羅斯百貨 (ROST) 2008 Q3 法說會逐字稿

Good morning.

Welcome to the Ross Stores third quarter 2008 earnings release conference call.

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

(OPERATOR INSTRUCTIONS)

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

Balmuth.

Good morning.

Thank you for joining us today.

Also on our call 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 from Investor Relations, Katie Loughnot and Bobbi Chaville.

I'll begin with a brief review of our third quarter and year-to-date performance, followed by our outlook for the balance of the year.

Then John will provide more details on our third quarter results and guidance for the fourth quarter, afterwards we will be happy to respond to any questions you may have.

Before we begin, I want to note that our comments in this call will contain forward-looking statements regarding expectations about future growth and financial results, and other matters that are based on managements current forecasts of aspects of the companies 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 in our fiscal 2007 Form 10-K.

and 2008 Form 10-Q's and 8-K's on file with the SEC.

Earnings per share for the 13 weeks ended November 1, 2008, grew 22% to $0.44 up from $0.36 per share in the prior year.

Net earnings for the 2008 third quarter grew to a record $57.3 million, up from $48.7 million in the same period last year.

Sales in the third quarter grew 6% to $1.555 billion, with comparable store sales even with the prior year period.

For the nine months ended November 1, 2008, earnings per share grew 30% to $1.57, up from $1.21 in the first nine months of 2007.

Net earnings for the first nine months of 2008, grew to a record $208.1 million from $166.6 million for the same year-to-date period in 2007.

Sales for the first nine months of 2008 increased 10% to $4.752 billion with comparable store sales up 3%.

We were pleased with our solid third quarter earnings growth especially considering the very challenging macro-economic and retail environment.

The ongoing resilience of flexibility of our off-price business model enabled us to respond to these external pressures, by further reducing both inventory and expenses.

These actions along with better than expected shortage results from our annual physical inventory during the quarter, enabled us to protect profit margin and deliver earnings per share at the high end of our original guidance.

Dresses, accessories and shoes were the strongest merchandise categories, posting mid single digit to midteen percentage gains in comparable store sales during the quarter.

The best performing markets were the Mid-Atlantic and Texas with percentage same-store sales growth in the mid to high single digits.

Our value focused model has also enabled our business to holdup fairly well, even in the hard hit housing markets.

In California, third quarter comparable store sales fell 2%, just slightly below the flat performance of the chain, despite the impact of unseasonably warm weather for most of the period.

Year-to-date both California and Florida same-store sales are up 1% compared to the chain and up 3% while the Southwest trailed with a low single digit decline.

Operating margin in the third quarter increased by about 70 basis points to 6.1%, as a 130 basis point gain in gross margin was partially offset by a 60 basis point increase in selling, general, and administrative expenses.

As we ended the third quarter, total consolidated inventories were down about 2%, with in store inventories down on average about 12%.

Pack away levels were about 33% of total inventories, compared to 30% at this time last year.

As expected, we opened 22 net new locations in the third quarter, 20 Ross Dress for Less, and two dd's DISCOUNTS.

Year-to-date we've added a net 70 Ross and five dd's stores, and we ended the quarter with a total of 963 locations.

As we saw in the first half of the year, sales trends at dd's discount in the third quarter continued to have mixed results.

Comparable store sales were slightly lower than expected, but improved during the latter part of the quarter.

As we have noted on prior calls, we have been working to strengthen the performance this year of the 26 new dd's DISCOUNTS that we opened in 2007.

Sixteen of which were in new markets in Florida, Texas, and Arizona.

Although we have seen improvement in a number of these stores, we've decided to close four locations by the end of the fourth quarter.

Three of the store closures are in Florida, and one is in California, we have concluded that the demographics at these four locations were not an appropriate fit for dd's.

Furthermore, we did not see an opportunity for meaningful improvement.

We continue to believe that there is a customer who values the dd's business proposition, and will continue our efforts to improve the overall sales and profitability of this young chain.

Now, let's talk about our financial condition.

Both our balance sheet and cash flows remain strong and healthy as we ended the third quarter.

We believe that our ability to continue to self-fund our growth in the midst of the current credit crisis is a competitive advantage, especially as we look to develop new vendor relationships, and take advantage of the terrific merchandise opportunities we are seeing in the marketplace.

In addition, after internally financing both our working capital and capital expenditure requirements, we use available cash to buyback common stock in the amount of $79 million in the third quarter, and $231 million year-to-date.

