羅斯百貨 (ROST) 2008 Q4 法說會逐字稿

Good morning.

Welcome to the Ross Stores fourth quarter and fiscal 2008 earnings release conference call.

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

(Operator Instructions).

Thank you.

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

Balmuth.

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 Bobbi Chaville, Senior Director, Investor Relations.

We will begin our call today with the review of our fourth quarter and 2008 performance followed by our outlook for 2009 and the longer term.

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 regarding expectations about future growth and financial results and other matters that are based on management's current forecast of aspects of the Company's future business.

These forward-looking statements are subject to risks and uncertainties that could cause our actual results to differ materially from management's current expectations.

These risk factors are detailed in today's press release and our fiscal 2007 Form 10-K, fiscal 2008 Form 10-Qs and fiscal 2008 and 2009 Form 8-Ks on file with the SEC.

Earnings per share for the 13 weeks ended January 31st, 2009 grew 9% to $0.76 up from $0.70 for the 13 weeks ended February 2nd, 2008.

Net earnings for the quarter grew to a record $97.4 million, from $94.5 million in the prior year period.

For the 52 weeks ended January 31st, 2009, earnings per share grew 23% to $2.33 up from $1.90 for the 52 weeks ended February 2nd, 2008.

Net earnings for fiscal 2008 increased 17% to a record $305.4 million up from $261.1 million in 2007.

Fourth quarter sales increased 5% to $1.734 billion with comparable store sales down 1% from the prior year.

For the full year, total sales rose 9% to $6.486 billion with same-store sales up 2% over the prior year.

Merchandise and geographic sales trends were generally broad based.

The best performing merchandise categories for both the quarter and the year were dresses and shoes, while the mid Atlantic was the strongest region throughout the year.

We are very pleased with our solid earnings per share growth for both the fourth quarter and fiscal 2008.

Our results are especially noteworthy considering the extremely challenging macro economic and retail environment that became increasingly difficult as the year progressed.

The key driver of our performance was the efficient execution of our resilient and flexible off-price strategies including our ability to take advantage of the huge amount of closeout opportunities in the marketplace.

This enabled us to deliver fresh and exciting assortments of sharply priced name-brand bargains to our customers.

More importantly we accomplished this while also operating the business with leaner in-store inventories which drove faster turns and reduced markdowns resulting in higher merchandise gross margin.

Operating margin for the 2008 fourth quarter was 9.1% which was up about five basis points over the prior year.

We were pleased with our ability to maintain profit margins during the quarter, despite the extremely difficult external environment.

Our fourth quarter results were driven by solid gains in merchandise gross margin, that were partially offset by some deleveraging on occupancy and store operating costs as well as by higher distribution expenses as a percent of sales.

For the 2008 fiscal year, operating margin increased about 60 basis points over the prior year to 7.6%.

As a percent of sales, key drivers of our improved profitability for the year were higher merchandise gross margin and lower distribution and shortage costs, partially offset by an increase in occupancy, store operating and incentive plan expenses.

On average, in-store inventories were down in the double digit percentage range throughout 2008, and we ended the year down about 18%.

We are planning to further reduce in-store inventories in 2009, with average levels targeted down in the double digit percentage range compared to 2008.

Operating our business on lower inventory levels allows us to get more fresh and exciting merchandise in front of the customer.

As we saw with our 2008 results, it also drives faster inventory turns which typically results in lower markdowns and higher merchandise gross margin.

We believe this ongoing focus on tight inventory management will enhance our ability to meet or possibly exceed our financial targets in what we expect will be another very challenging year in 2009.

Turning to our store expansion program, we added 66 net new stores in 2008 for a 7% increase.

This growth included 72 new Ross Dress for Less and five dd's DISCOUNTS locations.

We also closed six Ross and five dd's during the year.

Now I'd like to update you on dd's DISCOUNTS.

We are pleased to report that we began to see stronger sales trends at this young business beginning in the latter part of the third quarter and continuing throughout the important Holiday season.

