羅斯百貨 (ROST) 2009 Q1 法說會逐字稿

Good morning.

Welcome to the Ross Stores first-quarter 2009 earnings release conference call.

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

(Operator Instructions).

Today's call is being recorded for playback purposes.

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 Bobbi Chaville, Senior Director of Investor Relations.

We will begin with a brief review of our first-quarter performance followed by our outlook for the second quarter and the balance of 2009.

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

Before we begin, I want to note that our comments on this call will contain forward-looking statements regarding expectations about future growth and financial results and other matters that are based on management's current 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 2008 Form 10-K and 2009 8-Ks on file with the SEC.

Today we reported that earnings per share for the 13 weeks ended May 2, 2009 grew 20% to $0.72 from $0.60 per share for the 13 weeks ended May 3, 2008.

As noted in today's press release, our first-quarter 2008 results included a real estate settlement that added income equivalent to about $0.02 per share during the period.

Net earnings for the current year quarter grew to a record $91.4 million, up from $79.5 million in the prior year period.

Sales for the 13 weeks ended May 2, 2009 increased 9% to $1.692 billion with comparable store sales up a solid 3% on top of a 3% gain in the prior year.

We are very pleased with our sales and earnings results in the first quarter, which were well ahead of our plan.

This performance was especially noteworthy considering that it was achieved in one of the most challenging economic and retail environments on record.

Our business benefited mainly from our ability to offer customers fresh and exciting name brand bargains as we continued to take advantage of the substantial amount of closeout opportunities in the marketplace.

Dresses and shoes were the top-performing merchandise categories with double-digit and high single-digit same-store sales gains respectively, while the mid-Atlantic was the strongest region, with comparable store sales up in the low double digits.

California same store sales increased 4% in the quarter.

Operating margin grew about 75 basis points to 8.9%, primarily driven by a 90 basis point improvement in gross margin.

Partially offsetting this gain was a 15 basis point increase in selling, general, and administrative costs versus the prior year.

Last year benefited by about 30 basis points from income related to the previously mentioned real estate settlement.

Our focus on delivering compelling bargains not only drove higher sales in the quarter but also (technical difficulty) margins on those revenues.

Profit margins also benefited from our ongoing strategy of operating our business on lower inventories which drove faster turns that resulted in lower markdowns.

John Call will provide some additional details on operating margin trends in a few minutes.

As we ended the first quarter, total consolidated inventories were down 11% with average selling store inventories down about 13%.

With faster turns, clearance inventories at the end of April were also down considerably from the prior year which we believe should bode well for merchandise margin in the second quarter.

Packaway was about 34% of total inventories compared to 36% at the end of last year's first quarter.

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

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

Again, we believe we have an improved understanding today of this customer and have fine-tuned our merchandise offerings and real estate strategy to better meet the wants and needs of this consumer.

We are very encouraged with the progress we are seeing at dd's.

Improved sales trend that began in the latter part of last year's third quarter continued through the important holiday season and have accelerated even further during the first quarter of this year.

We are also making progress with dd's profitability.

The earnings drag of about 35 basis points in 2008 is now forecast to be 20 basis points or less in 2009, driven by a combination of higher sales productivity with healthier gross margins.

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

These measures are expected to drive further improvement in dd's sales and profitability and we are optimistic about the long-term growth prospects of this young chain.

Now let's talk about our financial condition.

We are pleased to report that both our balance sheet and cash flows remain healthy.

We ended the quarter with [$460] million of cash and short-term investments.

Our cash position is benefiting from reduced working capital needs as we operate the business on lower inventories.

During the first three months of 2009, we repurchased 2.2 million shares of common stock for an aggregate purchase price of $77 million.

We remain on track to complete the remaining $223 million authorization by the end of the fiscal year.

Now our CFO, John Call, will provide some additional color on our first-quarter results and details on our guidance for the second quarter.

Thank you, Michael.

As discussed, operating margin improved by about 75 basis points in the quarter driven by a 90 basis point increase in gross margin partially offset by a 15 basis point increase in selling, general, and administrative costs.

Merchandise margin increased about 65 basis points, while freight declined by a similar amount.

Currently freight costs are benefiting mainly from lower oil prices and improved transportation rates compared to last year.

We also realized about 20 basis points of leverage on occupancy costs.

Partially offsetting these improvements was a 55 basis point increase in buying and incentive costs.

In addition, distribution expenses as a percent of sales were up slightly, about 5 basis points over the prior year.