This allowed us to retire 2.4 million and 7.0 million shares in the quarter and year-to-date periods respectively.

I am pleased to report that we remain on track to complete half of our current two year, $600 million buyback program this year.

In addition, we expect to complete the full two year buyback as planned, by the end of 2009 without taking on any incremental long term debt.

Looking ahead, we believe our stores are competitively positioned to appeal to an increasingly value driven customer, as we enter the important fourth quarter.

Our merchants have been able to take advantage of the increased supply of terrific close-out opportunities in today's market,s to create fresh and exciting assortments of sharply priced, name brand bargains and gifts.

Compared to most other retailers, our steadfast focus on delivering compelling values has helped to offset some of the impact on our business from the recent slowdown in consumer spending.

That said, based on the increasingly difficult macro-economic and retail climate at our expectation of a very promotional holiday season, we believe it is prudent to adopt a more conservative outlook for the fourth quarter.

As a result, while we hope to do better for the 13 weeks ending January 31, 2009, we now represent in comparable store sales to decline 1% to 3%, on top of a 2% gain in the prior year.

Fourth quarter earnings per share are now forecasted to be in the range of $0.69 to $0.75, which includes expenses equivalent to about $0.015 cents per share related to the four dd's Discount store closures.

This updated range compares to earnings per share of $0.70 in the 2007 fourth quarter.

For the 2008 fiscal year, we now are forecasting earnings per share in the range of $2.26 to $2.32, for a projected increase of 19% to 22% over $1.90 in fiscal 2007.

This range includes expenses for the four dd's closures.

Now, John will provide additional details on third quarter results, and review the underlying operating statement assumptions that support our updated guidance for the fourth quarter.

Thank you, Michael.

As Michael discussed, third quarter operating margin improved by about 70 basis points driven by a130 basis point increase in gross margin, that was partially offset by a 60 basis point increase in selling, general, and administrative costs.

The improvement in gross margin during the third quarter was driven mainly by higher merchandise margins, which increased about 90 basis points, not including the benefit from lower shrink.

As Michael noted, our increased open to buy position this year has enabled us to take advantage of the attractive close-out opportunity in today's markets.

Combined with leaner and tighter inventories, we are realizing faster turn and lower markdown.

We completed our annual physical inventory of stores during the third quarter.

Results reflect that efficient execution of our shortage control initiatives over the past year contributed to a better than expected improvement in shrink, providing a favorable comparison of about 35 basis points versus a third quarter of 2007.

We estimate that the benefit from this lower shortage versus our accrual added about $0.02 in earnings per share for our third quarter 2008 results.

Gross margin in the quarter also benefited from lower distribution expenses, which offset a slight increase in buying and incentive costs versus the prior year.

The increase in selling, general and administrative costs was driven in part by timing issues related to an initiative to better align store operating costs with functional activities.

Specifically, we shifted some store payroll dollars associated with the receipt of holiday merchandise, from this years fourth quarter into the third quarter.

Also, as expected, expense comparison were affected by a construction-related settlement at one of our distribution facilities in the third quarter of 2007, that benefited that prior year period by about 25 basis points.

Finally, as Michael noted both our balance sheet and cash flows remain very healthy.

At the end of the quarter, we had $234 million in cash and short-term investments, and $150 million in long term debt comprised of two series of senior notes due in 2018 and 2021, proceeds from which were used to finance our distribution centers.

In addition, we have a $600 million revolving credit facility with a wide syndicate of commercial banks that remain fully available and extends through July 2011.

As a result of a combination of our existing cash balances, ongoing cash generating capabilities and current credit facilities give us plenty of financial flexibility to manage through the difficult environment of both the short and longer term.

Let's turn now to our fourth quarter guidance.

As Michael noted for the 13 weeks ending January 31, 2009 we have adopted a more conservative outlook, and now are forecasting comparable store sales to decline 1% to 3%, on top of a 2% gain in the fourth quarter of 2007.

We are also projecting earnings per share of $0.69 to $0.75 for the fourth quarter of 2008, compared to $0.70 in the prior year.

The assumptions that support our fourth quarter earnings per share projections are as follows: total sales are expected to grow about 3% to 5%, driven by a combination of new store growth and as mentioned, same-store sales that are projected to decline 1% to 3%.

