羅斯百貨 (ROST) 2007 Q4 法說會逐字稿

Good morning.

My name is Sylvia, and I will be your conference operator today.

At this time I would like to welcome everyone to the Ross Stores fourth quarter and fiscal 2007 earnings release conference call.

This call is being recorded and will begin with prepared comments by Michael Balmuth, Vice Chairman, President and Chief Executive Officer, followed by a question-and-answer session.

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

After the speakers' remarks there will be 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.

Mr.

Balmuth, 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 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 review of our fourth quarter and 2007 performance, followed by our outlook for 2008 and the longer term.

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

Before we begun 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 forecasts 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 our fiscal 2006 Form 10-K, fiscal 2007 10-Qs, and fiscal 2008 -- and 2008 Form 8-Ks on file with the SEC.

Earnings per share for the 13 weeks ended February 2, 2008, were $0.70 compared to $0.66 for the 14 weeks ended February 3, 2007.

Net earnings for the quarter totaled $94.5 million compared to $93.1 million in the prior-year period.

For the 52 weeks ended February 2, 2008 earnings per share were $1.90 compared to $1.70 for the 53 weeks ended February 3, 2007.

Net earnings for fiscal 2007 were a record $261.1 million compared to $241.6 million in 2006.

For the 2007 fourth quarter and full year, earnings per share grew 19% and 17% respectively when we adjust the prior year comparable periods by eliminating the extra week.

As we have previously noted, the 53rd week in 2006 added earnings equivalent to approximately $0.07 per share to both the fourth quarter and the year.

Fourth quarter sales increased 3% to $1.652 billion, with comparable store sales up 2% over the prior year.

For the full year, total sales rose 7% to a record $5.975 billion, with same-store sales up 1% on top of a 4% gain in 2006.

The northwest and Texas were the strongest regions in the quarter and the year, while dresses, home, and shoes were the best performing merchandise category.

During the quarter we continued to strengthen our merchandise offerings by expanding the assortments in accessories as well as our home and gift giving categories.

We are pleased with the solid performance of these businesses in both the fourth quarter and full year and plan to expand upon these efforts in 2008.

We also took steps to improve the fashion and brand content in our apparel businesses during 2007.

While we have started to see improvement in our men's categories, our ladies' businesses in the fourth quarter underperformed our expectations, due in part to weakness across the industry.

As we move into 2008 we continue to take steps to further strengthen our assortments in both men's and ladies', laying the ground work for ongoing improvement in these key apparel businesses.

For the 13-week fourth quarter of 2007 operating margin was 9.0% compared to 9.3% for the 14-week prior-year quarter.

We estimate that last year's 53rd week added about 55 basis points to the 2006 fourth quarter operating margin.

So while we realized an improvement in merchandise gross margin in the fourth quarter of 2007, it was more than offset by the deleveraging effect on occupancy and selling, general and administrative costs of one less week of sales in this year's fourth quarter compared to 2006.

For the 2007 fiscal year operating margin increased about five basis points to 7%.

We estimate that the 53rd week added approximately 20 basis points to profit margins in 2006.

Gross margin improvement of about 20 basis points for the year was largely driven by an increase in merchandise gross margin.

Again, the comparison to 2006, which had the extra week, contributed to the deleveraging effect in 2007 on occupancy and selling, general, and administrative costs.

We finished 2007 with average in-store inventories down about 9% and expect inventories will be down in the mid to high single-digits throughout 2008.

Turning to our store expansion program we added 93 net new stores in 2007, a 12% increase, including 67 Ross Dress For Less and 26 dd's DISCOUNTS.

This growth was partially driven by the real estate acquisition of about 40 former Albertsons' sites in late 2006.

We ended 2007 with 890 stores, including 838 Ross Dress For Less and 52 dd's DISCOUNTS locations.

We doubled the size of our dd's DISCOUNTS chain in 2007 with 26 new stores, including entry into three new markets; Florida, Texas, and Arizona, where we now operate 16 locations.

While our existing 26 comparable stores in California performed in line with expectations in 2007, the new stores we opened, particularly in our newer markets, underperformed our targets.

In 2007 the drag on earnings from dd's was about 40 basis points.

For at least the next year or so we will focus mainly on gaining a better understanding of the target dd's customer.