Higher selling, general, and administrative costs as a percent of sales were mainly due to the prior year comparison which included a 30 basis point benefit from income related to the previously mentioned real estate settlement.

As a result, excluding this income benefit in 2008, all other expenses as a percent of sales levered by about 15 basis points.

Net interest expense of $1.7 million in the quarter was mainly due to much lower interest rates on our cash balances versus the prior year.

Finally, our buyback program drove a 5% reduction in shares outstanding.

Let's turn now to our second-quarter guidance for the 13 weeks ending August 1, 2009.

While the external environment remains challenging, based on year-to-date results that have been well ahead of our expectations, we are raising our sales and earnings outlook for the second quarter and the back half of 2009.

For the second quarter ending August 1, 2009, we now are forecasting same-store sales to be flat to down 1% compared to our prior guidance for a mid-digit percentage decline.

This compares to the strong 6% same-store sales gain in the 2008 second quarter which we believe benefited significantly from the tax rebate check.

Second-quarter 2009 earnings per share are forecast to be in the range of $0.60 to $0.63, up from $0.54 in last year's second quarter.

Our second-best EPS guidance is based on the following assumptions.

Total sales are expected to grow about 3% to 4% driven by a combination of new store growth and as mentioned, same-store sales that are flat to down 1%.

We are forecasting about 18 new stores to open during the period including 17 Ross Dress for Less and one dd's DISCOUNTS.

By month, we are planning comparable store sales in May to be up 2% to 3%, benefiting in part from favorable weather trends.

This forecast compares to a 7% gain in May of 2008.

With weather expected to become unfavorable in many markets in June, we are projecting same-store sales in that month to decline 2% to 3% compared to a strong 8% increase in the prior year.

Clearance inventories in July are expected to be down significantly from last year and there was a shift in the (inaudible) back-to-school shopping holidays from July into August in several states.

As a result, we are targeting July same-store sales to be down 1% to 2% compared to a 4% gain in the prior year.

Operating margin for the second quarter is expected to increase about 40 to 65 basis points from 7.1% last year.

Net interest expense for the second quarter is planned to be approximately $1.5 million and our tax rate is expected to be about 39%.

We also estimate weighted average diluted shares outstanding of about $126 million.

Now I will turn the call back to Michael.

Thank you, John.

Again while the economic and retail climate remains difficult, our much better than expected results year to date reflect that consumers are continuing to respond very favorably to the compelling values we offer.

As a result, in addition to boosting our second-quarter guidance, we are raising our targets for the second half of 2009.

Same-store sales that were previously projected to be relatively flat to the prior year are now planned to grow 2% to 3% in the second half of 2009 on top of a 1% decline in the same period last year.

Based on these updated sales targets, we now are projecting earnings per share for the fiscal year ending January 30, 2010 to be in the range of $2.62 to $2.72.

This compares to our initial fiscal 2009 guidance of $2.25 to $2.45 and to earnings per share of $2.33 in fiscal 2008.

To sum up, we are especially pleased with our performance in the first quarter.

Delivering these outstanding results in the midst of the current recession not only reflects the ongoing resilience of our off-price model but also that we are executing our strategies extremely well.

Certainly the off-price sector is well positioned in today's environment.

More than ever consumers are looking for ways to save money and are attracted to the great values we offer at Ross and dd's DISCOUNTS.

As I noted earlier, we are meeting that increased demand with assortments that feature a sizable amount of compelling namebrand bargains as (technical difficulty) take advantage of the significant amount of close-out opportunities in the marketplace.

While supply of desirable product is very plentiful today, we have never had a problem acquiring enough quality namebrand bargains to drive our business.

Ensuring access to a wide array of brands at great prices is always our top priority and is reflected in the ongoing investments in our merchandise organization.

Today we have hundreds of Ross and dd's merchants combined sourcing product from several thousand manufacturers and vendors.

In addition, because our merchants can buy even closer to need than full price retailers, we can be more defensive and operate our stores with leaner inventory levels in all types of business conditions.

This in turn increases our open to buy capacity and allows us to get more fresh and exciting merchandise in front of the customer.

All of this enhances our topline growth while promoting more rapid inventory turns which drive lower markdowns.

Looking ahead, we believe that the turmoil in the retail world today will remain an opportunity for us as we expect consumers to continue to seek out bargains and value retailers like ourselves.

This shift in shopping behavior is enabling us to gain new customers whom we hopefully will keep as the economy improves.

Finally, we remain very focused on the efficient execution of our (technical difficulty) which we believe is always the key to maximizing our prospects for sales and earnings growth in any type of economic or retail climate.