With Thanksgiving coming a week later this year compared to 2007, November had seven fewer shopping days after Thanksgiving, also our fiscal December has two more days before Christmas.

Taking these shifts into consideration, as well as the potential pressure from store closures such as Mervyn's and Linens-N-Thing's, we are planning same-store sales to decline 3% to 5% in November, to be relatively flat in December, and to decline 2% to 4% in January.

In 2007 comparable store sales were up 3% in November and December, and up 1% in January.

Operating margin is expected to be flat to down 50 basis points for forecasted range of 8.5% to 9%, about 15 basis points of the decline is related to the four dd's store closures.

Our projected operating margin range assumes flat to slightly up gross margin, and that is expected to be offset by some deleveraging on selling, general & administrative costs.

During the fourth quarter we start to anniversary the gross margin improvement that began during this period in 2007, when reductions in inventory levels start to drive faster turns and lower markdown.

We are forecasting no interest income or expense for the fourth quarter.

The fourth quarter tax rate is expected to be about 38%, which is unchanged from the prior year.

Diluted shares are targeted to be about 130 million in the fourth quarter and 132 million for fiscal 2008.

Now I'll turn the call back to Michael for some closing comments.

Thank you, John.

To summarize, Ross Stores has been able to achieve solid growth and financial results year-to-date in a very tough macro-economic and retail world.

For the first nine months of 2008, we've been able to deliver total sales gains of 10%, same-store sales increases of 3%, and earnings per share growth of 30%.

This performance, especially compared to most other retailers, reflects not only the resilience of our off-price business model but more importantly, the successful execution of our strategies due to the focus and discipline of our entire organization.

Our merchants remain focused in their search for the very best bargains among the huge supply of terrific branded merchandise available to us today.

We also continue to operate the business on even lower inventory which has been key to our improved open to buy liquidity, helping to drive faster turns, better gross margins, and higher returns on invested capital.

And across the Company, associates in our stores, buying offices, distribution centers, and corporate offices are finding ways to get the job done smarter, faster, and at lower cost.

Finally, as a management team we have always been and continue to be conservative in our use of capital and leverage, and in our focus on maintaining the strength and flexibility of our balance sheet and cash flows.

In closing, we remain confident that our core strategy of delivering compelling bargains will continue to resonate with an increasingly value driven consumer.

We also believe that our ongoing focus on successful execution of our off-price strategies in all areas of our business, will continue to enhance our ability to manage through this increasingly difficult economic cycle better than most other retailers.

This focus is the key to maximizing our prospects for sales and earnings growth, while optimizing stockholder returns over both the short and the long term.

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

(OPERATOR INSTRUCTIONS)

The first question comes from Paul Lejuez of Credit Suisse.

Your line is now open.

Hi, guys.

John, can you maybe just clarify what you were saying about the payroll shift, what was it that hurt expenses in the third quarter.

And then Michael, just wondering given what is happening in the environment, how much have you changed the amount of up front buying that you were doing versus buying in season and if there's any sort of a quantification you could provide there, that would be helpful.

And then also Michael,l just wondering in terms of product availability, would you say that the next 12 months can be as good as the last 12, or would you say that it's tough to get much better?

Thanks.

So Paul, I'll take the first piece which is the shift in some store expenses.

We shifted some payroll dollars this year from our fourth quarter to the end of our third quarter, as part of the strategy to align store payroll more with some of the functional activity such as the receipt period rather than how we allocated in the past if it's just based on sales volume.

So that shift was about 30 basis points from the fourth quarter to third quarter.

And as I also mentioned there's a 25 basis point favorability in the '07 compare that related to a one-time item where we had an amount of construction defects in one of our distribution centers.

And the other five basis points is just basic deleverage based on the negative comps.

This is Michael.

Relative to up front buying, we predominantly buy close outs.

There are a couple of pockets in the store where we do a little more up front than others, but for the most part, we're a close out store.

With that said, we still do some up front and yes, we pulled it back.

And the numbers are not gigantic that we're doing, nor is the pull back massive.

So -- and I don't have the exact number at my finger tips, but we are certainly buying less up front product than we were before.

Relative to product availability, it obviously, based on market conditions, has been a very good time to be an off-price buyer.

As we look forward to next year, we anticipate that price availability will still be very strong, as a result of the fact that we do not anticipate that inventory will fall to line in mainstream retailing.

They've been hard for the retailers to get their handles on to date, and we think that will continue.

Great.

Thanks and good luck.