Consumers responded to the competitive value offerings at dd's which helped drive solid comparable sales gains during the fourth quarter.

As we have noted on prior calls, we have been working to improve the performance at dd's.

We closed five stores at the end of the fourth quarter, after concluding that the demographics for these locations were not a good fit for this business.

One site will reopen in 2009 as a Ross location.

The earnings drag (technical difficulty) from dd's in 2008 was about 35 basis points and included expenses related to the five store closures.

This compares to a 40 basis point drag in fiscal 2007.

All in all, we are encouraged with the progress we are seeing at dd's, especially considering that it was achieved in one of the most difficult retail climates on record.

We believe we have an improved understanding today of this customer and have fine tuned our merchandise offerings to better meet their wants and needs.

Going forward, we will continue to strengthen our assortments with attractive and compelling values that appeal to this budget-conscious shopper.

We believe these measures will enhance our ability to continue to improve the sales and profitability of this young chain over the longer term.

Now let's talk about our financial condition.

Both our balance sheet and cash flows remained healthy as we ended 2008.

We believe that our ability to continue to fund our growth in the midst of the current financial crisis is a significant competitive advantage.

During 2008, after internally financing both our working capital and capital expenditure requirements, we used available cash to buy back $69 million of common stock in the fourth quarter, and $300 million for the fiscal year.

This allowed us to retire about 2.4 million and 9.3 million shares in the fourth quarter and fiscal year periods, respectively.

As previously disclosed, we plan to complete the remaining $300 million stock repurchase authorization during 2009.

In addition to the buyback, our commitment to enhancing stockholder returns is reflected in the 16% increase in our quarterly cash dividend that our Board approved in January.

Now I'd like to update you an important initiative, micro merchandising.

Micro merchandising consists of new information system enhancements and process changes that are designed to improve our ability to plan, buy and allocate product at a more local level.

We recently completed, as planned, the initial chain-wide rollout to about 15% of the merchandise classes in our stores.

We are pleased to report that this rollout went smoothly and that these new systems and processes are working as planned.

During 2009, we expect to roll out micro merchandising to another 50% of the merchandise categories in our stores, with the remaining 35% rollout in 2010.

It is difficult to quantify the benefit from this new initiative especially after just one season and with only 15% of our merchandise categories on the new platform.

We expect that it will take a couple of seasons to build some history and user knowledge to gain proficiency with the system's capabilities.

That said, we remain confident over the longer term these new tools will drive gradual improvement in sales and profitability not only in our newer markets but also across the chains.

Now I'd like to review the 2009 targets we communicated with our January sales release in early February.

As previously noted, we have a very resilient and flexible off-price model that when executed efficiently has enabled us to deliver solid results in both favorable and more challenging business cycles.

We also recognize however that we are still in the midst of one of the most severe recessions on record and that consumers continue to face numerous economic head winds.

As a result we have been cautious in setting our sales and earnings targets for 2009 with the hope we can do better as we recently did in February when sales were above plan.

For the 2009 fiscal year, we are forecasting same-store sales to decline 1% to 3% compared to a 2% gain in 2008 and projecting earnings per share in the range of $2.25 to $2.45.

For the first quarter of 2009, we also are projecting same-store sales declines of 1% to 3% compared to a 3% gain in the prior year and earnings per share in the range of $0.56 to $0.61 compared to $0.60 in the prior year period.

We face the toughest sales comparison of the year in the second quarter when comparable store sales rose 6% last year benefiting in part from the tax rebate checks.

As a result, we are planning same-store sales declines in the mid single digits for the second quarter of 2009.

With easier prior year comparisons in the second half, we are planning comparable store sales to improve and be relatively flat to last year.

Now, John will provide some additional details on our fourth quarter results and review the underlying operating statement assumptions that support our earnings per share targets for the first quarter and fiscal 2009.

Thank you, Michael.