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

(Operator Instructions) Michelle Clark, Morgan Stanley.

Good morning, thank you.

First question if you could provide for us the comp metrics in the quarter in terms of the both number of transactions and average ticket.

And then second, if you can update us on what comp you need to leverage both SG&A and occupancy and what the sensitivity is for every 1% change in comp?

Thank you.

Hi, Michelle.

This is John.

On your first question, actually our transaction count was up mid-single digits.

As we reported, we did a 3 comp.

So the basket or the amount that customers are spending per transaction was down to offset that to come into a 3 comp.

On your second question around sensitivity on breakeven, typically we break even around the 3% comp for both SG&A and occupancy.

So that's where that is.

And the sensitivity around that, John?

In terms of what happens -- a 1 point comp up or down?

Yes, that's right.

I mean it's probably 10, 20 basis points in that range.

Okay, thank you.

Richard Jaffe, Stifel Nicolaus.

Good morning, (inaudible) thank you.

Great quarter, guys, and really taking advantage of a terrific environment, particularly the rapid or rapid acceleration of the inventory turn.

We are seeing the improvement in mid-Atlantic.

It's gratifying.

I'm wondering has the mid-Atlantic state stores caught up to the chain average or are they at this point ahead given though the pullback in California?

Richard, this is Michael O'Sullivan.

The mid-Atlantic stores have, as you said, they've performed well this year.

They actually performed well last year.

They are still below the chain average, as you would expect, given our strength in California.

So obviously they are still below the chain average.

Thank you.

Kimberly Greenberger, Citigroup.

Thank you.

Good morning and I will add my congratulations as well.

John, I was hoping you could comment on the second quarter as you look out.

It looks like you sort of accelerated from this (inaudible) compensation last year into the second quarter.

Do you think even on the flat to negative 1% comp you might be able to leverage SG&A in the second quarter?

And then just a question for Michael.

Going into the second half of the year, do you continue to see an opportunity to buy closer and closer to need and therefore we should continue to see inventory per square foot decline after turns even as we start to anniversary some of the very, very big declines?

Kimberly, this is John.

On the flat to down 1 in the second quarter, what we would expect is continuing accretion in our margin -- gross margin rate, similar to what we experienced in the first quarter.

But it's pretty tough to lever G&A in the second quarter on that comp.

So I would expect increased gross margin offset by deleveraging G&A.

And it's Michael.

I expect to run -- we expect to run lower inventories and buy closer to need throughout the fall season.

Okay, thanks.

Good luck.

Marni Shapiro, The Retail Tracker.

Hi, guys, congratulations on a great quarter.

I was curious if there were any segments within the store that had -- you have been significantly flexing up or flexing down and what were some of the bright spots at dd's that have really gained traction that are making you more confident here?

Flexing the store meaning businesses we are investing more?

Yes, you know, men's not doing so well.

We're taking it down but kids really killing it so we are taking it up, things like that.

The strength in the store has really been dresses and shoes, as we said, and so we continue to fund those.

And we are managing the more difficult businesses down.

You brought one up.

Men's is certainly that way and although total ladies is doing fine, it's driven by addresses, so the sportswear elements we are managing -- managing them very tightly.

And the second question was --?

At dd's.

Marni, I think the improvement at dd's has been pretty broad-based across services and lines, so all business areas at dd's have done well.

Oh, that's great.

Congratulations, guys.

Good luck with summer.

Stacy Pak, ST Research.

Hi, thanks, guys.

Excellent results.

I guess first question on May, just wondering what's driving the comp strength.

Is it in markets where weather has been great and are you continuing to see the very strong traffic?

And in that vein, can you talk about where you think the new customers are coming from, i.e., what segment of the store?

And can you also address the SG&A dollars for the back half and would you expect inventories to be down double digits again?

So Stacy, what was the first part of that question again?

Just on May, the comp guidance that you are (technical difficulty) where is the upside coming from?

Maybe, John, you can also talk about it.

I mean the run rate now that it looks like it is improved nicely from even Q1 and yet you are conservative -- your guidance looks conservative again for the back half.

I will take the May one.

We really wouldn't comment on components of our business midmonth, so --

Relative to the back half, Stacy, we took a look at it, took a look at the year, looked at we were running versus our original plan in the first quarter.

Looked at what we thought second quarter would do, and the back -- it didn't seem reasonable to keep the back half flat, so we took that up.

We think sales could be conservative, but we will see the closer we get.

And Stacy, I think there was another question in the middle there about where our customers are coming from and as a look at that issue, we know that our customers are able to shop everywhere and they are able to shop at other competitive retailers.