In particular, we are looking at how the demographics in the new locations we opened during 2007 might differ compared to our earlier openings in 2004 through 2006.

We believe this knowledge will enable us to do a better job of fine tuning our assortments to more effectively address customers wants and needs.

Now let's talk about our financial condition.

I am pleased to report that as we ended the year our balance sheet and cash flows remained healthy.

In 2007, cash flows from operations funded $236 million in capital expenditures to open 93 net new stores and make ongoing distribution network, infrastructure, and systems investments.

Our solid financial position and healthy cash flows also enabled us to continue our long-term practice of returning capital to shareholders through both our stock repurchase and dividend programs.

During 2007 we repurchased 6.9 million shares of common stock for an aggregate of $200 million and completed our two-year $400 million program.

We ended 2007 with 134.1 million shares of common stock issued and outstanding.

This past January our board of directors approved a new two-year $600 million stock repurchase program.

This is a 50% increase over the prior program, reflecting our confidence in the future profitable growth potential of our business.

The board also approved a 27% increase to our quarterly cash dividend to $0.095 per share, which is our 14th consecutive annual dividend increase.

Now I would like to turn our -- to our earnings guidance for the 2008 first quarter and full year.

As we announced in our January sales release our target for same-store sales is flat to up 1% for the first quarter ending May 3, 2008.

We recently reported that comparable store sales in February rose 4%, benefiting from broad-based geographic and merchandise trends, as well as favorable weather comparisons in some of our markets.

When we reported February sales we also reiterated our outlook for March and April.

Easter calendar shifts are usually difficult to predict, especially when the holiday falls as early as it does this year.

As a result, it is important to look at comparable store sales for the two months combined, which we have forecasted to be flat to up 1% compared to the prior year.

When planning our business for March, we took into consideration that the holiday shift also results in one less selling day this month.

As a result, at that time beginning of this month we reiterated our forecast for same-store sales to decline 4% to 5% in March followed by a 7% to 8% increase in April, which is aided by the extra selling day.

Operating margin for the first quarter is projected to be flat to down 20 basis points, and we continue to forecast earnings per share in the range of $0.52 to $0.54.

This compares to $0.48 in the prior year.

For the fiscal year ending January 31, 2009, our earnings per share target of $2.10 to $2.20 also remains unchanged and represents an 11% to 16% increase over the prior year.

Total sales are planned to increase 8% to 9% with comparable store sales gains of 1% to 2%.

Operating margin is forecast to be flat to up 20 basis points.

Underlying assumptions for 2008 also include store growth of 8% for the year, including 65 to 70 net new Ross and five dd's DISCOUNTS.

We recently completed our first quarter openings, adding 26 new Ross and two new dd's locations earlier this month.

Now let's turn to some of our longer-term initiatives.

For the next three years we will be gradually rolling out new system enhancements and process changes that we believe will enhance our ability to plan, buy, and allocate product at a more local or even store level.

As we have previously communicated, the objective of these new micro merchandising tools is to drive gradual improvement in sales and profitability, not only in our newer market, but also across the chain.

We are planning to roll out this program to 15% of merchandise categories across all stores by the fall of 2008, followed by an additional 50% of merchandise categories in 2009, and the remaining 35% in 2010.

Until full implementation of this initiative is complete in 2010, we believe that the Company's total sales and profitability will be enhanced by targeting expansion in our most productive existing markets.

This will mean a lower percentage of new stores will open in the southeast and Mid-Atlantic during 2009 and 2010.

These are regions where we grew rapidly over the past several years.

As a result of this change, along with our focus on improving dd's performance in our newer market, we have adjusted our longer-range earnings model.

As previously announced in early February, we now are planning unit growth of about 5% to 6% in 2009 and 2010, and a return to our historical comparable store sales growth rate of about 3%.

Combined with our larger stock repurchase program these modifications are expected to drive average annual earnings per share gains in the mid teens percentage range, as well as an increase in return on average equity to over 30% by 2010.

To sum up, over the years we've been able to manage successfully through many types of business climates with less volatility in our financial results than a comparable full-price retailer.

As an off-pricer, the up side in more difficult environments is generally an increased supply of great bargains.