Thank you.

The next question is from Brian Tunick from JP Morgan.

Your line is now open.

Hi, good morning guys.

A couple of questions.

First one, is the math right, that it's costing you $9 million to close those four dd's, and we're just curious, were those stores losing that much money and just maybe talk about your thought process of spending that much to close four stores.

The second question maybe for '09 from a CapEx perspective, one of your obviously largest competitors is talking about real estate acquisition opportunities.

Is that something that you guys would consider as well if there are boxes that are the size you're looking for?

And then the third thing is on your SG&A leverage opportunities, already you have very lean SG&A, should we still expect a 2% to 3% comp needed to get leverage as we look into 2009?

And if you need help I'll repeat any of those.

So let me take the first one, and now the dd's closures are not costing us $9 million.

I think we mentioned 15 basis points, but that 15 basis points is off the fourth quarter, not the year, so I think that is the math.

Okay.

And the second question?

It was CapEx guidance for next year and just your thoughts vis-a-vis real estate acquisitions similar to something that your largest competitor is starting to talk about.

Yes.

So relative to CapEx for '09, we will give more specific guidance with our January sales release in February, but as it relates to this year, we plan to spend probably around $225 million.

There are some capital dollars that will kind of flow between years based on one that (inaudible) related to, expanding our Marino Valley distribution center.

Relative to what we see in real estate we are seeing rents start to soften across the real estate markets, and as we move forward we'll take advantage of those real estate opportunities that fit our strategy, but we are seeing it start to soften.

And I'll just add in real estate, with the number of retailers that are in financial problems or have closed, certainly things are changing in the real estate market.

And if unique opportunities come available, we'll be looking at them and -- but we'll see.

So I think your last piece, Brian, related to what kind of comp we need to leverage it, and that number for us is probably around 3%.

Okay.

Terrific.

I'll get back in line.

Thank you.

Thank you.

The next question is from Kimberly Greenberger from Citigroup.

Your line is now open.

Great.

Thank you.

Good morning.

John, I'm wondering if you can just address the comp side for January.

It seems like that is an easier comparison for the quarter, and it seems you're still expecting kind of a decline there, I'm not sure that I understand exactly why.

And then secondarily, do you have any other debt that will be coming on the balance sheet, either at the end of this year or any time for 2009?

So the first one relative to comps, as we looked at the fourth quarter, and unless there's some shifts going on relative to a later Thanksgiving, a couple more extra days in December, and so we think we would kind of pull a shift.

And as it relates to January, we believe that the customer will shop when there's a reason to shop, and in January we don't really see any clear catalyst to cause them to shop, and that's what's in the guidance for January.

Relative to your debt question, Kimberly, we don't see any long term debt coming on the balance sheet in 09.

Great.

Thanks.

And then could you just let us know, John, how much shrink benefit will -- should we expect in gross margin in the fourth quarter, and then in each of the first two quarters of '09?

Sure.

So we mentioned there were 35 basis points of benefit, which is the total annual benefit that got trued up in the third quarter.

So for the fourth quarter and the first two quarters of next year, the benefit will be between 5 and 10 basis points as we true up the historical rate.

Having said that, we think it's prudent to take a fairly conservative view on that accrual given the tough economic times out there, that may influence that number.

So are you thinking that it's possible that you could see your shrink results or your shrinkage increase as we go through tougher economic times?

I would say I think that's an influence.

We think we have good programs in place to prevent that.

We think we've seen some good traction around those programs, so I think, I don't believe nor should we plan it to go up beyond where it's been historically, but I think we need to be vigilant around our programs to make sure we're doing the appropriate things.

Great.

Thank you and good luck for the holiday.

Thank you.

The next question is from Michelle Clark from Morgan Stanley.

Your line is now open.

Yes, good morning and thank you.

I just wanted to touch on your fourth quarter comp guidance is down 1 to 3.

If I take the mid point of that which is -2, and I look at your two year comp trend, you're only assuming about 50 basis points deceleration sequentially.

So first question is, why not take a more negative outlook given what's going on in the current macro-environment?

And then second question, obviously you guys have had a very strong year in terms of gross margin improvement, just wanted to get your thoughts on where you see further gross margin opportunity as we look ahead into fiscal year '09?

Thank you.

Why not take a further negative view?

We think we've taken a prudent view based on trends we see, factoring in the calendar shift and factoring in closures, and we believe we've taken a conservative enough position for the year, for the fourth quarter.

