羅斯百貨 (ROST) 2005 Q3 法說會逐字稿

Good afternoon.

Welcome to the Ross Stores third-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.

As a reminder, this call is being recorded.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question-and-answer period. (OPERATOR INSTRUCTIONS) At this time, I would like to turn the call over to Michael Balmuth, Vice Chairman, President and Chief Executive Officer.

Sir, you may begin your conference.

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 Executive 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 third 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 in 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 SEC filings including the 2004 Form 10-K and the 2005 Form 8-Ks and 10-Qs.

Today we reported earnings per share for the 13 weeks ended October 29, 2005 of $0.25, compared to $0.25 as restated for the 13 weeks ended October 30, 2004.

Net earnings for the third quarter ended October 29, 2005 were $36.3 million, compared to $37.7 million as restated for the 13 weeks ended October 30, 2004.

Fiscal 2005 third-quarter sales rose 20% to $1.237 billion from $1.028 billion for the quarter ended October 30, 2004.

Comparable store sales for the period increased 9% over the prior year.

For the nine months ended October 29, 2005, earnings per share totaled $0.87, compared to $0.78 as restated for the nine months ended October 30, 2004.

Net earnings for the nine months ended October 29, 2005 were $128.7 million, compared to $118.1 million as restated for the same period in the prior year.

Sales for the first nine months of 2005 rose 17% to $3.533 billion, with same-store sales up 6% over the prior-year period.

Earnings for the third quarter of 2004 are inclusive of a $0.01 per share gain on sale of the Company's former corporate office and distribution center in Newark, California.

Results for the nine-month period ended October 30, 2004 also include a net non-cash impairment charge of $0.06 per share to write down the value of the Newark property to its estimated fair market value.

The geographic strength during the third quarter was broad-based.

The strongest region was the Southwest, where comparable store sales rose in the high teen to 20% range followed by Texas and Florida, where same-store sales were up in the low double-digit range.

In our most important state, California, comparable store sales rose a solid 7%.

Shoes and juniors were the top performing merchandise departments during the quarter with same-store sales up in the low 20% range, while children's and home both generated comparable store sales increases in the low double-digits.

Gross margin during the third quarter declined about 60 basis points mainly due to the previously announced increase in inventory shortage resulting from our recent physical inventory of stores along with a net cumulative charge for corrections of differences identified in the related reconciliations of merchandise accounts payable.

Shrink as a percent of sales increased about 130 basis points over the prior year, reducing earnings per share during the quarter by about $0.05.

The net charge related to the accounts payable reconciliation resulted in an additional 65 basis point increase in cost of goods sold during the quarter, which reduced earnings per share by another $0.02.

As a result, we estimate that earnings per share during the third quarter without these charges would have been about $0.32.

We believe the higher shrink in our stores was driven in part by various systems related issues we experienced since our last physical inventory.

For example, our fraudulent refund control system was not operating for several months as our new core merchandising system was being implemented.

Execution issues in our distribution centers also contributed to higher shrink results.

In addition to these issues, we experienced an increase in both internal and external store theft over the past year, especially in our higher sales volume locations.

We are immediately implementing an aggressive shortage control program with the goal of getting future shrink related expense over time back to historical levels.

These measures include wider use of security tags for higher shrink merchandise, a larger number of security personnel, and increased use of technology including software to monitor internal theft and more digital security cameras in higher shrink locations.

It is important to note that the 130 basis points in higher shortage in the third quarter represents a cumulative adjustment for activity that took place since our last inventory in the third quarter of 2004.

Looking ahead, we believe it is prudent to accrue for shortage at our current higher shrink rate at least until we take another physical inventory.

This higher reserve rate is expected to pressure operating margin over the next few quarters on average by about 35 basis points each period or about $0.01 to $0.02 per quarter.

The higher costs related to the shortage results and related accounts payable reconciliation were partially offset by approximately 75 basis points of leverage on occupancy and buying costs; from the 9% increase in same store sales; a 30 basis point decrease in supply chain costs; and a 30 basis point improvement in merchandise gross margin.

As expected, distribution center costs as a percent of sales improved during the quarter; however, we still have a lot of work ahead of us.

Implementation of engineered standards, which began in the first quarter of this year, remains on schedule for completion by the end of the first quarter of 2006.