When full-priced retailers struggle, we typically can take advantage of the larger amounts of close-out opportunities this creates.

We benefited from this situation in 2007 and continue to acquire terrific bargains in the marketplace today.

In addition, as we saw in 2007, because we can buy even closer to need in the current environment, we can be more defensive and operate our stores with leaner inventory levels.

This, in turn, increases our open-to-buy capacity giving us even more flexibility to take advantage of the great closeouts available in the market.

As a result, we can realize faster turns with a more rapid flow of fresh and exciting bargains to our stores like we are doing today.

Looking ahead, we remain confident in the ongoing resiliency of our off-price model.

We strongly believe that effective execution of our value-focused business strategies will enable us to continue to deliver competitive bargains to our customers and in turn, maximize our prospects for future sales and earnings growth.

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

(OPERATOR INSTRUCTIONS) Your first question comes from Jeff Black from Lehman Brothers.

Hey, good afternoon, everybody.

On the -- can you remind us, Michael, what your CapEx budget is for '08?

And then on the inventory side, kind of surprising to hear we're going even lower in per square foot inventory after this year.

Where are you finding opportunities to take that inventory down, and do you think that inhibits the ability to really hit the 3% to 5% comp level that you outlined?

Thanks.

Jeff, this is John.

I'll take the first one on CapEx.

We're looking at '08 to spend $250 million.

The biggest piece of that increase is really the buildout of a distribution center in southern California.

This is Michael.

Relative to where are we taking inventory out of, we have found that we were carrying too much inventory.

We took too much markdowns last year and actually over the last couple years.

We're finding we can turn our product much faster, and it really is pretty much across the board, across the store.

And some of it is the enhancements we've been putting in through our distribution network, and we do not believe in any way, shape, or form, as we saw in the fourth quarter, that it's inhibiting our ability to perform at a reasonable sales level.

And then just to follow up quickly, how do you feel about the inventory level or the content of the inventory now in terms of what might need to be marked down for spring?

Thanks.

I feel much better on our inventory content today than I did a year ago at this time.

I think some of our initiatives are taking hold, so I feel pretty good about that and in total inventory levels so I think we're well positioned.

Great, thanks.

Good luck.

Your next question comes from Mark Montagna from CL King.

Hi, just a follow-up question on the distribution center in southern California.

Curious what exactly you're building out and can we be certain that we're not going to see any disruptions from that?

We're doubling the size of that distribution center down there.

It's in full operation today, but what we're actually building out is additional storage space and then some additional production area.

So can we guarantee that there won't be a disruption?

I believe so.

There's no major system changes or enhancement.

It's really just an opportunity and we're taking advantage enlarging our capacity there.

Okay.

And then with the better inventories that you had in 2007 and what you're seeing right now, would you categorize the inventories for 2008 as better than -- do you think they're going to continue to get even better throughout all of 2008?

Well, what I would say is based on what we've seen going on in the marketplace to date and what was started in the back half of last year and continues now, the opportunities in the market are plentiful and with that I would expect our inventories to continue to improve.

Okay, so you're probably -- do you think you're going to be able to open up additional new brands for Ross Stores?

I would expect some.

There aren't a lot of brands that we don't carry today.

It's really the availability and the quality of the inventory that's available from the core resource structure that we all work with.

Okay.

Then just wanted to get an update on -- for the full year 2007 what the total comp was for California, Texas, and Florida, and then what percentage of total sales each of those states represented?

I'll give you the store count by state if that's --

Yes.

-- helpful.

So for -- for example, in California we had 235 stores that represent about 26% of the store base.

If you add Arizona, Florida, and Nevada in that mix, it was about 45% of the stores.

So from a comp standpoint, California actually performed in line with the chain at up 1%, Texas was up 3%, and Florida was slightly negative.

Okay.

What about the store count for Texas and Florida?

Texas we had 126 stores and Florida we had 105.

Okay, were you including dd's in that or just Ross Stores?

Dd's is included in that count.

Oh, it is?

Okay.

All right, that was all I needed.

Thanks.

Your next question comes from John Morris from Wachovia.

Hi, thanks.

Congratulations on a great quarter and year, guys.

I think my first question's for Michael Balmuth.

We see you had net interest income of $2.6 million in the quarter.