As Michael discussed our fourth quarter operating margin improved slightly over the prior year as a 40 basis point increase in gross margin was partially offset by a 35 basis point increase in selling, general and administrative costs as a percent of sales.

The higher gross margin during the fourth quarter was driven mainly by better merchandise margin which increased about 70 basis points.

As Michael noted, our more liquid open-to-buy position this year enabled our buyers to take advantage of the very attractive closeout opportunities in the market.

Combined with leaner inventories we also realized faster turn and lower markdowns.

The improvement in merchandise margins in the quarter was partially offset by an increase in occupancy and distribution expenses versus the prior year.

About half of the higher selling, general and administrative costs as a percent of sales during the quarter was driven by the deleveraging impact on store operating costs from the slight decline in same-store sales.

The remaining pressure was mostly related to expenses equivalent to about $0.015 cents per share to close the five dd's locations at year end.

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

At the end of fiscal 2008, we had $322 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 center.

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

As a result, the combination of our existing cash balances, ongoing cash generating capability and current credit facilities gives us plenty of financial flexibility to fund our growth and working capital needs over both the short and longer term.

Now we will spend a few moments summarizing the underlying assumptions that support our 2009 fiscal year and first quarter EPS targets.

A more detailed version of this is available in the written transcript of our January sales release recorded comments in the investor section of our corporate website.

Our fiscal year 2009 earnings per share projection of $2.25 to $2.45 is based on projected total sales growth of 1% to 3% over 2008 driven by a 5% increase in the number of stores, partially offset by a 1% to 3% decline in same-store sales.

Operating margin that was forecast to be flat to down 40 basis points for the year as an expected improvement in merchandise gross margin and lower freight and distribution costs as a percent of sales are forecast to be offset by some deleveraging pressure on expenses, net interest expense of about $7 million, a tax rate of approximately 39%, and a 5% decline in diluted shares to about $125 million.

The operating statement assumptions that support our first quarter EPS guidance of $0.56 to $0.61 include total sales of our forecast to increase about 1% to 3% over the prior year.

Earlier this month we completed our first quarter store opening adding 19 new locations, 18 are Ross and one dd's.

The sales benefit from these new stores is expected to be partially offset by a 1% to 3% decline in comparable store sales.

On March 5th, we reported that February same-store sales increased 1% which was ahead of plan.

While we were pleased with our performance in February, it is the smallest month of the quarter, with the important March-April Easter selling period still ahead of us.

In addition Easter is moving to the second Sunday of fiscal April 2009 from the fourth Sunday in fiscal March last year.

Holiday shifts like this can be difficult to predict.

As a result, earlier this month, we reiterated our guidance for a same-store sales decline of 4% to 6% in March and a 1% to 3% increase in April.

First quarter operating margin is charted us to be down ten to 50 basis points.

Our year-over-year comparison is impacted by operating margin in the first quarter of 2008 that benefited by about 30 basis points from income related to a real estate settlement.

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

Thank you, John.

To summarize, Ross Stores was able to achieve strong sales and earnings growth in 2008 despite one of the toughest macro economic and retail climates on record.

As mentioned earlier, we generated 2% growth in same-store sales, and a 23% gain in earnings per share during 2008.

More importantly, we continued to show earnings growth in the second half of the year, despite the fierce economic head winds that exerted pressure on the retailing world and became increasingly difficult as the year progressed.

Our comparable store sales slowed from the strong 5% gain we posted in the first half to a 1% decline in the second half.

However, our strict inventory management enabled us to drive faster turns that led to better than expected gross margin.

This allowed us to leverage these revenue gains into solid 13% earnings per share growth for the third and fourth quarters combined.

These financial results especially compared to the vast majority of other retailers reflect the continued resilience and flexibility of our off-price business model when it is well executed.

Looking ahead, we remain confident that our ongoing ability to deliver compelling bargains will continue to resonate with our -- with today's increasingly value-driven consumer.