We think we are drawing broadly from those retailers as our customers are looking for value and that's what they are coming to Ross for.

I guess what I'm wondering though is it a younger customer?

Is it a junior customer?

Do you have a sense on that?

The other last part of the question was also, John, SG&A dollars.

Can you address that in the back half?

On the customer segments, we have looked at different demographic [costs] in terms of how stores in different income areas are doing, different ethnic areas are doing, different demographic [costs], basically, and to be honest, Stacy, there's no clear pattern.

You know, our business has been strong across different demographics.

So Stacy, as it relates to the back half, a couple of things.

We will begin to anniversary a couple years of inventory declines, so we think gross margin we are up against tougher comparisons from a gross margin standpoint.

Additionally from a freight standpoint, oil prices were much higher in the first half last year and they begin to moderate in the second half.

And so we believed in the back half we don't have the opportunity we have the first half relative to margin accretion and relative to the split between margin and G&A at this point in time, we are not going to split those out.

This is Michael.

Relative to your inventory question for the back half of the year, we would expect our inventory to be down very high single to -- or low doubles.

Great, okay, thanks a lot, guys.

Brian Tunick, JPMorgan.

Hi.

Congrats as well.

I guess two questions for you guys.

So it looks like the EBIT margins here on track based on your guidance to be the highest in six years, so I think as we take a look sort as the longer term here, should it be the gross margin or the SG&A that you think in the longer term will be the bigger drivers?

And then the second question is on dd's.

When do you think we get some color here on potential 2010 store openings and what are you seeing on some big box real estate opportunities with some of the bankruptcies out there?

Brian, you are obviously correct on the EBIT margin.

If we do kind of the higher end of the range we have out there, we will be approaching 8%.

We believe going forward that the opportunities in both margin and G&A.

On your question about dd's store openings, Brian, obviously there's a fair bit of lead time on these store openings.

So during the balance of this year we will be taking a look at 2010 and we will have more news on that at the end the year in terms of new store openings for dd's.

I think you also asked about real estate and what we are seeing in the real estate market.

You know, the truth is real estate obviously as you all know, that industry is in turmoil right now.

So it's hard for us to predict what that's going to mean in terms of our availability of location (inaudible).

Did we miss one, Brian, or did we cover all your questions?

Nope, I think you got them.

Jeff Black, Barclays Capital.

Thanks.

Michael, can you talk about a couple things?

One is California.

A couple of our retailers have commented on accelerating foreclosure trends there, yet it seems like your biggest competitor said things were stable.

Just what are you seeing in overall trends there?

And any specifics on product availability?

That is always a question on the off pricer?

But any specifics you can give us on amount of new labels you've added, areas where you've added some new labels?

And by that I mean product segments.

Thanks.

Okay.

California has been pretty much running with the chain and so it's just high foreclosure markets but we seem to be getting through it and with our value proposition.

Product availability, we have opened up lots of new labels.

We don't quantify it, but there's been lots of new labels opened up in really both companies.

And it isn't even -- it's not confined to certain segments of the store.

It's been really broad-based across the whole store as you would expect in this kind environment.

Off pricers like ourselves have become more desirable partners with the marketplace, the vendor marketplace.

And it should bode well for us now and long term as these relationships become solidified.

And clearly it has positioned our investment and our merchandise organization in this regard has positioned us very well.

Great, good luck.

Thanks.

Jeff Klinefelter, Piper Jaffray.

Excuse me, thank you for taking the question.

Congrats as well in the first quarter.

On dd's DISCOUNTS, curious given everything that's changed here in the economic cycle from when you launched this concept, any new thoughts on the size of the addressable market, the demographics?

I would imagine real estate here would be a more specific opportunity given the size of those stores and some of the needs that developers have.

Are you hearing or sensing any of those things in the marketplace?

And how has given the improvement in the financials, how has the potential size of that chain changed in your mind?

Jeff, I think when we first launched dd's we said there was a potential for 500 stores.

But it's a very young chain and it's hard for us to predict at this point.

I don't think we have an update on that 500 number, at least not yet.

So that's kind of how we think about the potential.

Just repeat the second part of your question.

I wasn't clear on what you were getting at there.

Just curious, from the time that you launched it, we are in a very different economic cycle and you've obviously learned a lot over those several quarters.

So just curious on in terms of the demographic positioning the addressable market size, what you are seeing in terms of reception from your various customer segments?

Sure, even before the economic slowdown, we believed that there was a low income or a lower income customer that was being underserved and that was really what dd's was targeted at.