If I'm right -- I look back in the notes and the guidance was that you would expect no interest income or expense back when you talked about it in the third quarter, so I'm wondering where that -- first of all, if that's right, if that changed, and also where that came from?

Sure.

Actually when we went in the quarter that's what we had planned on.

Having said that, we took inventories down pretty dramatically.

That gave us more working capital.

Also, we had less CapEx spending as some of the money for the distribution center actually will be spent in '08 instead of '07.

Then are you accounting for that with lower inventory levels in '08 on your net interest expense guidance?

Yes.

And also, Michael, is there a way you can quantify for us, how much did the 53rd week affect gross margin in the quarter?

Actually, on the 53rd week, as Michael mentioned, it meant about 55 basis points of EBIT in '06, and that 55 basis points is evenly spread between -- pretty evenly spread between cost of sales and SG&A.

Okay.

And then the final question I have is, on the go-forward expansion of Ross, which will primarily be in existing markets, can you give us a little bit more color there?

If you look at the openings that you have planned for '08, where will the heaviest concentrations be?

I can answer that.

We'll continue to open in our existing markets, as we've stated.

We won't see any new markets for us.

The '08 plan was set really 12 to 24 months in advance, so you'll continue to see our stores open in a similar fashion as last year.

Well, I guess it sounds like maybe to clarify, you're not going to be opening nearly as many in the Mid-Atlantic and southeast, correct?

[That's not] actually true in 2008.

In 2008 as Gary said, the truth is that the lead time on real estate is 18 to 24 months, so the plans were laid down for '08 18 months ago.

The plan in terms of reducing the store openings in the southeast and Mid-Atlantic is something that we'll actually -- you'll see start to happen in '09 and '10.

Okay, great, thanks for that.

Thank you.

Good luck.

Your next question comes from David Mann from Johnson Rice.

Yes, thank you.

Good morning.

Can you update us on what shrink was last year and how you expect that to proceed in '08?

Sure, David.

This is John.

We picked up probably about ten basis points in shrink improvement on the year, probably about $0.01 per share.

Obviously we don't know until we take our count in '08, but would expect to continue to see improvements in that area as some of the initiatives we've taken begin to take further hold.

Okay.

As you continue to shrink inventory per store and at the same time you're seeing some occupancy cost pressure, how are you looking at the size of the prototype?

Any opportunity to shrink that going forward?

We continually look at it, and we do see some opportunity and we'll use it strategically.

It won't be across the board.

In certain locations, we think we can run a slightly smaller box.

But the size of the box that we should plan for '08 should be very similar to what you've had in the past?

Yes.

Okay.

And then lastly, can you just comment on some of the weaker categories and what you might be trying to do to improve performance there?

Well, the weakest categories really in the store have been ladies', exclusive of dresses, which has been very excellent performer.

And really what we've done, it's -- we've done a lot of things, but primarily it's in adjusting our strategies, aligning our -- evaluating our mix of moderate and better product, evaluating the talent that we have in the organization, adding more manpower into the ladies' organization, because our view would be to strengthen and bolster up the manpower in there at a time of weakness as opposed to cutting back.

So those are the moves we've pretty much made.

Thank you.

Your next question comes from Paul Lejuez from Credit Suisse.

Thanks, it's Tracy Kogan filling in for Paul.

First thing I'd like to a follow up on the CapEx.

Can you tell us how the $250 million breaks out between new stores, IT, and other?

And then secondly, can you tell us what comp you will need to leverage expenses in '08?

Thanks.

Sure, Tracy, this is John.

Breaking down the $250 million, so new stores will be about $60 million, existing stores, maintenance capital, et cetera was about $40 million, the DC --distribution centers will be about $115 million, IT about $20 million, and there's about $15 million of other projects we have going.

And the second part of the question was?

What comp you need to leverage expenses this year and also buying and occupancy?

So if we look at this year, in '08, we're saying on a one to two comp, we can grow EBIT -- it's probably going to go flat to 20, so at a two comp about 20 basis points of operating margin leverage is what we're planning on this year.

Having said that, we understand we're operating in a more difficult retail environment.

We do have pressure from occupancy and wage increases.