We believe that the improved efficiencies we expect to realize over time from these processes and procedures will result in increased quality and productivity, leading to a gradual decline in distribution center costs as a percent of sales.

General, selling and administrative costs as a percentage of sales rose about 45 basis points during the third quarter.

Approximately 55 basis points of leverage on stores and related depreciation and amortization was more than offset by an approximate 100 basis point increase in general and administrative expenses due to higher incentive plan costs compared to the prior year.

During 2004, the incentive plan expense accruals from the first half of that year were reversed in the third quarter when we determined that no bonuses would be paid under the plan.

As we ended the third quarter, average in-store inventories were relatively flat to the prior year on a comparable store basis.

Total consolidated inventories increased 7%, driven mainly by the growth in new stores partially offset by lower levels of pack-away inventory.

Pack-away was about 32% of total inventories at the end of October 2005, compared to 35% at the same time last year.

During the quarter we completed our store opening program for the year, adding another 33 Ross stores and seven additional dd's DISCOUNTS locations.

We currently operate 715 Ross locations in 26 states and Guam and 20 dd’s stores all in California.

We are pleased to report that the balance sheet remains healthy as we enter the fourth quarter.

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.

As announced in today's press release, our Board of Directors recently approved a new two-year $400 million repurchase program along with a 20% increase in the quarterly dividend payment.

The new stock buyback program represents over 10% of the Company's total market value at current price levels.

In addition to our new authorization, approximately $42 million remain available under the prior stock repurchase authorization which we expect to complete by the end of this year.

During the first nine months of 2005, we repurchased 4.9 million shares of common stock for an aggregate of $133 million, ending the third quarter with 144.7 million shares outstanding.

The new quarterly cash dividend of $0.06 per common share is payable on or about January 3, 2006 to stockholders of record as of December 7, 2005.

Both the stock repurchase and dividend programs reflect management and the Board's commitment to enhancing stockholder value as well as our confidence in the long-term prospects of our business.

Looking ahead, although the external climate remains challenging, our recent progress in improved sales and merchandise gross margin trends keep us cautiously optimistic about our prospects heading into the important holiday season.

For the 13 weeks ending January 28, 2006, we continue to project same store sales gains of 2 to 3% on top of flat comparable store sales in the prior year and are now forecasting earnings per share to be in the range of $0.44 to $0.47, compared to $0.35 as restated in the fourth quarter ended January 29, 2005.

Following are more detailed assumptions that support our earnings per share projections for the 13 weeks ending January 28, 2006.

Total sales are expected to grow about 13 to 14%.

We completed our store opening program for the year in the third quarter.

Year-to-date we have opened 76 new Ross locations and 10 dd's DISCOUNTS.

As mentioned earlier, same-store sales are forecasted to increase 2 to 3% in the fourth quarter.

By month, we are forecasting same-store sales to be up 3 to 4% in November; up 1 to 2% in November; and up 3 to 4% in January.

During 2004, same-store sales declined 2% in November; grew 2% in December; and declined 1% in January.

Month-to-date, same-store sales in November are in line with plan and up 4% over the prior year.

Operating margin is projected to be up 70 to 110 basis points or in the range of 7.7 to 8.1% compared to 7% for the same period in the prior year.

A projected combination of higher merchandise margins and forecasted improvements in distribution and buying costs as a percent of sales are expected to be partially offset by higher incentive plan costs compared to the prior year.

Our tax rate is expected to be around 39% and we estimate weighted average diluted shares outstanding up about 145 million.

Now I'd like to review some of our longer range plans for 2006 and beyond.

Since our last conference call in August, we have been working to develop plans to address two key objectives; strengthening our performance in the newer markets we have entered over the past few years and increasing operating margins and return on equity and assets.

Although new store productivity in our newer regions has improved slightly in 2005, it is still underperforming both our expectations and productivity in markets with more longevity.

To better understand this issue, we recently conducted some in-depth analysis on newer markets sales and margin trends.

We also have performed some competitive merchandise audits of sample Ross stores in newer markets versus the competition.

In addition, our merchants have spent time traveling to these newer markets to personally evaluate Ross assortments versus our competitors.