I think that's even more true in this economic environment.

It is tough for us to predict how long this economic environment will continue, but we continue to believe that there is an underserved market and that's really the niche that dd's is looking for.

Great, and then one last question, Michael, with respect to your second half or John, second-half guidance.

Clearly you outperformed your expectations in the first quarter and that's providing confidence to take these numbers up.

When you look out into the second half, you know, which is difficult to predict for anybody is it the way that you are performing operationally that provides that confidence?

Is it the product mix that you have or is it how the customer has behaved in key markets here this first quarter that gives you that confidence?

It is all those things, and we also are up against easier comparisons.

Okay, all right, thank you.

Gary Giblen, Goldsmith & Harris.

Good morning.

I was wondering, would you ascribe more than 50% of the improvement in the mid-Atlantic to the micro (technical difficulty) or are there other significant factors at work there?

Gary, this is Michael O'Sullivan again.

Let me just give you a quick update on micro-merchandising.

So as we said on previous calls, we have piloted the micro-merchandising tool in about 15% of the businesses.

And based upon that, we are pretty happy with how it's working.

So during the course of this year we will roll it out to the whole -- to all of our businesses.

That said, I don't think we would really attribute much of the improved performance in the mid-Atlantic to micro-merchandising.

There's some other things that we've done including assortment adjustments in the mid-Atlantic that are separate to micro-merchandising that we think have driven that performance.

Okay, then that leads to the question of are those steps you took to get a notable improvement in the mid-Atlantic things that can be replicated through the Ross system?

Or are you already there in let's say in California or the more mature marketers?

In many ways --I don't want to say we are there because I don't think we are ever there, but you really could replicate those things in close to 1000 store chain on an individual market-by-market basis without the systemic use of our micromerchandising process, which is still (technical difficulty) we're still now rolling it out and we should be rolled out very shortly, finish rolling out very shortly.

So that is the way for us to solve the riddle of more opportunities in more -- on a store-by-store and market-by-market basis.

Okay, got it.

Thank you.

Dana Telsey, Telsey Advisory Group.

Good morning, everyone.

Can you talk a little bit about the productivity of stores in new markets, how that's trending and what you are seeing?

Then as your business has done well in this environment, what are you seeing in terms of average price points in IMU?

Is it changing?

Is it changing by category?

What do you expect going forward?

Thank you.

Dana, on your question about new stores, if we look at our 2008 stores, we are happy with how they are performing but on average, those stores have been open seven or eight months.

So I think we want to give them a bit longer.

But [as I say] I think we are happy with how we are doing.

And then the '09 stores we just opened 17 net stores in March, obviously too early to provide any read on those.

And Dana, relative to your question on price points and markdowns, price point is kind of flattish.

We have not seen that change a whole lot relative to margin.

We did get improvements in both [mark-on] and markdowns during the quarter and expect that to continue.

Thank you.

Patrick McKeever, MKM Partners.

Thanks.

Just wondering if you might provide a little color on your store performance in Florida.

Are you seeing any change there?

Are things getting any better?

And then the second question is on some of the department store shutdowns, Mervyns and Goody's and I guess Gottschalks, here at some point over the next few months -- do you feel like you are picking up market share?

And how are you positioning yourselves to do that?

Thanks.

So Florida is still trailing the company, performing slightly better than we anticipated for the year, but it's still trailing the company.

Patrick, on the competitive closures, you just -- just to give you a sense of it, we have 227 Ross Stores that are within five miles of a Mervyns.

We have 445 Ross Stores within five miles of a Linens 'n Things, 160 Ross Stores within five miles of a Shoe Pavilion.

I could go on, but there's been a lot of competitor closures and we think that over the long term, that's going to help us.

Yes, that's our perspective.

(Operator Instructions) Rob Wilson, Tiburon Research.

Yes, thanks for taking my call.

I was looking at your 10-K and it appears that you have increased your number of merchants over the last two years by approximately 20%, if I -- I think I have those numbers correct.

Has that been part of your success?

And do you plan to hire even more merchants going forward?

It's been an integral part of our strategy over -- for a while and we plan to definitely continue that.

Okay, it is a key component of us solving (technical difficulty) vendor relationships and acquiring more resources which is the key to acquiring bargains in our [price].

So we should expect increased hirings in the merchant area going forward?

Yes.

Fair enough, thanks for taking my call.

At this time, there are no further questions.

Thank you all for attending.

Have a very good day.

This does conclude today's conference call.

You may now disconnect.