If we can keep our eye on the ball, keep our inventories appropriate, manage our expense line, hopefully we'll do better than that.

Thank you.

Your next question comes from Patrick McKeever from MKM Partners.

Thanks.

I don't think you mentioned this, John, but just wondering if you could tell us how much merchandise margin was up year over year and maybe talk about the different components of merchandise margin which drove the increased markdown -- fewer markdowns -- it sounds like fewer markdowns, but was there a continued benefit from shrink there, that kind of thing?

Thanks.

Yes.

So, Patrick, to speak to the quarter primarily, merchandise margins, actually we saw solid improvement, and you're correct in it was lower markdowns that drove that result.

Shrink helped a little bit, the lower shrink accrual.

Having said that, that improvement was offset by deleverage in occupancy, including the deleverage from the 53rd week.

So for the quarter margin actually deleveraged by five basis points -- or gross margin deleveraged by five basis points.

And for the year, kind of similar trend.

We had increased merchandise margin primarily due to lower markdowns, again offset by occupancy.

And then any color on the March month-to-date sales trend?

I was thinking, Michael, you might add some color there when you were talking about the plan for first quarter.

Actually, our policy is not to comment in the month.

Okay.

All right, thank you very much.

Thanks, Patrick.

Your next question comes from Marni Shapiro from The Retail Tracker.

Hey, guys.

Congratulations on the good quarter in this environment.

Two quick questions.

Michael, you talked about the misses' being tough but if you could just talk a little bit about non'apparel in the misses' space and special sizes in juniors, which I think falls all under your ladies' category?

I know you guys are buying closer to need, but are you seeing inventory already available for the fall?

In terms of ladies' apparel, I would say that the weakest business right now is in juniors, and special size business we see improvement.

We've seen some improvement, but -- is that what you're looking for in --?

Exactly.

The juniors was up against tough comps, is that right?

Our junior business for several years running has had very tough comps, and we planned it conservatively based on what's going on nationally in the junior business nationally rate now, so it's factored into our plan.

And the question relative to closer to need?

For non-apparel accessories, footwear, things like that?

Those businesses -- the other businesses that relate to the woman are all very strong and we're pleased with the progress we're making in them.

Great.

And I was just curious, I know you guys don't buy this far out but are you seeing your vendors approaching you about fall inventory already?

Not close outs on fall inventory, no.

Good.

Good luck with the spring.

Thank you.

Your next question comes from Michelle Clark from Morgan Stanley.

Good morning.

Thank you.

First question, can you break out fourth quarter comp by ticket and traffic and then what you expect for both first quarter and full-year '08?

Relative to the comp in the fourth quarter, actually the traffic was up about a point and a half and the ticket was up about a half a point or so.

Actually, those numbers -- they -- the volatility in those numbers is very low.

Over our history it's been about the same so I'd expect more of the same.

So continued trends in first quarter and full-year '08?

That's what I would expect.

Okay.

Second question, your '08 sales guidance implies an acceleration in growth rate relative to '07, despite lower square footage growth.

What's driving the optimism that we'll see an acceleration in comp growth?

Well, our feeling on comp growth is essentially that we have execution opportunities from a year ago.

We have initiatives we've put in place that are starting to take hold, and we think if we continue on that -- and we've seen some of that momentum going to fourth quarter and into February, so we're -- we think that will help drive our improvements as we move through the year.

Thank you.

Your next question comes from Kimberly Greenberg from Citi.

Thank you.

Nice quarter.

John, I was hoping you could give us the basis points associated with the improvement in merchandise margin, the deleverage in occupancy here in the fourth quarter, and if you have any detail on SG&A that would be helpful as well.

And then Michael, the rollout of micro merchandising, I think you said 15% of your categories are going to roll out a planning and allocation tool.

If you could give us a little bit more information on the tool and how you expect it deployed in your business, that would be great?

Thanks.

So Kimberly, relative to gross margin, as I said, we had improvements in gross margin in the quarter.

It was around 50 basis points, mainly due to lower markdowns.

That was offset by deleverage, principally in occupancy and also from the 53rd week.

In G&A, expenses delevered by 25 basis points, principally due to wage pressures and lower leverage on the two comp in the quarter, and the impact of the 53rd weak on fixed expenses.