Our continued focus on efficiently executing our off-price strategies will remain the key to maximizing our prospects for sales and earnings growth, while optimizing stockholder returns over the both the short and the long term.

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

(Operator Instructions).

Thank you.

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

Your line is now open.

Hi, guy, congratulations.

Two quick questions.

The first is housekeeping.

You guys have done a lot of work on shrink over the years.

You had some issues a couple of years back.

I was curious as the economy gets tougher have you increased your reserves for '09?

And then the other is for Michael.

I know there is so much inventory out there.

We all know that there's a ton of inventory out there.

I was curious if you could just talk about the quality of inventory and if you are seeing the quality of brands improve from you guys still even at the end of the year and heading into '09?

And if you feel good about those relationships heading into '09 as it seems some of the inventory commitments have started to come down a little bit?

Great, Marni.

I will take the first one on the shrink reserve.

This is John.

Our practice is to reserve based on our most recent historical results, and we recognize that in this tougher economic times there could be some upward movement in shrink.

We have tried to provide for that.

But we are also investing pretty heavily in shrink control measures.

So, hopefully we will have a good result this is year.

Great.

Thanks.

Marni, it is Michael.

On the -- on merchandise availability, and the quality of brands and the relationships.

Merchandise availability has been strong and continues to be.

And this is at all levels, both in moderate and the upper end of the business.

And the quality of the assortments that are available as well as the brands has really never been better.

And I think the relationships have gotten stronger through these tougher times, for ourselves with the marketplace.

And I think it puts us in good stead going forward.

Great.

That's what I expected.

Congrats, guys and good luck.

Thanks.

Thank you.

The next question is from Kimberly Greenberger from Citigroup.

Your line is now open.

Great.

Thank you.

And congratulations on a nice quarter.

John, I was hoping you could help us with the comp metrics in the quarter, number of transactions versus the average (technical difficulty) ticket?

And then Michael if you could talk about your inventory plans for the year.

Ongoing double digit declines -- just help us understand how you're able to execute this.

And does it involve a change in your packaway strategy?

Thanks.

Kimberly, this is John.

On the comp metric, actually our basket, our total basket is down a couple of points, but transactions are up one which resulted in the down one comp.

So we are seeing customers spend a little less but the traffic [along] transactions has been pretty healthy.

Great.

It is Michael.

Relative to our inventory position, as you all know we cut our inventories dramatically last year, and actually started at the beginning of '07 -- at the end of '07 cutting it.

And basically our premise was increasing the flow of receipts to stores in a more consistent, actually rapid manner.

And with the work we have been doing over the last several years in improving the speed through our whole distribution network, that helped give us the capability to cut our inventories, and anticipate that we would be able to still replenish the stores quite frequently.

So, we have not seen the customer say ouch, in terms of not having enough product in our store.

And so we will continue to run at lower levels this year as we have said.

It does not affect our overall packaway strategy.

We are able to make decisions however to -- on some product that we might have packed before, we might flow now, some portion of it or all of it.

So on an overall basis though, our packaway strategy has not changed.

Great.

Thanks.

Good luck for spring.

Thank you.

The next question is from Brian Tunick from JPMorgan.

Your line is now open.

Thanks.

Hi.

It is Evren Kopelman for Brian.

The first question is about your square footage growth.

Have you thought about 2010, if you expect unit growth to potentially return to normal rates or if you still think it will be in the mid single digit range?

And if you -- do you still think you could be a 1200 store chain?

No, as it relates to 2010 obviously we are not that far out.

We did, I think last year announce that our growth this year would be more in the mid single levels.

And I don't know whether we are ready to talk about 2010 yet based on what's going on in the market.

Okay.

But in terms of long term growth we still see ourselves having the potential of being 1200 or beyond, okay.

The 1200 is your number.

Okay.

And then secondly in terms of rent, how many stores do you have in centers with either Linens [or] Things or Circuit City that could potentially give you kick out clauses or rent relief?