Based on this work and as we had expected, we found that our merchandise assortments in many newer market stores have not been competitive enough in meeting the local needs of customers in these regions.

To address this issue, we plan to strengthen our current micromerchandising tools through some process changes.

These may include more detailed store planning combined with a focus on lifestyle or local market needs.

We are also exploring additional system driven solutions to enhance performance over the longer term.

These actions are expected to provide more detailed information to help us better understand what is most important to customers in each individual market.

As we concentrate over the next couple of years on improving our ability to meet customer needs at a more local level, we plan to focus store growth in the regions we already serve.

We believe this more targeted expansion program will enhance our ability to realize gradually improving store sales productivity and profitability across all markets, enabling us to balance growth with improvement in operating margins and overall returns.

As a result, we currently are planning total net unit growth of about 8% in fiscal 2006 consisting of approximately 55 Ross and about 5 dd's stores followed by approximately 9% total net unit growth in 2007.

Based on our updated store growth assumptions for fiscal 2006, along with our projections for same-store sales gains of 3 to 4% and gradual improvement in operating margin, our preliminary forecast is for earnings per share for the 53 weeks ended February 3, 2007 to be in the range of $1.60 to $1.70.

This preliminary projected earnings range for fiscal 2006 includes the estimated earnings benefit of about $0.06 to $0.07 from the 53rd week in 2006 but does not include the projected non-cash earnings impact related to the adoption of FAS 123 R share based payment.

We expect to provide more detailed earnings guidance that will include the estimated impact of stock option expensing and other operating statement assumptions as we normally do on our January sales release call on February 2, 2006.

In closing, I want to emphasize how we remain excited and optimistic about our long-term opportunities for sales and earnings growth.

Our recent trend of solidly improving sales with comparable store gains of 6% year-to-date in 2005 confirms that our core strategy remains very viable and attractive to our target customer.

As we look ahead to the fourth quarter and 2006, our continued strategic focus will be on delivering the best name brand bargains at the largest discounts possible.

Going forward there will be an increased emphasis on creating assortments that are tailored to more effectively meet the local needs and wants of customers in all of the markets we serve today.

We believe that these merchandise strategies combined with the expected benefits over time from our recent systems and distribution center investments will enhance our ability to achieve our target of annual earnings per share growth in the range of 15 to 20% over the next few years.

That earnings growth is projected to be driven by a combination of ongoing expansion, gradual improvements in operating margin and a gradual reduction in diluted shares outstanding from our stock repurchase programs.

Our business model remains very solid, continuing to generate significant amounts of cash after self-funding our growth.

We use that cash to enhance stockholder returns through our share repurchase and dividend programs.

We have bought back stock every year since 1993 and have also increased our dividend each year since its inception in 1994.

Today's announcement of a new $400 million stock repurchase program and a 20% increase in our cash dividend is evidence of our ongoing confidence in the business as well as our continued commitment to enhancing stockholder value and returns.

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

(OPERATOR INSTRUCTIONS) Jeff Klinefelter, Piper Jaffray.

A couple of quick questions.

One, just considering taking a look now at all the systems changes you have made as well as the new distribution center and other dynamics in the industry in terms of changes to sourcing as well as other brand developments, going forward what sort of a normalized gross margin rate would you anticipate being able to achieve once you work out the current maybe just slight lack visibility in terms of the shrink levels?

Is there anything structurally that has changed that would take you higher than sort of a historic normalized rate or keep you from achieving those peak rates in the next couple of years?

Jeff, this is John.

As we look forward to gross margin rates, we think they will be fairly similar to what they have been historically.

We see -- historically meaning prior to the recent systems issues.

So that would be our view going forward.

So looking something back in like the 25% range?

Something like that.

As a follow-up to that, again with respect to some of the systems changes that have been made, anything that is happening on the SG&A level that would deviate from those trends during those prior periods?

We have obviously invested more in systems, so in the quarter you probably have about 30 to 50 basis points of extra investment in IS as we had to depreciate the more expensive systems going through.

Okay.

Given the competitive dynamics out there right now, any changes at all in improvements in your product availability in certain brands?

It is actually -- I would say no change from any previous discussions we have had.

It is a pretty good time to be a buyer in off price.

Great, thank you very much.