Further opportunities in gross margin, really the biggest opportunity is in if I'm looking at merchant gross margin or overall?

Overall gross margin.

Oh.

So the gross margin is obviously the biggest component of that is the merchant piece of the gross margin, and we'll continue to manage our inventories down.

We believe that will give us faster turns, and provide some benefit in markdown rates, and we do believe there's opportunity to continue to take those down.

Last fourth quarter '07 inventories were down 9 as we rolled in and out of that quarter and this year, we're anticipating a first couple months will be down high singles and ending the quarter at down low teens, so we do believe there's opportunity there.

Okay, and then just one follow-up question.

How much are you expecting to get in comp benefit from store closures of competitors that you mentioned?

In fourth quarter, we wouldn't think of it positive for the future, after fourth quarter.

In fourth quarter they will be running liquidation sales.

So you're assuming negative impact there?

Yes.

Okay.

Thank you.

Thank you.

The next question is from David Mann from Johnson Rice.

Your line is now open.

Yes, thank you.

Just to piggyback on your last inventory comment, I think on the last call you talked about continuing to take inventory per store down next year.

Can you just update us on if that's still, I think you talked about mid single digit decline, if that's still what you expect or would you be more aggressive in light of the environment?

Well we're still formulating our '09 plans, but I would say that will be the minimum we would be taking inventory down.

Okay.

And then John, in terms of the dd's performance, can you just give us what your latest estimate is on the drag to operating margin from dd's this year?

And would you expect that to improve next year, and if so by how much?

So the drag this year is probably around 30 basis points -- is where we think it will end up, and that's as it relates to '09.

David, we are still formulating those plans, but if dd's gets stronger, and we continue to perform, hopefully perform better in that business.

And that 30 basis points, does that include the stores you're closing?

No, it does not.

Okay.

And it doesn't include the charge, and if you take out the drag that those specific stores had on the leverage component, it's really not that material.

Okay.

And then in terms of fuel and freight costs, can you just clarify how that impacted you in the third quarter?

And with fuel prices down, how you expect that to impact you in the fourth quarter?

Sure.

As we were coming into the quarter, the first kind of half of the year, freight had hit us for about 10 to 15 basis points.

In the thirt quarter we were flat year-over-year from a freight standpoint, and in the fourth quarter you look to see some benefit, as we have lower fuel price than we did last year.

Great.

Thank you.

Thank you.

The next question is from Sean Naughton from Piper Jaffrey.

Your line is now open.

Yes, quickly on micro merchandising initiative, I think you were doing about 15% of the categories for holiday this season.

Can you give us an update on how that is progressing?

Sure, this is Michael O'Sullivan, Sean.

That's right.

We turned on micro merchandising for about 15% of the business, just earlier in the fall season.

The way micro merchandising works, is it sort of looks back over a couple of months, and then projects forward what the sales should be by store and by class.

So we really only have a point now in the season where we are starting to do that, given we are now a few months into the season.

And we are pretty happy with how it's working from a mechanical point of view.

We're making some adjustments here and there, but overall it seems to be working pretty smoothly.

And I would caution you, you do need to sort of get through a full season, before we actually see what impact it's got on the business.

And even then, we want to have expanded it to more than 15% of the business to really identify any meaningful results.

So thinking about that potentially for next year, there could be some benefit as we start to lap this in Q4 of next year, if there is something in the micro merchandising initiative that we're looking for on the gross margin line?

Yeah, that's possible, although if you could see I'm kind of smiling just because everything going on in the environment right now, there are plenty of other headwinds pushing us back the other direction, but yes, micro merchandising should help us next year.

That's right.

Sure, okay, understood.

And then on the Mervyn's and Bed Bath & Beyond, is there anything you're doing specifically in order to capitalize on some of those customers that may be coming to the store and increasing the frequency on any of the co-tenancies you have with those particular companies?

Mervyn's and actually Linens-N-Things.

Specific action, certainly for fourth quarter there is nothing we will be doing, while they are running their liquidation sales.

And we'll be examining that for next year.

Okay, and then finally, anything on trade down within the store, are you noticing any differences on some of your higher price point items versus some of your lower price point items?

Are you noticing anything different in the basket for customers?

So during the quarter, what we did notice is that actually traffic was up, -- that was offset by the customers basket actually decreasing as they put fewer goods in that basket.