We -- Evren, this is Michael O'Sullivan.

So, we have -- I actually wouldn't even limit it to those retailers.

There are so many retailers that have gone out of business, many of whom were in the same centers as us.

So if I run it across Linens 'N Things as you mentioned, we have close to 100 stores that are in the same [space resolineum].

But we also -- as a Mervyns we have another 30, 35 stores in the same center.

I could keep going down through the list.

But we have -- inevitably in this environment, there are a lot of retailers in the same centers who are going out of business.

And finally, your packaway has really declined over the last several years from the mid-40s to I guess mid-30s at the end of last month.

Can -- you mentioned your packaway strategy is not changing but can you talk a little bit more about whether that is kind of the rate you plan to keep, or what that means for in general inventory planning?

Well, packaway, our packaway inventory levels will fluctuate based on availability of product and also the level in which we exceed our sales plan.

Okay?

So, we haven't had a materially different view of that for years.

And so I would say for modeling -- John, we are guiding people --?

For about even on a year-over-year basis.

Okay.

As a percent.

And obviously there is seasonality that comes into play there as well.

Thanks a lot.

Thank you.

The next question is from Paul Lejuez from Credit Suisse.

Your line is now open.

Hi, thanks, guys.

You had mentioned your plans for merchandise margin to be up for the year.

Can you maybe just talk us through how that might look throughout the year, where your real opportunities are from a merchandise margin perspective, and maybe address if you think you can still have opportunity in the back half?

And then second just wondering if you have seen any impact improvement in the stores that are located close to some of the Mervyns that have closed?

Thanks.

So relative to merchandise margins as we look at '09, Paul, we think there's still -- obviously we think there's still some upside as the markets are pretty good for off-price buys.

Additionally, as we manage inventories tighter we think we can get quicker turns and reduce some of the markdowns.

So we still see some bit of upside in that throughout the year.

If it peaks out by quarter it is probably not that meaningful right now as opposed to looking at the full-year as a whole.

[So you're saying] even as we get to the back half there's still opportunity, right?

Yes, we think there's opportunity in the back half as well.

Paul, on you second question about impact from store closings our expectation -- this is just stating the obvious I guess -- is as more competitors go out of the market, we are going to benefit from that.

We think many of those shoppers are going to be looking for bargains and we think if we execute on our strategy of delivering those bargains we are going to pick up business.

Have you seen anything just yet on some of those store closings?

I would just add some things, it is -- we believe we are seeing some benefit, but it is difficult really to quantify, especially with all of the other external issues that are impacting not only us but all retailers today.

But certainly over the longer term, closures could do some very good things for us.

It should enhance merchandise supply.

It should give us a further ability to attract good retail talent and I think our market share should grow as weaker players leave the competitive landscape.

In terms of quantification, Paul, just to put it in perspective, many of these retailers have only been closed for eight weeks or so.

So if I go through the list, we have 400 Ross stores within five miles of a Linen 'N Things.

We have 200 Ross stores within five miles of a Mervyns.

We have over 150 within five miles of a Shoe Pavilion.

So there isn't much of our chain that hasn't had a retail go out of business within a competitive geography.

So, we are pretty happy with our business so far based upon [separates] performance and it could be that's what -- that could be one contributor, but it is hard for us to tell just given the extent of the retailers going out of business.

Got you.

Thanks and good luck, guys.

Thank you.

Thank you.

The next question is from Jeff Black from Barclays Capital.

Your line is now open.

Hi, thanks.

A couple of questions too.

For John, what drove the distribution expenses a little higher in the quarter?

I don't believe I caught that.

And Michael, why not use this opportunity -- we're buying a lot of stock up here -- and put some of that money into growing stores if you think you got a good stable ROIC model?

And if we do at some point get around to growing square footage again, would we likely see Ross move into some new geographic areas?

Are we there yet or would we see dd's expand?

Thanks.

Okay, Jeff I will take the first one on DC's.