So on balance, the quarter on a 53 to 52-week period delevered by 30 basis points.

If we look at it on an apples-and-apples basis, on a 52 to 52-week basis we actually levered by 25 basis points.

I don't know if that's helpful to you, Kimberly?

Yes, thank you.

On your question about micro merchandising, let me just step back for a second.

What is micro merchandising?

We've -- historically we've always planned our business top down, so we plan each classification for the whole chain and then once we plan that, we then allocate it to each store.

That's what we've done historically.

And going forward with micro merchandising, what the tool and its associated processes allow us to do is actually look at each individual store and see how each individual store is trending for that classification and then build that back up and say, well, how much product do we need to buy and then compare that with what's available.

So it's a bottom-up planning process that will work in conjunction with our top-down planning process.

That's how we're going to use it.

As Michael said in his earlier remarks, we're going to turn that process on in '08 for about 15% of the classifications across the chain, and then in '09, 50% of the business, and then in 2010, the remaining businesses, so that's the schedule.

Michael, if we wanted to monitor progress in those classifications that you're going to start to be pulling the tool in where are you going to start?

Are you going to start in home or kids' or men's?

Can you share that with us?

Actually, for competitive reasons we prefer not to share it at this time.

Okay.

Thanks.

Good luck here in the spring.

Thank you.

Your next question comes from Jeff Klinefelter from Piper Jaffray.

Yes, just a couple quick questions.

Maybe first, Michael, if you could comment on California as a market, people are very interested in how these various southern markets and those housing -- most susceptible to the housing market are performing.

You've operated for a long time in California.

Can you share any more perspective, maybe a little higher level perspective on what you're seeing trend wise, shifts across the categories, overall performance and what you're anticipating as we come out of this recessionary period, particularly in those states?

Well, obviously we've been doing business in California for a long time, and California has had a lot of ups and downs, and we -- if we execute effectively [in the test] for these ups and downs we performed okay.

And California's not running materially different for the Company at this point in time.

Okay.

Couple of other follow ups.

In terms of -- apologize if I miss this, but in terms of inventory turnover do you have a new objective going forward, John, that you'd like to hit in terms of overall Company-wide turnover as a result of system-driven enhancements or new inventory management paradigm?

When we look at that, Jeff, we're really looking at underlying turns, obviously, we're looking at markdown risk, and the way we communicate that, at least internally and externally, is we're looking at what average to our inventories do.

As Michael mentioned, down 9% on an average store basis and I think throughout the year we like mid to high single level inventory reductions.

As Michael also mentioned, that's where we were coming into the fourth quarter and it turned out all right, so I would anticipate throughout this year that that would be -- the paradigm we'd be set on.

What about store payroll, John?

Any thoughts there in terms of your ability to flex that up and down in different comp environments but is there a level?

Is it lower than the last couple years?

What is the appropriate level of store payroll going forward, given the combination of system improvements and overall business climate?

I would say just from a financial perspective that one's a little tougher.

We have minimum levels of payroll in the store that we run.

As sales go up and down we have the ability to flex that some but at some level you get to a base where we have to have payroll.

We do have pressure from minimum wages, both last year and this year, and more over, what's putting pressure there is our average store volumes are staying relatively flat with increasing wage rates, so we're look at productivity measures, other things, but by and large I would anticipate that continue to put pressure on.

And you've been operating at that base level of payroll the last couple of quarters?

I would add that we haven't.

So we have -- through a lot of work in last year, we're now able to allocate payroll based on workload, so you have stores that have operated because of volumes at that base level, but stores that require additional payroll due to workload, which ultimately is driven by sales, we allocate payroll accordingly.

Okay, great.

One just last one for Michael again.

Do you continue to do any competitive analysis on cross shopping with your customer?

Are you noticing any changes given the weakness in the economy and where you're pulling customer traffic in from or any up-to-date insights on that?

We do competitive research pretty frequently and it tracks where our customers tend to cross shop, but it's not really a -- it's not really an accurate enough instrument to spot short-term trends.

So over a period of a couple years we could say we're pulling more customers from this competitor or that competitor, but over a matter of months I don't think we have that kind of visibility.

What about the trend over the last couple of years then?

No.

Actually in terms of the last couple of years, no.