Kimberly Greenberger, Citigroup.

I was wondering if you could comment on the adjustment to the fourth quarter range.

If the $0.01 adjustment due to the higher shrink accrual going forward?

Then on your higher theft, Michael, that you talked about in the stores, can you maybe expand a little bit on that and give us your thoughts as to why you think that staff and shrinkage has been higher here over the last four quarters?

Kimberly, in response to your first question, the change in the range of $0.01 is due to the extra shrink accrual.

This is Gary.

Relative to the shrink question we saw our shrink come in two different areas.

We saw some issues that were related to BC (ph) processes and we also saw an increase in shrink in stores.

Shrink was pretty broad-based throughout the chain, but we saw larger increases in our larger volume stores.

And why would that have happened suddenly in the last year when it had not been the case historically?

Relative to the in-store shrink?

Exactly.

We made a number of changes over the past couple of years and I would say we have got a focus today on preventing shortage throughout our stores and we focus on using electronic article surveillance along with digital camera systems.

But based on the shortage that we have seen, we are going to be reimplementing a number of security personnel in our higher shrink stores.

So was it the case that for the past couple of years as you had been looking to scale back on SG&A, was it the case that maybe some of these security measures were removed from the stores or you were tagging fewer items in store?

Can you comment on that?

I would say that in both cases yes.

We do have a new, better electronic system.

Along with that, the number of tags that we use today were less than we have used in the past.

We have reinvested though to ensure that we have the right number of tags in our stores and the same with security personnel.

We will make sure that we have the right number of people in the right stores to prevent shrink going forward.

Okay, great.

One last question for John.

On the SG&A, John, I for some reason had thought that your incentive plan costs would be up about 150 basis points versus last year's third quarter.

I thought for some reason that maybe last year you had a 100 basis point decrease in incentive plans from the reversal of Q1 and Q2.

Plus you had a 50 basis point benefit for not accruing in the third quarter for that quarter.

Maybe I am just not remembering properly.

Could you help me with that?

Sure.

In last year's third quarter there was a 150 basis point change. 60 of that related to Q4 -- Q3 '04.

So if you take the 60 last year plus we put we accrued another 30 to 40 this year, that is a 90 to 100 basis points from this year.

So the 150 you are remembering is correct but that relates to '03 to '04.

Okay, great.

Thanks.

That's helpful.

Brian Tunick, JPMorgan.

I want to ask you how steady your comps are.

I do have three questions for you.

I guess one on the guidance, how does the extra week next year give you the $0.06 to $0.07 of upside?

We can only get half of that.

So relative to the $0.06 to $0.07, it is really a function of the extra week of sales times the gross margin rate, so when we did this actually five years ago it came to about $0.06 to $0.07 as well.

What kind of sales are you expecting for that extra week?

I think in line with kind of the typical run right.

Of a January month?

Correct.

We will have to get back to that.

Second question maybe Michael will talk about your customer and how you think the potential energy cost increases impacts.

I know you guys have talked about the "want a bargain" versus "need a bargain".

Maybe can you talk about those two kinds of customers?

Okay, obviously the rise in energy cost is not good for any of us in retail.

We do have two customers.

We have the customer who needs a bargain and the person who needs a bargain is somebody who is more impacted by the energy cost and essentially needs to buy in an off-price store or a discount store because of their income level.

The want a bargain customer is somebody who likes the thrill of the hunt, the treasure hunt, and it’s kind of like sports shopping.

So although the energy crisis has been going on for a bit, our sales have not been horribly impacted.

We picked up 9% last quarter and 6% year-to-date.

Essentially off-price can get a swing where customers trade down also.

So it is hard to exactly say how much of our customer is that versus our consistent customer.

So we are concerned about it.

We are watching it.

So far it hasn't seemed to impact our business.

Just final question.

In Texas, Florida and California you got close to 400 stores.

Where do you see saturation levels in those big three existing markets?

We still think we have a lot of growth potential in all those markets.

Be a little specific?

We don't think we are near saturation at all.

Okay, so we don't need to worry that the concept can't be over 1000 stores if those existing markets mature?

I would not worry about that.

Okay.

Thanks.

Good luck.

David Mann, Johnson Rice.

If I could follow up on that last question, you said that you're planning on focusing on opening in markets you already serve.