They did delever by 20 basis points in the fourth quarter but DC comps really can fluctuate on a quarterly basis.

We have certain DC comps that get capitalized in inventory and as inventories come down, those comps flow through the P&L.

So it was a timing issue there.

So I think it is probably more constructive to look at DC's for the year to take out some of the timing differences and we did lever by about 20 basis points based on productivity and efficiencies that were achieved in the DC's.

On the square footage question, Jeff, I mean to be clear, we are growing square footage, about 5% this year.

And as John mentioned earlier we are looking at our plans for 2010 and beyond.

We expect to continue to grow.

We haven't yet made decisions about when we would enter new markets.

That is probably at least a couple of years away.

But that is what we are thinking about right now.

Fair enough.

Thanks.

Thank you.

The next question is from Stacy Pak from SP Research.

Your line is now open.

Hi.

Thanks.

A couple of things.

One is can you say what the drag was for dd's for the quarter?

Two can you tell us what shrink was for '08 or did you come out ahead versus your reserve this year?

Three, the comp to leverage occupancy, and SG&A?

And then just going back to the whole merchandise availability question, specifically thinking about the second half, how are you thinking about managing the business given that there was so much product late '08, early '09?

I guess I am kind of surprised packaway isn't higher and I am just wondering how you think about it?

Have you changed your strategy at all to compete and just how low can you get inventories going forward?

Thanks.

So the first one is dd's drag.

I will take that one.

So for the year, it was about 35 basis points.

That included about five basis points related to the closures we had at year end in dd's.

That compared to about 40 basis points in 2007.

Do you give the fourth quarter or you don't break it out by quarter?

Don't really break it out by quarter.

We expect to improve on that, however in '09 as we roll into '09.

Okay.

The second question was comp leverage?

Right.

We think on the expense line we need probably about a 3% comp to get leverage on expenses and occupancy.

And the third question was on the shrink reserve.

We actually -- we are a little over reserved as we came into physical inventory and I think we took about ten basis points on a cum basis into income during the year.

So I think we are adequately reserved.

Relative to how we are thinking about the business going forward, in terms of availability, we would expect that the year will be a volatile year and availability would still be there.

I have been doing this for a number of years and availability has always been there.

But I think retailers are having a hard time forecasting their sales patterns.

When that happens it leads to more inventory for the off-price sector.

And I don't think this will be any different for the back half of this year.

How low can we get inventories?

I don't know.

Okay.

We are going to keep moving the needle.

We are certainly going to do what we have said for this year and I would expect we will take further reductions going forward.

But we haven't started planning '010 yet from an inventory level basis at this point.

But certainly the business is built on receipts not inventory levels and as long as we are getting enough fresh receipts to our stores, we seem to be satisfying our customers.

Can I just follow up?

Can you hear me?

Sure.

Yes.

Okay.

On the inventory, I mean a lot of retailers are getting better control over their inventories for the second half.

So, why would you not be changing at all in your strategy?

I mean why do you think -- you just think they're going to be off in forecast?

I mean wouldn't it make sense to maybe have more packaway or something along those lines?

When they get control of their sales line I will be more concerned.

Okay.

All right.

Thanks.

Thank you.

The next question is from David Mann from Johnson Rice.

Your line is now open.

Hi, yes.

Thank you.

Good morning.

In terms of dd's, John can you quantify in terms of basis points, what that includes?

I mean do you expect to be on the drag in '09?

And then in addition can you give us a sense on how many stores or what kind of time line you would expect to get to profitability there?

And then I have a second question for Michael.

Sure.

Probably expect to be seeing at least five to ten basis points of improvement in dd's in '09, Dave.

And then how many stores or when would you expect it to be profitable?

We are expecting that once we get to 80 to 100 stores, [we are expecting to see the bottom].

Okay.

And then, Michael, obviously the fourth quarter environment, everyone was caught by the surprise of the quick decline there.