Our customer -- the interesting thing about our customer is they shop everywhere.

It's a very diverse customer base and as long as we offer more compelling bargains than our competitors, and those competitors are a very wide group of retailers -- apparel retailers, we do very well.

Okay, thank you.

Your next question comes from Brian Tunick from JPMorgan.

Thanks.

Hey, guys, a couple of questions.

Relative to Florida, is there anything you're doing down there, thinking about the business differently as far as marketing or payroll or anything there, first?

So I'll take it.

There's no additional marketing today.

It's our program -- our standard program, if you will.

As we look at store payroll, as I stated earlier, we allocate towards workload and sales and are doing that in Florida, as well.

So we're just ensuring that as relative to expenses we're managing it closely and ensuring that it's appropriate for the level of sales that we have in market.

Okay, second question.

When you talk about '09 and beyond, that mid-teen earnings growth, do you think about the bigger opportunities in distribution leverage, shrink, or markdowns as you look ahead?

As we look at '09, '10 and beyond that, just longer term, we think there's opportunities, specifically in the merchandise gross margin, we think there's opportunities in productivity and distribution centers.

That would juxtapose against operating costs that should get better.

We should lever over a period of time as we focus more on building store count in more productive markets.

So I would say kind of would look for expansion on the gross margin line from better merchandise turns and DC productivity offset by some pressures in occupancy and operating costs.

And along those lines, if you look back in '07, and these decisions to slow down real estate, so at dd's and the Mid-Atlantic Ross Stores, was it more about a miss or weakness on the top line, or was it more about the four-wall margin not up to what your targets were?

We would say it was a combination of both.

Okay.

And just finally, any update on auction rate securities on your balance sheet?

Yes, Brian, actually, as we sit today, we have very minimal levels.

I think we have about $2 million in long-term investments in auction rate securities.

No prohibiting your share buyback or CapEx?

No.

Thanks very much, guys.

Good luck.

Thank you.

Your next question comes from Reade Kim from Merrill Lynch.

Thanks for taking the question.

I was curious, on the competitive landscape that came up a couple questions ago whether you look at comparative item pricing or market baskets or whatever you would call it, how that fell out in the quarter when you compare yourselves to the mid-tier department store channel.

What kind of a discount were you at?

Reade, when we look at pricing -- because when you walk into a Ross store there are just so many SKUs what we try and do is we compare each individual SKU with where it's available.

So if it's sold in a department store we make sure that we have a significant discount on that SKU versus where it can be purchased at a department store.

But that's the level at which we do that competitive pricing, we make sure that our pricing is as compelling as possible.

We don't roll that up into one single number that I could share with you that we say it's become less or more compelling, it's just we make sure each individual SKU is in our store for a reason and the reason has to be that it's a bargain, and if it isn't we wouldn't be buying it.

So I'm not sure if that answers your questions?

That's helpful.

Just broadly, and I realize it's a rough estimate, but comparing this past season to '06 do you think there was some compression given all the promotional activity going on in the mid-tier department store channel?

Yes, and there was some compression and fortunately when there's that much availability of product in the market you're able to fight through the compression as we're able to.

Okay.

The other question I had was, I was curious given the amount of new stores you've added if there's an estimate you could give us on the amount of additional boost to comps you got from just the new stores hitting the comp group in the quarter?

Yes, difficult to piece out like that.

Okay, thanks.

Your next question comes from Erik Mace from Basso Capital.

Hi, thanks.

Good morning.

Just some follow-up questions on the micro merchandising.

This kind of feels as though it's round three or four in the efforts of micro merchandising over the last eight or ten years.

I know that goes back awhile, but what -- I understand the bottom-up planning process is somewhat different, but what else gives you conviction in what's changed and what's new and how successful you'll be this time around?

Good question, Erik.

Actually I agree with your point.

I think this is -- if you think about the objective of micro merchandising it's to improve the assortments in our stores and I don't think that's a single action.

I think it's a series of steps that hopefully will help to us continuously improve our assortments in stores.

So I won't, but could I go back historically and just describe the different steps that have happened to try and improve those regional assortments.

This particular step I think is an important one because we are, as you mentioned, putting in a bottom-up planning process, which should make the assortments that we present in each store more customized to that individual store.