So those two elements offset each other to drive the flat comp.

Okay.

Best of luck.

Thank you.

The next question is from Dana Telsey from Telsey Advisory Group.

Your line is now open.

Hi, good morning, everyone.

Can you talk a little bit about assortment adjustments, and the focus that you had had for a little bit, whether it's going to a little bit more trend right assortments?

How is that changing in this environment?

And also -- on dd's, anything on dd's that we should be watching the performance there or the assortment or whether it's regional in terms of what you're noticing?

And just lastly, on shrinkage, as you've had some better shrinkage performance over the past two years, can it get better from where it is now?

Thank you.

On the trend merchandise that offers a portion of our business, our strategies there have actually been -- we've been happy with and again sometimes a little harder to read in what's going on in general business these days, but we've been happy with it through the course of the year.

Certainly we felt good about it in the early part to back-to-school period, and so we haven't made any adjustment from our strategy.

We think our strategy is fine.

The only thing that I would say is, we are adjusting a little as we go forward, is the consumers very value conscience, and the level of higher end product has to be monitored much closer by classification, and in this difficult kind of economic environment.

And on your second question about dd's.

Obviously, there are a number of internal metrics that we're looking at on these and monitoring very carefully.

As Michael said in his opening comments, the performance in Q3 for dd's was kind of mixed.

There was some good signs.

The comp stores missed plan, but actually started to improve towards the back end of the quarter, so obviously we'll be looking at that to see how that progresses.

The non-comp stores which in our parlance means, these stores that we opened in '07, actually did better than planned but many of those are still below where we would like them to be.

So again, we're continuing to monitor those stores and make improvements where we can, so that's really what we're looking at for dd's over the next couple of quarters.

And Dana, this is Gary.

I'll take the shortage question.

We have seen improvement over the last three years in shrink, and I would say that we believe we can get better and we have a number of initiatives and investments both in human and technology investments, that we have made and will continue to make in our stores.

We've added door agents, floor agents, we have category specific, electronic article surveillance.

We continue to expand our data mining capabilities including remote monitoring, and have tailored and will continue to tailor local LP programs by store and by market.

With all that said, we think that it's appropriate to take a conservative posture relative to shortage, in this uncertain time and with the closures that we're experiencing right now, but we believe that over time we do have more opportunity with shortage.

Thank you.

The next question is from Marni Shapiro from The Retail Tracker.

Your line is now open.

Hi, guys.

Congratulations in this environment.

You're doing great.

I was curious if you're seeing any kind of close outs from the factory level.

Do you have people overseas in China where the factories are?

Are you able to buy direct?

And are you also getting close outs from specialty stores as they cut back inventory as well?

What I would say, is we're seeing close outs coming from every direction right now, okay?

And what we have overseas I really wouldn't feel comfortable commenting in a call like this, but the second part of your question about specialty store products, yes.

There is availability from specialty stores as you would expect, they resulted in line with the world of retail.

Great.

And have you guys changed your marketing at all for the fourth quarter?

I'm just curious.

Our marketing is pretty consistent year in and year out, reinforcing our value message.

We'll still be doing that.

Okay, great.

Good luck with holiday.

Thank you.

Thank you.

The next question is from Randy Konik from Jeffries.

Your line is now open.

Hi guys, a couple questions.

First on the dd's closures, you talked about unfavorable demographics.

Can you just give us a little bit of a sense of what's the difference between demographics of these unsuccessful stores that are closing versus the successful stores?

And then related to the store closures on the dd's long term, do you have to rethink about the real estate strategy on the dd's and the potential number of stores you can ultimately have?

I believe the prior was 500.

And then finally where are we on breakeven number of stores to breakeven on dd's.

Thanks.

Randy, it's Michael O'Sullivan.

Let me try and take those three, if I can get them right.

First of all, on the dd's closures, as we mentioned on earlier calls, we've done quite a bit of research on the dd's customer over the past 12 months.

And based upon that research and based upon our own experience in terms of how stores have performed, we actually think the dd's customer is a narrower demographic profile than we first thought when we sent out the business and by narrower, I mean specifically more ethnic.

You know the dd's customer at least initially we characterized as being low income, I think we now believe that actually low income isn't enough.

It needs to be low income and more ethnic.

So if I compare the stores that we're closing with the stores, that have done very well, that's really the key difference that we've seen.