Doe that suggest that you're planning on opening in some of these markets where your stores or underperforming?

Yes, we would be.

We will still continue to back fill in those regions.

How much of the issues in those markets do you think is related to marketing and customer awareness of your concept?

I think that's very small and I think that really is a very small factor in off price.

I think it really -- the issue is us and what we put in the stores and we've got a plan to remedy that and we're going to work very hard to do that.

And have the issues in some of these newer markets which I suspect are mostly the southeastern markets, has it been uniform across the different states in urban areas or have you had some signs of success there?

We have had some signs of success, but we have had enough signs to tell us that it varies by different places that we're at.

And essentially what we know is putting the same product in throughout these nine states is incorrect.

We need to get closer to local needs and we're going to get very focused on that.

Michael, one last question.

You're also slowing the growth at dd's in terms of that growth rate yet that's I guess mostly in a markets that you had been very comfortable with.

So can you just elaborate on the thoughts behind that or just some issues you feel like you're still working out there?

Are you committed to the concept?

Okay, I look at the dd's store numbers -- we will have 25 stores, which I think is enough stores for us to work out the kinks that we have.

And essentially our sales are encouraging and it is an expensive business to operate.

It is a lower retail business so there are logistics costs and handling costs that we are working to figure out and we are focusing our efforts on attacking that side of it.

But the top line is encouraging.

So should we expect that -- is that something you expect to figure out in '06 and then expand again in '07 at a faster rate?

We expect to figure it out.

We are working diligently on it now and we expect to figure it out.

And after that, we will discuss our growth rate.

Very good, thank you.

Paul Lejuez, CSFB.

Are there any of the newer markets that you are happy with?

Can you maybe talk a little bit about which states are perhaps stronger than others; which are weaker?

Not sure if I missed this but did you talk about where the new dd's would open?

Are they still all out in California?

And just last, can you point to any specific improvement that you are starting to see from the new systems investments that have caused you some problems over the year?

Okay, a three-parter.

There are pockets that we're doing well in our newer markets and for competitive reasons I cannot elaborate on which ones those are.

But there are pockets that are doing fine.

The second question, I'm sorry, was on dd's.

Dd's will remain in the current markets that we operate in.

And its expansion this year.

And the third part of your question was relative to our systems.

This is Michael O'Sullivan.

Let me just respond on that one.

The new system actually collects more data than the old system used to.

So in many ways it provides a better platform for some of the things that we're thinking about doing from an improved store assortment point of view.

So we actually expect the new system is going to be helpful as we try and pursue some of those opportunities.

Have we seen any of that yet?

If not, when do we?

I think I would say in 2006 we would expect to see some modest improvement and it’s really in 2007 that we'd see a bigger improvement.

Thanks, good lock.

Dana Telsey, Bear Stearns.

Can you talk a little bit about the analysis that you did and the surveys that you did?

Is it still ongoing?

What else do you expect to learn from it?

And the stores that you've opened this year, how are those productivity levels doing?

What are the plans to improve that?

This is Michael again.

I'll take that.

We did some initial sort of research just to understand the extent of the issues in those new markets and that confirmed for us that our assortments could be more competitive.

So that is how we got to this point.

We are now looking at phases of sort of looking at how they could be more competitive, what specifically we should do.

And that is kind of where we're at at the moment.

I think the last part of your question was how are the 2005 openings doing?

Yes.

There's some improvement in those stores but the truth is its very early.

We are still in 2005.

So some improvement but again, we still feel like there's plenty of opportunity to make those stores perform even better.

And CapEx for this year and next year, is it still 185 million for this year and what are you looking for next year?

Dana, this is John.

I think this year we will land between 180 and 185 and we're still putting the finalizing our plans for '06 and we will be out with that number with our January sales call in February.

Just lastly, Michael, what are you seeing out there in the buying environment product category wise?

Women's, men's, home, juniors -- are you seeing any changes in trend by category?

Changes in trends in availability?

And sell through.

I would say first of all on availability, availability is still a pretty position, as I said earlier.

It's a buyer's market right now.

And in terms of our overall trend, I would say there have not been any dramatic changes for us that we have seen in the last 90 days.

The parts of our business that were driving it before still currently drive it.