When you see the commercial environment as it's sort of starting to pan out in the first quarter and related to what you saw in the fourth quarter, are you seeing any level of improvement in terms of what your, the competition is doing?

You mean, are they as promotion?

Exactly.

I think they're, it is a little tamer right now.

My take.

But again, pre-Easter hasn't really kicked in yet.

It is too early.

February, certainly, their clear-out prices on fall were extremely aggressive and department stores advertising discounts on fall product up to 85% off.

That's unusual.

On new spring merchandise, it has been relatively -- it doesn't feel much more aggressive than it has been in prior years.

Okay.

Very good.

Thank you.

Thank you.

The next question is from [Sean Nime] from Piper Jaffray.

Your line is now open.

First, congratulations in a tough environment on the quarter.

And then I guess I have a couple of questions here.

First can you remind us of some of the puts and takes within the operating margin that may impede your progress toward achieving an operating margin that you've seen before, 9.5, 10% level?

Sure.

I would say the biggest driver of that would be top line.

It is tougher to get operating leverage obviously when you are flat to negative comps.

For '09 we are saying down 1% to 3% would be flat to down 40.

So I think the component to that is to get the top line going, that's -- obviously there is a lot depending on the external environment around that.

Having said that we are doing a good job of maximizing merchandise margin, gross margin with inventory control and we are always looking for expense saves.

The Company has a very good history of being pretty frugal on the expense line, so we will keep pounding away at those things and again get back to more healthy margins.

And then in terms of just specifically freight for the year, are you -- how far down are you planning that?

For the year we believe just based on fuel pricing the way it has been, I think fuel pricing today sits at about 30% lower than it was last year.

So we do expect some help from that on the freight line, probably ten to 20 basis points in '09.

Okay.

And then on dd's, is there anything specific within the trends and the merchandise that you are seeing within that business?

It really is very broad based.

It is broad based.

The business is a younger business in terms of the customer a little, in terms of some of the businesses in the store, the younger businesses are more important.

But the trend is very broad based.

Okay.

And then lastly on the sales tax increase that is set to go in here in California, on April 1st, can you comment on or quantify any sort of impact that you have seen in prior times when you've had some sort of a tax increase?

It is tough to do.

We have gone back and we've looked at it but the reality is, Sean that what is happening in California is just a small subset of what is happening in the overall economy, I mean with the housing market getting worse, with California legislature are leveling for actually half of the budget, with the federal Government trying to save the banks.

It is hard for us to figure out what the impact of all of those things is.

And certainly we expect ramp, at one single item like the sale tax increase is very hard.

We have tried but we just don't have a way to predict it.

Fair enough.

Best of luck on the quarter.

Thank you.

Thank you.

The next question is from Rob Wilson from Tiburon Research.

Your line is now open.

Yes.

Thank you.

You've had a lot of success, I guess recently with mid Atlantic.

Are those stores as profitable as the rest of the chain now?

Have they historically been less profitable?

Do I have that correct?

Yes.

You have that correct.

Relative to store contribution, they don't do as well because the volumes aren't what the other parts of the chain are.

We have done well recently in the mid Atlantic from a comp standpoint, but they still aren't at the level of store volumes of the chain.

But yes we have seen store volumes and store core activity improve.

We have seen contribution margins improve.

So we're happy with the progress we've made [as an upsell].

So that gap is closing, but is it a material gap still, John?

It is enough to where there is plenty to work on.

Okay.

Also in your cash flow statement, I notice an uptick in depreciation in Q3 and Q4 versus the prior year, and I was wondering if you can help explain that, John?

Sure.

We brought online a part of our Moreno Valley distribution center which I think adds to the depreciation line.

And that started kind of third, fourth quarter this year.

So that will continue into the first half of '09?

And do I have that right, $175 million to $180 million is your guidance for depreciation in '09?

Yes, that's right.

Okay.

And one last question, in your guidance you provided for Q4 you suggested that there would be no interest income or expense or it would be flat net.