Obviously that insight, if you like to get into what our real estate strategy will be for dd's going forward, we're obviously going to look for locations that have those demographic profiles, but having said that, I think we want to validate that customer profile.

As you'd expect in the next couple of years to be pretty cautious, we aren't going to ramp up this business based on the profile at this point.

We'll gradually expand business, and retest and validate that profile.

And then I think your final question, was breakeven at dd's.

That hasn't changed.

We still think that somewhere between 80 and 100 stores we should be able to breakeven from a P & L point of view.

So do you change that I guess 500 store opportunities at this point or no?

Not materially.

It certainly changes where we would choose to put the stores, but in terms of the total potential as we sort of run through the model, we don't at this point think that's going to change internally.

Final question, if we think about the different demographics, you mentioned a lower income ethnic demographic versus maybe a middle income demographic as it relates to your Ross Stores.

Can you kind of give us a little bit of flavor of how those different demographics are performing within your Ross Stores chain?

I'm sorry, ask that question again?

So if you have maybe some Ross Stores that are currently located in lower income demographics, or maybe ethnic demographics, more ethnic demographics, can you kind of give us a flavor of how those types of Ross Stores are doing today, versus maybe some Ross Stores that are located in more maybe a little higher income demographics at this point in time.

Yes, I think that we don't have Ross Stores that are in the same demographics as dd's.

So the dd's stores are in lower income areas typically than the Ross Stores, so there isn't a group of Ross Stores that I could say that have the demographics and how they're performing.

I'm not sure if that's answering your question or not.

Well how about if you think across the United States of America, if you have something in California, if you take the California state, there's got to be some Ross Stores located in higher income demographics, and some Ross Stores located in lower income demographics within the state of California.

How are we seeing those performance of those Ross Stores differ?

You know, it's pretty mixed.

What we see in terms of Ross's performance is more of a regional split rather than a demographic split.

So as we talked about I think on previous calls, what we see is regional performance differences, which is is obviously a big area of focus for us in terms of bringing up some of the regions that we've entered more recently, like the Southeast.

And within regions, there's a mix.

There are Ross Stores and higher income areas that are doing just great, and Ross Stores in higher income areas that aren't doing as well as we would like, but it's much more mixed.

It isn't as segmented.

Okay, fair enough.

Thank you.

Thank you.

The next question is from Patrick McKeever from MKM Partners.

Your line is now open.

Thanks.

Have you seen any change in the payment at stores?

Has it shifted away from credit a little bit and more toward cash?

Just wondering what the dynamic is there.

Yeah, Patrick, this is John.

We have seen a slight shift away from credit into cash, and when I say slight, probably around a point, but not meaningful, but a little bit of a shift.

Okay, and for next year, I know you haven't given guidance for next year other than to say that you're still planning on buying back about $300 million worth of stock, and using internally generated cash to fund that.

How about store growth next year?

Are you still planning to continue your basic underlying store growth rate next year?

So some time ago, I think we announced that we're going to slow store growth a bit, in the kind of 8% unit growth to more like mid single, four or five-ish, and that's still on track, we haven't changed that perspective.

Okay.

Thanks very much.

Thank you.

The next question is from Adrianne Shapira from Goldman Sachs.

Thank you.

We noticed that the pack away ticked up slightly 33% versus 30%.

I'm just wondering, given the opportunistic buys that you're seeing in the market, is there room for that percentage to go higher?

How do you think about the appropriate level of pack away?

We think about it certainly relative, we look at it by every category of business in the store but we look at it in terms of the quality of pack away that's being offered to us.

And if the pack away bargains are great, it will run higher, okay?

So and yes, we have ceilings that we don't want to go above in every segment of the business, but so we'll see.

Thank you.

The next question is from William Keller from FTN Midwest.

Your line is now open.

Thank you.

Most of my questions have been answered, but just to come back to that cost shift that impacted SG&A.

Was that a change in when the costs were actually recognized, or when they were incurred?

Thank you.

They are actually incurred and recognized in the third quarter.

And previously they would have been incurred in the third quarter but recognized in the fourth?

No.

They would have been incurred in the fourth quarter, and recognized in the fourth quarter.

So what we found when we did -- lined payroll up more appropriately along at a receipt level, as in the stores as opposed to a sales line level.

So the functional activity actually takes place in the third quarter received (inaudible) the inventory, and we shifted payroll to account for that.

Got it.

Okay, thank you very much.

Thank you.

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