The shoe business, the junior business.

There's a lot of novelty things going on around and it really -- novelty and embellish really translates across all ends of apparel, accessories and shoes.

Thank you.

Richard Jaffe, Legg Mason.

Just to follow on in terms of product availability and sourcing, following on to Dana's question, your pack-away has incrementally declined the last several quarters.

I'm wondering if there's a little bit of shift in the strategy that you want to be more liquid, more opportunistic in the marketplace that you are seeing?

More at once availability or is it just coincidence that this has been trending downward?

Not a coincidence.

There has been world market shifts and there has been a whole of things going on with over quota, embargoes, and so we positioned ourselves a little differently going into the year.

And we continue to operate in that manner and we have had no problem at all filling our pipeline.

So looking forward we should assume that this trend will continue, that your pack-away percentage could decline below 30% next year?

I would not assume that.

It all depends on how we assess market conditions going forward as the rules are changing a bit.

(multiple speakers) made on a monthly or quarterly basis?

It is a dynamic -- I guess I would say it's a dynamic thing.

There's going into this year and in this year there was a change in the basic premise of how goods were imported into the country and essentially as that stabilizes and when that -- as that stabilizes and as opportunities arise we evaluate this daily.

Thanks very much.

Margaret Mager, Goldman Sachs.

I have a question about your targeted growth rate of 15 to 20%.

If you are lowering your new store openings, the formula to get to that has to change a little bit and I'm just wondering how you are thinking about how you continue with a 15 to 20% targeted growth rate in light of a slower expansion of new stores?

Sure, Margaret.

So if you think about topline growing around 10-ish or so, you get -- I think the change would be our expected operating margin improvement, which would add 4 to 8 percentage points of growth.

You have a buyback of 1 to 2 points.

You'd get to about 15 to 20% growth.

See you don't anticipate changing the buyback amount in any meaningful way?

Today we announced $400 million buyback which is incrementally more, but again, that will add probably 1 to 2 points of growth.

Isn't that consistent with the history though as far as your boost to EPS growth?

That's pretty consistent.

Okay.

And what is your current thinking in terms of what is the right level of operating margin for Ross Stores?

Again, we are working very hard to get incrementally better and I think over a period of time our objective would be to get to this more normalized historical levels but we think that's going to take some time.

Do you have a rough estimate of some time?

You know, I would say this Company has gone through a lot the last couple of years.

We are very focused on doing the components to get us there as opposed to exactly when we will get there.

So we are very focused on new markets, on our rollout of stores so that we would not be going into new regions.

We are very focused on improving our productivity in our distribution centers -- out of our distribution centers.

We are very focused on shrink control and as always, we are very focused on being a branded bargain store.

With those things, if we do those things correctly over time, we will be positioned correctly and we will see the improvement that you are referring to, but we don't know exactly when that will be.

Okay, thanks for the thoughts.

Ken Holman (ph), Omega Advisers.

Apart from a tangible customer trading down that you've mentioned, what else explains the remarkable strength in the sales?

I'm still very impressed with your comps.

Okay, well the truth of the matter is we had a difficult third quarter last year.

I know that.

Okay.

And we are up against some poor performance at every angle in our Company and we have been focusing our efforts in making sure our bargains are where they should be and running our business appropriately.

And when you come up against easier numbers and you focus on the things you should do, you can get some topline growth.

Now we have to figure out how to get it to convert through the whole system.

If you don't mind, second question.

On the CapEx for the next year and the year beyond -- is it a reasonable to assume that it will be in the range of 130 to 135 million for 2006?

Again, Ken, we will be out with those numbers as we finalize our plan.

Right, thank you.

Marni Shapiro, Merrill Lynch.

Can you talk about you slowed store growth.

Are you redirecting those funds back into the stores in remodels or anywhere else within the stores?

And talk about anything that you're changing marketing-wise if you're planning on increasing or decreasing that at all.

And if you could just give us a historical perspective -- I think somebody has asked previously about the shrink rate.

Historically it has never been an issue for you.

Where did it run historically and how long have you been seeing it increase?

Was it just within the last 12 months or have it been increasing as far back as 2003 or 2004?

This is Gary.

I'll take the last question on shrink.