Now, before we took the step of developing that capability, we did do a proof of concept and, simply put what we did is we looked at some individual items and we allocated them using our old process.

We planned and allocated them using our old process, then we planned and allocated using this new process on a prototype basis.

And what we saw was -- not surprisingly, when you look at the trends in each individual store and you allocate to those trends you actually do a better job of making sure that you send the right merchandise to the right store.

So the reason why we moved forward with this particular investment is we saw good results in the proof of concept.

So as you look at -- presumably this is a multi-year opportunity in terms of merchandise margin benefits, how do you size it out?

Is it tens of basis points, hundreds of basis points of opportunity in merchandise margin?

That's a very hard question but what we ended up doing is -- we certainly saw enough to justify the investment so we knew that this would be an investment that would have a return.

But can I point to a number in terms of the impact on comp and the impact on margins and tell you it's going to be exactly X?

No, I can't.

I can tell you it's going to more than cover its costs, which is why we pushed ahead with it.

And we probably would be able to -- we'll feel more comfortable addressing questions like that after we've got a reasonable part of the store rolled out.

Okay, thank you.

Your next question comes from John Morris from Wachovia.

Hey, a follow-up question.

Thanks.

For John Call.

John, tell us again the guidance for net interest -- net interest expense for 2008 and also the first quarter?

Give me a minute, John, on the guidance question.

I think actually it's probably up on our website and I'd be more than happy to get back to you on that.

I don't have it at my fingertips.

Okay.

I think -- I was just look at the notes and finding it here -- I think it was net interest expense of $2 million to $3 million in '08, and again, no income or expense in Q1?

Yes.

And if it's still that, I'm wondering with the kind of improvement we saw in actually getting net interest income benefit in Q4 from the significant lower inventory level, since the inventory's going to stay low or remain lower on a go-forward basis I'm just wondering if that would have changed as well, that you would actually be seeing instead of net interest expense but actually net interest income in '08 and would that flat number in the first quarter be the same?

So inventories obviously will be lower but there's another couple factors going in.

We're taking our buyback up $100 million, so you have to factor that in.

Also, our CapEx going up from $236 million to $250 million, so you factor those in and you come out with an interest number, something along the lines we had in the plan.

Okay, thanks.

Your next question is from William Keller from FTN Midwest.

Good morning.

Thanks for taking my question.

Just to go back to the micro merchandising for a moment, obviously going out over a few years you expect the benefit to roll out gradually as you increase how much you do in the store, or is it something that you're going flick the switch here in '10 and see a big improvement?

Our expectation is it would be gradual.

I won't get into the underlying mechanics of the micro merchandising planning process, but even the mechanics of that mean that it'll get better over time, so I think we expect the results to be gradual.

Okay, thank you.

Your next question comes from Mark Montagna from CL King.

Hi, just a question about D&A, I'm a little confused.

The guidance back on February 7th said $160 million versus $145 million for '07 but today's release shows $121 million of depreciation for '07.

So am I missing something, or -- just wanted to reconcile that.

Yes, so there's a couple of differences.

Obviously our CapEx spending came down, and we also have, I think, some -- in the D&A there's restricted stock amortization you have to put in that number.

Mark, we can work through that with you separately.

All right, I'll work on that off line.

Do you have a year-end cash target that you're looking for?

We obviously have a cash plan, would expect it to the come down from where we were ending '07 based on the fact, as I pointed out, given the stock -- increased stock buyback and given the increased CapEx.

Okay.

All right.

So you don't want to share a more specific number?

No, not a specific target.

Okay.

Then also just lastly, regarding the February comp, you were up 4%.

Given the comments that you've made about the quality of inventory, would it be fair to say that the merchandise margin on that comp was pretty strong considering -- I'm assuming it was pretty good spring selling as opposed to such an emphasis on clearance selling?

I would say February was pretty good.

Inventories were well controlled.

Having said that, February is the lowest volume month of that quarter and the second lowest volume month of the year, so I wouldn't lean on February too hard.

I think we have to get through the calendar shift in Easter to really understand what trends are going to happen and where inventories are going to be.

Okay, thanks.

And at this time I'm showing no further questions.

Are there any closing remarks?

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

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

You may now disconnect.