael, you said it all along.

And that's probably fine.

But do you see right now, a situation shifting dramatically in a more positive manner towards your side?

Or as probably July and August is turning much more positive in terms of inventory balances in retail channel?

I'm just trying to see if you can -- if that is like really an improvement to your side?

I'm sorry, could you give me that again, please?

Can I amplify your point about inventory, specifically turning to the positive side for Ross Stores in July, August and September, like the ability of how much you can buy improves as we speak?

Are you asking me to quantify how much we could buy?

Are things getting better in terms of supplies?

Absolutely, the supply lines are fine.

We absolutely -- we are finding no issue in procuring merchandise at all right now.

It's a pretty good market.

But, I'd say market conditions are fairly similar at this moment in time to a year ago.

Really?

Yes.

Thank you.

And a good job on buying back shares.

Thanks.

[OPERATOR INSTRUCTIONS]

Our next question is coming from David Mann with Johnson Rice.

Yes, good morning.

I wanted to follow up on the new store productivity issue.

I think in past conference calls you've talked about this issue, but you kind of made it sound like it was not endemic to all of the new markets that you've entered.

Is that still the case?

Yes, I think it is still the case.

We are, as we said is earlier -- this is Gary -- we're not -- we're not completely pleased with the performance in new markets, but it isn't necessarily every store in every new market.

So as we talked about, we're going through a process now to really look at the new stores in the new markets and really understand what we need to do internally to drive the productivity.

And then from a -- perhaps a bigger picture, Michael, I guess one of the markets where you had trouble years back was when you went into the Mid-Atlantic.

Can you draw any compares to what you're going through now versus what you went through there?

Is there an issue in terms of merchandising appropriately to the southern customer, or is it a question of getting to a critical mass level to where you can advertise effectively like you do in Texas, Florida, and California?

At this point, David, I'd say it's a combination of both those issues.

It's up to us now to sift through it so we can understand it so we make the right decisions going forward.

And of the 50 to 60 stores that you're talking about, are they a mix in terms of age, from when you went into those new markets?

Or are some of the older stores in the newer markets doing better versus your expectation versus the newer stores?

I'd say some of that is all part of it, yes.

Okay.

Thank you very much.

Thank you.

Thank you.

Our next question is coming from Paul Lejuez with Credit Suisse First Boston.

Hey, guys.

Two questions.

One, with the systems issues that you've run into over the past 18 months, just wondering how that might play into getting a clear and accurate read on these new stores and new markets.

And do you look at these issues as being system flow related, or is it a merchandise problem in some of these markets?

And then second, just to clarify, on the comp, you said 14% month-to-date, is that above your plan, or had you been planning it to be stronger in the first half of the month and tapering off throughout?

Thanks.

Okay.

I'll go second question first.

It's above our plan, and we did -- so we're obviously pleased.

It's early in our quarter but we're pleased.

But it's above our plan.

The second part of the question, the second -- the first part of your question was -- could you give me that again?

Sure.

With the systems issues in the DCs, turning them over, how do you get a real clear read on the new markets?

Are you -- doesn't it cloud the view?

It absolutely does, and that's why we're spending so much time going through this in a very, very careful manner, because we have a clouded situation on new store openings from 2004 on.

And we're trying to make the best decisions, getting through clouds.

When was the first time that you might have even looked at the new stores and new markets as being potentially a problem?

Was it at any point before you ran into the systems issues?

Not really, no.

I mean systems issues, things kind of got a little worse.

But whenever you have a systems issue it's hard to ascertain if it's a performance issue, really at the store level, or it's something you're doing to harm it.

Based on that, and as we're coming out of the clouds, we've now made a determination that there's more to it than it was just the system issue.

Okay.

Thanks.

Good luck.

Thank you.

Our next question is a follow-up coming from Brian Tunick with JP Morgan.

Hi.

Yes, I just wanted to talk a little about dd's for a second, just trends that you're seeing in average ticket versus Ross.

And then maybe refresh us on the expectation for dd's impact on full-year earnings.

Thanks.

Okay.

General trends in dd's are consistent with what we thought, the younger businesses are better than the mainstream businesses, and on an overall, that's how it's playing out.

The average ticket is slightly below what we anticipated, okay.

And it's well below Ross.

And relative to the operating margin drag on dd's it's about between 30 and 40 basis points flat with last year.

Okay.

Thanks very much.

Thank you.

Our next question is coming from Greg Fontana (ph) with Brooke Capital.

Actually, you just answered the question, the 30 or 40 basis points on dd's.

I didn't think that was talked about earlier.

But while I have the mic, I still -- maybe could you give me a little bit more color on this cloud that you're referring to.

I think as put in new systems, maybe you have better clarity on the stores, and maybe that would bring out some of the issues that you've seen before.

No, no, the cloud really was when we really had no information in our system as we went through the conversion at our -- .

Okay.

Now I get that.

Thanks.

That was long gone.

Yes.

Thank you.

We do have another follow-up coming from Kimberly Greenberger with Citigroup.

Thank you.

Could you just give us your quarterly transaction metrics, average dollar sale and number of transactions for the second quarter?

Relatively flat with where we've been, historically Greenberg -- or Kimberly, we haven't seen really any material change.

So flat, average dollar sales, so the increase in comp in the second quarter was due to an increase in traffic?

Yes.

Or, I'm sorry, increase in number of transactions?

Yes.

Okay.

Thanks.

Thank you.

At this time there appear to be no further questions.

I would now like to turn the floor back to Michael Balmuth for any further remarks.

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

Thank you.

Ladies and gentlemen, this does conclude today's teleconference.

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