We did not see an increase in prior years.

The increase that we are experiencing is really relative to our last physical inventory period of time.

On the second question about marketing, I think your question was are we planning any major changes in our analysis.

No.

Nothing has really changed in our analysis.

What was your first question again?

You've slowed some of the store growth.

Are you planning on redirecting those funds back into the stores in remodels or different types of incentives for the salespeople or hiring additional salespeople or anything to that measure?

As we always do, we reinvest in our stores on a consistent annual basis and we do have funds that are allocated to look at remodels and improvements throughout the chain.

But no major changes there?

No.

Thanks, guys.

Ken Gill (ph), Pioneer Investments (ph).

Good morning.

I wanted to just say before this that I thought your sales for the third quarter were very good and very encouraging.

Looking forward on the options expense number I'm a little bit discouraged.

I would have hoped that you have included that in your guidance -- the preliminary guidance for 2006 because you've given yourself an opportunity to lower estimates once more.

I'm just wondering if you can take us through the rationale for not giving us some kind of framework for it or giving us a framework if only a very rough one?

This is John.

In our footnote disclosures in our FAS 123 there is a framework.

We don't anticipate that option expensing going forward would be that difference from that piece.

We're going through the forecast methodology currently.

Okay.

And our run rate this year under 123 is around $0.06.

Okay, great.

It would have been nice to see that in the number because again these numbers are going to have to come down one more time.

Last year in '05 you talked about a 35 basis point drag from dd's.

With more stores directionally -- I know you probably can't go into any detail but directionally would we expect to see that as a greater drag or a lesser drag in '06, with a higher store base from dd's?

I think we will see '06 around 40 basis points or so.

40 basis, okay.

Finally with regard to the systems and micromerchandising some of the other markets; it has been a bare case out there on the street that Ross doesn't do four season markets well.

I'm wondering if you can talk about how the new system and some of the efforts that you've talked about with regard to micromerchandising might enable you to do that better and maybe put to rest that concern.

This is Michael O'Sullivan again.

I think in terms of four seasons, we -- I would say several years ago, five or six years ago, we moved to regional planning to try and addresses the whole issue of climate differences between different regions and different stores.

I think we feel reasonably comfortable that we've made a lot of progress on that.

What we're really focused on now is within regions looking at stores that have different characteristics within regions and trying to get down to product level differences that might help to improve the assortment at a store level.

So it's not really so much focused on climate but more consumer need to take in those particular store areas.

But part of that will certainly be driven by climate.

As a former Californian, I can tell you I didn't own an overcoat until I moved to Boston.

Agreed, but I think we feel like we have understood that for some time.

I would add that the newer markets we have gone into are really not four season market issues.

So there is like the Carolinas and such that you don't think that's a four season market issue?

I would not compare it to Boston.

It is a much softer climatic approach.

These are really much more localized issues that are different, different wants and needs of consumers in broad regions that we have to work through.

I realize you don't want to lay out your merchandising plan on the call but could you maybe just give us an example of it so we can understand it a little bit better?

For competitive reasons, I really couldn't go into it now.

Not even a small one?

No.

Great, thank you.

Ben Strum (ph), Barnett Research (ph).

Can you give us an example of a competitor maybe in the off-price segment that is already using the localized planning strategy?

Is this a best-in-class?

Where are you guys looking at options?

What is kind of the time schedule for making a decision and purchasing and just a little more color on that?

On competitors, I'm not sure I can really comment.

All -- what we have done is focus on ourselves in terms of whether we think we're satisfying a customer in those markets.

Obviously we have reached the conclusion we have reached that we have opportunities to improve.

So I'm not sure I could comment on how competitors are doing it.

Okay.

Is there just a time schedule I guess for looking at different systems and purchasing and implementation?

Sure.

We have sort of a product plan internally.

We're looking at -- first of all, we're looking at what the priorities are in terms of how the assortments needs to change.

And then once we have sort of reached a conclusion on that we would then figure out what process changes to make, what systems changes to make.

We expect during 2006 to do the bulk of that work.

That is the timeframe.

Are there particular challenges to off-price to managing this down to the local level because of the opportunistic process of buying in different categories?

Yes, there are, but nevertheless we think we can manage those challenges and still include the local assortments.