And there was certainly expense in Q4.

So I was wondering if you could help us understand that, John?

Rates actually went down on investments pretty severely during the fourth quarter.

And that's what led to that difference in interest income.

Okay.

Well.

Thanks.

Thank you.

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

Your line is now open.

Good morning and congratulations.

Can you talk a little bit about, when you think about your customers, in this environment, do you feel you are gaining new customers in the stores or a bigger share of the wallet of your -- from your existing customers?

And if so how do you track it?

And the next thing is on the competitive landscape out there, how has that changed given the ultra promotional environment that we've had?

Are discounters encroaching more, or is the drop-down in department store pricing making it more competitive?

How do you see the landscape and how are you adapting to it also?

Thank you.

Dana, this is Michael O'Sullivan.

So on your first question about customers, it is very hard for us to track precisely where our customers are coming from.

We have always believed that our customers have lots of different choices and we have always believed that our customers shop around looking for bargains.

So when we look at our business now versus the business of other retailers, what we have to conclude is that we are getting a bigger share, probably getting more customers into the store and buying -- those customers are therefore expanding our share versus competitors, just looking at the relative comps that mathematically has to be true.

In terms of you questions about -- your question about the competitive landscape, that's a good question.

It is hard to predict when the dust settles on this economic crisis we're going through, what we are going to be left with.

As we said a little bit earlier we do think that we are pretty well positioned and we expect to come out of this economic environment stronger.

As more retailers struggle, as more retailers go out of business, we think how that is going to be good for us long term.

Thank you.

Thank you.

(Operator Instructions).

Thank you.

The next question is from Patrick McKeever from MKM Partners.

Your line is now open.

Thank you.

I know February is a small month and then you have got this Easter shift in the current month that makes it difficult to assess current trends, but just wanted to ask if you feel, I mean, do you think things are getting any -- is there any discernible, meaningful change in trend?

I mean do you think consumers are feeling -- your core customers are feeling a little bit better these days, a little bit worse?

I know you talked about 2009 being a very difficult year.

But any insight you might be able to provide into just kind of current trends will be helpful.

Thanks

I think all we really could say is that we are happy with February and it is very early in the season to think that we are seeing anything discernible going on out of February.

And I think there's a lot of bad news out there, and hopefully it will start moving in the right direction.

But we are not economists and it is too early here for us as a retailer to form any conclusions.

Thanks, Michael.

And then second question, has there been -- you mention closeouts in the press release, that there are huge opportunities in closeouts.

I mean you don't generally, and most of your buying is still manufacture overruns; right?

How -- are closeouts becoming a meaningful, meaningfully bigger percentage of your buys?

And how about canceled orders?

Would you -- I mean are those, would you say (technical difficulty), are closeouts canceled orders as well, or is that something different?

I guess I am just wondering how your, the mix of merchandise that you are buying is changing.

Okay.

Closeouts, overruns and canceled orders are all one in the same.

Okay.

So the mix of what we are buying is -- we are closeout oriented Company, and we are seeing more closeouts available now.

So the closeouts even become even a bigger part of our mix than they are normally.

So, but it is a mix of all of those three types of purchasing that you said that forms the basis of us talking about our sales as a closeout-driven off-price Company.

So it is somewhat different, okay.

And the numbers are higher in the level of closeouts that are in our assortments today than before.

And the big point though, is it really isn't just a percentage game, it is the quality of the closeouts versus the past.

It has been very -- it has been a very good shopping time.

So getting a lot of or getting some brands anyway that you might not have had a year ago?

I mean you are getting newer, different brands?

Some of that and more of the resources we would like to carry the most of.

So it is a mix of some newer brands in the store and also a mix of getting more products from top tier brands.

Great.

Thank you.

Thank you.

We will now turn the call back over to Mr.

Balmuth for closing remarks.

Thank you all for attending.

Have a very good day.

Thank you.

This concludes today's conference call.

You may now disconnect.