And of your '06 initial guidance, what do you see driving the 3% comp?

Is it just the easy comparisons, the improvements in systems -- better execution where you think you're taking market share would really help as well?

First of all we're up against 6% comp year-to-date so I don't think it's purely just easy comparisons.

I think we are getting better at operating within our new system.

Okay?

Our historical rate is probably not that far off from that if you looked at the last five years.

So I don't think from a topline end our growth rate is unreasonable.

We think there are some things that Michael said earlier that we think there will be some modest improvements from our efforts in micromerchandising next year.

And was there another part to the question?

I understand the first part (multiple speakers).

Is there anywhere you think you're taking market share in particular -- you know -- the department stores and the consolidation that's ensuing here?

Competing off-price chains with your stores returning to normalized levels here in this year?

I would expect it to be -- if I had to -- hard to say.

We get it from so many different sectors.

There should be some I would expect some movement from the department store sector.

There has been a lot of change in dynamics, as we all know, in the department store sector.

There will be the implementation of the consolidation plan next year.

So in Federated in May so it is likely it would come from there.

I guess the last part to that was the '06 guidance then, is that assumed to be the operating margin improvement all merchandise margin improvement?

Would that include a reversal in the shrink that would happen I guess first or second quarter when you inventoried again?

Did you leverage at 4%, right?

So with the 3% comp it is assumed mostly from gross margin area?

Yes.

It is mostly gross margin.

There is a bit of DC leverage as well in that number.

Okay, great.

Thanks a lot.

Kimberly Greenberger, Citigroup.

I just had a follow-up question on the four season merchandising.

Michael, you indicated that you don't think the issue with the new stores of four seasons merchandising, so would that imply that the new stores in Montana and Wyoming are performing where you would expect them to perform?

You know, I don't think performance in a region where we have one store or two stores, I think I really couldn't elaborate on that in this kind of forum for competitive reasons.

Okay, so are the difficulties with your new stores then primarily isolated to the southeast part of the country excluding Florida?

Primarily.

Okay.

John, if you could just tell us at what percent to sales have you historically accrued for shrink?

That would be helpful.

Again, for competitive reasons, we don't get into that level of detail.

Is it somewhere around industry average?

Yes.

Okay, thanks.

Patrick McKeever, Sun Trust Robinson.

Question on store labor.

Do you feel like you have enough store labor on the floor in the stores both number one to maximize sales?

And number two, to do help control shrink?

Do you think -- is that an issue at all as it relates to shrink not having enough store labor hours out there?

This is Gary, Patrick.

I think that our store labor hours are sufficient.

We use -- in order to get at shrank we use number of different methods.

We use systems.

We use an electronic article surveillance system.

We use digital cameras and as I said earlier, we are going to go back and add in security personnel in our higher shrink stores.

But I think our labor hours in store today are sufficient.

Patrick, to answer that question, labor hours aren't any different than they were when we had a better shrink result.

And then on the renewed core merchandise management system when you think about it today looking beyond the shrink adjustment in the third quarter which was -- which covered a multi-quarter time period.

But if you looked at your core merchandise management system today, are you kind of pleased with the day-to-day operation of it?

And are you doing some of the things that you talked about when you first rolled out the new systems?

Are you taking for example regional markdowns yet?

And what kind of big benefits are yet to come potentially?

Let me break it down into two pieces.

I think the core merchandising system, our focus in the last 12 months has been to make sure that we are getting the reports that the business needs to sort of drive the business forward, including the merchants.

We are pretty happy with where we are on that.

Merchants have the report that they need.

The second piece of it is how can we use it to move beyond that?

I think a lot of our comments around micromerchandising sort of relate back to this, that the new core merchandising system should give us a much stronger platform for making some of the improvements that we would like to make in micromerchandising going forward over the next year or two.

So is that then to say that you're not yet taking regional markdowns?

That that still an opportunity ahead of you?

That's right.

That's one of the things that we are looking at.

It's one of the opportunities that we are looking at as part of micromerchandising.

Thank you.

(OPERATOR INSTRUCTIONS) I am showing no further questions at this time.

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

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

Ladies and gentlemen, this concludes today's Ross Stores conference call.

Please disconnect your lines at this time and have a wonderful day.